December 1, 1997 webweek
NET MONEY: ISP Pushes Private Networks, Keeps Consumer Access
By Todd Spangler
Since Henry Nothhaft joined Concentric Network Corp. as president and CEO in April 1995, he has transformed the company from a wholly consumer-focused Internet service provider to one focused on providing secure private IP networks for businesses.
A year ago, Concentric's revenue base was 100 percent consumer. For the third quarter of 1997, the company's $11.8 million in revenue was split between 60 percent from corporate accounts and 40 percent from consumers. Concentric, of Cupertino, Calif., lost $14.2 million, or $1.22 per share, in the same period.
Unlike other major business-focused ISPs such as Uunet Technologies Inc. and PSINet that have jettisoned their consumer customers in the past two years in favor of corporate customers, Nothhaft said that Concentric will keep its revenue streams diversified, with its target a 75/25 mix of corporate and consumer revenues.
"In an enterprise-business series of products, you can use usage-sensitive pricing and get higher yields per customer, but you want to achieve as balanced a load as possible on the network," he said.
Nothhaft said that the usage patterns of consumers and businesses are complementary: Consumers go online in the evenings, after business use has tapered off.
The transition from a provider of dial-up access for individuals to a provider of customized virtual private network (VPN) services has required significant capital. Investment in network equipment contributed to the company's $66.3 million net loss for 1996 on revenue of just $15.6 million.
"When I came to Concentric, the network in place was adequate to serve consumers, but it would have been inappropriate to institute an enterprise sales and marketing effort," Nothhaft said.
Since then, Concentric has built an ATM backbone--which lets the company guarantee levels of performance--that includes 15 main points of presence (POPs) supplemented by 134 additional POPs.
To sustain further growth and build up its sales and marketing efforts, Concentric completed an IPO in August of this year at $12 per share that raised $55.2 million and boosted its cash balance to $39.6 million for the third quarter, compared with $3.5 million for the previous quarter. The stock was trading last week at about $10.
Though analysts don't project that Concentric will be profitable until at least the fourth quarter of 1998, most have designated the company's stock as a strong buy.
"The results will begin to show in the beginning of 1998," said Miles Russ, an Internet analyst with Wheat First Butcher Singer, who set a 12- to 15-month target of $19 for Concentric's stock. "What they did with the proceeds of the IPO was build their sales infrastructure."
Conventional wisdom says that ISPs must merge or partner with telcos to be able to get cost-competitive bandwidth--and Concentric has chosen the partnership route. Part of its IPO included private placement of 1.5 million of its common shares to Bay Networks Inc. and Williams Communications Group Inc., a telecommunications provider.
As part of the deal with Williams Communications, Concentric has guaranteed access to bandwidth at a price close to what it would have been if it owned the bandwidth itself, Nothhaft said.
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