Electrical retailer Dixons is expected to sever its long-standing relationship with Freeserve and instead install AOL's Internet access software on its PCs.
Dixons helped create Freeserve during the dot-com boom, and the ISP quickly became the UK's largest dial-up provider due to its pioneering subscription-free business model. The service was sold to French service provider Wanadoo in 2001, with Dixons retaining a stake in the company. But the relationship could soon come to an end, according to industry sources.
The Dixons Group, which runs around 1,400 shops around Europe and includes retail chains Dixons, Currys and PC World, has been in talks with BT and AOL for at least six months. But according to sources, BT has been ruled out of the equation, leaving AOL as an obvious replacement for Freeserve.
Hamish Thompson, a spokesman for Dixons Group, confirmed that Freeserve was given one years' notice that its dial-up contract could be cancelled in February. The companies also have a broadband contract, which is set to expire in February 2005.
Thompson told ZDNet UK that Dixons is very happy with Freeserve, but admitted that if it wanted to switch ISPs, the UK market is narrow in terms of significant players. He said a Dixons and AOL partnership is "a reasonable supposition".
The move would mean that the Dixons group will no longer distribute Freeserve's CDs in its shops or pre-install its Internet software on its PCs, which is potentially devastating for Freeserve.
Research company Forrester said that with 2.4 million subscribers, Freeserve is still the biggest dial-up ISP in the UK, but because it has been slow to provide extras such as instant messaging, AOL has almost caught up.
Rebecca Jennings, a senior analyst at Forrester, told ZDNet UK: "The Dixons partnership has been instrumental to Freeserve's growth and is the reason it is number one." But she wasn't convinced that the deal will hurt Freeserve as much as it would have a few years ago, when Internet penetration was still growing at a tremendous rate.
"The problem is that the Internet market is now all about getting people to swap providers. We are not quite at maximum Internet penetration, but close to it. Growth today is all about providing premium services," she added.
Should Freeserve lose its contract with Dixons, there is a good chance that it will also lose its broadband contract a year later.
Freeserve refused to comment on the speculation.