Select Committee on European Union Minutes of Evidence

Examination of Witness (Questions 526 - 539)




  526. Good afternoon, Mr Melville. I think you have just been sitting in here.
  (Mr Melville) I just caught the last five minutes. It was very interesting. I disagreed with everything he said.

  Chairman: That is a very useful point.

Baroness O'Cathain

  527. Before you start, Lord Paul wants to know what your share price is?

  A. Do you really want to depress me? When I last checked we were £4.50, and that is fine. We floated at £1.50.

  528. You went up to about £9, did you not?

  A. Our all time high is £9.30. I think there is something of a period of reflection going on at the moment.

Lord Paul

  529. What is the latest guess when you will make profit?

  A. I cannot possibly give you that.


  530. Thank you for your e-mail in which you listed the issues we might discuss today. I think it really does move us on to the first one, what are the problems that need to be resolved as a matter of urgency if e-commerce is to flourish? This is generally not just solely for Freeserve, you can answer at both levels if you wish.

  A. To put it into context, first of all e-commerce is actually doing quite well at Freeserve. Let me just help you by making sure that the Committee understand Freeserve's presence within the United Kingdom market because that might help you to get a bearing in terms of Freeserve as a benchmark, if you like. We have on various surveys between 30 per cent and 35 per cent of the Internet access market, by that I mean the number of people in households who connect to the Internet, which I think is about 7 million in the United Kingdom, there or thereabouts. At the moment 35 per cent of those households dial-up on the Internet through Freeserve. We have established a reasonable share of the Internet access market. We floated in August last year and we also floated on NASDAQ and we have an obligation to report on a quarterly basis. Our quarterly results for quarter three, as we are calling it, were published last week and they showed that our e-commerce revenues—by that I mean revenues we enjoy from a combination of advertising income and what we would conventionally describe as e-commerce revenue, which for commercial reasons we do not split out, we give a global figure—have grown by 54 per cent on the previous quarter. That was impacted to an extent because one was looking at peak trading. Also being part of the Dixon Group we enjoyed a very significant increase in the number of registered users during that period, because a lot of people bought their PCs at Christmas, took advantage of the New Year sales and then starting surfing, if you like, from the period January through to March. The e-commerce revenue growth we saw of 54 per cent was significantly ahead of analysts' expectations and not withstanding what has happening in the market there was generally quite positive reaction to those numbers. I am not sure what the Committee mean by "flourishing" at this stage because obviously one is talking from a relatively low base. If you look at Freeserve's revenue as a whole, e-commerce now accounts for over 55 per cent of our revenue as a business and we are increasingly moving away from the argument that our revenue is dependent on connectivity or interconnected charges, which is another source of revenue and clearly a very important one. That is where we are, 35 per cent of the market and our e-commerce revenue has increased by 54 per cent quarter-on-quarter. What needs to happen for e-commerce to flourish even more? One does not necessarily have to look at a new economy to answer that because my own background is in retailing, not coming from within Dixons, but from another retailer—within the stable of the Dixons Group we have a very strong perception of what consumers' requirements are. Your second bullet point raised the question of trust and confidence in consumer transactions. Even before that there is a requirement for consumers to feel that the kind of products that they want and they need are available from an e-commerce proposition, which is at least as good as and, if not, offers greater advantages than anything else which is out there. That is not, if you like, an economy answer. From a regulatory perspective the onus is on us as retailers or as companies who are able to enable other companies to trade online to make sure first and foremost that there are attractive offers which will draw in the consumer and which will encourage the consumer to spend money with us.

  531. Which way do you see yourselves going in this emerging platform, such as mobile and broadband?

  A. Mobile is not there yet. Broadband will offer fantastic opportunities for everyone involved in the new economy through its ability to distribute rich content, media, multi-media and essentially speedy access to products. Freeserve's approach at the moment is to recognise that we are in a narrow band environment and the kind of things consumers have been buying from us have been products which have naturally lent themselves to a PC based order system, CDs, books and increasingly—and I heard the reference to—travel and promotional activities are a tremendously popular source of Internet based contact with the consumer. It is for us as retailers and for Freeserve as a combination of something which is both a retailer as well as a provider to make sure that we offer content which is attractive as it possibly can be at the right kind of prices.

  532. Was there anything you might have hoped to have heard from the Chancellor yesterday that you would have felt benefited the organisation and the industry, beyond what he said?

  A. There is a whole series of different initiatives there. We are encouraging small and medium size enterprises to come on to Freeserve. We launched something that we described as Freeserve Marketplace—which is exactly the Freeserve market enabling product that was being described by the last speaker—this week. We have about twenty small retailers on that site now and I think the initiatives that the Chancellor announced yesterday to encourage more enterprise and innovation in this sector I hope will lead to even more retailers feeling they can come online. The capital allowance position that was presented is obviously going to encourage them to do it. They are doing it because they hope they will make money from it and so the issue of share options and the ability to taper down relief to ten per cent after only four years is a very, very welcome opportunity. It still leaves us with the problem of national insurance on stock options but one is pleased to see that as a subject for consultation. When I think about the companies that we talk to and the kind of people we do business with, in particular the small businesses who are now contemplating coming online for the first time, I think the Budget will be very warmly received. This Government certainly seems to be embracing e-commerce very well and we will be pleased to see it.

Lord Paul

  533. Your service and the whole e-commerce trade is going to make prices cheaper for the consumer, that is what the intention is and that is why there is a lot of interest in this. One of the first people who are going to be affected is your owners, Dixons or similar companies like that, how do they see your progress? Secondly, you must be discussing within the company how long this party will last and that share price remains good, even if you do not make a profit, what is the thinking on that?

  A. In relation to Dixons, they are embracing this economy as equally quickly as Freeserve. They have their own online offer. They are into at least two areas of online e-commerce activity, which most people expect to form a significant part of e-commerce activity over the next few years, I am thinking of software and games, and on the left-hand side they have Freeserve. Just as Dixons embraced this economy by taking Freeserve on, supporting it and allowing it to IPO, at the same time they have been parallel tracking their own e-commerce and they are shrewd enough to realise the extent to which this represents a threat is something that they must take issue with themselves. I think it is probably also fair to say that Dixons have a perspective on the new economy which is not out of keeping with other established retailers in the United Kingdom. Dixons have not been slow to embrace it but if you consider the principle retail brands in the United Kingdom I think it is probably fair to say they do not represent at the moment the strongest e-commerce offerings out there. As a consequence people like Amazon and Books-On-line, have been allowed to establish a market presence in the United Kingdom. Certainly my old company, which was Argos—where I was Director of Legal Affairs—now has a very strong e-commerce offering. As part of the GUS Group, Kingfisher have a strong offering. I think established brands are embracing. There is no doubt, however, and Dixons have said publicly themselves, they expect margins to come under pressure as new entrants join in this economy. One has to accept that an established base of retail stores, with all the paraphernalia that goes with that, might find it difficult in some product areas to compete with virtual stores. Most established retailers still feel pretty confident that there is room for both, they are not yet convinced it marks the end of their run, as it were.

  534. The question about the share price?

  A. I really find it very hard to comment on the share price.

  535. My question is, where does the feeling go, how long will the market keep accepting companies without profit?

  A. I can give you an entirely personal reaction to that. If you work in this sector everyday, you get exposed to the ideas, to the people and to the environment that I get exposed to everyday. I will give you an example of a community based company we bought last week, which is called I have two young children and I explained to my daughter, who was 12 yesterday, that we have just bought a company who have access to software functions which allows communities to e-mail each other, one of them is an astronomy community. They have just bought a telescope in Hawaii and that means you can sit at your keyboard and not just see a screen but actually direct where the telescope wants to go. The excitement and the enthusiasm of this sector leaves me feeling that the share prices have an awfully long way to go.

  536. The reason I asked that question was because more competitors have come to and there are more book suppliers coming up, in this case establishing yourself is far easier than in the old fashioned businesses.

  A. I do not necessarily agree with that, with respect. I think Freeserve enjoyed a unique advantage through its distribution with Dixons. Amazon are spending millions and millions of dollars to bring their product to the face of the consumer, advertising is very difficult. The reason, if I can go back to Marketplace, that we created an area within our own site is to enable the retailers to actually avoid the cost of bringing reach before two million users and spending the kind of money on advertising campaigns you need to get in front of two million consumers.

Lord Cavendish of Furness

  537. My questions are more prosaic. Can I be clear about the sort of things on your menu? Am I right in thinking apart from being able to connect me, you could design a website for me on your shopping browse key? Is this the trend of you and your competitors?

  A. I am not sure it is the trend of our competitors but the description that people are using increasingly to describe Freeserve is an application specific rather than an Internet service. Most people's perception of Freeserve is as it was when we floated last August, which is we provide a gateway to the Internet and once you are through you go on and find out whatever you want to find out. Increasingly what we have been doing is building a portal offer, which is to provide a full range of information to all services and products and around that portal identify areas of activity in relation to small businesses, in relation to small retailers and, perhaps, in relation to particular interests and sectors that they might be. In relation to committees of women, for example, we established a women's portal. That is how we see the business going forward.

  538. There is great diversity.

  A. Enormous diversity.

  539. My second question is different, as somebody who is sceptical of the ability of Government to regulate, is there a case for worrying that if Europe as an entity, rather than Britain, were to be stealing the march on the United States in those circumstances history has shown that America would be prepared to play a bit dirty and China almost certainly, if they were big enough. Is there a case for the political world to try and establish some parameters in which this goes, for instance a level playing field, to use a very overly worked expression, in the single market?

  A. It makes it extremely difficult to establish a global level playing field. The reality is that the Internet is essentially a global marketplace, which means that a site in China beamed across to a server in Leeds enabling me as a user on the Internet to download a pirate copy of the latest blockbuster will be extremely difficult to turn off. In practice one can do it but it is difficult to regulate.

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