subject: Backing a winner. (ISP Survival Guide) posted: Wed, 19 Jun 2002 16:28:59 +0100
Internet MagazineMarch, 2002
Backing a winner. (ISP Survival Guide) .
Author/s: Steve Hill
The ISP industry is in a period of consolidation. Your provider could be the next to be acquired, merge
or go bust. So how do you determine which ISPs will be around for the next five or 10 years and which
will sink without trace within six months? Steve Hill has some handy hints...
Choosing a reliable ISP has never been easy. Sadly, many of us have grown accustomed to poor
service, whether it's in the form of slow access speeds, engaged tones or ill-informed technical help
operators who sound like they don't give a toss. But it doesn't get much worse than when your ISP
goes bust or is sold. If you rely on the Net for business, a failing ISP can be disastrous. Yet ISP
mergers, acquisitions and failures are an unfortunate reality for many Net users.
ISP industry consolidation takes a number of forms. Clearly, the worst situation is when an ISP goes
bust and leaves thousands of users in the lurch. Far too often we see people paying ISPs large sums of
money up front, perhaps for a year or two of unmetered access, only to see them go bust a couple of
months laters. You're then faced with the tricky task of trying to get your hard-earned money back.
These days, it's wise to be wary of paying large sums of money upfront and of contracts that lock you in
for years.
A lesser problem is when an ISP is sold or merges with a larger rival. This has become more and more
common with large, often foreign, ISPs buying their way into the potentially lucrative UK market.
So how do you determine which ISPs will be around for the long haul, and which will be lucky to make it
to Christmas? Well, read on...
A short history lesson
ISP consolidation has been on the cards for years. Most people realised back in 1999 that the market
couldn't sustain the numbers of ISPs then in existence. To be fair, consolidation is a natural process
that affects any developing market. Why should Net access be any different? Naturally, some ISPs will
grow and gain market share, while weaker ones will merge, be acquired by stronger rivals, or die out.
When Freeserve (www.freeserve.com) launched its pay-as-you-go model in 1998, it proved an
immediate hit with punters and spawned hundreds of copycat services. These ranged from large
operations such as Virgin.net (www.virgin.net) through to numerous small providers. In those days it
was relatively cheap to set up an ISP and, crucially, the banks would willingly lend you the cash to do it.
But the market shifted in 2000 when unmetered packages came on stream. Many ISPs rushed to bring
out services in preparation for the launch of BT's unmetered wholesale package. Sadly, BT's rollout
was very slow, and ISPs found themselves charging subscribers at an unmetered rate while paying BT
on a metered basis. You don't have to be Einstein to realise that punters who spent a lot of time online
would spell financial ruin for an ISP.
These days it seems ISPs have to be big to survive. Backbone providers are far more willing to deal
with ISPs boasting a large number of subscribers. The result is an industry that's boiling down to a few
big ISPs with the power to negotiate competitive deals.
It's even better for ISPs to be telco operators themselves, and it's clear BT Openworld has some major
advantages here.
Is consolidation a good thing?
Anyone who's had their ISP disappear on them might not be a big fan of consolidation. When an ISP is
sold or merged, it can mean changes in price and quality of service.
Large ISPs often have trouble integrating a newly-bought ISP with their existing back-end systems.
While these problems are often rapidly overcome, they can be a worry to users who suffer lost emails
and poor access speeds in the meantime.
Choosing an ISP is also a personal decision. Since you bought into certain brand values, a change in
company might not go down well. But let's not forget that a struggling ISP is good for nothing. A new
owner might rapidly improve your service, despite initial discomfort.
But beyond service to customers, consolidation raises some big issues. The UK has traditionally been
home to one of the most competitive ISP markets in the world. Will consolidation mean an end to
competition and the advent of a cartel?
In theory, consolidation can make choosing an ISP easier. Instead of having 400 ISPs, ranging from
multinationals to garage operations, confusing consumers with a huge array of products and pricing
structures, you might have just five or six large operators vigorously competing with each other.
But what if they don't compete? Cartels can have a terrible impact on an industry. Net access in the UK
has already been held back by the dominance of a former nationalised telecoms operator which
controls access to network capacity. Nobody wants to see one provider dominating the UK ISP market.
But what happens if a large foreign operator moves to not only dominate the ISP industry, but also to
control print and television media? We all hope Ofcom, (the media regulator) would step in to protect
the consumer, although some have real doubts over its ability to do anything about it.
So how do you pick an ISP?
It's impossible to guarantee that any ISP will stick around for the next 50 years. That said, there are
some basic features you should look for to reduce your chances of picking one that will go bust.
First, it makes sense to check how long the ISP has been in business. The established names have
had years of experience of dealing with contention ratios and should know how to manage capacity.
Large ISPs can be something of a mixed blessing. Crucially, a big operator can make the best use of
those all-important economies of scale. They can share network capacity and broker those important
backbone deals. But size can mean losing touch with the needs of their customers.
You might look to go with an ISP linked to a telco. They can identify problems with the network and
solve them faster. But ISPs not linked to telcos say they have the freedom to shop around and get their
customers the best deal.
Or you could choose an ISP that offers business services. Business ISPs know their customers rely on
high quality connectivity, and if they also run consumer services, these too could benefit from their
reliable servers. ISPs with a mixed portfolio of services also tend to be less vulnerable in a recession.
It's worth checking out the newsgroups before signing up with any ISP. Go to Google Groups
(http://groups.google.com) and search for your prospective ISP, or take a look at
alt.internet.providers.uk. Although you should take everything in newsgroups with a large pinch of salt,
it'll be obvious if an ISP is in trouble.
THE BIG PLAYERS
TISCALI
www.tiscali.co.uk
The undisputed king of consolidation, Tiscali is well known in Italy for launching pay-as-you-go access
in 1999. But on these shores, few people had heard of Tiscali until last year, when it launched an
assault on the UK market, snapping up ISPs and gaining a huge market share almost overnight.
With a presence in 15 European countries, two of Tiscali's acquisitions were pan-European ISP World
Online (which itself was formed from ISPs such as Screaming.net and Bun) in December 2000 and
LibertySurf in January 2001.
It's probably not the largest ISP in Europe--T-Online and Wanadoo have more customers, although
ISPs don't reveal their exact figures--but Tiscali has the largest 'geographical footprint' in Europe, which
is to say it has services in more countries than anyone else. This is important for gaining ad revenue on
portals and creating economies of scale, T-Online, for example, has more users, but the majority of
them are based in one country--Germany,
So what does the future hold for the expansionist ISP, and is it worth becoming a member? Make no
mistake, Tiscali wants to be one of the three largest ISPs in every country it operates in. It's now fourth
in the UK--AOL, Freeserve and BT Openworld have more subscribers (although these figures are
based on estimates). It has also had recent and severe problems integrating some of its newly-bought
ISPs. We've heard complaints from former LineOne customers, in particular, though no complaints from
WorldOnline converts.
Tiscali is a publicly-traded company, and its big focus has been to reach profitability. To date it hasn't
done a great job on its UK marketing. Rivals Freeserve, AOL and BT Openworld regularly run massive
and billboard campaigns, but not Tiscali.
But what's perhaps most interesting about the company is what is least talked about. Tiscali has been
quietly working on building a high-speed, pan-European, fibre-optic backbone network linking cities
throughout Europe. It has already completed the northern loop, which links Paris and London as well as
major cities in Germany and Benelux, and is now constructing the Southern Loop, which will connect
major cities in Spain, France, Switzerland and Italy. This will allow the rollout of more advanced
services and link its subscribers across Europe. This network will undeniably make Tiscali a formidable
force in the future, if it wasn't one already.
Next six months Average. The ISP should overcome its problems integrating newly bought ISPs and
focus on offering better customer service. A strong b2b division means it doesn't have all its eggs in the
consumer basket.
Next six years Perhaps the favourite horse to back for the long term. Economies of scale generated by
its fibre-optic backbone will let Tiscali run profitably. This ISP will dominate the European market for
many years to come.
WANADOO
www.wanadoo.fr
When Wanadoo decided it wanted to become a serious force in the European ISP market, it didn't
mess around. It bought the UK's most popular ISP, Freeserve.
The France Telecom-owned provider is number one in its native country, and runs one of the most
popular French Web sites, Voila (www.voila.fr). It also has services in Algeria, Belgium, Denmark,
Spain, the Netherlands, Lebanon and Morocco.
Rather sensibly, Wanadoo kept the Freeserve brand as a separate entity. The Freeseve portal
(www.freeserve.com) is one of the most popular UK sites and still generates substantial amounts of
revenue from e-commerce and sponsorship.
So what does the future hold for Wanadoo in the UK?
Freeserve built its success by launching pay-as-you-go access, but has sadly struggled in the new
unmetered world. In 2000, Freeserve launched a pre-Friaco unmetered package but was forced to
withdraw it because it couldn't cope with demand. Its ST Friaco-based product, Freeserve AnyTime, is
priced at [pounds sterling]12.99 and was launched in January 2001. As we went to press, Freeserve
was negotiating a new agreement with BT, and had hinted at possible price rises for its unmetered
service. Freeserve CEO John Pluthero told the Financial Times, "We are looking at pricing. We have
not made a decision yet, but I think that all the pricing pressure in the market is upwards. I would be
surprised if there were no price hikes from a lot of players this year."
These days Freeserve seems to spend most of its time bickering with AOL. It needs to realise
customers don't care about any of this. All they want is a decent, reliable, service.
Next six months Average. Freeserve is living off its past glories as the creator of pay-as-you go Net
access in Europe.
Next six years Uncertain. France Telecom has its finger in a lot of pies and it's hard to tell exactly how
committed it is to Net access. Its focus could shift to developing its profitable portals.
T-ONLINE
www.tonline.com
ISPs don't come more bizarre than T-Online. Whenever any large UK ISP is up for sale, the German
giant is always a 'rumoured' buyer, despite to date refusing to put its money where its mouth is.
But while T-Online might not be big in the UK ISP market, it's a giant in Europe, with over 10.7 million
subscribers. Deutsche Telekom, T-Online's parent company, is the fourth largest telecoms company in
the world.
T-Online operates in Austria and Germany, and its home page is one of the most visited German-
language portals. It also owns ISPs in France (Club Internet) and Spain (Ya.com), but the vast majority
of its users are in Germany, where it dominates the market.
So why isn't it expanding? Rumours are rife that a series of boardroom squabbles over strategy has
delayed the company's expantion outside its native country. Sceptics might also say that Deutsche
Telekom's first-hand knowledge of the advantages of having a near-monopoly on a telecoms market
could also factor in its reluctance to enter the BT-dominated UK.
But its lack of success in the ISP market isn't halting T-Online's progress. T-Mobile, Deutsche
Telekom's wireless division, owns One2One and is rolling out several interesting m-commerce services.
Next six months Uncertain. Could be looking to buy its way into the UK market.
Next six years The dark horse of the industry! UK ISPs are right to be concerned about a threat from T-
Online. Deutsche Telekom, that giant in the German market, might strike when Oftel makes it easier to
take on BT and win. Could snap up NTL once the cable operator's debt problems are sorted out.
AOL
www.aol.co.uk
You can't write about consolidation without harking back to the mega-merger of AOL and Time Warner
in January 2000. AOL was big beforehand (it already owned CompuServe and Netscape), but the
merger transformed it into the world's largest media company.
The word 'media' is central to AOL's vision. The company differs from many of its rivals in that it isn't
owned by a large telco and relies instead on providing quality content to bring in the punters. AOL-
would no doubt say this is a benefit as it's free to negotiate the best deals with a range of telecom
operators, but we're not sure whether its reliance on content will be wise in the future.
This company's not called America Online for nothing. The US is easily its largest market, and it's
unclear how much freedom the UI( division has to launch new products or make acquisitions. AOL
Europe, which owns AOL UK (,hasn't floated, which means it lacks its own cash. European media giant
Bertelsmann pulled out of AOL Europe when Time Warner got involved, which might also have
weakened AOL's position in Europe.
While few would doubt that AOL has been incredibly successful in offering narrowband metered Net
access globally (it's still 'the world's No. 1 ISP (1)), there are too many unknown factors when it comes
to its other products. Rumours are rife that AOL is making a substantial loss on its unmetered service
(although cross-subsidy might make it appear profitable). AOL refuses to either confirm or deny this.
The success of its broadband offering is even less certain. There's a huge archive of movies and music
ready to go, but lacking the high-speed network to deliver it. AOL is reliant on BT offering ADSL to
everyone at an affordable price. BT's failure to deliver has seriously hindered AOL's progress,
AOL also assumes its exclusive content is enough to attract new customers. But this is far from certain.
The likes of Telewest now have stakes in TV channels and could give AOL a run for its money.
For the meantime, AOL seems content to sign up new members by flooding the market with installation
disks.
Next six months Good. Generally agreed to have done a reasonable job of pro viding unmetered Net
access. If only it could make it profitable!
Next six years Uncertain. The world's largest media company won't disappear overnight, but there are
too many unanswered questions. Will the quality of its (mostly US-generated content) be enough to
ensure it dominates the UK broadband market? And can it survive without owning a telca?
AFFINITY INTERNET
www.affinity.uk.com
You might not know it, but Affinity Internet could be your ISP. It runs VISP (Virtual ISP) services for
brands such as WH Smith, Arsenal FC, Egg and around 150 more.
Marketing an ISP is a costly business, so Affinity wisely leaves this to others. It charges companies
[pounds sterling]10 a month foreach user on its unmetered model. Whatever the companies charge on
top of that is up to them.
It's not economically viable or desirable for many of these companies to run ISP services themselves,
especially with a small subscriber base, so they're happy to let Affinity do it for them.
Affinity is a real hidden success story. While AOL and Freeserve battle it out to gain mainstream
consumers, there will always be niches for specialist interest ISPs, and Affinity is the company that will
help fill it. It firmly believes companies will always be keen to offer the Net as an added benefit.
Affinity is also planning to offer fixed-line and mobile telephony. This will appeal to people who like the
idea of having just one bill for all their telecoms charges.
Our only worry is that Affinity seems to be buying up ISP brands itself -- it now owns Breathe and
bought BlueCarrots in August 2001. Running these services will mean marketing, a trap Affinity has so
far avoided.
Next six months Good. Looking to buy up more less profitable ISPs, although it needs to stay focused
on its VISP service. Next six years Good. Believes that the future is about unified billing for telco
services. We like the sound of that!
BRIGHTVIEW
www.brightview.com
Brightview was founded in April 2001 and has grown rapidly by buying up the subscriber bases of
various ISPs, including Madasafish, ic24, TotalServe, Callnet and Totalise.
When lomart sold Madasafish in May 2001, the ISP had a reputation for excellent customer service. But
the handover to Brightview hasn't gone particularly well and internet Mogazine readers have been
among the casualties. Thankfully, things are now on the mend.
Unfortunately all ISPs need marketing and it's far from certain that Brightview has the cash to do it.
Next six years Good. It's the smallest ISP on the list and will always be vulnerable to attack from rivals,
but if it continues to offer a high quality, no-frills service it should survive.
Next six months Average. Needs to integrate its new ISPs well.
APPROACH WITH CAUTION
As we've seen, any smaller provider is vulnerable in the new ISP world. It's increasingly difficult
(although perhaps not impossible) to have an ISP that is small, run profitably and also offers unmetered
services.
Some larger ISPs could also be ripe for sale. We have our doubts over the future of Virgin.net, which
has only just got round to rolling out an unmetered service. We praised it for not rushing into this and
learning from others' numerous mistakes, but a year later, it's likely many customers got fed up with
waiting.
Last year was dominated by persistent rumours that Virgin wanted to get out of the access market and
focus on running its excellent entertainment portal. In early 2001, it tried to sell its 51 per cent stake in
Virgin.net to NTL (which held the other 49 per cent), but the deal fell through. According to The
Guardian, Lehman Brothers were then appointed to handle the sale of the ISP, which was priced at
around [pounds sterling]50 million. Tiscali was thought to be a possible buyer, but again the deal came
to nothing.
Virgin.net has an incredibly strong brand and it's likely that any potential buyer would want to keep it.
But Virgin would have to find a reliable buyer to run the service or else face the prospect of its good
name being tarnished.
CompuServe (www.compurserve.co.uk), owned by AOL, could also be an ISP at risk. AOL, announced
it was to ditch Netscape Online, the pay-as-you-go, youth-targeted ISP, in September 2001, as it was
making little impression on the market. At the time, it slashed the 20 staff working on CompuServe's
site to just two, raising questions about its future.
Over the past year we've seen this once superb ISP wither. CompuServe used to offer its members a
vast range of exclusive content. Unfortunately, this has all but disappeared. CompuServe content is
now available free to anyone and consists of little more than links to Time Warner sites and some
syndicated stuff.
AOL has denied that twill close CompuServe. It still charges a subscription of [pounds sterling]7.50 and
is profitable, but the subscriber base has remained almost static and it desperately needs some life
breathing into it. Perhaps it's time to put it out of its misery.
Finally, one company definitely ready for takeover is NTL, If only it could get rid of that mountain of debt
([pounds sterling]12 billion high at the last tally)! The bad news is that lowering the debt involves
extracting more money from its existing customer base.
NTL has already imposed a [pounds sterling]5 a month charge on its once-free unmetered service,
while new customers will be charged [pounds sterling]10. And it's possible (some would say highly
likely) that these prices could go up again.
Most unmetered ISPs only work using BT lines, so NTL customers might feel forced to pay up. We
want NTL to survive, as its happy customers and Broadband Britain need it to stick around,
THEY'VE STAYED THE COURSE
Some ISPs come and go, but there are others that stay in business for years and years. Demon was
one of the first ISPs in the UK to offer affordable Net access at a local rate, and it's still well and truly in
business. Founded in 1992 by Cliff Stanford, it has always stuck to its subscription fee of [pounds
sterling]10 a month for metered access,
Demon now targets small business users and consumers who are serious about Net use. Thus is also
developing a fibre-optic network that should deliver profits in the future.
Claranet is another ISP stalwart. Probably its smartest move was not floating on the stock market. The
falling share prices of ISPs and pressure from shareholders have been well documented. Claranet has
been wise to stay private and make its own decisions.
The company was founded in 1996 in the UK and remains fiercely independent. It hasn't stood still
though, In fact, it's a rare example of a British ISP expanding on to the continent. It now has offices in
London, Paris, Frankfurt and, most recently, Barcelona. It has around 450,000 users in the UK, but over
700,000 in Germany, and offers a mix of business and consumer services.
Finally, there's good old Pipex, which was established in 1991. The ISP has traditionally targeted
business, although this year it has launched an ADSL service for home users priced at just under
[pounds sterling]30, The first 40,000 customers will get connected free of charge, The ISP knows
broadband is a sustainable service and it's at the speed people want. Could be worth checking out.
RELATED ARTICLE: Be prepared for the worst
Unexpected ISP closures can sneak up on the best of us. If your provider is looking shaky or, God
forbid, goes under, here's what to do to limit the damage
1. Don't panic!
If you rely on the Net for business, your first reaction might be to panic, as you imagine your ISP
running off with your hard-earned money.
2. Know you enemy
Check your terms and conditions (the document you signed without reading when you joined!). A few
ISPs offer customers some rights in the event of closure or poor service.
3. Look for alternatives
Register with a pay-as-you-go ISP before you lose your Net connection. At least if the worst happens,
you won't be totally cut off.
4. Download email
Your'll probably lose all email you haven't downloaded from the mail servers. So download your email
now and keep doing so regularly, until you're completely satisifed that the future of your ISP is secure.
5. Back up your Web site
If you host your Web site with your ISP, make sure you have an up to date version of your Web site
backed up on your computer somewhere. You Should also consider mirroring your Web site elsewhere.
6. Buy a name
It's worth having a domain name that stays with you no matter what's happening with your ISP. If and
ISP goes bust, you can quickly change the forwarding of emails and URL to another provider.
7. Keep in touch
When an ISP is in trouble, the technical support lines are often the first to be closed. So keep in contact
with the gossip in newsgroups.
8. Inform the ISPa
The Internet Service Providers Association (ISPA) has a complaints procedure. Sadly, only a tiny
fraction of ISPs are members and they tend to be the good guys.
9. Inform your local Trading Standards
Local Trading Standards offices have became used to sorting out disreputable ISPs.
10. Keep a diary...
...of any losses to your business time spent, holding on technical support lines and so on. This will be
helpful to Trading Standards and could help your case in court.
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COPYRIGHT 2002 EMAP Media Ltd. in association with The Gale Group and LookSmart.
COPYRIGHT 2002 Gale Group
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