Fool's Eye View

[ November 22, 2000 ]

Netting The Cash

By Alan Oscroft (TMFAlan)

Liverpool -- This Internet thing, child born of the 20th century, is still far from maturity. But it is growing up. Like all new technological developments, when it started out there were many different business models aimed at exploiting it. And like most things, only the fittest will survive and the truly long term successful business models will come to dominate.

But what will the successful business models be?

But First, A Sad Farewell

The failure of TheStreet.co.uk, whose operations closed so recently, was a sad event. It was felt particularly in companies like our own, because I think we all feel an empathy with fellow pioneers in our new business space. What TheStreet did, it did very well. But there are two lessons to be learned from hindsight (and which many observers have already pointed out). Firstly, the "capture the eyeballs and sell them to advertisers" business model is looking less rosy than it did just a short year ago. To be successful long term and bring in the cash, online businesses need to do more than that and need to provide value added services that people will actually want to pay for.

Secondly, and perhaps more contentiously, is the idea that brand really is important. Personally, I've always thought that TheStreet's brand was a rather poor one for the UK market. Certainly, if I were to ask friends and family who don't use online financial services what "The Street" was, they be likely to adopt a puzzled expression and answer "It's the long black thing in front of the house, of course."

I've always been a firm believer in the importance of great brands, but it was this excellent piece by Bob Fredeen (TMF Bobdog) from the US Fool that really drove home to me the importance of brands in cyberspace (and it extends beyond pure retail). Well worth a read, I think.

But though I will miss it, it's not TheStreet that I have been thinking mostly about today.

Profit for ISPs?

The "Will they, won't they, will they, won't they, will they sell the firm?" quadrille that Freeserve (LSE: FRE) has been dancing for so long now looks closer to reaching a conclusion after today's news that a takeover might finally be on the cards.

Freeserve has been the inspiration for many an emotion in me: from amazement at the flotation value of around £2bn, through shock at the subsequent share price rise and frustration at not having stagged the issue, to incredulity at claims made for the company's profit potential.

In this afternoon's Fool's Eye View, Rob Davies (TMF Essex) takes a look at how the mooted acquisition by French ISP Wanadoo might pan out and what it holds for UK investors. And that French court decision against Yahoo! (Nasdaq: YHOO) that he mentions -- a forward-thinking rational act or an example of Gallic arrogance? Hmm, I know one country where I wouldn't want to be making any Internet investments.

But what does Wanadoo want to do with Freeserve (if indeed it acquires it)?

A Commodity, Surely?

Just as the provision of telecommunications services is firmly becoming a commodity business with progressively less and less differentiation between suppliers, the provision of Internet services is surely going the same way.

I use a number of ISPs and have, among others, an "all you can eat" account with Freeserve. For a flat £10 a month I get unmetered Internet access. In fact, I also get £10 worth of free ordinary phone calls and if I use those, Freeserve gets precisely zero in return for the ISP service I enjoy. I never look at Freeserve's home page and never respond to any Freeserve e-mail newsletters (I delete them without reading them).

What kind of business model is that? I reckon it's a bad one and I've always felt that my Freeserve account has been living on borrowed time -- that they've either got to change things and make me pay for the commodity that I'm consuming, or offer extra services that I will want to pay for, or go bust. I don't hold out much hope for the longevity of my Wanadoo unmetered account.

Freeserve did build a well-known brand, but whether that brand can ever be exploited to generate profits remains to be seen.

It Can Be Done

AOL (Nasdaq: AOL) is another service provider that has built a powerful brand (in the USA, anyway). But AOL has also built up a value-added service. Much as I personally dislike AOL's software -- and anyone criticising Microsoft (Nasdaq: MSFT) for allegedly stifling technological innovation really should try it -- the company has done a lot to create a captive audience. That has been achieved partly through the non-use of standard Internet protocols (so that to connect to AOL you have to use AOL's proprietary software, to access AOL mail you have to use AOL's proprietary software, to access the web you use an embedded browser rather than a stand-alone one, etc) but it has been effective. A whole subculture of Americans (and a growing number of Brits) equates the AOL world with the Internet.

Others have achieved similar things using standard Internet software, but none has achieved quite the same success as AOL.

Adding Value

So that's what Internet success ultimately depends on -- creating genuinely valuable services that can be sold at a profit. AOL is achieving it, but Freeserve hasn't so far. It will be interesting to see how the new owners plan to rake in the cash.

Where Next?

• Freeserve discussion board
• Lunchtime Fool -- Freeserve In Talks
• Fool's Eye View -- Wanadoo-a-deal with Freeserve?
• American Shares -- Yet Another Lesson For E-tailers