Sunday, August 31, 2003

The impact of charging regimes on the growth of dialup internet services or Why do I have so many different e-mail addresses?

Traditionally, British people (and most other Europeans) have paid by the minute for all phone calls, including local phone calls. As an Australian, this is different to what I am used to, which is for local calls to cost a flat fee: you pay for the call but can talk for as long as you like without having to pay any extra. This is different still to what Americans are used to, because the situation in America is that local calls are free, or at least the cost of them is included in the line rental.

In the days of telephone monopolies and cross subsidies from one part of the network to the other, these differences didn't matter much. Some countries had high line rentals and low call charges, and other had low line rentals and high call charges. What some people lost on the swings, others gained on the roundabouts. That said, local calls tended to be shorter in Britain than they did in either Australia or the US. Charging people a fee per minute does this.

However, this difference in telephone charging arrangements became quite a big deal when people started using their telephones for dialup internet service. The obvious reason for this is that people using the internet like to make long calls. In the US, Internet service providers initially started charging by the minute, but by about 1997 unmetered service became standard. People were charged a flat fee by their ISP, and could dial the ISP using a local number. People using the internet a lot were on the phone a lot longer than before, but did not pay any additional money to the telephone company for the extra calls. The telephone companies made some extra revenues through people paying line rental on second lines for internet use, and made some more through ISPs themselves renting lines that they used to provide internet service. Telephone companies weren't especially happy about it, complained about additional costs, and argued at length about whether things should change, but basically they were stuck with it. The other way for telephone companies to make money from dialup was for them to actually own ISPs, and this happened in a big way.

In Australia, virtually all local phone lines are owned by Telstra, the (ridiculously still 50% government owned) former monopoly. As I mentioned, local calls cost a flat fee. An ISP market came into being in which customers pay a monthly fee to the ISP, which provides local numbers for connection. The customer then pays per call to Telstra for local calls. If you are a fairly heavy internet user who makes three or four calls a day, you end up paying about $A30 a month in call charges to Telstra and about $20 a month to the ISP directly. This is very lucrative for Telstra, which has had its revenues go up considerably due to the internet. However, it has a couple of negatives. For one thing, people will stay connected to the internet for four hours (or longer) rather than make two calls four hours apart, because this is cheaper. Secondly, dialup is so lucrative to Telsta this Telstra doesn't have much of a financial incentive to migrate its customers to DSL, which is one reason why the broadband market in Australia is so underdeveloped. (Another reason is that Telstra also owns the most important cable networks, so there is little competition from other platforms).

In the UK, however, we started with the other extreme. British people traditionally have paid by the minute for all their phone calls, including local calls. When the internet came along, this was a problem, as it made being connected to the internet for a long time very expensive. Initially, customers had to pay a fee to an ISP as elsewhere and a per minute charge to BT. Mass market internet did not take off.

However, in the 1990s considerable competition was introduced in telephone services in the UK, and at least some local numbers belonged to telephone companies other than BT. If a local call was made from a BT line to a line belonging to some other carrier, then BT would charge the customer for a local call and a portion of the money (the origination fee) would be kept by BT and the remainder (the termination fee) would be paid to the telephone company that operated the phone receiving the call. In 1998, a company called Freeserve was created by Dixons, a chain of electrical goods stores, and Energis, a telephone company competing with BT, to use this fact to launch an internet service that was cheaper than previous arrangements. Essentially, customers were given a dialup number to call that terminated on an Energis number, that was connected to the Freeserve ISP. The customer was charged for a local phone call, BT kept the origination fee, and the termination fee went to Freeserve. (Actually Freeserve took advantage of something called "0845 non-geographical local rate" numbers rather than local numbers strictly, as someone would no doubt point out if I didn't myself. However, the effect was exactly what I described). The customer only paid a single fee that appeared on his phone bill as the cost of a "local phone call", but this was split, and some of the money went to BT and the rest to Freeserve. Freeserve didn't have to worry about billing customers directly or anything like that, as this was all handled by BT's existing billing services.

This was cheap enough and simple enough that British people started using the internet in large numbers. Freeserve almost immediately became the largest ISP in the UK, a position it retains to this day. Other ISPs quickly followed, and dialup internet services that work like this - the only charge is for timed phone calls that appear on your phone bill - are still very common in the UK. Collectively they are known as "Pay as you go" services, and they are popular with people who only use the internet for a few hours a month.

Pay as you go services were a big advance, but they were still timed and still worked out to be expensive for people who wanted to use the internet a lot. There was pressure for the introduction of genuinely untimed dialup intenet services. BT was under pressure to deliver these from a variety of directions. One was that BT was receiving competition from cable companies that provided local phone services as well as other services, and which did offer untimed dialup internet services for their customers. This was a reason for some of BT's best customers to jump ship and get all their telephone services from other companies, and BT had to compete. Secondly, both customers and the regulator of BT's semi-monopoly looked at the rest of the world, saw that untimed dialup internet was common, and asked why we couldn't have it here. The regulator eventually announced that BT's wholesale charges (ie to resellers of its services, including ISPs) had to be related to its costs. In effect, this meant that ISPs could charge their customers a flat amount per month. A portion of this would then be paid from the ISP to BT. For this, the customer would then be able to call his ISP an unlimited number of times on a freefone (0800) number without there being any further charges to BT. Again, the customer would pay a single charge (although this time to the ISP rather than BT) which would be split between the telephone company and the ISP. (This is a simplification of the development of untimed dialup services, and there are a couple of other stages that I have left out. The company that introduced the key innovations and got its product to market first was AOL, which now consequently has a substantial share of the ISP market in the UK, although Freeserve remains the market leader).

(These wholesale rates also meant that resellers of BT's telephone services could also provide untimed voice telephone services to their customers. Essentially, this means that customers who pay a higher line rental can now have free local (or even national) calls, just as in the US. People who pay lower line rentals still pay by the minute).

So that is where we are. Most serious dialup intenet customers in the UK pay a flat monthly charge for as much dialup as they like, and there are no additional call charges. Less serious users pay by the minute and are charged on their phone bills. At all stages in the development of the market, BT has dragged its feet, and other companies have been the innovators. BT has usually offered similar services soon after, but has never really challenged for a position of market leadership. (This is typical. BT is a reasonably good wholesale company, but at the retail level is hopeless. This in some ways isn't so bad. If it was a good retail company, its retail arm might prevent the wholesale arm from selling its services to other people as happens with Telstra in Australia). In 2003, people in the UK have started to get serious about broadband, and there is a price war going on for broadband right now. BT seems to be doing a little better selling broadband than previous innovations, but is still a long way behind. (Just out of interest, the five most significant ISPs in the UK are Freeserve, AOL, BT, and cable companies NTL and Telewest).

Now, what does this mean for my e-mail addresses. Well, oddly enough the existence of pay as you go services makes it much easier to change ISP. The big hassle to changing ISP in the US or Australia is normally having to change your e-mail address, because once you have left an ISP they are unlikely to be willing to continue to provide you with an account on their mail servers. However, in the UK, if you are on flat fee untimed service from an ISP, you tell them that you don't want to continue using the untimed service, but you wish to keep an account with them on their pay-as-you-go service. Because you are still technically a customer, your e-mail account continues to exist and you can access it via POP without even connecting to that ISP. However, because you don't pay anything to the ISP unless you connect to it via dialup, you don't generally have to pay anything for continued use of mail (and also webspace) facilities. Sometimes the ISP will delete your account if you go a long time without connecting, but normally they will send you e-mail telling you this is about to happen, and you respond by connecting for a few seconds and paying a few pence.

In 18 months in the UK, I am now on to my third ISP. I initially used the untimed service belonging to BT, but after about nine months I decided to switch because BT were more expensive than the competition. They still weren't very expensive, but they were not especially reliable, and if you are going to charge premium prices you need to provide premium service. I then switched to Freeserve, which I used until quite recently. Although Freeserve are not the cheapest ISP out there, their pricing is about in the middle of the pack and I found their service to be considerably better than that of BT. However, after about nine months of them, I decided I wanted to upgrade to DSL. Freeserve's DSL pricing was once again in the middle of the pack, but (like many of their competitors) they require new DSL customers to sign up for a 12 month contract. I am not in a position to commit myself for 12 months. However, Richard Branson's offers a DSL service which only requires you to sign up for one month, and which has a monthly charge that is slightly lower than Freeserve. (Virgin requires you to pay for your modem, whereas many of the other ISPs throw in a free modem if you sign up for 12 months. When you take that into account, the cost of Virgin for 12 months is close to exactly the same as the others). So I have now been signed up to for a bit over a month.

However, I still have Pay as you go dialup accounts with BT and Freeserve. My e-mail address that I got from BT, which is, still works and I still use it as my primary e-mail address. (It is receiving so much spam these days that I may abandon it soon, however. BT's service is still occasionally unreliable, too, hence things like the e-mail outage the other day). My e-mail address from Freeserve, which is mjj12 at, also works fine. (This one does not get a lot of spam, hence the 'at' rather than '@'). Feel free to use this one. I have a third e-mail address from, which is michael.jennings1 at Again feel free to use this one. These pay as you go dialup accounts are also useful to have around as backup if my DSL connection fails.

And I fear this may be long and dull. Oh well.

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