Big Guys May Force ISPs to Improve or Die
It was a bright summer day and Greg Wiley had a crisis on his hands. As president of the Loop, a Hollywood-based Internet service provider with about 5,000 customers in the Los Angeles area, the problem landed on his lap when one of his firm’s 11 computers crashed, suspending subscriber e-mail somewhere in the ether.
The Loop’s problem, as it turned out, lay with a single disk drive for one of the three computers that route e-mail. The routine hardware failure provoked pandemonium at the firm’s spartan offices while a technician worked furiously to revive the ailing computer. Downstairs, two denim-clad young employees manned telephones and begged the indulgence of frustrated Net surfers.
“If one of the other two computers had gone down, we probably would have been fine,” Wiley shrugged. “You can plan and plan and plan and then something happens that you could never have accounted for. There are just some days when things stop working.”
Such a shutdown could hardly come at a worse time. In March, AT&T; Corp. began offering popular-priced Internet service to its 80-million long-distance customers, ushering in a new era of Internet service competition. Since then, cyberspace pundits have prophesied the imminent demise of small-time Internet service providers, or ISPs, like the Loop, which sell access to computer users in a particular geographical area and have thus far dominated this budding business.
These small providers have helped give the Internet its unstructured, unregulated, village-square feel. But they have also suffered from repeated technical outages and service irregularities.
The entry of well-heeled telecommunications giants into the Internet service business--besides AT&T;, MCI Communications Corp. and Sprint Corp. are also offering service to customers--now may force the small providers to improve or die. How they will fare in the new era of high-grade competition is an open question, and industry observers are not optimistic.
“There’s very little chance that small independent ISPs can withstand the long-term economic pressure of an AT&T;,” said Emily Green, an analyst with Forrester Research. Any competition-building losses AT&T; takes in its Internet business is “pocket change,” she argued.
Many small providers risk getting boxed in by the peculiar economics of the Internet business, in which certain pricing strategies can drive up losses.
Consider the Loop’s plan “to offer everything AT&T; does, but at 45% less,” as Wiley said. “We can afford to do it because we don’t have the overhead they do.” But the Loop collects a flat $14.99 a month whether subscribers log on for an hour or stay online all day. The more time subscribers spend on the Internet, the more equipment is required--at potentially greater cost to the Loop.
Since they can’t recover costs from high-use customers, providers like the Loop tend to upgrade their networks more slowly than user traffic requires. That, in turn, might increase service glitches as usage intensifies.
As it happens, the expense of keeping up with demand has always been a problem for the small companies.
“The reason companies are going out of business isn’t that they can’t attract customers, but because they can’t grow fast enough to deal with them,” conceded Sky Dayton, the 24-year-old founder and chief executive of EarthLink, a Pasadena-based ISP with more than 100,000 subscribers in the Los Angeles area.
“It’s a very capital-intensive business, and a lot of the ISPs were started by a hacker with a bulletin board service who then got a T1 line,” he said, referring to a high-capacity telephone line. “Now they’re facing the prospect of investing hundreds of thousands or even millions of dollars on equipment.”
Even so, Dayton insists the market is big enough to support a large number of Internet access companies. “Only 10% of American households have access to the Internet or an online service,” he said. “The other 90% is the opportunity, and it’s such a huge opportunity that no one company can hope to dominate it.”
Some Internet competitors take heart from giant AT&T;’s uneven record in parlaying its brand name and marketing power into success in all fields. Among other things, its attempt to become a big computer and office equipment maker failed miserably after its purchase of NCR Corp. went awry. Similarly, two previous efforts to market online data services failed before the company tapped into what appears to be the enormous Internet market with WorldNet.
Wiley noted that subscriptions at the Loop are up since AT&T;’s announcement. “We’re still here,” he said hopefully. (There is no way to verify the Loop’s, or any other ISP’s, subscription figures.)
Nevertheless, unless small ISPs improve service and add costly features, they risk losing out to large telecom companies poised to offer clients one-stop shopping for everything from local and long-distance calling to Internet, cellular and even video transmission.
Among independent Internet providers, service breakdowns continue to be common. Even Netcom Online Communications Inc., the largest ISP, with more than 500,000 customers nationally, crashed recently because of a software glitch and was down for 13 hours. Internet newsgroups are filled with complaints about any number of providers. (“Looking for an ISP recommendation,” reads one recent message. “[Mine] has let down its clientele big time by going down . . . leaving us in the lurch for a week now.”)
The Loop has continued to test subscriber patience. A couple of weeks after its hard disk crashed, a taped message told telephone callers, “We are still experiencing intermittent difficulties with two of our T1 connections to the Internet which in turn could cause you to experience a bad connection.”
Another factor hurting small ISPs is the existing structure of the telecom business, in which they are dependent for phone service on companies that are themselves potential rivals. Some ISPs complain that local phone companies drag their heels on installing the high-capacity lines required to provide service.
“We need more bandwidth [capacity], but PacBell hasn’t told us when they can come in to install a T3,” groused a Loop technician recently. A T3 connection, which requires a fiber-optic cable, can carry 672 voice or data channels, whereas a T1 is limited to 24.
More than any other factor, it is the telecom giants’ marketing clout that menaces the small ISP.
AT&T; surprised many with its aggressive offer of free Internet access for a year to its 80 million residential long-distance customers. The offer encompassed five hours of service a month; unlimited service is available at $19.95 monthly, also an aggressively competitive price.
AT&T; isn’t the only phone company to offer Internet service. MCI, which began offering access months before AT&T; and claims to have 200,000 consumer users, matched its rival’s price, as did Pacific Bell parent Pacific Telesis, which began offering Internet access in March. Sprint, which sells the access to business customers, is expected to offer a plan similar to AT&T;’s for its residential customers in the fall.
For all that, even market-savvy AT&T; found itself unprepared for the onslaught of willing customers: It succumbed to customer service problems of its own that have given traditional ISPs time to devise counter-strategies.
In the first few months of its offer, AT&T; was forced to turn away 450,000 customers for fear its computer network was too small to accommodate them. Orders for disks carrying start-up software were backlogged for weeks because the company hadn’t ordered a sufficient supply.
Nor did AT&T; have software for either Apple Computer Inc.’s Macintosh or Microsoft Corp.’s Windows 95 operating systems, the two most popular on the market.
Today, AT&T; said, it has slightly fewer than 400,000 subscribers and no longer limits sign-ups. Many of the kinks seem to have been worked out: WorldNet is earning high marks from industry experts for ease of installation and customer support. So far there have been no reports of interrupted service, although during peak traffic times, access to the Internet can be slow. The company now offers a Windows 95 version of its software; a Macintosh version is expected within weeks.
Battling such behemoths requires money above all. Some ISPs have already sold out to better-funded companies: Uunet Technologies Inc. was acquired in May by MFS Communications Co., an Omaha-based local telephone company, which in turn recently merged with long-distance carrier WorldCom Inc. PSINet Inc. recently hired an investment banker to explore the merger possibilities, and Netcom, which has lost $14.3 million over the last two quarters, has also said it would consider a buyout.
Analysts say ISPs standing the best chance are those that can add specialized features to their services. Pilot Network Services Inc., a 3-year-old Alameda firm, sells Internet access with “firewalls,” a layer of software that protects computer data from theft or tampering by Net intruders.
