Freeserve's e-commerce revenues jump

But the free Internet service provider will still have to come to terms with the dawn of the unmetered era

Freeserve (quote: FRE), the UK's largest Internet service provider (ISP) and portal, unveiled steady growth in its user base as well as in its e-commerce and advertising revenues, despite the group's income from telephone charges being undercut by an ISP price war.

As of 5 February, Freeserve has 1.8 million active registered accounts, up from 1.56 million at the end of the previous quarter -- a growth of 16 percent.

More significantly, however, may be that e-commerce and advertising revenues have surpassed those from telephone charges. In the 12 weeks to 5 February, 55 percent of the company's £5.14m in sales were generated by e-commerce and advertising, which was up from 49 percent in the previous quarter.

The shift is important because Freeserve is planning to eventually rely on e-commerce and advertising for all of its revenues, anticipating the introduction of unmetered Internet access in the UK.

The ISP also announced that it has acquired SmartGroups.com, a site offering group tools such as calendars and email, in a paper deal worth up to £60m.

Freeserve shares initially surged 42 points to peak at 629p before settling back to around 585p.

Unmetered access has already begun to arrive, a bit sooner than might have been comfortable for companies such as Freeserve. In recent days, competitors such as AltaVista (majority-owned by US-based CMGI) and cable company ntl have announced flat-rate Internet service packages, throwing the business model Freeserve introduced out the window. Freeserve's shares lost more than 30 percent of their value as a result, before the company came up with its own offer on Tuesday; following the move, shares rose more than eight percent.

Unlike counterparts in the US, where flat-rate local telephone calls have long been in place, Freeserve and its competitors will effectively have to pay telecommunications providers for the calls users make dialling up the service. Starting in May, Freeserve is to offer unmetered access at off-peak times for £6.99 per month; customers who use Freeserve partner Energis will get unmetered access any time, as long as they spend more than £10 per month on voice calls.

Like most Internet companies, Freeserve is not profitable; overall pre-tax losses declined slightly to £3.5m from £3.6m the previous quarter.

Freeserve signed up an average of 21,000 active users per week during the quarter, up 50 percent from 14,000 per week in the 12 weeks ending 13 November. In the second quarter, Freeserve had a total of 1.56 million accounts.

Users spent 2.2 billion minutes on the service during the quarter, although the majority of that time was spent on sites other than Freeserve's. That figure was up 15 percent from the previous quarter.

The rate at which new users left the service, or the churn rate, declined to seven percent every four weeks from 7.7 percent in the previous quarter.

The group's Web site, freeserve.com, received 162.8 million page impressions in February, up 48 percent from November's 110 million.

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Find out more about free Internet access in our Unmetered Access Guide.

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