The evolution of the ISP market as a model for public Wi-Fi

In our last piece, we discussed how the development of the U.S./global cellular industry has some lessons in store for predicting the future of public Wi-Fi. Today we will draw some significant parallels between the development of the Internet service providers (ISP) market in the 1990s and today's public Wi-Fi market. 

Although the commonly held belief is that Internet usage exploded overnight, in 1993, almost  three years after the advent of the World Wide Web, there were only 90 ISPs in the U.S.   Enthusiasm for the Internet, however, picked up between 1993 and 1996, and there were estimates of 15% monthly increases in new Internet accounts. The amount of publicity and the low barriers to entry drove the market, and the number of ISPs operating out of their basements and garages mushroomed to more than 2500. Many of these providers had transformed a hobby into a business and most had less than 1000 customers. ISPs could enter the market with as little as $12,000 investment.

Initially ISPs differentiated themselves based on the quality of the connection and number of telephone lines and especially the absence of busy signals. Pricing was around $15 to $25 flat monthly fee although AOL, Prodigy and Compuserve, which were known as online service providers rather than ISPs, charged per hour fees. AOL crashed for 18 hours in the summer of 1996, and its service deteriorated further when it introduced all-you-can-use access for $19.95, but its customer base grew from 900,000 in mid-1994 to 8 million by the end of 1996. 

Similar to the current Wi-Fi situation, security was a major concern for enterprise customers in allowing access to their corporate databases and a deterrent to the rapid growth of the Internet. However IETF protocols regarding security and interoperability as well as further improvements to VPN security especially IPsec increased the general trust in IP-based networking.

Table 1: Historical Number of ISPs
	Number of ISPs
1993	90
1995	1500+
1996	2500-3000
1997	4000-4500
1999	5000
2001	6000
Source: eTinium, Inc., Boardwatch, Kellog School of Management

 

Similar to the current state of the Wi-Fi market, the ability to survive and make their way through the unknown maze of the Internet, joint ventures, co-marketing arrangements, partnerships and minority investments was de rigueur with the ISP community in the mid-'90s, and larger service providers wanted to hedge their bets by taking small stakes in many potential winners.

By early 1997, although the Internet was growing and companies like AOL had blossomed, the business model of the consumer-based ISP was still not completely deciphered. Many at the time claimed that consumer Internet access was not a moneymaking proposition, which might have been the reason behind the RBOCs' hesitancy to make an all-out push into the market. Similar to today's Wi-Fi market, analysts advised the RBOCs to storm the market through acquisitions to forgo the learning curve.

By mid 1997, MCI's doubling of its monthly phone rates to ISPs was a tremendous blow to the 4500-member-strong market. Many valiant and remaining ISPs turned to providing business services, but many simply went out of business or were taken over by larger companies to increase volume and lower their costs. Although a survey revealed that 10% of ISPs disappeared annually due to bankruptcies or consolidations, three years later the market had nevertheless increased to 6000 participants, meaning for every ISP that threw in the gauntlet, approximately 1.5 re-entered the market. 

There were a number of prognostications in 1999 regarding the future of the ISP market, most of which did not materialize. It was expected that the RBOCs would storm the market in 1999, leading to mass disappearance of smaller ISPs. The RBOCs limped along in dialup access (as they normally do with new technologies and services) and finally found their true calling through broadband access in 2001-2002.

It was said that ISPs with bundled products would be the ultimate winners. ISPs offering bundled services (access and content), like AOL and AT&T rode high for a while, but the reality caught on shortly after. Today AOL has become the Achilles Heel for Time Warner, and Excite@Home, which had AT&T as a major shareholder, has declared bankruptcy.

It was said that consolidated middle-market ISPs would provide high-speed access and value-added services, and would survive. Although some middle-market ISPs did survive, many of the companies like Verio, which got into offering value-added services such as collocation and Web hosting, ended up with extremely poor financial results, and some even went out of business. Vanity ISPs were also expected to become the dominant way to attract customers, but after an initial take-off, that idea fizzled out as well. Free monthly access subsidized by advertising and e-commerce, similar to the commercial TV model, was also foreseen to replace regular Internet access. Although today access charges are increasingly based on speed and reliability, free access never really became the mass-market phenomenon it was made to be.

The one prognostication that held its own was that thousands of small ISPs with less than 10,000 subscribers would thrive in secondary and rural markets. By 2000, there were still 5000 independent ISPs, 300 of which accounted for 90% of the Internet traffic but 65% of the revenues. The small ISP market thrived for some very basic reasons: Larger providers were not interested in smaller communities, quality personal service attracted customers, and it was estimated that profitability could be attained with anywhere between 1000 to 4000 customers.

The irony is that although the smaller independent ISPs were always considered vulnerable, it was really the major ISPs with high infrastructure costs that started falling apart in the latter part of 2000 and most of 2001. Once again the conventional wisdom maintained that the larger a network and the larger the footprint, the more profitable and cost-effective the operations. However what many did not realize was that these huge national networks were not optimized with a large number of subscribers and remained unprofitable. Smaller ISPs have thrived and are now serving more than 83 million subscribers. More information on the parallels between the ISP and public Wi-Fi markets can be found in eTinium's recently released study Seamless Mobility: The Marriage of 3G and Wi-Fi.

Goli Ameri is the President of eTinium, Inc. (www.etinium.net) a telecom consulting and market research company specializing in wireless and switching technologies.  She can be reached at gameri@etinium.net.