David vs. Goliath, Part I

Less than a year ago, Brent Ruggles, IT manager at Snow Engineering & Corp. (SE Group), had no worries about the various high-speed internet service providers (ISPs) the company’s six U.S. and two international offices use. Because many of SE Group’s offices are in rural locations, the company, a ski industry consultancy, has to rely on smaller, local ISPs and doesn’t have the option of using one nationwide provider for all its locations.

That didn’t matter until Ruggles, offhandedly surfing the Web, happened upon news that the ISP providing service to SE Group’s Seattle office was about to cease operations. The second blow came months later when the company’s New Hampshire ISP came inches away from shutting its doors. What was once hassle-free for Ruggles has now become a time-consuming chore as he is forced to reevaluate the health of his existing ISPs, not to mention size up a second string of potential partners.

Ruggles is not alone in his pain. Many small and mid-sized businesses over the last year have been waylaid by the financial problems hammering smaller ISPs, particularly those focused on digital subscriber line (DSL) services. DSL carriers that did not diversify their offerings have particularly suffered, because the service hasn’t taken off as expected. Some of the providers like Ruggles’ Seattle partner, Zyan Communications Inc. of Los Angeles, have filed for Chapter 11 bankruptcy protection and are in the process of reorganizing. Others like his New Hampshire office ISP, Vitts Networks of Manchester, N.H., are struggling to get additional funding to keep their businesses afloat. The list of near-casualty ISPs grows on a daily basis. One of the most recent is one-time high-flyer PSInet Inc. of Asburn, Va., which in March shuffled around its top management deck and announced a plan to restructure debt.

“What’s happened over the last two years is a result of supply and demand,” explains Rob Carlson, senior analyst, network services for Current Analysis, a tactical intelligence provider focused on the telecommunications space based in Sterling, Va. “There was a lot of demand for the Internet, and it wasn’t difficult for anyone to become a service player. With that kind of ease of entry into the market, there was real fast price competition and therefore, low margins. That’s the basis for why a lot of small and mid-size ISPs are in the red–they never had enough margin to be real stable.”

Do your homework

What does all this market instability mean for business customers like SE Group? Mainly, that they are going to have to sink a lot more time and energy into how they evaluate and choose ISPs, especially when they’re looking for partners to be around for the long haul. It’s not like there’s an imminent shortage of players. International Data Corp. (IDC), a market research firm in Framingham, Mass., estimates that even with market consolidation, there are over 7,000 ISPs in the U.S. alone. And there is still strong revenue growth projected for the ISP category. According to IDC, total revenues for IP services among ISPs and traditional telecommunications players was $24 billion in 2000. That number is expected to surge to over $80.6 billion by 2005, a compound annual growth rate of 27.5%, say IDC analysts.

The complicating factor in all this for small and mid-size businesses is how to choose the right player amid all the hype, and now, hysteria over market consolidation. During the early heyday of DSL, many small and mid-size businesses were won over by the upstart providers’ state-of-the-art new services, ability to deliver personalized attention, and more competitive pricing options compared with what was offered by traditional, large telecommunications providers or regional bell operating companies (RBOCs). Until the market settles, however, experts say these may not be the best criteria upon which to evaluate an ISP partner. Instead, companies may now feel pressure to avoid the risk of new ISPs in favor of the long-term financial stability of established players, even though they may not necessarily offer the most compelling deals or services.

“Finding stable ISPs that will be around several years from now may be hard,” notes Steven Harris, senior research analyst with IDC, in New York. “Companies may be loath to go with a major RBOC for [Internet services], but they will survive and be around.”

Tomorrow, find out what you should look for when evaluating an ISP.

Beth Stackpole is a freelance writer living in Newbury, MA. She can be reached at bstack@stackpolepartners.com

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