Sorry for the prolonged silence. It's amazing what a few projects and some impending holidays will do to time availability...
Anyway, the interesting question for today is: Whither the ISPs?
At the beginning of 1995, I left WorldCom and, with two partners, started a new Internet business. We left because Mr. Ebbers just didn't get it when it came to the Internet. We had just been acquired as part of WilTel and he was shutting down all of our Internet-based initiatives. Of course, the storyline has changed quite a bit since then. Along the way, Mr. Ebbers and WorldCom accidentally acquired a company called UUNET, and the rest is, as they say, history...
Anyway, as I was saying, in 1995, we started Digital Frontiers. Over time, we went from just doing web page development to creating vertical industry portals to launching a nationwide ISP (after we sold the company back to Williams and had the capital to consider such a concept). Year after year, from 1995-1997, the industry analysts predicted the demise of the ISP - saying that the industry would consolidate to a reasonable number of players. Year after year, the industry exploded, from hundreds of ISPs to thousands of ISPs to tens of thousands of ISPs. Being part of that industry, we hoped and prayed that the analysts were wrong, and we were thankful when they were.
So today, I feel a bit like Mr. Ebbers (only a bit), as I stand before you, having completely reversed my position on the topic, and, as an industry analyst, predict that the industry will collapse and consolidate.
How can this be? Well the theory is finally becoming reality. ISPs can't offer a complete bundle and they don't have a competitive cost structure.
There have been lots of ISPs over the years because the ISP business primarily became a retail business. It started with lots of mom-and-pop ISPs offering services locally. Differentiators were network availability (fewer busy signals) and price ($19.95/month, then $14.95/month, then $9.95/month, then free). Along the way, the market has basically segmented into consumer-focused providers and business-focused providers.
The consumer-focused providers have always been very price-oriented. This hit bottom with the rash of free dialup providers. Unfortunately, these providers have suffered the wrath of the dot-com collapse and the reality of a negative-cash-flow business model. Many of these are failing. In addition, consumer Internet customers are mostly fixed location Internet users. Bandwidth, specifically broadband bandwidth, is today's key differentiator. And guess who is well positioned to own the broadband consumer - not the mom-and-pop ISPs, not even the nationwide ISPs like Earthlink, but rather the RBOCs/ILECs and maybe the cable companies. The RBOCs probably hold the long term advantage here since they can offer a bundle of broadband Internet, local telephone service, and long distance, which is a much more logical bundle than cable TV and broadband entertainment. (The key, of course, is long-term, but the RBOCs are already winning the mindshare battles against the traditional ISPs.)
The business-focused providers have shifted from price differentiation to the need to support mobile teleworkers. When I travel, I need to know that I'll be able to dial-up from my hotel room and check my e-mail over an IP connection. Again, the mom-and-pop's of the world don't stand a chance. Earthlink and other ISPs may be able to compete in this space, but they will likely struggle against a provider like AT&T or Worldcom that can offer a complete and customized bundled solution.
So what does this mean for the ISPs? Why not ask PSInet? PSInet was one of the original ISPs, along with UUNET, back in 1987. They have always maintained a fierce independence, bordering on arrogance. But apparently, no more. They can't offer the bundle of services that business customers demand, and they lack the backbone economies to compete in the commoditized backbone market. So their business plan no longer works. I'm sure that their attractive collection of assets will appeal to some large buyer (if anyone can raise the capital), and the name may even live on as UUNET's has, but I'm afraid that the PSInet that we have grown to know and, er, appreciate, will soon be history.
And I truly hate to say, as falls PSInet, so falls the rest of the ISP industry. So long good friend, it's been good to know you...
Anyway, the interesting question for today is: Whither the ISPs?
At the beginning of 1995, I left WorldCom and, with two partners, started a new Internet business. We left because Mr. Ebbers just didn't get it when it came to the Internet. We had just been acquired as part of WilTel and he was shutting down all of our Internet-based initiatives. Of course, the storyline has changed quite a bit since then. Along the way, Mr. Ebbers and WorldCom accidentally acquired a company called UUNET, and the rest is, as they say, history...
Anyway, as I was saying, in 1995, we started Digital Frontiers. Over time, we went from just doing web page development to creating vertical industry portals to launching a nationwide ISP (after we sold the company back to Williams and had the capital to consider such a concept). Year after year, from 1995-1997, the industry analysts predicted the demise of the ISP - saying that the industry would consolidate to a reasonable number of players. Year after year, the industry exploded, from hundreds of ISPs to thousands of ISPs to tens of thousands of ISPs. Being part of that industry, we hoped and prayed that the analysts were wrong, and we were thankful when they were.
So today, I feel a bit like Mr. Ebbers (only a bit), as I stand before you, having completely reversed my position on the topic, and, as an industry analyst, predict that the industry will collapse and consolidate.
How can this be? Well the theory is finally becoming reality. ISPs can't offer a complete bundle and they don't have a competitive cost structure.
There have been lots of ISPs over the years because the ISP business primarily became a retail business. It started with lots of mom-and-pop ISPs offering services locally. Differentiators were network availability (fewer busy signals) and price ($19.95/month, then $14.95/month, then $9.95/month, then free). Along the way, the market has basically segmented into consumer-focused providers and business-focused providers.
The consumer-focused providers have always been very price-oriented. This hit bottom with the rash of free dialup providers. Unfortunately, these providers have suffered the wrath of the dot-com collapse and the reality of a negative-cash-flow business model. Many of these are failing. In addition, consumer Internet customers are mostly fixed location Internet users. Bandwidth, specifically broadband bandwidth, is today's key differentiator. And guess who is well positioned to own the broadband consumer - not the mom-and-pop ISPs, not even the nationwide ISPs like Earthlink, but rather the RBOCs/ILECs and maybe the cable companies. The RBOCs probably hold the long term advantage here since they can offer a bundle of broadband Internet, local telephone service, and long distance, which is a much more logical bundle than cable TV and broadband entertainment. (The key, of course, is long-term, but the RBOCs are already winning the mindshare battles against the traditional ISPs.)
The business-focused providers have shifted from price differentiation to the need to support mobile teleworkers. When I travel, I need to know that I'll be able to dial-up from my hotel room and check my e-mail over an IP connection. Again, the mom-and-pop's of the world don't stand a chance. Earthlink and other ISPs may be able to compete in this space, but they will likely struggle against a provider like AT&T or Worldcom that can offer a complete and customized bundled solution.
So what does this mean for the ISPs? Why not ask PSInet? PSInet was one of the original ISPs, along with UUNET, back in 1987. They have always maintained a fierce independence, bordering on arrogance. But apparently, no more. They can't offer the bundle of services that business customers demand, and they lack the backbone economies to compete in the commoditized backbone market. So their business plan no longer works. I'm sure that their attractive collection of assets will appeal to some large buyer (if anyone can raise the capital), and the name may even live on as UUNET's has, but I'm afraid that the PSInet that we have grown to know and, er, appreciate, will soon be history.
And I truly hate to say, as falls PSInet, so falls the rest of the ISP industry. So long good friend, it's been good to know you...
posted by Russ at
2:23 PM
