FRANKFURT, July 6 (Reuters) - The dramatic rise of "free" Internet services across Europe over the last six months is now raising a critical question:
How long will it take before free access becomes completely free? Following the lead of Britain's Freeserve, a host of telephone companies, retailers and banks have launched no-subscription-fee online services of their own -- in Spain, France and Germany as well as in the United Kingdom. But as their numbers increase and newcomers vie to attract and keep users, some are sure to eliminate the cost of "free" access -- the local phone charges users pay for the time they dial into the Internet.
"We believe by the end of this year you will see a completely free-to-air provider in the UK," said Nick Jones, an analyst at Jupiter Communications Inc, an Internet market researcher. "There will be some ambitious retailer or network operator that packages some services so that access is free," he said. But getting that first provider to go "free-to-air" may take more time than people expect. The free providers first have to build up enough additional revenue from advertising and electronic commerce to cover the phone charges.

RESISTANCE FROM MAJOR SERVICE PROVIDERS
There is also a great deal of resistance from some of the major Internet service providers (ISPs). AOL Europe, a venture of America Online Inc and German media giant Bertelsmann AG , plans to start a free service of its own, but sees it more as a fad than a lasting business model.
Deutsche Telekom AG , whose T-Online unit is the largest access provider in Europe, is opposed to the free-to-air concept.
All the free providers offer cut-rate Internet access in hopes of ringing up other streams of revenue. Freeserve is trying to become a major portal -- a high-traffic Web page that makes money from online advertisements and takes a cut of any e-commerce it brings to e-retailers connected to its site.
Telefonica SA , the Spanish phone company, wants its Teleline service to boost traffic for its phone network. Dell Computer Corp , which has launched free services in Britain and Germany and plans to go to France and other countries, believes DellNet will drive sales of its PCs.
But with so many providers trying to build up a loyal customer base, some free providers will eventually resort to picking up their customers' phone tabs as part of the deal, said Ian MacDonald, an analyst at Charterhouse Securities Ltd. "It's not inconceivable to imagine some Internet service providers even paying customers to use their service," said McDonald, who follows Freeserve's parent Dixons Group Plc , an electronics retailer. Dixons, he added, is more interested in getting revenue from selling products online than getting revenue from phone charges. "They view access like the cost of running a store -- you don't charge people to come in and look around."
The rise of free services has been hailed by Internet watchers across Europe because they are helping get more people online. Within months of its September 1998 launch, Freeserve had one million users registered to use its service. Scores of others -- including retail rival Tesco Plc , Barclays Bank , and broadcaster BSkyB -- have joined the fray. The switch to really free Internet access could put Europe on the way toward narrowing the gap with the United States in the online boom. Many Americans spend 50 hours or more a month surfing and shopping online because they get unlimited access for a flat, monthly fee -- often for a total of about $40 per month.

EUROPEAN CHARGES DISCOURAGE HEAVY USE
Europe's system of per-minute charges discourages heavy use. In Germany, 30 hours of online time can cost 150 marks ($78.50) or more. And every additional minute ups the cost. "If you take away the meter, usage goes way up," Jones said.
At least one British provider, X-Stream Technologies Inc, already offers unlimited, totally free surfing -- but only on selected weekends. E-mail messages alert X-Stream users a few days before it activates a toll-free 0800 number. X-Stream likes the idea of going totally free, but has no plans to do so without competitors pushing it. "We are already the freest service. Why should we make it even freer?" said marketing director Paul Shalet.
None of the free services can yet afford to go all-free all the time, and even the biggest have to work to get there. Freeserve has already passed AOL Europe as the largest provider in Britain. But because of its amorphous customer base, it may have a hard time generating the advertising revenue to support a free-to-air offer. Without a subscription fee tying customers to Freeserve, some could sign up and quickly switch to another provider, or never use Freeserve at all. AOL Europe thinks advertisers will prefer hard demographics that come from a subscription-based service that knows the names, addresses and credit card numbers of who is online. The best chance for truly free Internet use may come from phone companies or cable TV companies that can offer access as a part of another service. Net users in Kiel, Germany, for example, can surf all day and all night with no extra charges as long as they switch their basic phone service from Deutsche Telekom to a local phone company owned by Mobilcom AG . Mobilcom wants to make the same offer in other cities where it doesn't have local exchanges, but must rent phone lines from Deutsche Telekom to do so, and that is bogged down in months of negotiations and technical work. That leaves Deutsche Telekom and T-Online as the provider for most Germans. Furthermore, the former monopoly has no interest in dropping T-Online's pay-as-you-surf system for a flat rate or a free model. "The user must always pay," said Chief Financial Officer Joachim Kroeske. "Access is a service that has a value and you must pay for that."
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