Rivalry In ISP Market Heats Up
( 1/ 1/98; 5:00 PM EST)
By John Borland, Net Insider
As ISPs seek to differentiate themselves, the competition in this still-young market is tightening.
Major corporations such as IBM, AT&T, and GTE are fighting for the ground originally staked out by online service providers such as America Online and smaller local or regional providers, aiming particularly for profitable business customers.
As the telephone companies and other mega-corporations step up their marketing efforts, medium-sized and smaller ISPs are turning to assurances of personalized service and new kinds of products to compete with the bigger newcomers.
"Providing dial tone is a hell of a lot different than providing Internet access," said Kirsten Kappos, vice president of corporate communication with the Earthlink Network, one of the several independent national ISPs. "Some analysts said telcos will own and dominate this market space. That couldn't be further from the truth."
Year Of The ISP
The past year has been good to ISPs. According to a November study by Maloff Group International, the service provider market has grown to nearly $8.4 billion, up from only $1.85 billion in April 1996. In roughly the same time period, the average price of a connection dropped to $22 from $25, the group reported. The top business-oriented providers are IBM, WorldCom's Uunet, AT&T's Worldnet, and PSINet, according to Maloff's survey.
IBM officials say Big Blue has quietly climbed the top of the business provider market by providing Web hosting and content development services as well as a connection. "It's good to have the pipes," as telephone companies do, said Nancy Faigen, the Armonk, N.Y.-based company's vice president of global Web solutions. "But once you have a relationship, customers seem to have an insatiable desire for more services."
IBM's network even provides the Internet access sold by some of big telephone companies such as Bell Atlantic, Faigen noted.
Like IBM, most ISPs focus either on providing corporate services or dial-up service for consumers and small businesses. "The nature of serving businesses and serving consumers is different," said Michael Mael, general manager of Web services and electronic commerce at PSINet, in Herndon, Va. Mael's company had a consumer branch called Pipeline, but sold it about a year and a half ago, he said. "We mostly wanted to focus on our business customers," he said.
At the top of the consumer ISP food chain is still AOL, which passed the 10 million-subscriber mark in November, and announced earlier this month that it had signed up 1 million overseas customers. By acquiring the subscriber base of CompuServe, previously the No. 2 player in the consumer access market, AOL solidified its position even further.
Well behind the top two consumer services remain the Microsoft Network and Prodigy, both of which provide news and entertainment content in addition to simple access.
In a speech at the Fall Internet World show in New York, AOL president Steve Case attributed his company's exponential growth to consumers' desire to reach out to the Internet. "The growing consumer interest in the Internet has fueled an unprecedented demand for AOL," he said.
But large independent companies such as Netcom, Concentric, or Earthlink, which have local access points across the country and focus on consumers and small businesses, are still providing serious competition to both the telcos and content aggregators such as AOL. Earthlink's Kappos said there is a gulf between these companies and the more massive group of local companies. "ISPs that have a customer base of 30,000 to 300,000 -- we call that the dead zone," said Kappos. "It's hard to get large. North of 300,000, that's when the economies of scale kick in."
Earthlink has about 400,000 customers, and analysts said they have predicted it would finally reach its financial break-even point in the second quarter of 1998, Kappos said.
Local Shops Have A Place, Too
At the bottom of the ISP pyramid are the more than 4,000 local providers, often with only a single access point and a few thousand subscribers. A recent Gartner Group report said the number of mom-and-pop ISPs will drop to roughly 500 during the next five years. But Zona Research's Barbara Ells said even these small companies will continue to have a place in the access spectrum.
"Businesses like to do business with the same-sized companies," Ells said. Rather than get lost in a large provider's 500,000-strong subscriber list, she added, a small local business often will feel better served by the personal attention of a local provider.
Nipping at the heels of the traditional access and hosting companies are a slew of new technologies that promise to give their users bandwidth far beyond what is possible with today's dial-up connections, such as cable or satellite connections.
Early in December, Time Warner's Road Runner and U S West's MediaOne announced they would merge their cable-access service, giving the new joint venture a combined subscriber base of close to 45,000. This eclipsed the previous market leader, the Comcast and Cox-backed @Home, which has about 26,000 subscribers, but still was a long way from threatening traditional dial-up or corporate network providers.
Few think the market for access and associated online services is slowing, however. A recent Maloff study said ISP revenues were growing by a total of 25 percent per month, though a November Interactive Services Newsletter report cautioned big ISPs had lost between 3 percent and 5 percent of their customer base in the past several months.
"This is not a saturated marketplace," said Kappos. "This is a wide-open market."
c CMP Media 1997 |
