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Freeserve Falling Off the Apple Cart

The slope on UK-based Freeserve's six-month stock chart looks picture perfect - if you plan to ski down it. But if you're an investor caught in the avalanche of negative sentiment heaped on this new economy issue, it's looking like a cold winter this year. While the FTSE 100 index returned to its high for the year last week, the rising tide failed to lift all boats for this once celebrated Brit cyber-celebrity.

Freeserve sits 75% off its 52-week high, and within a stone's throw of its all-time low. Now the London Stock Exchange has indicated the free ISP will be booted from the Techmark 100 technology index this week because of a sagging market cap. Despite aggregating a bevy of eyeballs, Freeserve has fallen on the same lean times as its U.S. counterparts, and for all the same reasons.

UK's largest electronics retailer, Dixons, owns an 80% stake in the once high-flying Freeserve. The parent has been pulling its hair out trying to pawn its sibling off to the highest bidder. But for a start-up boasting an out-of-favor business model with a frothy market capitalization that threatened to rival the sexiest of the dot-com bellwethers, a deep-pocketed white knight never quite materialized.

Deutsche Telekom's ISP subsidiary T-Online has been the most likely suitor bandied about, with France Telecom's Wanadoo spin-off not far behind. While both newcomers have been eager to gain a toehold in Europe's second largest market, Freeserve has left potential buyers with sticker-shock.

How soon the ISP will walk down the aisle depends largely on the price bigger fish are willing to pay for roughly two million users of Freeserve's free access service. The growing sentiment on Wall Street is that subsidized users who flock to "free" aren't worth pennies on the dollar to potential acquirers, because typically, advertising dollars are reluctant to target cheapskate consumers.

Retail investors in the U.S. have long been hip to that logic, sending shares of Netzero and Juno Online to the bargain bin. Both free Internet access providers led the group of Net stocks forced to walk the plank by grumpy investors in April and still skip along the bottom of the barrel near their respective 52-week lows. Even with high-tech enjoying a recent boost in the markets, freebie Net access remains on the outside looking in.

While Freeserve's fall from grace obviously makes it ripe for consolidation, the company needs to hop off its high horse and get serious about its exit strategy. With unmetered access threatening its bread and butter revenue stream and dimming prospects in the public markets, Freeserve will only continue to lose its looks with age. The upstart is likely sitting on a business model with limited shelf life; so, now's the time to strike while the iron's hot.

Any questions or comments, love letters or hate mail? As always, feel free to forward them to kblack@internet.com.

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