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Thursday, 26 September, 2002, 07:42 GMT 08:42 UK
Techies braced for new internet boom
Graph showing growth in UK broadband users

There is something of the horror film about it.

There is going to be more crying and screaming before the market settles down

Andrew Ferguson, ADSLguide
Just when you thought the internet industry was a safely chilling corpse, it lurches back into life - rejuvenated, experts claim, by the magic of high-speed broadband access.

Now, telecom incumbent and would-be broadband pioneer BT Group is launching the UK's most intensive TV advertising campaign ever.

And the market is already attracting a new generation of orthographically eccentric firms - edNET, InWeb, izRSolutions and the like.

Indeed, the number of clients at the trade's wholesale end grew by 40% between February and July.

Trouble ahead

It's like 1998 all over again.

There are business plans based around undercutting rivals by 50%, and talk of 500% growth in customer numbers.

Broadband billing league
France: 35
Germany: 27
US: 27
UK: 26
Sweden: 21
Home broadband prices, per month Source: Oftel

Even conservative BT talks about doubling the rate at which it signs surfers to broadband.

"I hate to say it, but the problems we had when unmetered access appeared - with people making these great offers which came unstuck - we are going to be hitting those again," says Andrew Ferguson, staff writer at sector monitor ADSLguide.

"We are going to see entrepreneurs who know nothing about the market, but see it as a money spinner, moving in.

"And there will be some who get caught."

Indeed, some industry watchers believe the number of broadband providers, of which ADSLguide lists more than 150, will eventually wither to five.

Falling bills

The growth in broadband service providers is being driven by a customer boom which saw user numbers expand fivefold last year.

Grab from Freedial website
Freedial prices: Are they sustainable?

Cable firms Telewest and NTL accounted for much of the rise.

But it is the market for providing broadband through phone lines - so-called ADSL services - which is proving the most contested battleground.

Interest in ADSL has soared since BT, "encouraged" by regulators, halved its wholesale prices to 14.75 a month.

The cut has in turn allowed broadband providers to reduce their bills to customers.

After accounting for admin costs, plus an extra BT linkage fee, providers have been able to charge 25 per month and still turn a profit.

'Too good to be true'

But that was just the beginning of the price war.

Manchester-based ET Global Solutions has started offering services for 18.95 a month.

Nell McAndrew launching BT's
New net model: Nell McAndrew at the BT ad launch
News last week of a 12.99 package from rival Freedial upped the ante still further.

"It seems an offer too good to be true... the pricing looks almost suicidal," ADSLguide wrote.

Iain Ogilvie, marketing manager at broadband service provider Nildram, says: "I am not so sure these prices are sustainable."

Cost saving tips

Still, there are tricks providers can use to supplement their income.

Some, for instance, economise by cramming users into line space - risking poor service quality - or levy cash by registering helplines as national rate or premium numbers.

We do not want people to be affected by idiots streaming music all day and abusing the service

Don Day, ET Global Solutions

"It does not take long at premium rate for customers to notch up extra pounds," Andrew Ferguson says.

Others scrimp on support altogether.

Disgruntled surfers have set up BTopenwoe and Pipexwoe sites to swap tales of service and support failure.

Cross-subsidy offers further potential for underpinning cut-price packages.

"Service providers can use revenues from business customers, where margins are much higher, to subsidise consumer services," Mr Ferguson says.

And some providers insist on the purchase of hardware with a service deal.

"They can sell a modem for a mark-up of 50-60%, which adds a lot to revenue."

Key calculations

Indeed, Freedial makes a 30 margin on a "connection kit" sold with every broadband package, managing director John Nicholas says.

The company also operates some cross-subsidy from its higher-tariff schemes.

"We have got the sums worked out," Mr Nicholas says.

The calculations show that Freedial will be able to provide its cut-price service for at least two years, he says.

"And who knows what will be happening then?"

The firm reserves the right to raise its future charges.

Technology trick

ET Global Solutions, meanwhile, operates both the modem-purchase and high-density tactics.

But the modem it sells is designed to deter the kind of volume-grabbing customers likely to jam its wires.

"The thing about broadband is the number of people using it to stream music, which takes up a lot of bandwidth," managing director Don Day says.

"We do not want introductory people to broadband to be affected by idiots who are streaming music all day and abusing the service."

Land grab

A land grab has begun in cyberspace.

The question is whether there is sufficient territory to support the growing number of claimants.

"There is going to be more crying and screaming before the market settles down," Mr Ferguson believes.

And the losers will not just be the failing providers, but the customers they have signed up.

Just when you thought it was safe to embrace the internet...

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