Freeserve could get the boot from FTSE 100

ISP's removal from top index underscores change of heart about pure-play Internet stocks

The downturn in dot-com shares will take another toll next week, when pioneering Internet service provider Freeserve will likely be removed from the FTSE 100 index.

The move is the latest message underscoring the loss of confidence in the Internet companies.

The index is calculated on a quarterly basis, and the new numbers will be based on closing share prices as of 5 September. If Freeserve is not in the top 100 companies that day it will move into the FTSE 250.

Also under threat are Corus -- formerly British Steel -- and Rolls-Royce, while Granada Media and Dimension Data may move up.

Since spring Internet shares have taken a beating, with investors suddenly -- after years of suspended disbelief -- demanding a clear plan for turning a profit. Investment dried up for such companies as boo.com, which collapsed earlier this year just a few weeks after launch.

In the meantime giants such as Amazon.com and Yahoo! in the US, and lastminute.com and Freeserve in the UK, have also come down from the fantastic highs to which investors pushed them a few months ago. Some industry observers say it is not as accurate to talk about a dot-com downturn as a waking up to the facts. "Reality has finally set in," says Martha Bennett, vice president for European research with Giga Information Group.

"Since Freeserve appeared on the scene, I have said anybody who bases a business model around advertising and e-commerce is likely to be disappointed, and that's exactly what's happened. There is only a slump in the sense that initial expectations were over-inflated," she says.

However, investors are also beginning to realise that "pure-play" Internet companies may not be the main beneficiaries of the Internet revolution. Pioneers such as Freeserve, which popularised the "free" ISP business model, are giving way to more diversified, established players such as Thus (quote: THUS). Even in the US there are questions over whether the likes of Amazon, Yahoo! and eBay will be able to continue with their pure Internet business models, according to Bennett.

Freeserve may have a better chance of surviving than some, since as a primary point of entry to the Internet it can provide a valuable marketing tool for other Web companies. "Smaller outfits who are currently trying to compete will need to go under a larger umbrella, and Freeserve could fill that niche," Bennett says.

In related news, Peter Cowley, the ISP's head of broadband, said the company expects to sign up more than 100,000 users in the 12 months following the rollout of its ADSL offering Freeserve Plus. a large number considering the system will cost £40 per month.

According to reports, Cowley told an audience at the Edinburgh International Television Festival that Freeserve hopes to get DSL's price down below £30 next year, which will drive adoption "into the millions". Freeserve and other ISPs will be reselling British Telecom's Openworld DSL service.

Broadband services such as DSL and cable-modems are expected to revolutionise the way people use the Internet. However, DSL has been delayed from an original launch this spring and has been further hampered by the complicated unbundling process.

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