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.


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