Flat-Rate Pricing Set to Fuel Europe Net Usage

LONDON (03/17/2000) - With the wave of flat-rate Internet pricing announcements made by companies in the U.K. over the past two weeks, Internet and telecommunications industry insiders in Europe expect low-cost pricing schemes to flood the rest of Europe, knocking down cost barriers that have prevented Internet usage from reaching critical mass.

"What has been happening in the U.K. will affect the rest of Europe. Flat-rate pricing is a very strong trend overall," said James Eibisch, a research analyst for International Data Corp. (IDC).

In the past, telecommunications giants in Europe, in particular British Telecommunications PLC (BT), Deutsche Telekom AG and France Telecom SA -- all former state-owned telecommunications monopolies -- have been extremely reluctant to threaten revenues from metered telephone calls, mainly in the form of voice calls.

Unlike in the U.S., where customers are charged a flat monthly fee for an unlimited number of local telephone calls, European customers are accustomed to paying per-minute rates for all calls, including local ones.

"Voice is a lot more profitable than data and the telcos would like to keep the profit from voice high. Law in some European countries does not allow companies to discriminate between voice and data," Eibisch said.

Therefore, the large telecommunication companies have been reluctant to open the door to flat-rate Internet plans for fear flat-rate voice will be forced to follow. The promise of e-commerce, however, has brought to light the need to offer European consumers uncomplicated Internet access and payment plans.

Though companies are getting ready for its emergence in the future, "e-commerce by itself is still a kind of embryonic proposition because its margins on transactions are so slim," said Evan Rudowski, managing director at Excite Europe Ltd.

"But I do think that U.K. users will find Internet access will be virtually free at some point in the future. Narrow-band access will be free," Rudowski added.

Industry analysts also believe that the major telecommunication companies have no choice but to bend under the pressure of deregulation, increased competition from smaller telecommunication companies and now, Internet-based companies.

"They can't absolutely determine services available in their countries. This has been changing since deregulation and changing as the level of competition increases," Eibisch said.

The cracks began to show late last year when France Telecom SA announced it was launching an "all-in-one" Internet access service payment plan beginning Nov.1, 1999, called Integrale Wanadoo. [See "France Telecom to Offer Flat-Rate 'Net Access," Oct. 29, 1999.]The France Telecom service has three payment options: 39 francs (US$6.25) per month for 3 hours of online connection time, 99 francs per month for 10 hours, or 159 francs per month for 18 hours of Internet access. All of the rates apply 24 hours a day, seven days a week. "I do not have specific numbers, but the plan is very popular," a France Telecom spokeswoman said.

With French Internet users spending an average of just 8 hours 10 minutes a month on-line, their needs are largely met by such offers, an official at the French telecommunications regulatory authority said.

Deutsche Telekom AG also recently responded to the call for flat-rate Internet access when Deutsche Telekom's chairman and chief executive officer Ron Sommer announced at a speech at last month's CeBIT trade fair in Hanover, Germany, that the carrier will shortly introduce a variety of flat-rate offers aimed at different kinds of users, similar to the France Telecom plans.

But proving that Deutsche Telekom is still fiercely defending its voice call profits and resisting a U.S. fee model, Sommer said he was against one flat-rate fee for online users. "A flat rate like that in the U.S. makes little sense. You have infrequent users subsidizing frequent ones," Sommer said. [See "DT Focus on Expansion, Broadband and Flat-Rates," Feb. 22.]The real heat in the flat-rate fee arena has been in the U.K.

For example, AOL Europe GmbH teamed up with consumer groups like the Campaign for Unmetered Telecommunications to press BT into offering flat-rate Internet access fees.

"When we first started campaigning for unmetered (flat-rate) access, most people didn't know what that was and BT said that people didn't want it," Matt Peacock, director of corporate communications at AOL Europe said. "Unmetered is now a mainstream concept. It is cost-effective and people understand that and are screaming for it," Peacock said.

AOL UK has been experimenting with lower usage-based rates, which undercut BT's standard call charges, with dramatic results.

"In the five months since we've started offering that plan all of our members have doubled their online time from 15 minutes per day to 30 minutes per day," Peacock said. It is generally believed that the average Internet user in the U.S. spends about an hour online everyday.

In November, when telecommunications company CallNet PLC said it was going to offer flat-rate Internet fees the response was immediate and overwhelming. "It was so popular, there were more than 200,000 people who wanted to join us, which would have caused the physical infrastructure to be stretched," said CallNet's chief executive officer, Paul Goodman-Simpson.

"Since that time we have seen average online time per user increase from about 17 minutes per day to 35 minutes per day," Goodman-Simpson said.

BT quickly announced in December its own mass-market flat-rate Internet access plan, SurfTime -- but with a catch. BT said that regulatory approval would first have to come from the Office of Telecommunications (Oftel), the government agency that regulates the U.K. telecom industry.

The SurfTime proposal hung in limbo until the beginning of this month when two U.S. companies, communications group NTL Inc. and the new media firm AltaVista Co., renewed the attack on metered pricing with free and flat-rate Internet access announcements.

In the case of Alta Vista, in three months' time users will be offered flat-rate monthly Internet access, including toll-free calls, when they pay a yet-to-be-determined set-up fee of between 30 pounds (US$47) and 50 pounds, as well as an annual charge of between 10 pounds and 20 pounds.

NTL's offer is different in that users will get free Internet access and, more significantly for the U.K., free calls to connect to the Internet, when they sign up for cable telephony service and spend a minium of 10 pounds per month on voice calls.

U.K. Prime Minister Tony Blair was quick to commend the announcement, calling the NTL service a "significant new offer" for bringing Net access to the general public during his speech at Knowledge 2000 conference on March 7.

Since then, the flat rate Internet access fee announcements in the U.K. have come fast and furious. The ISP Freeserve PLC, the shopping portal and ISP Zoom.co.uk Ltd., and telecommunications companies Breath.net Ltd. and LineOne all announced in the past week their plans to go live with flat-rate Internet access by the end of the second quarter.

Excite Europe's Rudowski said his company was considering a flat-rate Internet access fee as well, which would generate revenue by some combination of advertising, e-commerce, and subscriber acquisition. "We'll make a decision fairly soon because in this business, there is no reason to dawdle over things," Rudowski said.

On March 8, BT also announced its "new" version of SurfTime: Beginning June 1, it will offer three separate usage and payment plans, including 24-hour unmetered Internet access, seven days a week for 29.25 pounds per month for residential customers and 29.74 pounds per month for business customers.

Unmetered access is not only here to stay, it will expand in the U.K. and Europe as well, according to Freeserve spokesman Steven Pang. "What will happen in this country is indicative of what will happen in the rest of Europe. The U.K. is the gateway into Europe, as the Americans see it," Pang said.

CallNet announced on March 7 that it plans to take its unmetered Internet access plan on the road and spread it to the rest of Europe in partnership with the German telecommunications company Mannesmann AG. "We are going to open the flood gates again," CallNet's Goodman-Simpson said.

CallNet will first target the German market, with a planned launch in three months, and will then reach to other European countries afterward by targeting the ISP and fixed line business sectors, Goodman-Simpson said. "We are trying to win new business in Europe. And in our experience, if we offer the lowest cost Internet access possible, (consumers) are interested. We are changing business models here and in Europe," Goodman-Simpson said.

Pan-European companies like AOL Europe are worried that smaller companies like CallNet simply cannot serve a mass market, but say that it's a good start.

"It's an important development for the value sector, but not so much for the mass market. It's a tough business model," Peacock said.

AOL Europe blames BT in particular for delaying the e-commerce explosion in Europe. "BT's foot-dragging does have an effect on the European market. The U.K. has the opportunity to lead, to be the leader in Europe on e-commerce, except BT will not give unmetered access. As the U.K. goes, Europe will follow.

As BT goes, all other European telcos will follow," Peacock said.

BT argues it would like to act more quickly in offering unmetered Internet access but that it is hampered by government regulations. When asked how he felt about two U.S. companies offering unmetered access in the U.K. before BT did, BT Chairman, Sir Iain Vallance coolly told IDG News Service that Oftel was to blame. "We have to offer a wholesale product to the customer. Because of restrictions and outside pressures, we will not be able to move as quickly as we'd like," Vallance said.

Partly in response to such charges of government interference, the European Union (EU) plans to jump into the debate over flat-rate Internet fees at an EU summit in Lisbon on March 23-24. The summit topic will be on growing Europe's knowledge-based, Internet economy. According to Portuguese prime minister and current EU president, António Guterres, one of the priorities of the summit will be to establish a plan for an EU-wide reduction in local telephone costs.

[See, "Report: EU to Challenge Net Phone Charges," Feb. 28.]Regardless of any decisions made in Lisbon, it is widely believed in the industry that flat-rate Internet access fees will have established a firm foothold in the U.K, and to a lesser extent throughout the rest of Europe by the end of the year.

"What has been happening in the U.K. in the past two weeks has been highlighting the very high levels of pent-up demand for unmetered services.

Yes, it will be more widespread than now by the end of the year," IDC's Eibisch said.

"We damn well hope so," responded AOL Europe's Peacock when asked if flat rate fees would be widespread by year's end. "Metered rates are an old and unjustified business model. The telcos are the barrier to the e-commerce revolution in Europe." Peacock said.

Even France Telecom realizes the change is coming. "The mass market in France is very short, people only want to try the Internet in small lumps of time now.

It is very hard to say about e-commerce but the market is evolving and for sure it is going to happen. Our position is to be prepared," the France Telecom spokeswoman said.

BT, in London, can be reached at +44-207-356-5000 or at http://www.bt.com/.

France Telecom, located in Paris, can be contacted at +33-1-44-44-2222, or at http://www.francetelecom.fr/. AOL Europe, in Hamburg, Germany, can be contacted at +49 403 61 590, or at http://www.aol.co.uk/. Mannesmann, in Düsseldorf, Germany, can be contacted at +49-211-820-0, or at http://www.mannesmann.de.

Freeserve, in Hertfordshire, England, can be contacted at +44-1442-353000, or at http://www.freeserve.co.uk/. IDC, in Framingham, Massachusetts, can be reached at +1-508-872-8200, or at http://www.idc.com/.

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