Kate Bulkley, Media Analyst.

Dial C for competition

By Kate Bulkley

The Guardian

Monday February 16, 2004

AOL's new alliance with Dixons which launches today is the start of an intense competition among internet service providers to attract users. Kate Bulkley reports

With 50% of UK homes already online, the next phase of the internet is as much about signing up first-time users as it is about competition among the biggest companies to get the most broadband subscribers.

AOL debuts in Dixons outlets today with a free dial-up internet start-up CD that replaces Freeserve's version. And, although this is dial-up and not broadband just yet, the exclusive five-year AOL/Dixons partnership will embrace broadband a year from now.

"We're still finding that people are coming on to narrowband first and then upgrading to broadband, but over time we will see more people signing up to broadband immediately," says AOL UK's chief executive, Karen Thomson. "Dixons is an outstanding distribution chain. Very, very targeted in terms of the audience."

AOL is using Dixons' shelves to launch a pay-as-you-go internet service called netbreeze, which will effectively replace Freeserve's own flagship pay-as-you-go dial-up product. As the marketplace becomes more complex, with narrowband and broadband offers sometimes confusing the public, the bigger companies, such as AOL, are likely to be in prime position.

"Access alone is not enough now that [the public] want to do a lot more things," says Thomson. "That's been behind a lot of the work we've been doing for the past few years.

"The first wave of people upgrading to broadband was motivated by speed and the fact that it was always on. Increasingly, we are hearing people say, 'What can we do with it?' It will take a while to focus on what people really like. It's very challenging, asking people what they want from broadband when they don't know themselves."

AOL has two million dial-up customers in the UK and 200,000 broadband. One of its nearest rivals, Freeserve, has 2.6 million on dial-up and 160,000 on broadband. Cable company NTL is also a major player with 910,000 broadband and 460,000 narrowband subscribers.

BT is ahead of its own predictions for selling wholesale broadband lines, announcing last week that it had 1.93 million users. BT has set a goal of 5m broadband lines by 2006. BT's own broadband ISP services, BT Broadband and BT Yahoo! Broadband, supply a little under half of these wholesale broadband customers. And at a financial results meeting last week, Pierre Danon, head of BT Retail, which runs the two ISPs, hinted that their prices could be cut to drive demand.

"There is clearly good momentum in the retail market in broadband," Danon said. "We might be a little bit more aggressive [on price], so watch this space."

As AOL moves forward, so Freeserve could be slipping back. Freeserve has built its business over the past five years largely through the Dixons high-street presence and it will continue to offer its broadband start-up CD in Dixons until the end of this year.

Until its sale to France Telecom in 2000, Freeserve was owned by Dixons and so the company is keeping a stiff upper lip about the loss of its exclusive Dixons CD arrangement. "Last summer we got into an auction situation with AOL and we walked away because we knew it was uneconomic," says Keith Hawkins, managing director of consumer marketing for Freeserve. Some observers say AOL is paying tens of millions of pounds for the Dixons' deal and, if true, Freeserve would argue that this is far too much.

In the wake of losing Dixons, Hawkins has a new strategy: a week ago Freeserve launched a broadband offer for 15.99 a month (with the first three months free); a high- street presence is still maintained through Argos, Littlewoods and Lloyds Pharmacy; and Freeserve advertising will focus on online, radio and print rather than television.

Hawkins admits that not being able to give away its dial-up access CDs in Dixons is "an issue", but believes that the market in the next months will be about convincing current online users to switch providers or to upgrade to broadband rather than about attracting new users to the internet. "Retail was one of the secrets of Freeserve's success in the early days, but not so much now because the market has moved online and so getting discs into people's hands is not so important."

But not everyone agrees. "In general, point-of-sale deals are not that important in driving ISP sales with the exception of Dixons," says Paul Zwillenberg, an associate director at OC&C Strategy Consultants. "Dixons' position as the leading PC retailer makes it the obvious retail outlet."

With 12 million people connected to the internet in the UK, the business is clearly hitting its mass-market stride. Hoping to capitalise on this, NTL is rumoured to be launching a TV channel on the Sky platform in two weeks called Broadband World, all about broadband services and information. And, to mirror AOL's faith in Dixons-type shoppers, the channel is set to be placed alongside QVC and other shopping channels on the electronic programme guide.

NTL has had aspirations for some time to boost itself into a mass market broadband supplier over and above its 2.8 million cable customers. The channel will help it to do this, but the company has yet to announce anything officially.

Chris Bunyan, head of internet services for NTL, will say that he has looked at broadband in retail outlets but has dismissed the idea because of the amount of cash needed to generate enough incentives for the sales teams. "We need to focus on what broadband does for the customer, not what broadband is and that's the key change in our message."

The sophistication of the broadband customer is now at the heart of the marketing future. Tom Ewing, an analyst at Nielsen NetRatings, says that the focus has shifted from getting people on to the internet for the first time to getting them to upgrade from narrowband.

"Broadband is now being sold as an entry point as well as an upgrade," he says. "People are used to paying monthly fees for things such as their Sky Digital TV subscription."

AOL agrees that the market has become much more complex. "A few years ago, we were heavy on direct marketing, such as internet access CDs through the letterbox," says Jonathan Lambeth, a spokesman for AOL. "This has changed significantly as the market has become more mature and there are definitely fewer newbies [people who are new to the internet]."

If proof was needed that AOL is serious about its broadband future in the UK, then its next annual marketing spend totals 30m, an increase of 50% since the end of 2002.

But one thing that will not go away for a while is the plethora of access CDs attached to the front covers of computer magazines or those that land on your doormat. Perhaps when this trend ends, a real leap forward in broadband sign-ups will have been achieved.


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