Make It Click: ISPs need deep pockets and reliable service to survive a consolidation frenzy

Make no doubt about it, Internet access is a buyer's market. Although Internet service providers will drive their products and services up the value chain this year-particularly in the business market-competition will be ferocious in nearly every product and service category.

Business ISPs will get closer than ever to their clients, but no clear lines of sustainable strategic advantage are likely to emerge. ISPs in the less profitable consumer segment, on the other hand, are revealing their positioning tactics.

"A player that lives and breathes customer support and reliable service can pull ahead of the pack at this point when the market is young," says Rebecca Wetzel, director of Internet consulting at TeleChoice. "When the market is further along in maturity, it will be harder for ISPs to take customers from each other."

The big difference between 1997 and 1998 is that customers are more demanding now.

"Customers are becoming more savvy, and I think they are going to push their service providers around more than they did in '97," Wetzel says.

In this environment, only the ISPs that provide the best quality of service will survive (Figure 1). Both the dial-up and business Internet access industries are cramped with giants and scrappy start-ups, and industry watchers continue to predict ISP consolidation among first- and second-tier suppliers.

Today's approximately 4400 vendors will dwindle to as few as 100 in about four years, says Carl Howe, analyst at Forrester Research.

"How deep your pockets are will determine who is left standing at the end of the blood bath," he says.

TeleChoice's second annual ISP performance survey supports that conclusion. The survey of 4500 network and information technology managers rated WorldCom's UUNet and AT&T's WorldNet highest in overall customer satisfaction, followed closely by BBN/GTE, the Bell regional holding companies, MCI and Sprint (Figure 2). A surprise finding of the survey revealed that Atlanta-based Mindspring outdistances its competition in reported value for the price (Figure 3).

"AT&T is well-positioned because it has made a priority of customer care, and on the dial-up side, Mindspring is a contender," says Wetzel.

New services provide growth IDC/Link Resources in New York predicts that 22.8 million U.S. households and nearly every large U.S. business will be wired for Internet access by the end of the year. However, Internet access is a $6.5 billion commodity market that soon will see a slowdown in customer growth.

Nonetheless, few glum faces appear in an Internet access industry that believes it is still on the flat part of an exponentially growing curve. The Yankee Group in Boston estimates that electronic commerce will blossom into a $39 billion market this year.

As the industry makes progress on promises of higher access speeds and greater network reliability, ISPs will introduce a host of value-added services that go well beyond providing Internet connections.

The new services will bring ISPs into close alliance with clients counting on an improved Internet to boost efficiency and bring in new business.

"Companies essentially will be outsourcing their corporate networks," Wetzel says. "Within the U.S., the market for connectivity is maturing, but the market for new, value-added services is in its infancy."

ISP value-added services for companies fall into three categories: complexity management, increased security and improved performance, says Subu Subramanian, networking director for AT&T WorldNet services.

"In each of these groups, the industry is providing a richer set of services," says Subramanian.

Fortune 5000 companies-which rely on the Internet as a critical business tool-are willing to pay for services such as virtual private networks, Web hosting, managed services, and the software tools and consulting services that go with them. Advanced Internet protocol network services such as AT&T's new suite of extranet-based network management capabilities are the kind of services likely to make loyal corporate clients in 1998.

"It is not enough just to sell pipe. We want to provide the underlying infrastructure and additional capabilities that enable our customers to address their business needs," Subramanian says.

Most business ISPs are pursuing similar measures.

For example, UUNet Technologies Inc., Vienna, Va., has bolstered its ability to provide IP services by acquiring CompuServe Network Services. The company is also first to deploy multicasting technology and market with a multicasting service offering.

"The economics for multicasting hold the seeds for revolution," says Alan Taffel, vice president of marketing for UUNet. "There is a yawning gap between unicasting and broadcasting, and one would think there would be large demand for the ability to reach hundreds of thousands of people, especially since those are very targeted people."

UUNet is also optimistic about demand for its recently unveiled Internet fax service. The $92 billion worldwide fax market is dominated by large long-distance carriers. Internet faxing will save businesses as much as 50% on faxing costs while offering features not available with traditional faxing, including broadcast capability and the ability to send and receive faxes by e-mail.

"The media concentrates on Internet telephony because it is sexy, but 50% of all international voice minutes are fax," says Taffel. "While everyone has their eye on Internet telephony, we are going after the low-hanging fruit."

ISPs seek differentiation Cut-throat competition long ago forced the dial-up Internet access market to a low-cost, unlimited use model that defies profitability. While some market niches, especially small business, may pay more for higher speeds and more reliable service, killer applications that might compel consumers to fork out more money have been evasive.

Although unprofitable, carriers such as AT&T will have to offer Internet services for consumers who will value bundled service offerings, some experts say.

"We have to offer [Internet] access as part of the package," Subramanian says.

The dial-up segment is so competitive that AT&T's new CEO, C. Michael Armstrong, is looking at overhauling AT&T's WorldNet service (see sidebar).

In the meantime, some companies are starting to define niches for themselves in the dial-up market.

Mindspring, for example, is positioning itself as the price/performance leader for the small to medium-sized business market, while Netcom seeks to become the provider of choice for more discerning dial-up users.

"We haven't abandoned the consumer," a Netcom spokesman says. "We are just going after the highly sophisticated Internet user that demands more-the kind of person who views the Internet as a productivity-enhancing tool."

On the other hand, Earthlink, Pasadena, Calif., is quickly becoming the second provider of choice among consumers who value user-friendliness above all else (see sidebar).

"They are positioning themselves as the ISP that people who start out on America Online graduate to," says Wetzel.

Ironically, AOL-by far the nation's largest consumer on-line access provider-rated last in the TeleChoice performance survey. The company's success stems from an easy sign-up process, compelling proprietary content and an aggressive early marketing campaign.

But the nation's leading on-line access provider never seriously has been in the business of connecting people to the Internet. Recently, the company cut a deal to outsource the access portion of its business to UUNet and several other ISPs.

"AOL's vision is to be a broadcaster, and it plans to make its money from advertising and transactions," Wetzel says.

New York-based Jupiter Communications estimates that advertising expenditures on the Internet will more than double in 1998 to nearly $2 billion. But a great deal of experimentation is taking place, and so far little evidence exists to indicate that electronic ads grab viewers the way a good 30-second television spot can.

While some 400,000 members can log directly onto AOL at once, advertisers can reach as many as 80 million TV viewers simultaneously. With those numbers, the TV networks are not quaking in their boots.

The biggest obstacle to industry growth remains slow Internet access. Attention has focused mostly on the last mile, but Internet network bottlenecks-especially the downloading of Web page elements-are a big part of the problem.

"This big network is like a clogged pipe," says Chris Fair, network engineer for the National Center for Atmospheric Research, one of the original five ArpaNet nodes.

Faster servers, data centers, new caching techniques and updated browsers that can download several Web page components at once will help speed the Internet and make the last mile even more critical. Modem makers will push modem speeds using copper wires to more than 100 kb/s in 1998.

Yet all eyes will be glued to developments in two-way cable.

Homes with cable modems may triple to 600,000 by the end of the year, industry sources say. Although most cable companies are too strapped for cash to take on the challenge in earnest, Comcast, MediaOne and @Home Network are making solid progress in numerous cities. Meanwhile, speculation is spreading that deep-pocketed AT&T may make @Home the centerpiece of its Internet strategy.

"Carriers missed the boat with ISDN, and [digital subscriber line] is the next chance," says Rebecca Wetzel, director of Internet consulting at TeleChoice. "Some cable companies have made this a priority, and they tend to be in large metropolitan areas with a lot of low-hanging fruit. If the carriers don't pick it, the cable companies will."

So far, satellite, DSL and two-way cable hold the most promise for serious increases in bandwidth. Satellite is available at 400 kb/s to any household that can position an 18-inch dish toward an unobstructed southern sky, but the system is expensive and complicated to set up. Meanwhile, phone companies continue their struggle with DSL scalability problems.

No one-not even Microsoft, which is hedging its bets-knows how it will shake out.

AT&T WorldNet is one of the few companies making a serious attempt to service the consumer and business Internet access markets.

In both segments, the company is betting that its name, experience and commitment to quality will win the day.

"We consistently differentiate ourselves by focusing on the quality of what we provide," says Subu Subramanian, networking director for AT&T WorldNet. "That's something we have drawn from our experience in the private line and frame business."

On the business side, a little cockiness might be in order for the telecom giant. The company consistently receives strong marks for customer service, and AT&T is a solid bet to be one of the few companies left standing after the battle for the dedicated-line market.

In 1998, WorldNet will roll out services to help companies maximize the Internet's usefulness and drive offerings up the value chain. For instance, WorldNet's Managed Network Solutions practice recently announced its as-needed Internet protocol (IP) and WAN analysis services.

"Its like a consulting service that crosses frame relay, IP architecture and intranet," says an AT&T spokeswoman.

The company also recently unveiled a suite of extranet-based network management tools that will make it easier for business customers to monitor and control corporate data and voice networks.

"We are building an electronic bond with our customers so they can easily obtain information and leverage AT&T's network to operate their businesses more effectively," says Michael Chaplo, marketing director for AT&T's voice network services. "We'll be offering more Web-based tools this year that will help simplify how customers do business with us."

And unlike some other traditional voice telephony carriers that do not take IP telephony seriously, AT&T is taking no chances on becoming obsolete. AT&T WorldNet Voice has announced that it will start offering IP telephony services at 7.5 cents to 9 cents a minute by the second quarter.

"AT&T WorldNet Voice is ideal for customers looking for basic, reliable service at the lowest possible price," says Gail J. McGovern, executive vice president of the company's consumer markets division.

Despite the IP voice launch, the consumer side of WorldNet is a major headache for AT&T's new CEO, C. Michael Armstrong. The unit's growth is slowing in the cramped $6.5 billion market, and Armstrong is not sure how a company can make money selling $20-a-month access. The only rescue plan in sight is if AT&T were to confirm speculation that it will take an equity stake in @Home Network. That would make it possible for the company to offer high-speed service at a premium price.

Otherwise, WorldNet becomes nothing but a necessary component in the carrier's bundled service offering.

Three years ago, 23-year-old Sky Dylan Thomas decided to drop the coffeehouse business for the Internet when it took him more than 80 hours to figure out how to sign up with a local Internet service provider. He was awed by the Web once he got on but turned off by the time-consuming experience.

He knew he could do better. Now, Thomas runs the nation's sixth-largest ISP, Earthlink Network Inc.

The company has gained a reputation for being the easiest way to get on and use the Internet, in large part because its founder constantly puts himself in his customers' shoes. The company's new browser, for example, features a video clip of an employee who walks customers through their first connection.

Navigating the Internet is not intimidating, and there is a lot to be said for that.

The company also offers superior customer service and technical support, including educational booklets for customers and a bimonthly newsletter on how to get the most out of the Web. Recently, the company announced the availability of a new premium access package, TotalAccess Gold.

The package includes software and services as a premium add-on to the company's standard TotalAccess dial-up accounts and ISDN connections for an additional $9.95 a month. The Gold packages provide toll-free priority technical support, an extra e-mail box and a quarterly software CD-ROM.

"It's important to note that our standard $19.95 TotalAccess pricing and services will not change at all," says Bob Johnson, the company's vice president of marketing and market development. "We found that one size does not fit all."

Another part of Earthlink's strategy has been to make as few commitments as possible, except to customer service.

Thomas decided not to build his own network. He leases capacity from companies such as PSINet Inc. and UUNet Technologies Inc. If Web access shifts to cable modem or satellite networks, Earthlink will not be stuck with a telephone-based network. Earthlink also foresaw the popularity of the Netscape Navigator browser and passed over the temptation to develop a costly browser of its own.

Earthlink's revenue last year was $32.5 million, up from $3 million the year before. Since its launch, the company has nearly $60 million in losses, but analysts expect it to turn profitable in 1999. The company has 400,000 subscribers, up from 227,000 last year. Earthlink should have about 600,000 subscribers by year's end, rivaling the likes of AT&T WorldNet, Microsoft Network, Prodigy, Netcom and one day, Thomas hopes, America Online.