The biggest are the best ... there is no other way

Jeffrey Young Allegra Strategies

Analysts at three leading internet research firms all agree that the time for ISPs to start charging fees is approaching fast.

This would involve a fundamental shift away from enticing new customers through bargain offers, focusing instead on ensuring increased revenue from existing customers.

Preparing for change

"European ISPs need to switch their customers to a paid-for model in order to get revenue and look to the future of a billing relationship," said Jupiter MMXI's Dan Stevenson.

"We're still in the [customer] gathering stage," said Director of Allegra Strategies Jeffrey Young, "but there will come a point when ISPs will have enough users to start charging."

Europe's big five

AOL T-Online Wanadoo Tiscali Terra

With big changes looming ahead, industry players have been battling to position themselves in order to ensure a greater share of the market.

There has been an extensive market-place shake-up, with a wave of takeovers creating a whole new landscape for the remaining ISPs.

The industry consolidation was also prompted because of the difficulties of making money from advertising.

Now, there are far fewer ISPs but they have a far bigger reach.

Going for growth

This week saw Italy's Tiscali scoop up the UK's LineOne, it's fourth acquisition since December.

Now Tiscali itself is rumoured to be a takeover target of its key competitor AOL.

The number of independent ISPs is set to decline sharply

Tiscali has said that it wants to be in the top three in each of the European markets - quite some expansion programme for a small internet provider that began life in Sardinia.

AOL has also been on the warpath in Europe, trying to spread its dominance in the US to the other side of the Atlantic.

It has won itself more than 2 million customers in Germany, is growing very fast in France and is in the top three of the UK, following what Allegra Strategies' Director Jeffrey Young calls a "staggering marketing campaign".

The web - a free commodity

A tie-up between these two giants could outsize the super-ISP formed last December by the takeover of the UK's Freeserve by France's Wanadoo.

But working out which ISP is winning the popularity stakes is tough because of the different methods of counting used by different ISPs.

Money - or the need to try and make some - is driving the rapid consolidation.

We'll keep buying to consolidate our position as European leader

Renato Soru Chief of Tiscali

ISPs are threatened with sharply lower advertising revenues and a customer base that has been weaned onto the internet through the idea that it is a free service.

In this highly competitive environment, taking advantage of the economy of scale is key to survival.

Operators are moving strategically to ensure a strong geographical presence across Europe in order to build scale.

"We'll keep buying to consolidate our position as European leader," said Tiscali's chief, Renato Soru.

Down to five

This process has led to just five main ISPs in Europe, according to Jupiter MMXI's Dan Stevenson.

And these five are either connected to telecoms firms such as T-Online and Wanadoo, or have very well-known portals such as Spain's Terra.

Further acquisitions are unlikely amongst the big five - apart from the talk of AOL and Tiscali - but medium sized ISPs are attractive targets, says Mr Stevenson.

The smaller ones will either be shut down or target a particular niche market.

Forrester Research predicts that by 2005, independent ISPs - such as the former Virgin ISP or World Online - will account for just 5% of the market compared to 27% last year.