Last week, ZDNet interviewed the man who turned the UK Internet access model on its head. John Pluthero, 36-year-old CEO of Freeserve, talks to Richard Barry about BT, the battle for unmetered access and why broadband is vital in the UK.
It should be understood that because of recent events, certain parts of this interview have been edited so as not to reflect inaccurately Freeserve's current plans to address the unmetered issue. More details will follow on ZDNet in due course.
What will the unmetered access model mean to Freeserve? Isn't it going to hit your business model hard?
No, it will be wonderful for us...
Our business does not rely on connectivity revenue from narrowband. When we did our business model, we had zero connectivity revenue from narrowband two years down from our start. We expected it all to be bid-away. The only bits of connectivity revenue we have are part of ADSL, which will start at £40 or £50 a month.
I think the economic hit on us will actually be quite small. If you look at, say, a product that costs £9.99 a month, you can expect that figure to come down. BT is obliged to sell a wholesale version. At the moment we make a small clip for every minute people stay online, which works out at around 40p per customer per month. That's revenue we're making today, and it's infinitely high if people stay on a long time.
In theory, that can go up as people spend more time online, but because there is per-minute charging, effectively there is a cap to how long they'll stay online. Now if you take a £9.99 unmetered package, the wholesale version will have 30 to 50 pence of retail margin in it. So we will switch from being, on average, 40p per minute, to being a fixed revenue per month of 40p, so our connectivity income will largely stay the same. It might go down a bit, but we didn't have any money in our connectivity model anyway. What you'll get is people trebling their time online, advertising through page impressions, other e-commerce opportunities...
The portal model kicks in...
Yes, and it will be fantastic for us.
The interesting thing for me is that, having educated the capital markets in the UK about the Internet, as we did our IPO first, we then did our Q1 results after that. By the time we did Q2, in early January, we sat down and said, 'right, here are our signup numbers' and they said 'no, what are the portal numbers?' So they got it, straight away.
Yup, I remember Gillian Kent (UK managing director) of MSN saying the portal model was far more important than the sign-up figures when MSN was changing tactics. But when unmetered access does arrive, analysts at Durlacher predict a move back to the subscription model.
Well, unmetered access can never be free. It's hugely expensive to provide because the bandwidth people use is phenomenal.
The government, through Oftel, and the industry have been putting a lot of pressure on BT (quote: BT) to drop the cost of access, and they came out with Surftime I, which was a knee-jerk reaction to the meetings that were going on. It was not thought through at all... unworkable. Surftime II, which takes the traffic off a little bit higher up, not off the local exchanges, has a slightly different pricing model. It's still a very clumsy looking product for people to work with, but it is getting there. And we will get there during the course of this year.
Will you use BT's Surftime?
We will use it if we can't do a better version ourselves.
How will you do a better version?
It's quite difficult because BT has not been clear on the wholesale purchase of capacity from itself.
John, it has been suggested that BT has been actively seeking to get its minutes back from you. Freeserve is the most dialled telephone number in the UK...
200 million minutes a week.
Yes, BT sits at the European high table of telephone companies and is ridiculed because it's the only national telephone company that doesn't dominate Internet access in its own country. It has systematically proved incapable of being sufficiently creative and innovative and commercial to do that. Every time it comes up with a new price plan for dial IP or whatever, we turn around and say 'you're getting there'. And it is still behaving only like a telephone company. It wants the traffic and it doesn't get it.
No-one has seen BT more insular, defensive, reactive than it is today with things like Surftime and it is are doing on ADSL. And you know, it's getting worse and worse. Everyone is speculating on a big reorganisation, and hopefully that will get a bit of 'umph'. Frankly, I talk to a lot of people in the city and in the industry, and the overwhelming reaction is one of disappointment.
Why can't our BT, which at one time looked like it could become a genuine world class telecoms business, lift its head and have some ambition? You know, another thing is that while it is working to get a new pricing model together for Surftime II ready, it has not lodged that yet.
With Oftel you mean?
Yes. I mean it is merely talking about this. That said, it will probably launch something in the summer. There will be an unmetered offering in the market from BT that will allow others to offer a service for around a tenner a month.
I'm glad you've brought this up, because I've just spoken to Adam Daum, principle telecoms analyst at the Gartner Group, and he tells me that according to Gartner's research, people will not pay a premium for broadband, and that £35 really is the ceiling for broadband. He says £10 for narrowband, all day, and £25 for broadband. So the question is: £10 a month for narrowband, is that low enough?
No. An off-peak package should be £5.99. If you could get £4.99, you're gonna fly -- the market will flip to that. At £9.99, no, it's not cheap enough. But in practice, if the market starts with Surftime II, that's fine, because we can work and we can bring those prices down. And BT, because it's a telephone company, is still network and engineering driven. What happened when we launched was that the national network fell over. At the time, BT's engineering department thought it would take three years for data to overtake voice. Well, it took three months. But the number of local exchanges really couldn't handle it, so it had to upgrade them all. We've never had a situation where we haven't had a modem ready and waiting. Yes, people do get busy signals because they can't get off the local loop and BT has had to upgrade the whole thing.
BT is very proud of its network quality. What it doesn't want to happen is to come out with £4.99 or £5.99 and for the whole thing fall over, because people's use will treble. We know that because we have a PC out there in the market with unmetered access and the use has tripled -- three and a half times, on average.
So BT is hugely concerned about what unmetered will do to network loading. Frankly, I am hugely supportive of its concerns. It will not do the industry any good if someone comes out with a really keen price from day one, have the network fall over and no-one can get on the Internet. Or you get continuous busy signals.
So I think with this, BT is right, and its original plan with ADSL was much the same -- start it high and bring it down with small steps... lots of small steps. I think if BT starts with £9.99, that's a safe place to start. There will be a bunch of people who come on, and then you can bring the price down gradually. I mean, a year after Surftime launches, you could be down at £4.99 for unmetered.
Interesting. So you think the price could come in at around a tenner or maybe a bit more, so that BT can protect the local loop, prevent it from falling down. Or could it be, as suggested by around 5,000 emails a month on this issue from our readers, that BT is simply lining its pockets and acting in the best interests of its shareholders -- not in the UK's greater population.
I think it's a bit of both. I think on narrowband we have no history of capacity pricing in the UK, and it's very difficult for BT to move that way culturally. But put it this way, it is second or third or fourth in the market, and what it's doing is making it far easier for the market leaders to pull even farther away from it. There are genuine network concerns with unmetered, I mean look at the US.
AOL cuts people off if you are dormant for I think 12 minutes. It does use a lot of bandwidth and there are some real engineering issues, but BT has a strong commercial reason not to move as the incumbent monopolist.
In Part II, Pluthero talks broadband and BT's mood with ADSL. Don't miss this fascinating insight into the developing broadband arena. Only on ZDNet UK News
Free and unmetered internet access has been on the agenda for some time -- right now the battle is on. Go to AnchorDesk UK to get the news comment from Tony Westbrook.