Examination of Witness (Questions 526
WEDNESDAY 22 MARCH 2000
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.
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
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.
529. What is the latest guess when you will
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 revenuesby 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 figurehave 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
retailerwithin 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 increasinglyand I heard the
reference to lastminute.comtravel 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
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 Marketplacewhich is exactly the Freeserve
market enabling product that was being described by the last speakerthis
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.
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
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 Argoswhere I was Director of Legal Affairsnow
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
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 Smart-Groups.com.
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 Amazon.com 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
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.