Flat-rate Internet stiffs in Europe

Flat-rate Internet access is a fact of life, right? Not in Europe, where ISPs offering it are bleeding cash and analysts predict the end.

          A wave of failures in Europe's fledgling flat-rate ISP market is just the beginning. Analysts expect a flood of mergers and bankruptcies in coming months, as a dramatic shakeout hits the European market for unmetered dial-up Internet access.

          "No surprise," said Lars Godell, European telecommunications analyst at Forrester Research in Amsterdam. "We are talking about a business model that, already in '99, was pointing heavily in the red in terms of huge losses." He predicted that the flat-rate ISP business model will be dead in Europe within two years.

          Several German companies are calling it quits in the hotly contested flat-rate market. Düsseldorf-based DUSnet GmbH announced Monday the end of its "FLATcity" tariff, which was introduced on Aug. 18. In a statement, the company said the pricing plan, with a startup fee of 69 marks ($US31.68) and a monthly flat fee of 69 marks, is proving economically unfeasible.

          Last week, Bitburg-based Surf1 GmbH announced the opening of bankruptcy proceedings. In a statement, the company said its flat-rate model had resulted in "immense losses," as 80% of customers were surfing more than the calculated break-even point.

          Versatel Internet Group GmbH, in Dortmund, has stopped taking new subscribers for its unlimited Sonne service, which costs 79 marks a month. The company said in an open letter to customers that the average user previously surfed an hour a day, and that figure has shot up by threefold or fourfold since introduction of the new flat-rate tariff.

          "We've determined that 80% of our network capacity was being used by 'power users' -- people who stay online for 24 hours a day," said spokeswoman Susanne Heeke. "That's not normal." She added that existing subscribers are being monitored for their usage patterns, and those who are online nonstop for 30 days or more will be terminated.

          Similar problems have greeted the rollout of unmetered Internet service in other European countries. In the UK market, AltaVista indefinitely postponed the introduction of its flat-rate service plan on Aug. 21.

          "The current state of the UK telecom market has not enabled the company to deliver an unmetered service within the time scales originally planned," the company said in a statement.

          The move came after several other ISPs in the country, including Springboard Internet Services Ltd.'s LineOne, LibertySurf Group SA and Breathe.net Ltd., all encountered problems with excessive demand for unmetered services.

          In France, Worldnet SARL, which calls itself the country's first ISP, dating to 1994, is pulling the plug on its "semi-unlimited" package, effective at the end of this month. The plan, rolled out in February, offered 20 hours of surfing time per month, unlimited between 10 p.m. and 7 a.m., for 299 francs ($US40.94).

          "Most of our competitors have gone under," said a spokeswoman, "and rather than put our customers in (the same situation), we've preferred to stop marketing the unlimited plan."

          Godell said European ISPs have traditionally made money off revenue-sharing arrangements with telephone companies.

          "The big difference between the US and Europe is that dialup, narrow-band users in Europe have to pay the local call charges when accessing the Internet," he said, "And basically the telcos, the Deutsche Telekoms and British Telecoms of the world and so forth, are required to share their revenues with other network providers, in this case the ISPs."

          But flat-rate ISPs, by contrast, have to absorb the phone charges themselves.

          "As long as a provider is charged for (online) time, he can't resell it unmetered; it just doesn't work," said DUSnet manager Udo Dluzinski. "It's not like in the U.S., where phone service is sold for a lump sum. That's a problem that the regulatory authorities need to aggressively go after."

          "The economics are extremely bad for this model, especially if you couple it with the subscription-free service as well," Godell said, "So the only revenues the ISPs could get are advertising and e-commerce revenues, and so far it's basically only been Yahoo and AOL that have been successful in attracting these."

          Godell said flat-rate Internet service may help companies gain customers in the short term, but is doomed to lose money over time. "The users are very disloyal," he said. "They're just trotting around looking at new deals."

          He predicted a rapid consolidation in the industry in the near future. "Out of the existing more than 500 ISPs in the U.K., there will probably be less than 10 by 2005."

          A similar squeeze is likely elsewhere on the continent, he continued, where the current growth in providers is unsustainable. "There are probably more than 1,400 ISPs across western Europe, but this number is going up every day."

          "I'm predicting it will be more or less impossible to make money just on access alone," Godell said. "So there will be a huge shakeout, and only telco-supported and big providers like AOL will survive. Independent ones will be forced out of business or forced to merge with telcos."

          (Peter Sayer in Paris contributed to this report.)

          Forrester Research in Amsterdam can be reached online at http://www.forrester.com/.

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