Freeserve faces future without Dixons

A major ISP or media company might be a better parent than Dixons, experts say

Electrical retailer Dixons could be set to finish off its involvement in the success story of Internet service provider Freeserve in the coming weeks by selling its majority stake.

Such a sale -- which could see Freeserve joined to Germany's T-Online or a major media company -- would be just one of several major transitions the ISP is currently undergoing. In the coming months Freeserve will have to battle other online forces for survival as a dominant internet portal.

At the same time, the "free" business model, which revolutionised the British Net-access business when Freeserve popularised it last year, is being threatened by broadband and the imminent arrival of unmetered access, and alternative plans could undermine the ISP's stability.

Dixons Group said it was considering all the options it will have when a one-year lock-in clause covering its remaining holding expires on the day its offspring's year results are announced, currently pencilled in for 27 June.

"These (options) may or may not include a sale or distribution of all or part of (our) holding," it said after the market closed on Monday, in a statement issued in response to press speculation that a move was afoot.

Dixons created Freeserve in 1998 and floated it last July at 150 pence a share. At the time it said it would not sell any shares for around a year. It is freed from that obligation when the results are announced or on 2 August, whichever is the earliest.

A Sunday newspaper reported the company had appointed Goldman Sachs to help Dixons evaluate its options as to a sale.

Industry experts said a change of ownership could be the way forward for Freeserve as it struggles to transform from a "free" ISP (getting its primary revenues from telephone tolls) to a Yahoo!-style portal with e-commerce and advertising revenues.

A link to T-Online, Europe's largest ISP, would provide a steady revenue base while opening up business opportunities. "From a technical or infrastructure angle, it would give [Freeserve] the ability to leverage more bargaining power and service relationships," said Scott Smith, director of European Internet strategies for Yankee Group. "It plays to their strategies in many ways."

Media companies may also be interested in the portal as a venue for distributing their properties online, Smith said.

Freeserve's plan has always been to phase out its dependency on telephone revenues in favour of a portal business model, but despite its prominent brand, the company still faces a struggle in the portal market.

Portals gather a variety of services, such as a search engine and community features, into one place as a way of generating large amounts of user traffic.

"Everyone wants to have the AOL model of converting from an access business to a service business," said Smith. "But there's going to be a limited number of powerful regional portals in Europe. Its main competition is probably from BT."

Smith predicted that clear winners won't emerge for another 18 to 24 months.

Reuters contributed to this report.

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