Why Telstra can't be a free ISP yet

However, he said the shift to free ISP for Net users would require a complex strategy reshuffle for a company the size of Telstra.

Telstra dismissed reports of a free ISP offer yesterday as "rumours and speculation" stemming from one unique community program in which the telco "discussed" offering free ISP access to residents of the small Victorian town of Stonnington. The offer would have fallen just one week after the Telco announced it will lower Big Pond prices to attract one million subscribers by June.

Although Telstra denied it was considering the free ISP offer, Budde said it was unlikely it would be satisfied with its 25 per cent Australian ISP market share for long.

"That [25 per cent] is not enough to succeed in the future. It would be enough for you and me, but not enough for a company like Telstra," he said.

Budde said offering free Internet access would be the easiest way for the ISP to increase its market penetration. "They are faced with the problem of how to go into the Internet market and how to quickly build up their market penetration. It's [free Net access] the easiest way to do it. The Internet will no longer be a commodity, over time it will become free. We will only pay for the services available over the network."

Budde said Telstra would need to make significant adjustments to its Internet strategy in order to succeed as a free ISP. He said if the ISP planned to offer Big Pond access for free it would need to better identify its users in order to attract more interest from advertisers.

"Just giving it [Net access] for free is impossible. You have to link it to advertising possibilities. You need to know exactly who your users are, who the target group is for your advertising sponsor. Advertisers are only interested if you've got a targeted audience you can deliver to them," he said.

However, Budde anticipated a market separation between Net users attracted to free ISP access and Net users sought after by advertisers. "People who know what they want, they might come through [Big Pond}, but they'll quickly jump out and go to other services. They could go to services in America or China. On the other hand, people who won't venture outside the walled garden, I would question whether that would be the most interesting target group for advertisers.

"If you go for the free end of the market, then you're aiming at the population [of users] who don't give a damn about quality so long as it's free. That's not the most loyal market," he added.

Any effect on Eisa?

Following yesterday's reports of Telstra's free Internet service, rival ISP Eisa's share price dipped by more than 7 per cent, or 20 cents, closing at $2.54.

But Budde said it was unlikely the free ISP reports would have permanently scarred the sharemarket's perception of Eisa. "I can understand the sharemarket's movement . . . but the whole emphasis of the Internet is moving away from engineering companies such as Telstra to marketing companies. Eisa, with its background in retail, is well suited to come up with good offerings."

Budde expects Eisa will soon take a dominant ISP market positioning by way of shrewd advertising and focused service offerings.

Telstra recently lost its battle to buy Australia's second biggest ISP, OzEmail, to Eisa.

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