/ 26 January 2001

Hidden costs in ‘free’ Internet service

The free Absa.co.za Internet service announced this week may be the first of many, if the plans of its United Kingdom-based partner Affinity Holdings are anything to go by.

But this virtual Internet service provider (VISP) is not quite free. Users who need not have Absa accounts will need modems, pay phone charges and have to provide personal information when signing up.

Technical support calls will be charged at cellphone rates. Analysts reacted with scepticism to the first announcement though it knocked 12% off the share price of Internet service and content provider M-Web.

But the logic behind the deal, as described by Absa, makes extremely sunny assumptions about a flood of happy online retail purchasers from whom revenue can be skimmed. And that’s assuming Absa.co.za gets its projected 200 000 users in the first year.

Absa and its shareholders have little to lose financially the bank is paying only for the marketing of the new venture. The financial risk lies with Affinity, which is footing the hardware and software costs.

Described by CE Wayne Lochner as “a supplier of branded Internet solutions”, Affinity’s share price reached 80 last February, but the graph looks like the Matterhorn: it has plunged to just under 6. It managed an operating loss of 7-million in 2000 on revenues of 4,55- million from operations in Scandinavia, Australia and the Benelux countries.

But some UK analysts are predicting Affinity will become profitable in the last quarter of 2001. Already it is involved in similar VISP deals with the likes of the Royal Bank of Scotland, online financial services company Egg and Arsenal Football Club. Of course, the revenue model for almost free Internet access in the UK involves getting a slice of the revenue earned through phone calls, impossible in South Africa.

But Lochner says the Affinity business model transplants easily to South Africa. “Because of the global deals we have [with strategic partners ICL Fujitsu and Cisco Systems], it can be very cost-effective for us to establish new projects.” “The virtual Internet service is but the first stage,” said Lochner. Affinity will be moving into e-commerce, online entertainment, branded mobile telephony, convergent billing (different accounts all appearing on one Web page) and online payment solutions.

Predictions that the new service will bombard users with advertising are unfounded those who change the home page settings on their browsers will hardly see Absa’s name. Absa promises it will not use the Absa.co.za database to deluge users with junk mail.

Internet analyst Arthur Goldstuck is sceptical about the deal, though he describes Absa’s getting Affinity to carry the infrastructure costs as a “masterstroke” . But Goldstuck does not believe that the returns Affinity seeks can be delivered by retail e-commerce. Nor does M-Web CE Antonie Roux, who points out that even in the huge United States market, the free ISP model has proved unsustainable.