Time for Freeserve to stand up and be counted

If it was a stormy ride simply watching last week's events unfold, spare a thought for one of the companies at the centre of the maelstrom.

Freeserve, the ISP that heralded the end of connection and monthly subscription fees, was widely tipped as the biggest loser of the week. A year-and-a-half after launching its revolutionary service, the Dixons spin-off is looking decidedly old-fashioned. Who cares about free subscription when you can have free calls too? Freeserve will die a slow and painful death at the hands of NTL, Altavista et al. Or so we were told.

In a strange week for the company, Wednesday also saw Freeserve ushered into the FTSE-100, the index of most valuable UK Plcs. But what should have been a landmark occasion turned a little sour when critics of the technology-swamped Footsie derided the influx of 'over-inflated, profitless' firms. And no one symbolised this trend more than Freeserve itself (losses: £1.7m, market capitalisation: £6.5bn). The Footsie has lost credibility and Freeserve will get its comeuppance. Or so we were told.

The trouble with these particular pearls of conventional wisdom is they fail to take into account either economic probability or entrepreneurial imagination.

It's true that interconnection charges currently account for a substantial chunk of Freeserve's revenues - approximately 50 per cent - but even before the latest spate of announcements, call charges were never the main part of the long-term business plan. Like other dot-coms, this ISP's future lies in advertising, ecommerce and additional services.

Freeserve boasts 1.5 million subscribers (and rising) who spend an average of 166 minutes online each week. Research from Durlacher suggests that time online will treble if calls are free. So while Freeserve would take an initial, and substantial, hit if it went completely free, more time online means more eyeballs on adverts, more time to shop and inevitably increased revenues. An increasingly popular high street means higher rates for shopkeepers.

Investment bank, Soc Gen, forecasts profitability for Freeserve within two years. Its estimated £11.9m operating profit is based on £41.3m turnover from ecommerce and advertising, £21.2m from telephone charges. If Freeserve went free, it would lose the latter but could probably double the former. Further, there is nothing to stop ISPs offering free dial-up services but charging for ADSL, and other high-speed services, as they become available. This is just one of the possibilities filed under the rather vague term 'additional services'.

There is little doubt this is crunch time for John Pluthero and his team. He can ignore the storm around him or he can embrace it: announce free access and prove that he can adapt to the changing times. And if he is looking for a role model, he need look no further than AOL's Steve Case. Back in the mid-90s when the world first woke up to the Internet, proprietary services such as AOL, Compuserve and Cix, were given a grim diagnosis by the doctors of high-tech spin. Yet these companies, rather than accept their fate, reinvented themselves as Internet service (and content) providers.

Unmetered access from Freeserve - as hinted at over the weekend - is not enough. If the company that introduced the idea of the free ISP is going to prosper, it has to go all the way. And it needs to do it sooner rather than later.