An independent approach to the Internet:

Independents that traditionally have focused on voice services can no longer ignore the burgeoning data market. Offering Internet services to smaller businesses may help recoup infrastructure investment

Independent telephone companies have reached a crossroads. What has until recently remained a non-competitive voice environment will quickly become a chaotic competitive market for the growing and lucrative data services business-a business generated by a need for Internet and Web access on the part of consumers and small- to medium-sized companies.

To be successful, Independent telcos must recognize the opportunity, identify and target the competition, and develop a strong and compelling response to that opportunity from both a technology and a marketing perspective.

Overall, Internet growth and its related opportunities for telcos is staggering. What was a $300 million Internet services market in 1995 is about to explode. Current estimates say that it will grow to nearly $30 billion by 2000 (Figure 1).

The opportunity is enormous. With demand for voice lines remaining level now and into the future, Independent telcos must recognize that data services is the single largest growth opportunity-and the one that ultimately may save them.

Finding the right niche Internet access may account for 77% of the Internet services market-or $23 billion-by 2000. Although different in their requirements for Internet access, the consumer and business segments will split the spending evenly between them (Figure 2).

The consumer Internet market, which Independent telcos have nearly saturated for voice service, will grow nine-fold during the next two years to 27.4 million connected households. That represents nearly a quarter of all households in the United States and a $12.4 billion opportunity in 2000.

Newer, faster technologies such as cable modems and ISDN, coupled with the move toward flat-rate pricing, are driving consumer growth. Market data suggests, however, that on-line service providers such as America Online will capture more than 70% of that market.

A better opportunity for Independent telcos is the small- to medium-sized business segment where no dominant market leader has been identified. By 2000, industry experts predict that one-third of all companies will be on-line, with nearly 400,000 firms purchasing access lines, 78% of which will be small businesses. Revenues for this market will climb from $595 million in 1996 to more than $10 billion by 2000.

Some of this growth will come at the expense of private corporate networks, as companies are guaranteed service levels appropriate for their businesses. These value-added services will allow carriers to differentiate themselves in the market.

However, this growth in the small- to medium-sized business segment will create increased demand for T-1 (1.5 Mb/s) and T-3 (45 Mb/s) lines, bandwidth that until now has been reserved for only the largest companies. In fact, industry experts estimate that 350,000 new T-1s and 25,000 T-3s will be installed during the next four years to keep up with business demand.

Although the data services market is huge, many players are vying for a piece of the pie. In addition to traditional carriers-local exchange carriers, competitive LECs and interexchange carriers-there's a new breed of player.

Several new types of public service providers have sprung up to take advantage of the large Internet services market, including on-line service providers, cable TV operators and national, local and regional Internet service providers.

On-line service providers, including America Online, CompuServe and Prodigy, primarily have targeted the consumer market by offering an array of services and Web browsing capabilities, but they can also make a mark on the small- to medium-sized business market.

Cable TV operators tend to target the consumer residential segment with their Internet offerings.

Several large and well-funded ISPs, some affiliated with IXCs, are focusing on large corporate customers. Companies such as Worldnet, BBN/Planet, MindSpring and Digex generally provide businesses with end-to-end service throughout a "single network" anywhere in the country.

Meanwhile, several thousand local and regional ISPs have sprung up around the country to offer Internet access to residences and small- to medium-sized businesses. These carriers represent an interesting opportunity for potential partnerships-as well as a competitive threat-to Independent telcos.

On one hand, these local and regional ISPs are clearly competing in the growing data services market, and some of their value-added services-including Internet-based voice, fax, video and virtual private network (VPN) services-cut into Independent telcos' existing business for private-line, asynchronous transfer mode and frame relay services.

On the other hand, ISPs are fueling the growth for T-1 and T-3 private lines, as well as ATM and frame relay services. Because ISPs typically are not facilities-based, businesses must go to their local carriers to purchase the bandwidth necessary to accommodate their Internet traffic. Here lies an enormous opportunity for partnership or complementary services.

While the Bell companies have chosen to implement their own Internet services, Independent telcos may be better off partnering with an ISP by bundling the ISP's service with their own telephony service. Such an alliance would enable Independent telcos to get to market much more quickly and learn about the Internet market and the inherent market opportunity.

Although the residential market offers huge growth opportunities, Independent telcos targeting that market will likely find themselves competing with cable operators and other local carriers for business, not to mention the large and well-known on-line service providers.

The small- to medium-sized business market is a far better bet for Independent telcos.

Infrastructure decisions Once an Independent telco has decided to target small- to medium-sized businesses, it should assess whether its infrastructure can support these emerging services.

Most current services-particularly those that have accommodated the growing analog market for consumer data lines-have a maximum speed of 56 kb/s. But this likely will not be enough bandwidth to cover business demands.

Independent telcos may need to offer leased-line, frame relay, Internet protocol (IP) and ATM services for business connectivity, as well as digital subscriber line, fiber or wireless services for remote access.

If these infrastructure technologies are already in place, the Independent telco can begin to develop a strategy for offering Internet/intranet services to business. If these technologies are not in place, the telco must assess which combination of services will best meet the needs of businesses in the service area.

A telco also must consider which enhanced services it will offer to business customers to support the Internet and corporate intranet markets. Each of these markets has key requirements that must be addressed.

The telco must be prepared to provide an Internet service that will support Web access and daily business operations with little downtime, and it must address the needs of mobile workers through a VPN or remote access server offering.

For corporate intranet services, the telco must be prepared to provide management capabilities, both as a value-added service and for corporate monitoring, and a high level of security through VPN or firewall systems. The telco also may need to offer customer premises equipment such as access switches or high-speed DSL modems.

Building a strategy and infrastructure to support business requirements for Internet/intranet services is a multiple-stage program.

Independent telcos must develop a blueprint for deploying new infrastructure technologies that includes a market evaluation of the business bandwidth requirements in the region and a systematic approach to building a data services network infrastructure.

The current network that supports most Independent telcos was designed to handle voice calls that last an average of three minutes each. As has been widely reported, the average Internet call lasts an average of 20 minutes-traditional Class 5 telephone switches can handle only one-sixth the number of Internet calls that they do voice calls.

This means Independent telcos will likely find that network capacity is decreasing without any increase in revenues. One solution for Independent telcos is to build a separate data network to handle Internet traffic-a network that bypasses the public network.

The data services network infrastructure may be best built by deploying a multiservice broadband switching network. In this way, the Independent telco will have a scalable system that grows as bandwidth requirements grow.

At the core of this network-most likely in the telco's central office and larger points of presence (POPs)-are integrated frame relay and ATM switches that can handle data from smaller multiprotocol access switches located throughout the regional POPs (Figure 3).

Through these access switches, the telco can offer leased-line, frame relay, ATM or native IP access to end users. Some access switches are designed to negotiate service levels-commonly called quality of service (QOS)-enabling telcos to offer specialized services to accommodate the demands of the small- to medium-sized business users.

For example, the telco may want to offer differentiated levels of service based on different QOS requirements. These services can be billed at premium prices, offering the telco an additional data services profit.

Alternatively, some switches have network management systems that allow usage-based billing, enabling the telco to offer data services in much the same way voice services are billed-per call, per minutes of use.

Experts predict that the Internet will cause data services bandwidth to grow at least three-fold and that data services will outstrip voice traffic during the next two years. Today's 5 million leased-line, frame relay and ATM DS-0 (56 to 64 kb/s) connections will grow to more than 17 million by 2000.

To take part in this growth, the time is now for Independent telcos to assess their market positioning, establish the infrastructure necessary to support increased bandwidth requirements, and develop value-added services to attract the huge and lucrative small- to medium-sized regional business market.