Freeserve defiant after Dixons chooses AOL

The move ends five years of history between Dixons and Freeserve and could have a substantial impact upon the UK's biggest Internet service provider's ability to acquire new customers.

Karen Thomson, chief executive of AOL UK, said in a statement: "We have already established an excellent working relationship with the Dixons team and believe that this agreement represents great value for AOL in terms of subscriber growth and brand awareness."

However, Freeserve said the agreement, under which Dixons promotes Freeserve's dial-up Internet service to customers in its chains such as PC World, had become a hindrance to the ISP's plans to be profitable by next year, because it restricts the ISP from signing up with some other retail partners.

"We will continue to maximise this time with Dixons, but at the same time we will further build on new opportunities for customer acquisition through alternative means," said Freeserve chief executive Eric Abensur in a statement. "With the agreements coming to an end, we will lose all the restrictions placed on us as to which other retailers and partners we can strike deals with."

The dial-up deal between Freeserve and Dixons will expire in February 2004. A separate deal covering broadband will continue through to mid-February 2005, and is not covered by the decision.

Freeserve, now a subsidiary of France's Wanadoo, said that its other distribution channels, including offline and online, topped the number of subscribers generated by the Dixons deal in the first quarter of 2003. Other retail partners include Orange, Littlewoods, Texaco, MVC and the Lloyds pharmacy chain, the last announced on Monday.

Dixons helped create Freeserve during the dot-com boom, and the ISP quickly became the UK's largest dial-up provider due to its pioneering subscription-free business model. The service was sold to French service provider Wanadoo in 2001, with Dixons retaining a stake in the company.

The Dixons Group, which runs around 1,400 shops around Europe and includes retail chains Dixons, Currys and PC World, has been in talks with BT and AOL for at least six months on replacing Freeserve in its shops. According to sources, BT was also in the running to replace Freeserve, but was ruled out of the equation earlier this year.

Research company Forrester said that with 2.4m subscribers, Freeserve is still the biggest dial-up ISP in the UK, but because it has been slow to provide extras such as instant messaging, AOL has almost caught up.

Rebecca Jennings, a senior analyst at Forrester, told ZDNet UK last month: "The Dixons partnership has been instrumental to Freeserve's growth and is the reason it is number one." But she wasn't convinced that the deal will hurt Freeserve as much as it would have a few years ago, when Internet penetration was still growing at a tremendous rate.

Freeserve on Monday announced a broadband promotion under which new customers will receive a free modem and connection as well as a one-month no-risk trial.