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AOL U.K. plans flat-rate Net access

The Internet giant plans to offer a flat-rate subscription service in the United Kingdom, opening a phase in its clash with popular rivals that offer free Internet access.

America Online today unveiled plans to offer a flat-rate subscription service in the United Kingdom, opening a new, risky phase in the company's clash with more popular British rivals that offer free Internet access.

Dubbed "AOL Flat Rate," the service will be priced around $21 (14.99 pounds) a month. The subscription package will include telephone and support costs.

The move caps an 18-month lobbying effort spearheaded by AOL U.K. to allow Internet users to avoid paying charges for local dial-up connections. Unlike their U.S. counterparts, phone companies in Europe charge per-minute rates on all calls, regardless of the distance. That can mean big bills for heavy Internet usage.

Under new rules approved in May, however, Internet service providers can purchase unmetered network access at wholesale rates, allowing their customers to bypass the local dial-up surcharge. The rules are expected to increase demand for Internet access by dramatically reducing the connection costs.

While that's good news for AOL, it is also promising for its competitors, and the company has a long way to go before it can consider its flat-rate service a victory.

When AOL adopted a flat-rate plan in the United States, its subscriber numbers skyrocketed, laying the groundwork for advertising and commerce revenues. But the competitive landscape in the United Kingdom and Europe is significantly different, and a flat rate alone may not provide the competitive edge for which AOL is still searching overseas.

In particular, the company faces stiff competition from "free" ISPs in the United Kingdom, most notably from Freeserve. These companies offer Internet access without subscription fees but are not truly free because customers have been required to pay metered phone charges, with a cut going to the ISPs.

"AOL is definitely the follower of Freeserve in the U.K. market right now," said Olivier Beauvillain, an analyst at Jupiter Communications. "I think this deal is more customer retention for AOL" rather than a customer acquisition play.

Freeserve's model, however, could come under pressure from the new rules that have allowed AOL to launch its flat-rate service. As any ISP can offer unmetered Internet access in the United Kingdom, non-subscription services stand to lose a significant revenue stream with the end of metered charges.

Regulatory hurdles
On paper, opening the gates to flat-rate pricing was a tremendous win for AOL.

Internet companies, especially AOL, have lobbied local governments aggressively to eliminate metered phone charges. They argue that metered pricing has limited the Internet's growth in Europe by imposing a price constraint on usage. Only by increasing time consumers spend online can Net advertising and e-commerce grow, they say.

In May, the United Kingdom's Office of Telecommunications ruled that British Telecom must begin selling wholesale, flat-rate services to competitors. As a result, network operators such as WorldCom could begin selling these services to ISPs such as AOL.

In a country where the Internet giant is an underdog, the ruling could be AOL's most important avenue to increasing its coveted subscription numbers in a battered market.

"The free model is coming into question, and the flat-fee rating will eventually dominate the market," said Youssef Squali, an analyst at ING Barings. "The rate of growth in subscribers will accelerate more in the next couple of years."

But as many U.S. companies have seen, what has proven successful at home may not work abroad. Consumers in Europe are still light Internet users, primarily because of metered pricing. It may take a while before the Internet becomes as pervasive and relied upon as it is in the United States, according to Jupiter's Beauvillain.

"In Europe, the large portion of the population hasn't experienced the Internet," Beauvillain said. "This population will continue to go for low-end offerings such as free ISPs. It's logical when you're new to the Internet. And then, as you spend more time online, you can upgrade to a more interesting pricing plan such as the one AOL is using right now."

AOL will introduce the flat-rate service gradually. Initially, the online giant will offer the plan to longtime AOL U.K. members and then slowly open its doors to new subscribers as it builds its network infrastructure.

The company has its reasons for being cautious. When AOL went to a flat-rate model in the United States, it ran into serious difficulties as demand outstripped capacity. Its subscribers suffered outages and busy signals, leading some angry customers to file lawsuits against the company.

"The whole point here is to make certain that we give a very good service to our customers," said Michael Lynton, president of AOL International. "We have a lot of experience in how to do this. Part of it we learned from our mistakes."