The Freeserve solution
A Freeserve case study

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Page 5: Competition across the industry

Freeserve 5 Diagram 1When looking at an organisation’s competitive position, it is important to understand the opportunities which exist in the market, as well as other competitive threats. The ideal situation would be a large market with growth potential and little competition. However, the Internet market has shown considerable growth in recent years and is also fiercely competitive. The market for subscribers, users and Internet advertising is new and rapidly evolving. Competition is expected to increase in the future.

Michael Porter has argued that there are five forces determining both the nature of competition an industry will have to face and the profitability of the entire industry. Four external competitive forces can influence the existing competition within an industry.

Bargaining power of buyers

Since the launch of Freeserve, over 100 other companies have introduced free Internet access services in the UK and some existing online services have stopped charging access fees. Consequently, there are low switching costs for users and subscribers.

Bargaining power of suppliers

Freeserve’s business and growth depends, in part, on the capacity, reliability and security of its network infrastructure, which is provided by Planet Online. In addition, Freeserve depends on public telecommunications operators such as British Telecom to transmit its traffic over long distance networks.

Due to the increased use of the Internet, telecommunications operators have experienced capacity problems. If Freeserve’s growth exceeded the current network capacity, Freeserve would have to acquire capacity on less favourable terms or with inferior service levels.Freeserve receives a pre-determined connection fee each time one of its users connects to the Internet.

Connectivity is a major source of revenue for Freeserve. If the costs of connectivity were significantly reduced, Freeserve would lose a significant proportion of its revenue. For this reason, Freeserve is looking to reduce its dependency on connection fee income over time.

The threat of substitute products

Freeserve competes for advertisers and advertising revenue with traditional forms of media, such as newspapers, magazines, radio and television.

Barriers to entry

Although barriers to entry in the Internet market are low compared to traditional markets, Freeserve has a number of unique advantages to help it counter the threat of new competitors.  Barriers to entry include:

  1. Economies of scale - Freeserve’s relationship with the Dixons Group provides it with several important benefits. Dixons’ credibility and long relationships with its suppliers strengthen Freeserve’s position in negotiating its own agreements. Freeserve also has access to Dixons Group’s operational skills, systems and infrastructure. Freeserve is a leading brand with approximately 1.4 million active users. Its large user base and strong brand name enhance its ability to enter into favourable arrangements with network service providers, e-commerce partners, on-line advertisers and content providers.
  2. Product differentiation - Freeserve differentiates itself from most of its competitors by not being a pure provider of Internet access or a customer loyalty programme for Dixons Group.
  3. Capital requirements - Freeserve’s recent flotation gave it powerful acquisition currency. Freeserve invested in Telepost, a provider of low cost teleconferencing and telecommunications. It acquired 100 per cent of Babyworld, an Internet business targeting families that are planning, expecting or have recently had a baby and recently acquired an 80 per cent share in a UK focussed auction business.
  4. Switching costs - Switching costs are incurred when changing the use of resources to develop products for a different market. Freeserve has the capital following its flotation to meet such switching costs involved in product development.
  5. Access to distribution channels - Freeserve benefits from extensive UK distribution channels through Dixons, Currys, The Link, PC World and @jakarta.
  6. Cost disadvantages - The flotation of Freeserve incurred charges of some £3.6 million flotation fees, expenses and marketing costs of £12 million. However, the costs were significantly outweighed by the benefits to Freeserve.

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