ISPs in the 21st Century


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ISPs in the 21st Century

  1. 1. Internet Service Providers In the 21st Century A white paper addressing the changing role of the Internet Service Provider in the emerging Internet supply chain. US Internet Industry Association March, 2003
  2. 2. 2 Service Providers in the 21st Century By David P. McClure Introduction time would collapse or consolidate to roughly 500 by the year 2000.1 Internet Service Providers created the Internet industry. They brought connectivity to homes The following year, the Gartner Group warned and businesses, built electronic mail and web enterprises that converged network services sites into essential services, and wired the would reduce the ability of “access oriented” nation’s schools, churches and governments – ISPs to compete, and that the Internet of the often at no charge. future would be dominated by a handful of multi-service networks capable of transmitting Today, as the first decade of the commercial voice, video and data traffic.2 Internet draws to a close, the role of these Internet pioneers is rapidly changing. In some Both of these respected research firms were cases, ISPs are finding their role in the Internet correct in their projections, given the set of supply chain supplanted by larger competitors assumptions that existed at the time. But the or the relentless advance of technology. In ISP industry has grown even as it consolidated. some cases a reversal of government policies – And while multi-service networks will someday notably reciprocal compensation payments, dominate the Internet access business, UNE unbundling of telco services, or line innovative business strategies and technological sharing in the local copper loop – may eliminate advances keep this segment of the Internet the financial advantages of the “traditional” ISP industry vibrant and alive. business model. In the first quarter of 2003, there are an Internet Service Providers, however, endure as a estimated 30,000 Internet Service Providers in critical link in the supply chain. Their the United States alone: businesses are constantly evolving, their range of services shifting with the differing perceived • 5,000 are colleges and universities. needs of the marketplace. • 1,800 are fixed wireless service providers3, including “community” or This white paper, a revised and updated version non-commercial shared networks. of a document first released in March of 2002, • 2,500 are Wi-Fi Wireless network examines the prevalent business models that nodes, “hot points,” and similar free- will shape the role of the ISP in the years ahead, access services. as well as noting several of the opportunities for • 15,000 are Multi-Tenant Unit and new ISP businesses in the years immediately Multi-Dweller Unit providers, serving ahead. apartment buildings, office buildings, college campuses and other properties4. The Death of the Traditional ISP The fact that “traditional” Internet Service Providers – those whose business is based on dial-up access to Internet services and news/mail 1 “Local ISPs May Survive Shakeout,” CNet News, servers – will become obsolete is hardly news. August 19, 1997 2 “Converged Network Services Accelerate ISP U.S.-based Forrester Research released a report Consolidation, Gartner Group, Research Note, in 1997 on the demise of traditional ISPs, August 17, 1998 projecting that the estimated 4,500 ISPs of that 3 Source: In-Stat/MDR, March, 2003. 4 Source: Broadband Properties Magazine, 2003
  3. 3. 3 • 2,300 are dialup and broadband services over ISDN and T-1 lines. The growth offered by independent ISPs using of broadband over wireless, satellite, incumbent telephone companies.5 cable, DSL and powerline has • 1,000 are rural and independent ILEC eliminated these clean lines of telephone companies that offer demarcation, throwing the industry into broadband and narrowband Internet a competitive frenzy that has injured services.6 competitors large and small. And it has • 1,000 are cable television companies, begun to alter the competitive landscape including cable over-builders, private further as users abandon their dial-up cable systems, and local and national accounts in favor of broadband. cable providers that offer broadband Nielsen/NetRatings reports that of the Internet services. 110 million Americans online today, 33 • 340 are cyber-cafes, resorts, shopping million are on broadband. Broadband mass kiosk sites and others offering posted a 59 percent growth rate in 2002, Internet access. while dial-up accounts declined by 10 percent.8 Broadband connections are • 100 are competitive local exchange expected to surpass dial-up connections carriers that offer broadband services, in 2007 and virtually replace dial-up by wireless or dial-up services.7 2010.9 • 125 are “virtual ISP” services such as the AFL-CIO and the Republican Party, • Bursting of the “Internet bubble.” which operate Internet services but have The rapid decline in the value of no infrastructure or support of their Internet stocks in 2000 through 2002 – own. the telecommunications sector alone lost • An unknown number of other ISPs, $2 trillion – took much of the value out including the remnant “free” services, of the industry while drying up sources Fiber-to-the-home (FTTH) providers, of capital needed for continued growth. powerline providers, information Moreover, the succession of companies services, private ISPs and virtual private under investigation or indictment for networks, corporate ISP services, and their accounting and business practices web hosting companies. has left investors wary and risk averse of technology companies, particularly Five major trends are affecting the Internet Internet companies. service provider industry in the opening years of the 21st Century: • Increasing capital requirements. Dial-up Internet services have not • The growth of broadband. The most traditionally been capital-intensive. significant factor in defining the Making use of telephone lines and industry and its opportunities has been simple modem/computer configurations, the growth of broadband Internet. In its these services effectively had no barriers initial stages, the Internet was cleanly to entry – anyone could and generally divided between dial-up Internet access did participate, to the point that by 1999 – dominated by a handful of there were an estimated 8,000 such information services and thousands of ISPs. But emerging technologies for small independent ISPs – and the broadband are extremely capital telephone companies, which dominated intensive – the investment made in the markets for higher-speed services broadband over cable is already over 5 8 Source: Combined data from Verizon, SBC, See BellSouth and Qwest broadband/article/0,,10099_1570321,00.html 6 Source: US Telecom Association, 2003 9 Study By ARC Group, referenced at 7 Source: New Paradigm Resources Group “CLEC Industry Report 2003” icle/0,1323,10099_985891,00.html
  4. 4. 4 $60 billion, with additional investments increase by 40% per year through this of up to $100 billion necessary to decade, according to the Gartner Group. complete buildout of those networks. And the US Department of Commerce Given the lack of available investment notes that retail sales online surged funding in the technology markets – again last year, up 28 percent over 2001. from the stock exchanges to private Added to these traditional applications investors -- this capital intensity will are a new generation of network allow only the largest companies to services that include peer-to-peer file participate in Internet access. sharing, instant messaging, Internet to cell phone integration and text • Government deregulation. Though messaging, and Voice-Over-IP much of the impetus for industry growth telephony. These services will combine can be traced to the with other telecommunications and Telecommunications Act of 1996, that video services over broadband to drive act has also served as a barrier to growth and profitability. investment and led almost directly to the stock collapse of 2000-2002. By These factors, combined with continuing heavily regulating telephony while consolidation and the on-anytime nature of refusing to regulate other forms of broadband, will ensure that the traditional dial- Internet access, the Federal government up ISP of the 1990s will disappear within a created strong competition from cable matter of years – almost exactly as predicted. and wireless Internet providers, but Those that survive may well number in the substantially weakened the development thousands, but that will depend on their ability of telephony-based broadband. This to move to a next-generation level of service. situation began to reverse itself through This move – the evolution of the Internet service a series of court rulings and FCC provider industry – is predicated on four decisions beginning in 1999. The FCC business models. in particular has removed requirements for reciprocal compensation payments, line-sharing for broadband and access to Model #1: Open Systems Interconnection the high-frequency portion of the copper loop. This has resulted in a decline in The Open System Interconnection model is the the number of competitors who have not traditional method of defining the interaction of invested in their own lines and facilities, the levels, or layers, of Internet services. It but in the long run will allow the defines a networking framework for telephone companies remain implementing protocols in seven layers. competitors in the industry with enhanced broadband offerings and In this model, the Internet is not a single entity fiber-to-the-home (FTTH). with a “telecommunications component,” but rather three (or more) inter-related services that • Evolving Internet services. operate across seven layers. All seven are Traditional Internet services -- email, integral to the operation of the Internet, and the web browsing and e-commerce – OSI model is the accepted definitional model for continue to grow. Email messaging will how the Internet works in both dial-up and broadband applications.
  5. 5. 5 This layer supports application and end-user processes. Communication partners are identified, Application quality of service is identified, user authentication and privacy are considered, and any constraints (Layer 7) on data syntax are identified. This layer provides independence from differences in data representation (e.g., encryption) by Presentation translating from application to network format, and vice versa. It is sometimes called the syntax (Layer 6) layer. Session This layer establishes, manages and terminates connections between applications. (Layer 5) Transport This layer provides transparent transfer of data between end systems, or hosts, and is responsible for (Layer 4) end-to-end error recovery and flow control. It ensures complete data transfer. This layer provides switching and routing technologies, creating logical paths, known as virtual Network circuits, for transmitting data from node to node. Routing and forwarding are functions of this layer, (Layer 3) as well as addressing, internetworking, error handling, congestion control and packet sequencing. At this layer, data packets are encoded and decoded into bits. It furnishes transmission protocol Data Link knowledge and management and handles errors in the physical layer, flow control and frame (Layer 2) synchronization. Physical This layer conveys the bit stream - electrical impulse, light or radio signal -- through the network at (Layer 1) the electrical and mechanical level. Figure #1 – Open Systems Integration Model The Telecommunications Act of 1996 defines an Layer 1 defines a capability that does not meet “information service” as “the offering of a the definition of an information service, but capability for generating, acquiring, storing, does provide transport carrier services regardless transforming, processing, retrieving, utilizing, or of the platform on which the information is making available information via transported. That is, the services of Layer 7 do telecommunications, and includes electronic not need to differentiate between the various publishing, but does not include any use of any types of transport provided in Level 1 – such capability for the management, control, or telephony, wireless, power grid, cable or other. operation of a telecommunications system or the management of a telecommunications service. Layers 5, 4, 3 and 2 are performed by an altogether different service entity called an Under this model, Layers 7 and 6 meet the Internet Access Provider.12 definition given an information service -- the The Internet is therefore comprised of three or “transforming, processing, retrieving, utilizing, more distinct services – including information or making available of information via services, Internet access services and transport telecommunications.”10 services. A single company may choose to offer all three of these services, bundled (e.g., This definition was further delineated by the US Comcast Cable), it may offer a combination of Supreme Court to include “electronic mail, any two (e.g., Earthlink, which does not own its automatic mailing list services (‘mail own transport services), or only one of these exploders,’ sometimes referred to as ‘listservs’), (e.g., backbone providers such as Genuity, ‘newsgroups,’ ‘chat rooms,’ and the ‘World 12 Wide Web.’”11 The Commission has defined “Internet access services” as services that “alter the format of information through computer processing 10 applications such as protocol conversion and 47 U.S.C. § 153(20). interaction with stored data.” Report to Congress, 13 11 Reno v. ACLU, 521 U.S. at 851. FCC Rcd at 11516-17, para. 33.
  6. 6. 6 content services such as eBay.Com, or In Porter’s model, an industry is “fragmented” – independent Internet Access Providers such as lacking cohesion, leadership and other qualities Mercury.Net). None of the three services are capable of Figure #2 – Porter’s Curve independently providing what we term Internet service. The Transport service requires the ability to initiate, route and terminate data. The Porter’s Curve Internet Access service requires data and the means to transport that data. And the Information Service becomes inaccessible without Internet access and transport. P r This model defines the Internet supply chain, o and provides the means to categorize Internet f service providers according to their participation i in one or more of the levels. t s Model #2: Porter’s Curve Dean of the school of Business Administration Market Share at Harvard University for more than a decade, Michael Porter rocked the business world in the Eighties with his theories of competition. of a mature industry -- until at least one In his landmark text Competitive Strategies, competitor garners a 40 percent market share. Porter noted that there is a relationship between The Internet industry remains highly the amount of market share a company fragmented, while larger competitors scramble commands and its profitability. It wasn’t and merge to reach that position. simply that companies with more market share are more profitable, Porter says. The curve is In Porter’s model, an almost infinite number of U-shaped, with companies at both ends of the smaller players participate in the market at the scale showing superior profitability. left side of the curve. These are what Porter termed “niche” players. They are companies In Porter’s model, there are two ways to reach that carefully select a target market (or “niche”), maximum profitability. The first is to increase pamper that market with exceptional service, market share in order to reach the right side of and charge a premium price. And they are very the curve. At that point, the ISP has enough profitable – in some cases just as or more subscribers to commoditize the product, drive profitable as the ISPs to the right of the curve, down prices and use efficiencies of scale to be though on a lesser scale. profitable. Porter’s Curve is a handy tool for examining a This is where the larger companies choose to marketplace, and for crafting a competitive participate. AOL claims to be farthest to the strategy for an ISP. On the simplest level, the right, though even it fails to dominate the right strategy is this: if an ISP is able to marshal the side of the curve with only a 17 percent market resources necessary to acquire market share share. Mindspring and Earthlink merged to get (either through growth or acquisition) to further to the right. Comcast and AT&T challenge for leadership, then it should do so as merged for the same reason. quickly as possible. The strategy is to get as far to the right of the curve as possible in order to be as profitable as possible.
  7. 7. 7 If the ISP cannot marshal those resources, and Figure #3 – The Internet Supply Chain cannot get far to the right of the curve, the only competitive strategy available is to define a Their access products to the next level of the niche and stay to the left of the curve. Porter supply chain. That next level may be a clearly warned that companies that could not secondary wholesaler in the case of a T-1 line, understand this would waste their resources in a or an aggregator who buys in volume at a futile effort to “get bigger” without discount in order to serve a number of ISPs. understanding that this also meant to “get less profitable.” He called such companies “stuck in ISPs, who do not own the network, nonetheless the middle.” are the critical resale outlets that sell the capacity of the “factories” to the end consumers. Consumers then make use of that capacity to Model #3: The Internet Supply Chain Model create works and products that are shared in a common marketplace with other consumers. Industries need fully developed and independent supply chains in which producers sell to In the early days of the Internet, it was wholesalers, who in turn sell to retailers, who in conventional wisdom that the Internet was the turn sell directly to the public. The only engine of disintermediation – that it would exceptions to this rule are small boutique collapse supply chains to facilitate direct sales. businesses – and telecommunications is This has proven largely untrue, even for the anything but that. Internet itself. Though it is generally permissible for factories The fact that the Internet supply chain has been to sell direct to the public through outlet stores, slow to evolve is due to two factors. and to bypass wholesalers to serve the largest of the retail outlets through direct national First, larger companies engaged in the Internet accounts, there are virtually no industries that misinterpreted the nature of the Internet. can thrive by cannibalizing their own supply Telephone companies, accustomed to operating chain. as a single supply chain in and of themselves, tried to move the Internet to fit that model. The Internet supply chain consists of the transport “factories” – telephone, cable, satellite, Cable and satellite companies, meanwhile, tried power grid and other companies who own and to bend the model to fit that of cable, in which maintain the networks, and wholesale the content providers are the factory and the transport companies are the wholesale/retail channel for that content. Transport Factories Both types of companies missed the central point that the product being purchased by Secondary Wholesalers consumers is connectivity, not content. The inability to grasp this fundamental has resulted in billions of dollars in wasted investment Aggregators chasing “killer applications” such as streaming video and interactive television. Internet Service Providers In this respect, Internet consumers more closely follow the narrow-casting model: there is no single reason why the majority will want Consumers/Content Providers broadband, just as there is no single reason why consumers subscribe to any given magazine.
  8. 8. 8 What consumers are purchasing from the Because such large and successful companies Internet supply chain are the means and tools to are adept at listening to their customers, and connect comfortably, reliably and securely in giving customers what they say they want, they order to share information and content with excel at sustaining existing technologies. other consumers. Disruptive technologies, however, are distinctly Second, the supply chain was wrecked in its different from sustaining technologies. infancy by the misapplication of onerous and Disruptive technologies change the value burdensome telephone regulations by the proposition in a market. When they first appear, Congress and the Federal Communications they almost always offer lower performance in Commission. terms of the attributes that mainstream customers care about. In passing and implementing the Telecommunications Act of 1996, the Congress The Internet, for example, did not initially offer and the FCC barely considered the potential any of the rich content, graphical interfaces or impact on the Internet industry – they were ease of use of even the most humble electronic attempting to stimulated competition in long bulletin board system (BBS). distance and local telephony. By not But like other disruptive technologies, the considering the Internet, however, these two developers of the commercial Internet improved forces of government policy provided financial their products' performance to eventually incentives for the Internet industry to telescope dominate the online services industry. the supply chain – forcing ISPs to try to compete with their own upstream providers, and In The Innovator's Dilemma, Christensen offers forcing the telecommunications factories to four Principles of Disruptive Technology to attack their own distribution channels in explain why the management practices that best response. exploit existing technologies are counter- productive when it comes to developing The result has been chaos, acrimony, disruptive ones: widespread business failures and significant deterrents to the deployment of faster, cheaper, • Leading companies must please better Internet services to consumers. existing customers and investors. In order to survive, companies must provide customers and investors with Model #4: Disruptive Technologies the products, services and profits that they require. The highest performing The fourth model, proposed by Professor companies, therefore, have well- Clayton M. Christensen, concerns the effect of developed systems for killing ideas that what he terms “disruptive” technologies – their customers don't ask for. They fail simpler, cheaper and lower performing to invest in disruptive technologies technologies that are first commercialized in -lower margin opportunities that their emerging or insignificant markets but which customers don't ask for - until their grow to dominate an industry. customers demand them. And by then, it is too late. Christensen concludes in his work The Innovator’s Dilemma that large and successful • Large companies have trouble companies often fail over the long term because serving small or niche markets. To the management practices that allowed them to maintain their share prices and create become industry leaders also make it extremely internal opportunities for their difficult for them to develop the disruptive employees, successful companies need technologies that ultimately steal away their to grow. As they get larger, they need markets. increasing amounts of new revenue just to maintain the same growth rate.
  9. 9. 9 Therefore, it becomes progressively mindset – or partner with small companies that more difficult for them to enter the are already comfortable with the new newer, smaller markets that are technology. destined to become the large markets of the future. To maintain their growth Lessons of the Four Models rates, they must focus only on large markets. Taken together, these models provide an evolutionary path for Internet Service Provides • New and emerging markets are as well as other elements of the supply chain, impossible to analyze. Sound market affording each the opportunity to be healthier research and good planning followed and more profitable. The lessons provided by by execution according to plan are the these models may be summarized as follow: hallmarks of good management. But, companies whose investment processes demand quantification of market size • There are at least three (and possibly and financial returns before they can more) distinct types of Internet enter a market get paralyzed when businesses – transport providers, faced with disruptive technologies Internet access providers and because they demand data on markets information services. The OSI model that don't yet exist. It is still not clearly demonstrates that the Internet is possible, for example, to know how not a single, homogenous business that many business web sites there are can be effectively managed by a single worldwide, or to quantify electronic entity. In fact, the vast dissimilarities in commerce sales. these differing types of business make it difficult for any single company, • Disruptive products upset the market regardless of size, to keep pace with the dynamics. Products that are currently evolving technologies in all of these. in the mainstream tend to perform better than they need to, because they • There is room for a significant are mature and well developed. number of Internet Service Providers Disruptive technologies tend to under- in the industry. While the largest of perform relative to customer the Internet Service Providers and expectations in the mainstream market Information Services will battle for the today, but will grow to compete with 80 percent of the US population in the the existing products (an example here top 50 population centers, it is still might be peer-to-peer file sharing, necessary to serve the 70 percent of the which will eventually challenge US geography (and 20 percent of the traditional distribution channels for population) in rural areas. Smaller, music and videos. well-niched ISPs will serve these markets. That is to say, Porter’s Curve A mistake that managers make in dealing with will remain in effect for the Internet new technologies is that they try to fight or industry as it is for others. Other niches overcome these Principles of Disruptive will include the SOHO and SME Technology – as many major companies markets, where ISPs have traditionally initially did with the Internet. Applying the held strong customer relationships. traditional management practices that led to success with sustaining technologies always • Transport companies own the “last leads to failure with disruptive technologies mile.” Companies that have invested in “last mile” technologies are in the This means that larger companies will have transport business, offering a service difficulty competing with disruptive independent of the content or technologies in the Internet space unless they information carried on their networks. can create separate organizations with a different ISPs who invest in the buildout of the
  10. 10. 10 “last mile” – particularly in isolated more nimble, more focused reseller urban or rural areas not well served by organizations to manage customer larger competitors – will nonetheless relationships. have to either niche well in their markets or prepare for competition from • Successful Internet companies will the larger cable and telephony transport form partnerships with other companies. companies in the Internet supply chain. Small companies with a • Internet Service Providers own the demonstrated ability to deploy Internet customer relationship. Consumers services will be sought after as business have learned to look to ISPs to partners by larger companies, because recommend, install and maintain their they are able to adapt to rapid and Internet connections and services. disruptive advances in the core Consumers are less interested in trusting technologies. Large companies, these functions to transport companies meanwhile, will be able to offer ISPs unless other options do not exist. This the resources to effect that deployment, is particularly true in the critical Small and economies in the production of Office/Home Office (SOHO) and Small- Internet services sold by the ISPs. to-Medium Enterprises (SME) markets. • Dial-up Internet access is fading. The 21st Century ISP They days in which “Internet access” is a viable business for anyone but a The Internet Service Provider industry is larger handful of companies is nearly at an end and more robust today than it was in 1997, but in 2003. With the exception of the rural the role of the ISP within the supply chain is markets, the majority of US homes in evolving. the 21st Century will be served by fiber optic and wireless services that offer At the end of this evolutionary process, the telephony, Internet, video and television Internet Service Provider will emerge as the link content across a single line. Internet in the supply chain that connects the product access services have three choices for factories for transport to the end users and their business model: remain in dial-up, content producers. extending it as far as possible as it declines through the end of this decade; The customer base will be a mix of business and build out their own “last mile” solutions residential customers. While larger companies in wireline, wireless, cable or other in the cable and telecommunications industry technologies; or resell the bundled will dominate the less profitable residential services of larger competitors. market, the business markets will be dominated by a more diverse mix of national ISPs and • Transport Companies must develop well-niched smaller players. Different ISPs effective reseller programs or lose within the same market may serve different business to competitors. The transport niches, particularly in the SOHO and SME companies have been slow to recognize markets. For example, some may operate the need for strong reseller wireless networks while others specialize in relationships, even in the face of the dial-up, cable and DSL services. poor performance of their affiliated ISPs, the failure of most of the DSL ISPs will specialize in delivering the most data LECs and the stall-out of DSL self- appropriate mix of Internet products for each deployment. The reality is that segment of both residential and business transport companies can efficiently markets. While residential customers will lead handle transport, which is a large-scale, large pipeline business. It will require
  11. 11. 11 in number of connections, the most profitable Also of strong interest will be the continued segment will be business customers.13 growth of 802.11 WiFi networks, which are predicted to attract 21 million subscribers by As part of this process, some ISPs currently 2007.15 An estimated 3,500 WiFi Internet operating at the mid-level will reinvent services are already in place or under themselves as secondary wholesalers and development to meet this demand. Again the aggregators, acting as the link between smaller FCC is working to expand availability, ISPs and the transport companies. Others will announcing in 2003 that it would make become niche players in the transport business, additional spectrum available for WiFi and other and will service rather than own reseller wireless applications. operations. Revenue streams will be derived both from Internet Service Providers will expand and direct payments by the end customer and diversify the products offered to consumers to through commissions from the transport include a more complete range of companies. That is, the transport companies telecommunications products and services. For will pay a commission to the ISPs as some, this will mean reselling broadband compensation for filling the capacity of their services offered by the transport companies as transport “factories.” The commission structure well as network management and servicing, and other payments will be managed through VOIP telephony, Instant Messaging, cellular standard commercial contracts that are telephone services, satellite services and other unimpeded by government regulations or tariffs. communications products in addition to the contemporary blend of web hosting and email. The small, independent ISP will be particularly critical in serving rural and other areas where it In particular, ISPs will continue to explore the is simply not cost effective for larger national myriad of alternatives to traditional wireline players to compete. Internet services. Perhaps the most significant changes will be the On February 14, 2002, the Federal closure of ISP businesses that do not have a Communications Commission (FCC) issued a coherent and workable business model, and the First Report and Order for Ultra Wide Band erection of barriers to new entrants into the (UWB) technology, which authorizes the market. commercial deployment of UWB14. Ultra- wideband (UWB) is a technology for wireless While competition is desirable as a mechanism communication, precision location and portable to regulate service and pricing, an industry with radar. It offers a simple, cheap method for no barriers to entry will suffer from runaway distributing high-bandwidth data wirelessly at competition that destroys profitability. This, in up to a kilometer in range. Because it’s sent on turn, leads to lesser levels of service and all frequencies, from high to very low, UWB innovation, since companies will not generate can pass straight though objects like the sea sufficient revenues to support customer service or layers of rock, and be used in radar or R&D. This was the situation created by the applications. Not only that, UWB pulses can be 1996 Telecommunications Act, which enabled set at any random interval, meaning the number thousand of new competitors to emerge in the of devices it could be embedded in is virtually Internet industry without making any significant limitless. investment in infrastructure. The dismantling of this regulated competition early in this decade will lead to improved profitability and the deployment of new services and applications, 13 “Broadband Appeal,” though at the cost of fewer companies in the industry. article/0,,10099_1010751,00.html. 14 15 See See FCC_RandO.pdf. wireless/article/0,1323,10094_974711,00.html
  12. 12. 12 the quality of their tech support or other factors. In reality, small companies fare 10 Rules For Success in the 21st Century poorly in head-to-head competition with large companies due to the resource The fact that many ISPs will survive and thrive imbalance involved. As a rule of in the 21st Century does not mean that all ISPs thumb, companies that are unable to share the potential to evolve into attract millions of dollars in capital communications resellers and service providers. financing should avoid competing At present, approximately 30 percent of ISPs are outside of their class. already on the evolutionary track, as evidenced by the growing number of aggregators and the 4. Niche or die. It is necessary for small expanded services being offered by ISPs. But ISPs to decide how they will participate the remainder are either stalled or already in in the supply chain and what niche or their final stages before closure. niches they will serve. Attempting to remain un-niched will be a fast track to For ISPs who do not fall in the top 10 largest disaster. national ISPs,16 there are 10 rules that will be critical for success in the 21st Century. 5. Compete on service, not price. The most fatal mistake made by small ISPs 1. The goal is profitability, not size. is to match the prices of the larger Porter’s Curve makes this lesson clear competitors (see Porter’s Curve again) for smaller ISPs – in the vast majority to attract customers. Niche players – of cases, increasing size will also everyone below the top two or three increase costs, with insufficient largest ISPs – will compete on service, economies to offset those costs. This is not price. It will be necessary to the deadly “stuck in the middle” improve service at every level of the scenario that has already claimed many business and to expand product mid-tier players in the industry. offerings to remain competitive. 2. Be wary of the transport wars. 6. Get training. It is not enough to have Transport companies, particularly cable, suppliers provide commissions, product telephone and satellite, will face a samples and spiffs. Commercial pitched battle for dominance in their contracts with every major vendor, own markets. This war will only grow including transport companies, should as the next generation of fiber optic include mandatory training for staff and products roll out in the coming decade. periodic meetings at trade shows or ISPs must decide whether to ally other events to assist the ISP in keeping themselves with one side or another, or current with the technology. hope for neutral trade with each. The policies of the transport companies and 7. Stay current with the technology. contractual exclusivity may require ISPs Voice over IP and cell phone integration to choose sides. are arriving in the Internet space. New satellites are coming on stream with 3. Compete wisely. ISPs have in the past capacity to sell to ISPs. And business- been led to believe they can compete class instant messaging could emerge as head-to-head with multibillion-dollar a major product line. ISPs must remain corporations based on government fiat, current in the technology to survive. 16 While this list is subject to constant change, as of 8. Get legal representation. All too the first quarter of 2003 these included America often, smaller enterprises attempt to Online, MSN, United Online, Earthlink, manage their own legal affairs as they SBC/Prodigy, Roadrunner, AT&T, Verizon, do other facets of their business, with BellSouth and Comcast.
  13. 13. 13 disastrous results. In the coming environment, contractual relationships with transport companies and other vendors can mean the difference between success and failure. A company’s future could turn on the deal it makes. For this level of criticality, ISPs need a legal expert in their corner. 9. Out-source services where possible. ISPs have been successful in out- sourcing a wide range of services, from technical support and billing to marketing. Where it makes financial sense to do so, this will enable the smaller enterprise to focus its management attention and activities to other, more critical functions such as developing and maintaining customer relationships. 10. Get involved and stay involved. The ISP industry is widely known in government circles for its unwillingness to participate in public dialogues and its lack of support for government initiatives. This will have to change, at both the state and national levels, if ISPs are not to be left to the mercy of lobbyists for larger firms. At a minimum, ISPs should get to know their local legislators, join their state association, and join the USIIA. US Internet Industry Association 815 Connecticut Ave. NW, Suite 620 Washington, DC 20006 (703) 924-0006 Voice (703) 924-4203 Fax (703) 851-4784 Mobile