The ISP Miracle - Different Types of ISPs
[All, this is a reprint of a July 1998 Telephony Magazine article. It doesn't mention our favorite form of ISP, namely the ITSP. Do I sense a form of denial here? <g> Frank C.]
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By DAN TAYLOR
Most of us have watched in amazement as the Internet has grown rapidly over the
past 5 years. More astounding is the growth of the Internet service provider (ISP)
business. Yet, while many estimates place the number of ISPs at somewhere
between 3000 and 4000, there is a great deal of uncertainty over the future of the
ISPs.
Some observers predict that there will be consolidation as smaller ISPs are
purchased by traditional telephone companies or larger ISPs. Others see the ISPs
becoming their own types of telcos, as a number of ISPs have filed to become
competitive local exchange carriers (CLECs).
Beyond the issue of what the market will look like is the greater issue of what role
will ISPs play in the future of telecommunications.
Many technology vendors hope that ISPs and CLECs will be their channels to
market, providing the feet on the ground and the expertise required to build
networks, integrate software and provide a first line of customer service for
technology and telecommunications services.
This role is a lot of responsibility. To better understand what the ISP market will look
like and what role ISPs will play, it is best to first discuss the different types of ISPs.
Not all ISPs are the same
Just as there are local and long-distance telephone companies, there are different
types of ISPs. The best way to define an ISP is to consider the type and geography
that they operate. Some may operate a national or international frame relay or
asynchronous transfer mode (ATM) network.
Others may only operate an Internet protocol (IP) network provisioned across
public ATM services. There are some ISPs that don't even operate a network,
instead reselling the dial-up modem access and adding their value with marketing and
customer care.
Here are a a few different ISP types:
Backbone: Backbone ISPs often call themselves network service providers
(NSP) to differentiate themselves. Typically, NSPs sell to other ISPs-their
core competencies include managing the operations of a large network and
handling the complexities of peering. UUNet is one of the best-known (and
most successful) of the backbone ISPs. 1
Regional: Regional ISPs operate metropolitan or regional networks to
service a local customer base. For services outside of their base geography,
regional ISPs usually resell a national dial-up network provided by an NSP.
National Dial-up: These service providers operate a very limited network,
usually restricted to a server farm for e-mail, authentication and billing. The
networks that they use are operated by an NSP. America OnLine is a national
dial-up provider that uses networks operated by Sprint, MCI, UUNet and
GTE Internetworking.
Content Provider: Content providers aggregate content and host
applications and Web sites. This is one of the most rapidly growing parts of
the ISP business, because it promises high margins while the network access
component of the ISP business is moving to commodity pricing.
Realistically, there are many ISPs who fit into some, or all, of these descriptions. As
the market becomes increasingly competitive, business models and core
competencies will become key differentiators.
The business that is most at threat is the full-service ISP. This is the ISP that grew
out a basement or a garage. Today, the ISP may have a local or regional customer
base, and it operates and markets all of its services internally-from dial-up access
to Web hosting and e-mail.
At issue are the economics of operating and marketing a wide variety of services
with a single team. As the business grows, many full-service ISPs find it difficult to
scale their organizations in all directions at one time. As a result, growing companies
tend to focus on a particular set of services, which is why we now seeWeb hosting
companies and national backbone providers.
Network Operations vs. Service Delivery
Probably the most pronounced specialization that we have seen is in companies who
focus on reselling backbone Internet connectivity. The backbone business is one of
efficiently operating a national network. As national backbone NSPs have grown, so
too have companies who focus on marketing services on the backbone.
This change is the fundamental shift in the ISP market. Operating a marketing channel
for IP services, many ISPs never get involved in the details of operating an IP
network. Instead, they focus on sales and customer support. While the NSPs find
their economies of scale in operating a large network, other ISPs find their sweet
spot in marketing the services available on the network. This is the fundamental
difference between network operations and service delivery-they are two distinct
IP services businesses.
We know from experience that there are markets for local telephone service and for
long-distance as well, and these businesses have different operating efficiencies.
The Miracle
When we discuss theISP miracle, we are talking about the very fact that a business
has developed for the delivery of alternative telecommunications services. The
Internet represents a set of interactive services and customer relationships that
incumbent telcos and cable companies did not create.
Any telco can operate an IP network, but can they create the relationship around a
set of interactive services?
Many of the ISPs have already figured this challenge out.
Can They Do It All?
But the question still remains: Can ISPs do it all? Can they be systems and network
integrators? Can they be the channel for everything from phone systems and
groupware?
Everyone else is placing a lot of hope on the ISPs--and this expectation is unrealistic.
ISPs cannot be all things to all people. Very few of them operate this way today, and
specialization will continue to be the name of the game in this arena.
Some ISPs will be systems and network integrators. Others will sell services to
consumers. Many will merge or partner with other types of telecommunications
service providers.
Realistically, predictions for the future of ISPs lie in their business models. Every ISP
is, first and foremost, a business. Each ISP must be able to make money in the
activities they choose to pursue. This reality holds true whether they sell routers,
servers or software, or provide Web hosting services.
Each ISP is a business. To understand the future for IP services, you must remember
one key fact: Each successful ISP is a profitable business.
Dan Taylor (taylor@aberdeen.com) is Director, Global Telecom Research, at
The Aberdeen Group, a Boston-based technology consulting firm.
The August edition of The Analyst's Corner will be online Monday, August 17.
Visit The Aberdeen Group website. |
