MARKET COMMENT
Something For Nothing!

By David Kuo (TMFDragon)
January 28, 2002

Carburton Street, London -- On Friday, in this comment piece we pointed to the measures that the Government plans to take to stimulate demand for broadband Internet access in the UK. This morning, the telecom regulator, Oftel, set out its stall in an attempt to secure the future of unmetered Internet access services across Britain. According to the proposal British Telecom (LSE: BT.A) will no longer be able to charge rival operators in advance for unmetered Internet access. It was widely believed that these unfavourable payment terms resulted in the slow take up of Internet services in the UK compared with mainland Europe. This was largely because Internet service providers were wary of over committing their leased services from BT.

The potential mass-market appeal for Internet access as a result of today's proposals should not be underestimated. Oftel's proposals are also likely to benefit many of the current Internet service providers and alternative telecom companies many of which are grappling with high level of debts and low levels of profit. This is a situation that cannot be sustained forever if we are to believe in the overriding remit of all business, namely to turn in profit for its shareholders.

Internet companies, even prior to today's proposals from Oftel, have been acutely aware of the twin issues of high borrowings and low profitability within their industry. But it should be remembered that the Internet, as an industry, is subject to the same life cycle rules that govern any business type. The early development phase, which was characterised by only a few users and just a handful of competitors, was rapidly replaced by a period of growth. This resulted in a corresponding increase in the level of competition within the industry.

In the shakeout phase, the weakest competitors were ejected and we have now entered a period, which should see the industry begin to mature. The various players that remain will need to pay greater emphasis on efficiency, which in turn implies a need to generate an acceptable level of return on capital for their shareholders. And for consumers this will mean that the days of free Internet access are effectively over because in the world of economics there are never any free lunches and you certainly don't get "Something For Nothing".