Sharing Network Duties. A Leap of Faith? A recurring theme: ISPs willing to "pay" telcos for providing services.
May 1, 1998
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So what's the catch? At present, these services are not available everywhere and vary widely in what they provide and in how much control they allow the ISP to retain. Many of the most likely service providers -- the local telephone companies -- are still struggling with the business model of serving ISPs. And some of the network equipment required to enable network operators to serve multiple ISPs economically is just now coming onto the market.
Factor in the leap of faith an ISP must make to turn over its network operations to an outside operator, and managed network services seems much less than a slam dunk.
"Managed services is definitely where the market is headed," says Hilary Mine, senior vice president of Internet coverage at Probe Research Inc. (www.proberesearch.com). "It makes a lot of sense for an ISP to get out of the network business and focus on providing services. But it's not all there right now. We see 1998 as the year when everyone develops their business plan and 1999 as the year when the services become feasible."
What becomes possibly confusing for an ISP looking to buy a managed service, however, is that no two companies are setting up services in exactly the same way. "There hasn't been one dominant model for how to do this," says Tim McShane, director of marketing for remote access at Cisco Systems Inc. (www.cisco.com). "The interesting thing is that the market hasn't been looking at one right technology model -- it's been more a combination of creating a technology and a business model."
Some ISPs would like to outsource every aspect of operating a network and focus solely on developing services, such as virtual private networks, local caching of content or Web hosting, that let them differentiate their company in the increasingly competitive market. Others want to hand over the physical operation of the network but retain control of the customer and network management. Larger ISPs want any equipment used by the carrier to provide their service to be dedicated to them -- for smaller ISPs, sharing resources may not be as big an issue as getting high-quality, reliable service.
"There are definitely those ISPs whose business plan is solely about interacting on a very personal level with small-business customers," Mine says. "They don't want to be bothered with having to learn how to be network operators, as well."
Where services are available today, they are provided largely by a new generation of competitors that consider themselves to be data local exchange carriers (DLECs) -- companies competing for local service using data networks.
These new carriers have differing network and business models of their own but share a focus on serving ISPs. Among the major players are Covad Communications Inc., NorthPoint Communications Inc. and XCom Technologies Inc.
"Focusing on service to ISPs is a very sound business strategy," says Rebecca Wetzel, Internet analyst at TeleChoice Inc. (www.telechoice.com). "ISPs are looking for partners that can provide network services -- there is demand in the market today. With the telephone companies not really stepping up to that demand, it makes sense for a data competitor to step in."
A Few Pioneers
Some local telephone companies are offering managed services to ISPs. Bell Atlantic Corp.; GTE Network Services, the local phone company arm of GTE Corp.; and Southwestern Bell, a unit of SBC Communications Inc., all offer slightly different flavors of services that manage routers and modem pools for ISPs.
GTE recently added a product known as CyberWAN to its service, called CyberPOP, which was launched last year. GTE will create a virtual point of presence (POP) for an ISP by installing an access router within one of its telephone central offices (COs), says Bob Johnstone, product manager of wholesale markets at GTE Network Services. "We install a product that meets the ISP's specifications in the CO, and we own it, maintain it and lease back the ports to the service provider," he says. "To the service provider, it appears as an extension of the existing network."
As part of CyberWAN, GTE also handles provisioning of services, including T1, or 1.5-megabit-per-second; T3, or 45-Mbps; and 155-Mbps rates.
"What this does is allow an ISP to very quickly extend their network without having to invest a lot of capital in equipment and then having to maintain that equipment," Johnstone says. "Within reason, we can let them pick the router vendor they want, so that the router that we own and install fits into their existing network management system."
The ISP is expected to report network or equipment problems to GTE, which would then provide the technical support, but the Internet provider retains the ties to the customer.
"We sell a virtual presence in our network, but as the local phone company, we don't necessarily have the expertise to run an Internet service, " Johnstone says. "If something goes wrong with the router, we depend on the ISP to work with our network operations center and then give us a password so we can run diagnostics on the equipment. Only by directly looking at the router log can we determine if the problem is in the router or somewhere else in the network. But that only happens when there's a problem."
That "hands-off" approach to providing a managed service is one of the emerging models, says Mitch Auster, remote access offer manager at Lucent Technologies Inc. (www.lucent.com).
"Essentially, the remote access servers are wherever the ISP has had remote access, but the service provider owns them," he says. "The remote access equipment is now in the service provider's network, but it's dedicated to that ISP."
Other telephone companies are looking at the kind of service GTE provides in the 22 states in which it operates a local telephone company network, but not everyone is moving quickly in that direction. One reason: It isn't clear what ISPs are willing to pay and how a telephone company can make money offering the service.
"The business model between the ISP and the carrier is not fully understood or fully defined," says Glenn Falcao, vice president and general manager at Northern Telecom Inc. Public Data Networks. "One approach is for the ISP to tell the carrier the kind of infrastructure that is required and for the carrier to build that infrastructure. But the question becomes: What resources are shared? Where is there money to be made, and what services can the network service provider offer, other than just building out the network?"
BellSouth Business Systems, a unit of BellSouth Corp. (www.bellsouth.com), is studying the ISP market in hopes of offering a service in the second half of 1998 and is looking at issues such as shared resources and economies of scale, says Sara Parker, product development manager at BellSouth Business Systems. That research has turned up demand for managed services, particularly from larger ISPs that would like to outsource all network functions.
"What we're trying to do now is put them in pockets -- group them by their requirements," she says. "They are all specific in their desires, so we probably need to work on customized solutions. They are typically asking for vendor- specific equipment."
The challenge becomes how the network service provider can offer the broadest range of services and still achieve the economies of scale that help generate profits.
"We've also got to look at the equipment they're requesting and determine if it's suitable for the CO environment," Parker says.
Telephone company COs have very strict requirements for high reliability, power consumption and heat dissipation, and some of the equipment that ISPs are requesting was not designed for that environment.
"To some extent, we're dependent on the vendor community and when they make this equipment available," Parker says.
The other issue is willingness to pay on the part of the ISP. "They know what it costs them to install and operate the equipment," Parker says. "The question is the value of the Tylenol -- what they are willing to pay to get rid of the headache of operating the network themselves."
Analyst Wetzel says many ISPs are willing to pay, if not premium prices, at least a reasonable price, particularly if they are relieved of the burden of constantly adding capacity to their networks and upgrading to meet new technology trends.
"It's become harder for ISPs to keep up because the technology is moving so much faster," she says. "It's no longer, 'Order a few T1 lines and create a modem bank.' "
Leap Of Faith
When InLink Communications Co. decided to buy its network service from Southwestern Bell, "it was an agonizing, near-death experience for two reasons: We didn't know anything about it, and neither did Southwestern Bell, " says Gary Hollingsworth, executive vice president at InLink (www.inlink.com), a regional business ISP based in St. Louis. "If there's such a thing as left of beta, we were it."
The phone company approached his firm only days before InLink officials planned to sign contracts to purchase digital modems.
"We were actually in the process of finalizing a contract when we got a call from Southwestern Bell," he says. "They came out that afternoon. "
InLink became the first customer of Southwestern Bell's Internet/Intranet Transport Service, which uses access equipment from Nortel (www.nortel.com) to separate data traffic from voice traffic before it goes through a voice switch and put it onto a high-speed data network.
Many ISPs may make the move to managed services at the same point InLink did, Falcao of Nortel says.
"At the point where they face a major upgrade of their network facilities is a natural time for an ISP to consider a managed service from a carrier, because it's an opportunity to avoid the pain of investing capital in new equipment and getting it up and running," he says.
In InLink's case, however, the pain became part of the managed service process, as well. Due, in part, to the fact that InLink was the first customer on a new service being deployed on new network equipment, there were bugs, Hollingsworth says.
"There was a tremendous education curve that we had to get over," he says. "We lost a lot of customers during that time, because people were getting busy signals or disconnects. I'm not saying that was all Southwestern Bell's fault, though. We thought beforehand and subsequently that it was the thing to do."
Ultimately, InLink felt -- and still believes -- that buying its Internet service from Southwestern Bell enables the company to provide better service to its customers, Hollingsworth says.
"Our customers are able to get better connectivity than by any other means," he says. "We think this is really important to us as an entity: speed and connectivity."
A major benefit to buying the service from a carrier is the ability to rapidly expand, he adds.
"We make a phone call and, 24 to 48 hours later, we can increase modem banks from 700 to 770," he says. "It's like the figurative snap of the fingers."
Rapid expansion also lured CapeInternet Inc. onto the managed service provided by XCom. The ISP had seven POPs serving southeastern Massachusetts but wanted to go statewide. That would have required creating 20 to 30 more POPs.
"That was just a huge amount of money for us," says Brooks McCarty, president of CapeInternet (www.capecod.net).
Buying the service from XCom allowed CapeInternet not only to expand across Massachusetts but to create a sister company -- New England Access -- to expand into New Hampshire and Rhode Island.
Just as important from McCarty's standpoint were some unexpected tax benefits. When building its own network, he says, the company had to lay out major capital, which could only offset revenue for tax purposes over a period of several years. XCom's (www.xcom.net) services are considered an expense and can be taken directly to offset revenue, creating a significant tax savings.
Still, CapeInternet proceeded cautiously.
"We started with a very small number of lines from XCom, until we had gone through their processes and found out that they were, in fact, capable of delivering what they said they were capable of delivering," McCarty says. Now future growth of CapeInternet is closely tied to what XCom can offer.
XCom's strategy is to be a DLEC -- or local data service company -- and the company is building a network around high-speed connections and programmable switches.
"My capital expense is much lower than that of a telephone company because I don't buy huge switches," says XCom President David Callan, who plans to cover 11 of 13 Bell Atlantic territory states by June and then move into California later this year. "We'll fill in between with Chicago, Dallas, Atlanta and Boulder," Callan says. "But the truth is that 65 percent to 70 percent of the business lines and 75 percent to 80 percent of the data traffic reside on two coasts."
By contrast, another data services company -- Covad -- is building its service around fast access on Digital Subscriber Line (xDSL) technology that lets it offer ISPs a 1.5-Mbps service. But like XCom, Covad (www.covad.com) has expansion plans. After launching service in Northern California, it is adding Boston, Los Angeles, New York, Seattle and Washington, D.C.
NorthPoint, another data service provider, is starting with Northern California and adding Boston in June, with further plans to add seven to 10 major metro areas by year's end. NorthPoint also is using xDSL as a differentiator, offering services at speeds ranging from 160 kilobits per second to 1.04 Mbps.
But Ann Zeichner, vice president of sales and marketing at NorthPoint, says the real differentiation comes in the ease with which ISPs can expand their networks without having to negotiate deals with the local telephone companies and wait for T1 links or other connections.
By offering speeds faster than analog or Integrated Services Digital Network can offer but much cheaper than T1 access from the telephone company, NorthPoint believes it can help ISPs target small to midsized businesses.
Probe analyst Mine says ISPs ultimately can become the value-added resellers that larger companies, including telephone companies, need to reach the small to midsized businesses cost-effectively. Where conventional wisdom has been that widespread consolidation within the ISP market will wipe out smaller companies, she sees a niche for these players on an ongoing basis.
"I think you'll see these companies that can really work with customers, that know data networking and are very hands-on with their customers do very well," she says.
<<Inter@ctive Week -- 04-27-98>>
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