Pure-play ISPs are going to have an uphill battle competing with ILECs and cable providers in the residential broadband market, but a report from The Yankee Group found you can't count them out.

by Michael Pastore Managing Editor, cyberatlas.internet.com [August 16, 2001]

The Yankee Group predicts that between 2001 and 2005, the number of U.S. households online will increase from 62.9 million to 80 million, while the households online with broadband access will increase from 10.7 million to 31.1 million. That's a shift from 9 percent of the total online households at year-end 2000 to 39 percent in 2005.

But because the overall growth rate will not be as pronounced, many ISPs will have to cannibalize their existing dialup customers (a fair margin segment) to up sell them to broadband (a zero to low margin segment).

To date only a couple of pure-play ISPs have made any progress in the broadband space, but the cable companies and Regional Bell Operating Companies (RBOCs) have take advantage of their deep pockets, political ties, and existing infrastructure and customer relationships to leap ahead of the ISPs in the race to capture the broadband market.

Once dominant in the consumer Internet sector, pure-play ISPs led by AOL, EarthLink, MSN, Prodigy and Juno now face increasing competition from much larger competitors and are forced to reassess their long-term plans for winning residential subscribers.

In addition to their more aggressive movements in the dialup market, the RBOCs hold a number of cards when it comes to broadband. Regional Bells like Verizon, BellSouth and Qwest own their networks, and most importantly—according to The Yankee Group report—they own the last-mile connection to the consumers they serve. By bundling access with local and long-distance telephony services, the RBOCs can also put together a very attractive package. For instance, BellSouth has pursued such a strategy through its BellSouth Complete Choice package, which consolidates the services and offers a $9.95 per month discount on DSL service.

ILECs have no content
However, the news is not all bad for pure-plays. They are experienced in an area that most cable companies and RBOCs are not—content.

"They have either developed or aggregated very robust content solutions," said Rob Lancaster, Internet Market Strategies analyst for The Yankee Group. "Most of the Bell operating companies just don't have the know-how or the resources to handle that."

The X-factor in this is what types of content will actually drive the acceptance of broadband. "Ultimately, it's going to be things like music and video-on-demand," Lancaster said, adding that packages targeted at different segments—like sports fans or gamers—are likely to be popular.

Indeed, many ISPs are pursuing a strategy of being "access-agnostic," or offering customers a variety of access methods from cable broadband and DSL to mobile and fixed wireless. But the report found the 'everything to everyone' model is a dangerous one on which to base an Internet business, and only the largest of the large will be able to succeed using it.

Target something or target nothing at all
The report recommends others pursue a more specific, targeted marketing strategy, identifying key markets and selling aggressively to them.

For some ISPs, that could mean staying out of the broadband market altogether.

"It depends on the size of the ISP," Lancaster said. "ISPs that want to compete on a national level, they need to align themselves with broadband providers. The way things are shaping up so far, the regional Bells and the MSOs have an upper hand over the ISPs because they control the access. National ISPs need to continue to develop content that they believe will be attractive to their subscribers over a broadband connection. [But] there needs to be a very conscious decision as to whether or not it makes sense to offer broadband service going forward. Currently, margins [in broadband] are zero or very low, depending on the structure of the relationship. For the smaller, local ISPs, that's going to be a challenge."

Instead, Lancaster said those smaller ISPs could comfortably and profitably remain dialup providers. "The dialup market is going to remain large and there's going to be plenty of dialup customers to go around," he said. "There is definitely a migration from dialup to broadband right now. There will be a shift in the imbalance between dialup and broadband, but there will always be a dialup market."

Wi-Fi is here to stay
According to the report "The ISP Market: Challenges and Strategies for the Future" from CyberAtlas Research (a division of INT Media, the parent company of this site), ISPs are recognizing that offering plain-old dialup access isn't enough anymore. More than 70 percent of the respondents said they currently offer broadband access and that high-speed services would be increasingly important to ISPs as the connectivity market continues to mature.

Currently, the most widely used platform for high-speed connectivity is DSL access. Seventy-two percent of the ISPs surveyed by CyberAtlas Research that offer broadband services do so via high-speed copper lines. But this is likely to change, the report found, 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 to acquire new DSL users in the range of $600 to $1,000, compared to $105 for picking up a new dialup customer.

• Several recent studies indicate that cable broadband subscribers are more satisfied with their service than DSL users, which compounds the cost of acquiring new customers as a factor of churn.

• While DSL access remains popular among small online entities, residential consumers remain largely ignorant on the subject of broadband connectivity.

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. And 40 percent of the ISPs that do not currently offer broadband access intend to offer fixed wireless solutions for home and office use.

Because fixed wireless systems do not present last-mile bottlenecks like DSL and cable-based services, ISPs are readily adopting the technology.

Thor Olavsrud of internet.com's InternetNews.com contributed to this report.

—End