Europe's Net Surfers Get A Price Break

Competition and regulatory pressure are pushing down rates

Xavier Imbrecks is back surfing the Internet. When the Belgian sound engineer bought a new computer last year, he spent at least two hours each day online. Then he received the bill--$100 for a single month. "I turned my computer off," he recalls. He turned it back on only after Belgacom recently cut late-night Internet access rates by 50%, to less than 2 cents per minute.

From Rotterdam to Ravenna, high local phone rates are plunging in Europe, removing a key obstacle to widespread use of the Internet. While Americans pay a flat monthly subscription for unlimited local Internet access, Europeans traditionally pay by the minute. That makes individual use of the Net about 30% more expensive in Europe than in the U.S. But now, regulators and competitors rolling out high-speed online connections are forcing telephone companies to cut prices and move closer to the single-fee system.

FLAT FEES. The changes represent a major shift in strategy for both telephone companies and popular new Internet services such as Britain's Freeserve PLC. While their short-term revenues could fall, overall call volumes and Internet usage eventually should more than compensate. Europeans spend a quarter of the time that Americans do on the Internet. But the figure rose 60% last year, according to Dataquest Inc. Since it unveiled its new rates, Belgacom's local call volumes have jumped 70%--almost entirely due to Internet use.

Price cuts are proliferating. British Telecommunications PLC announced on Sept. 2 a new BT Together program that slashes rates for regular daytime local calls by 25% to about 4.8 cents, and offers a flat $19 monthly fee for line rental and three hours of local weekend calls. "This is the first time BT ever has offered some kind of flat fee for local calls," says Susen Sarkar, a senior analyst at consulting firm Yankee Group Research Inc. In Germany, America Online Inc. on Oct. 1 will begin to charge customers a special, low 2 cents a minute for phone connections to its service--in addition to its monthly charge. Operators in Belgium and the Netherlands also have announced special Net rates or cuts in local charges.

Tougher regulation is responsible for much of the downward pressure. Former monopolies generally charge high fees for competitors to gain access to the last mile of copper into individual homes. Not for much longer. German regulators recently ordered Deutsche Telekom to cut its access fees by 66%. And French regulators are reviewing France Telecom's connection charges.

CABLE COMPETITION. Mounting competition is having an effect, too. Cable companies such as Britain's NTL Inc. and the Netherlands' United Pan-European Communications want to combine their television lines with high-speed Internet connections. "As cable services offer single-fee, 24-hour access, the telephone operators will be forced to do the same," says Robert Jowett, a senior analyst at CIT Research Ltd. in London.

For the former phone monopolies, lower local prices represent at least a short-term threat. In Germany, for example, Deutsche Telekom had managed through the middle of this year to keep local prices steady at 4.5 cents a minute. A precipitous fall in local prices could eat into telephone company revenues.

It also could slow the advance of free Internet access providers such as Freeserve. The company does not charge its British customers the usual monthly fee for its Internet service, but the phone company still charges Freeserve customers for every minute they are online, and splits that revenue with Freeserve. Now, "if Freeserve gets lower payments from BT, then it will have to make up the difference with E-commerce and advertising," says CIT's Jowett.

The big telecommunications companies aren't happy with the prospect of lower rates, of course. British Telecommunications, for example, has coupled its new price cuts with a rise in the basic monthly line rental charge, limiting the savings to customers. And Deutsche Telekom has protested the regulators' decision. They should probably stop the foot-dragging. In the long run, more calls compensate for lower prices, as serious Netizens such as Xavier Imbrecks surf more and more.

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