The majority of the UK’s operating ISPs — many of them Virtual ISPs set up by traditional companies — must shift from providing access to distribution, handing dominance of the access market to fewer than 10 large telco-backed ISPs and portals by 2005, according to Forrester Research (Nasdaq: FORR).

“Following the launch of Freeserve in 1998, subscription-free access quickly became the prevailing pricing model,” said Shobhit Kakkar, associate analyst at Forrester Research Ltd. “Offering a VISP was a simple way for traditional companies to tap into the growing online population, but the time to profit from this strategy is over.

“Driven by customer churn and aggressive moves by telcos, the market is changing rapidly and VISPs don’t have the scale or the scope to compete. A variety of access pricing models already exist — including unmetered options — but unmetered narrowband will give way to broadband services which will account for 4.5 million UK households by 2005. Also consumer online access is no longer restricted to PCs — around 5 million UK households already have interactive TV and from 2001, all new mobile phones will be equipped to access the mobile Internet,” he added.

VISPs fall into one of two camps — those with over 100,000 accounts versus the smaller players. Forrester predicts the large VISPs will sell out to surviving telco-backed ISPs as they continue to look for scale. The result of the ISP shakeout will be clearer differentiation between online access and online services. Traditional companies will no longer look to telcos to help them strengthen their relationship with consumers. To retain visibility, they will concentrate instead on arranging distribution with portals and ensuring presence across multiple access channels.

“While telcos and large portals fight for the top ISP spot, distribution will become key to traditional companies’ online strategies,” Kakkar continues. “Big brands will become important partners for budding portals. Instead of attempting to compete with portals by offering VISPs, traditional companies will form relationships with these sites in order to get traffic, and portal and traditional companies alike must ensure that consumers can reach them through whichever interactive channel they choose. Brands will leverage relationships with portals by demanding links on interactive digital TV and mobile portals, and enlisting portals’ help in designing new services.”

For the report “UK Virtual ISPs: RIP”,” Forrester spoke with 30 business-to-consumer players running VISPs, ranging from major high-street brands to community offerings, in addition to 15 companies including telcos, portals and regulatory bodies.