Oftel, the UK telecoms watchdog, has declined to put a stop to the free internet service providers phenomenon, and instead has released a consultation document outlining the introduction of pricing competition. The recommendations would allow ISPs to help set the price of local rate telephone calls to their services.

Under the proposals, new dialing codes will be introduced before the end of 1999, each reflecting a different price for internet dial-up access. Oftel is eager to ensure the new codes will become easily associated with the cost of calls they reflect in the public consciousness, the way users know an 800- call will be free. The watchdog suggests some ISPs could introduce one-time payments for unmetered dial-up, or bulk-purchase of minutes offers. This pricing structure is expected to stay in place until August 2001.

Reception to the document has been mixed. Free ISPs such as Voss Net, which runs a small service for schools and charities, has welcomed the move. The paid-for ISPs are more hostile. A spokesperson for AOL UK said the document failed to acknowledge that not all ISPs are tied to telecoms that some remain independent. The spokesperson went on to say AOL will not adopt the free model.

Many of the larger free ISP operators, such as Dixons or Virgin, are commonly held to use their ISPs as loss-leading marketing tools – used to direct customers into their e-commerce sites. The question remains whether these ISPs would be willing to cut their margins further to keep customers.

How the system will work

In the UK, calls made to free-phone, special rate and premium rate services are known as Number Translation Services (NTS). This means a number with a special prefix (such as 0845 for local call price NTS) costs the same for the caller, no matter where he or she is calling from. When a user makes a call to an NTS number, a formula is applied to the cost to determine what percentage is paid to the terminating operator (such as an ISP) and what is retained by the originating operator (typically British Telecom).

This allowed free internet service providers to spring up. The typical business model sees a telco operate an 0845 local rate telephone line for internet dial-up access, while a large retail or media company deals with marketing and distribution. Both parties then collect a share of the termination fee the service receives under the NTS formula.

Under the new system, the ISP could set an amount it would expect to receive per call minute. The originating operator (i.e. BT) would then add its expected retained fee to this figure to arrive at a customer price. A new dialing code would be used to signify the new call price, which could be higher or lower than the standard NTS local call rate.