How ISPs Plan
To Defy Difficult Times

Nobody has to tell ISP operators that the market is crowded with rivals vying for the same customers. But which business strategies work toward overcoming the challenges that lie ahead and can build future profits?

by Patricia Fusco ISP-Planet Managing Editor [April 11, 2001]

Internet service providers say the greatest challenge facing their businesses today is profitability, and they perceive that adding subscribers is essential for enhancing their bottom line profit. Keeping churn rates low and customer satisfaction high are equally challenging issues for ISPs, according to a recently released survey of ISP-Planet's visitors.

internet.com, together with Edgix Corp. and Insight Express LLC, surveyed more than a thousand visitors to ISP-Planet in order to determine how ISPs plan to survive and thrive in today's market.

Ted Stevenson, internet.com ISP channel executive editor, said that reliable market research is in short supply for ISPs, so the study could not be published at a better time.

"This report provides a window on current market realities in the ISP community at a time when its facing momentous changes," Stevenson said. "ISPs have told us where they're feeling the pain and what steps they're taking to improve their profitability."

The study, The ISP Market: Challenges and Strategies for the Future found that service providers recognize offering plain-old dial-up access isn't enough anymore. Shrewd ISP operators are actively diversifying revenue sources by firing up broadband programs and deploying value-added services.

More than 70 percent of the respondents said they currently offer broadband access (left) and that high-speed Internet services would be increasingly important to ISPs as the connectivity market continues to mature.

Which high-speed platform is the most popular among ISPs? Currently, the most widely used method for high-speed access is Digital Subscriber Line technology. Seventy-two percent of the ISPs surveyed that offer broadband services do so over high-speed copper wires. But this is likely to change, because DSL access presents more problems than solutions for ISPs looking to make a dent in the broadband market segment. Specific issues include:

• Industry experts put the cost of acquiring new DSL users in the range of $600 to $1,000 per client, compared to $105 for picking up each new dial-up subscriber.
• Several recent studies indicate that cable subscribers are more satisfied with their broadband service than DSL users, which compounds the cost of acquiring new customers as a factor of potential customer churn.
• While DSL access remains popular among small businesses, residential consumers remain largely ignorant on the subject of broadband connectivity options.

ISPs are already deploying one broadband solution that could further erode DSL market share—of those ISPs currently providing high-speed Internet access, 30 percent do so via fixed wireless technologies. However, 40 percent of the ISPs that do not currently offer broadband access said they intend to offer fixed wireless solutions for home and office use. ISPs are eager to adopt the technology because fixed wireless systems do not present last-mile bottlenecks like DSL and cable-based services.

Raising revenue
ISPs seeking to increase revenues seem to understand that they must extend their service offerings beyond providing Internet access alone. Eight-four percent of the respondents surveyed said they generate additional revenue from services other than Internet access. These services include Web hosting, e-commerce, and collocation services, as well as communications infrastructure services.

Because marketing add-on services to existing clients is much more cost effective than marketing campaigns designed to attract new customers, value-added services offer ISPs the opportunity to produce higher profit margins from services sold to current clients.

Unfortunately, half of the ISP respondents indicated that they derive less than 25 percent of their total annual revenue from value-added services and more than 80 percent said add-on programs account for half of their total annual revenue (right).

Most of the residential revenues earned by ISPs remain a product of dial-up Internet access. However, ISPs will find it difficult to increase dial-up revenue from residential users unless they can convince them to adopt either new high-speed technologies—like fixed wireless access, or pay for value-added services like—training, e-mail filtering and anti-virus protection.

Profit mission
In a market that includes multinational conglomerates, it would be wise for independent ISPs to rely on the same business strategies that have helped other small businesses succeed when facing larger rivals—personal service, quick responses to customer service inquiries, and the idea that the customer always comes first. Local and regional ISPs should also utilize their geographic service area to their advantage by offering content or services specifically designed to appeal to local audiences.

Building ISP profits in today's economy is not impossible. But independent ISPs must be willing to spend some money marketing their programs in order to convince users that they offer quality Internet services with personalized care and localized content, that large distance companies could not possibly provide.

— End