The Structure and Trendsof the ISP Market

Elizabeth McPhillipsExtended Enterprise LaboratoryHP Laboratories BristolHPL-IRI-1999-002April, 1999

E-mail: liz@mansci.strath.ac.uk

ISP market,ISP competition,internet services

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The Structure and Trends of the ISP Market

Elizabeth McPhillipsUniversity of Strathclyde, Glasgow andHewlett-Packard Laboratories, Bristol

liz@mansci.strath.ac.uk

February 1999

1. Introduction

An Internet Service Provider (ISP) is acompany that provides individuals andcompanies access to the Internet and otherrelated services.

This report aims to introduce the reader tothe idea of Internet service provision, theservices offered, the main players in theindustry, and its current state and itstrends.

Section 1 details the different types ofISPs, types of access, and the physicalstructure of an ISP. Section 2 describesthe services offered by ISPs, both basicservices and premium services. Section 3looks at the ISP market, analysing themarket forces and the influentialenvironment. Section 4 looks at the mainplayers in the market, examining eachindividually, and identifying theircharacteristics. Four general areas ofthreats to ISPs are outlined in Section 5.Section 6 identifies the main trends in theISP market and suggests emerging trends,and Section 7 sums up the main ideas ofthe report.

Internet users access and send informationeither through individual connections orthrough organisations such as universitiesor businesses. Users are either those whouse the Internet primarily to receiveinformation, or content creators who usethe Internet to distribute information. ISPsconnect those end users to Internetbackbone networks, which interconnectwith other backbone providers. The usersreceive Internet Protocol Suite (IPS), the

Internet equivalent of dial tone, whichroutes traffic between ISPs.

ISPs fall into three broad groups:backbone providers, national providersand local providers.

Backbone providers are nationwide ormultinational organisations that controlInternet routing. They often ownsignificant pieces of the backbone itself.National providers buy capacity androuting services from backbone providersand run Points Of Presence (POPs,locations of access points to the Internet)across the country (or the world).National providers are often described asresellers since they are simply resellingbandwidth that they have purchased fromthe backbone provider.Local providers operate in the same wayas the national group, but on a smallerscale. Usually they work within a smallergeographic area.

1.1 Accessing the Internet by meansof an ISP

To access the Internet, generally a usermust periodically pay an ISP and pay anyapplicable set-up fee to connect to thatISP. Most ISPs (particularly in the US)charge a flat monthly fee, and someimpose a per-hour charge above a certainmonthly threshold.The vast majority of users (mainlydomestic users, who make upapproximately 98% of all accounts) reachtheir ISP today through their telephonenetwork, using a dial-up connection.Many businesses lease lines or use ISDNconnections.

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Types of Access:

1.1.1 Analogue Dial-UpFrom a commercial perspective, dial-upaccess has a lower potential margin thandedicated access. This is because dial-upcost of service is high, while the revenueper customer is low. Service cost is highbecause modems and terminal servers(also know as access servers) areexpensive and dial-up billing can becomplicated. Dial-up equipment canaccount for over 10% of an ISP’s totalcosts [1].

Per usage billing is expensive, but itencourages users to make more efficientuse of the resources. Flat-rate billing ischeap and easy. Customers also seem tofavour flat-rate billing, even if it meanspaying more than they would under theper-usage scheme. It is easier to budgetwhen you know exactly how much youwill spend, plus customers seem to enjoythe idea of ‘all you can eat’.In spite of the advantages of flat-ratebilling, typical user behaviour is to log onand then stay online for long periods oftime, even if they are not using theInternet. This leads to a great inefficiencyand a degraded service, as users may becontending for resources (e.g. modems,bandwidth).

1.1.2 ISDN Digital Dial-UpISDN (Integrated Services DigitalNetwork) dial-up has two main uses: as afast pipe for individual users, and as alow-budget LAN Internet connection.When used by an individual user, it is justlike analogue dial-up but the transmissionis faster as it is over a digital line. Whenused for LAN connection, it is just like aleased line connection, except that the lineis not dedicated – it is only brought upwhen there is data to be transmitted orreceived.

As far as the ISP is concerned, equipmentcosts are reasonably low for ISDN, buttransport costs are relatively highcompared to analogue. However, profitsare significant, as compared with marginalprofits in the analogue case.

1.1.3 Dedicated AccessAn ISP typically has a number of ports ona router through which it offers dedicatedaccess. The goal is to connect as manycustomers to these ports as possible.Although set-up costs can be high fordedicated access (price being proportionalto the distance from the ISP to thecustomer) profits are high, generallybringing in over a quarter of an ISP’srevenues, even though they may onlyaccount for 1% of actual account numbers.

Other traditional transmission methods arealso finding their place in the world ofInternet access.Cable companies have already startedoffering Internet access over theirnetworks.

Hybrid Fibre Coax (HFC) is used toprovide this service. HFC uses cablemodems. It employs analogue fibre to anode that will serve a few hundred houses,and coaxial cable to the premises. Theposition of cable companies in the ISPmarket will be discussed in section 4.4,Cable Companies SWOT Analysis.

Because mobility has been an issue ofsuch importance in recent years, thecombination of mobile and Internetservices will be of great importance tocustomers. At present, the technologyrequired for high-speed wireless access isunavailable. Wireless Internet access willgrow rapidly once the technology isavailable at a reasonable price [2].

Many new last mile (i.e. from thetelephone exchange or ISP to thecustomer) technologies are emerging andit is likely that they will have a significantimpact on Internet provision. If using thetelephone network to access an ISP,whether dial-up or dedicated, there isusually room for complaint in terms ofspeed and reliability. This is for a simplereason - the telephone network wasdesigned to carry voice traffic and nothigh-speed data traffic. Therefore, manynew technologies are being developed forlocal loop data delivery.

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1.2.1 Digital Subscriber LinexDSL is the family of Digital SubscriberLine (DSL) technologies that has beendeveloped to provide high-speed linksover twisted-pair copper telephone lines.Because long copper loops distort signalquality, repeaters and amplifiers areinstalled on copper pairs at prescribedintervals to restore signal quality. WhatxDSL technologies do is use sophisticatedmodulation schemes to pack data ontocopper wires, and do so without repeatersor amplifiers. xDSL leverages thetelephone companies’ investment intwisted-pair copper to nearly every homeor business by providing the ability tosend voice and large amounts of data overexisting lines.

ADSL (Asymmetric DSL) is the form ofDSL with the most potential for Internetprovision. It is intended for the last mileinto a customer’s premises.ADSL technology consists of a pair ofmodems on either end of a twisted-paircopper line, which provides asymmetrictransmission of data up to 8Mbpsdownstream and 800kbps upstream.

1.2.2 WebTVWebTV allows use of the Internet througha television set. A set-top box is installedand a special WebTV ISP must besubscribed to. It is controlled by a hand-held control or by a wireless keyboard.Although the TV is used as the outputdevice, the information arrives through atelephone line and modem.

1.2.3 Digital PowerlineDigital powerline technology involves theutilisation of the electricity distributionnetwork as a means of providing bothpower and telecommunications services tothe home. An implementation ofpowerline communications has beendeveloped in which an electricitydistribution network may be conditionedsuch that it can simultaneously carry twoor more electrical signals.The advantage of this method is that ituses an existing infrastructure that is asystem connected to almost every homeand business.

1.2.4 Fibre To The CurbFibre To The Curb (FTTC) refers to theinstallation and use of optical fibredirectly to the curbs near homes or anybusiness environment.This method uses digital fibre to a nodeserving 16-32 homes. The short link tothe customer is through any number oftransmission technologies - twisted pair,coaxial cable, optical fibre, microcellularmicrowave etc., depending on thebandwidth of the services required.

1.2.5 SatelliteSatellite Internet access is likely to be usedfor customers in geographically isolatedregions.Provision of two-way higher bandwidthcapability over satellite is not common inresidential markets because of the highcost, but hybrid solutions have recentlybeen developed to deliver a highbandwidth capability via satellite with areturn path to a service provider usingconventional PSTN technology. Thismethod is being used to provideinteractive television services and may beused in the future to provide fast Internetaccess [3].

1.2.6 Radio Local LoopIn the UK, radio spectrum in the 10GHzregion has been allocated for the deliveryof high bandwidth services. Internetaccess by radio local loop would have itsadvantages and disadvantages. It isflexible in the building of its accessinfrastructure, but it has practical problemsof reach and interference, and costs ofterminal equipment can be high [3].

1.3 The Physical Structure of an ISP

Fig 1 shows a brief schematic showing thebasic physical structure of an ISP.

The ISP server is the computer program(and computer) that serves requested Webpages or files.

The DNS server contains information toresolve Internet names and addresses.

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ISP Router

Terminals (customers)

ISP

T-1 1.5Mbps Link to carrier POP

DSU

Terminal Server(only for modemdial-ups)

ISP DNS server

ISP server

Usenet News server

Subscriber-service server

ISP modem pool

Fig. 1 Structure of an ISP [4]

The news server receives and processesUsenet news, and although this is just onefunction, it can take up an entire computersystem on its own. It is not recommendedthat any other functions run on thismachine.

The subscriber-service server is providedto authorise service, maintain billingrecords, and keep other administrativedetails.

The terminal server is a device that allowsconnection of modems to the internalnetwork, and thus out to the Internet.

The Data Services Unit (DSU) takes datafrom the router and translates it into theformat required by the leased line that runsto the carrier POP.

The router looks at packets in an internalnetwork, finds the ones that are destinedfor the Internet, and sends them out. Thisis a simple function, but has to beextremely high-speed.For traffic outwith the internal network,the router is used to send it to the carrier’sclosest POP. This is usually done over aT-1 line (1.544Mbps, used in the US), or aDS-1 line (2.048Mbps, used in Europe).A leased line is usually provided by atelephone company to connect with thecarrier at their POP.

Enterprises such as universities and largebusinesses often have a T-1 (or DS-1)direct private-line connection to the carrierPOP.

The carrier then concentrates the trafficfrom many ISPs and enterprises andforwards that traffic over a set of higherspeed links (usually 45Mbps, but now ashigh as 155Mbps) to the closest NetworkAccess Point (NAP) for connection to theInternet.

2. What Services do ISPs Offer?

Basic ISP services include E-mail, WorldWide Web access and Bulletin BoardSystems. Over the past couple of years,Internet services have gathered muchgreater value and scope, resulting in manypremium services, which may be pricedaccordingly.Below are detailed the principal Internetservices provided.

2.1 E-mailE-mail is the electronic sending, storageand retrieval of messages. Messages areaddressed and sent to the computer wherethe destination e-mail account resides, andare stored there.

An e-mail message consists of three parts:• The header gives information about

the message (who sent it, when, who itwas addressed to, carbon copies, howit got there, etc.)

• The body is the actual message itself.• The signature is the part where the

sender personalises the message andgives further information aboutthemselves.

Because most PCs are not left on 24 hoursa day, connected to the Internet, with theirown host names etc, most e-mail accountsare usually on a host somewhere else. Thee-mail reader contacts this host (using PostOffice Protocol, or POP) to handle the e-mail when the user logs in. Once the e-mail is on the user’s PC, then all the e-mail activities are local (folders, lists, etc.)

POP is a client-server application designedto transport e-mail messages between anetwork server and a PC based clientcomputer.

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2.2 The World Wide WebThe WWW is, like Telnet and FTP, a toolfor accessing the information available onthe Internet. It is composed of a collectionof web pages residing on computers,called web servers. A web page authorcreates a document and encodes links(called hypertext links) into the document.By following these links, the reader canmove from the original document toanother document, which might be locatedon that same computer or on another webserver anywhere in the world.

Web software is designed around adistributed client-server architecture. Aweb client (called a web browser if it isintended for interactive use) is a programwhich can send requests for documents toany web server. A web server is a programthat, upon receipt of a request, sends thedocument requested (or an error messageif appropriate) back to the requestingclient.Because the task of document storage isleft to the server and the task of documentpresentation is left to the client, eachprogram can concentrate on those dutiesand progress independently of each other.

2.3 Bulletin BoardsBulletin Board Systems (BBS) are on-lineservices which allow users to read andpost messages, usually organised around asingle topic.The best example of an Internet BBS isUsenet, the world’s largest newsgroup. Itcontains more than 40,000 different topicgroups (January 1999).

There are various ways you can read ortake part in discussions on the Internet.One way is to subscribe to listservers.Another is to join a newsgroup. The maindifference between the two is that you signup for a listserver and the messages go toyour e-mail box, while you must visit anewsgroup and read the messages.Newsgroup messages are posted publicly,available for anyone to read and respondto.

Programs exist to allow a user and anotherperson to be on-line at the same time,trading real-time messages to simulate a

conversation. It is also possible to chatwith many more than one person at once.The most popular chat program is InternetRelay Chat (IRC). On IRC, several peoplecan simultaneously participate in adiscussion over a particular channel, oreven multiple channels. There is norestriction on the number of people thatcan participate, or on the number ofchannels that can be formed over an IRC.

With the growing familiarity with theInternet, and the explosion in the numberof ISPs in the market, both access andprimary services are becomingcommoditised. Although it is humannature to be fascinated with a new serviceor product when first presented with it, itis equally natural to grow accustomed anddemand more. As consumers becomefamiliar with what is currently availableand with what is possible, their serviceexpectations will grow. Customers are nolonger willing to pay a premium for basicaccess and services, so ISPs are having tooffer more. They will compete to delivermore technically sophisticated and costeffective services to meet the ever-increasing needs of educated customers.In a short time, the market has gone fromone being fought over access, to one inwhich more must be offered, in the way ofnew value-added services and benefits,technological or other.

2.4 Voice and Fax ServicesBecause of the idea of ‘pay local, speakglobal’, voice over the Internet (or Voiceover IP, VoIP) has been a point of greatinterest over the last couple of years.Internet telephony users can speak withsomeone anywhere in the world, often forthe price of a local telephone call. It hasbeen the centre of much attention andoptimism because it has the potential tosignificantly reduce the cost of long-distance telephone communication.

At present it is rather cumbersome tomake a telephone call over the Internet, ascomputers were not designed to support it.The other main disadvantage is thatquality, although improving, is not as good

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as that of the PSTN (Public SwitchedTelephone Network).

The PSTN is a circuit-switched networkthat has been optimised for real-time orsynchronous voice communication with aguaranteed QoS (Quality of Service). Itguarantees the QoS by dedicating a full-duplex 64kbps circuit between the partiesof a telephone conversation. Since thebandwidth remains constant whether ornot the involved parties are speaking, thecost of a call on the PSTN is based ondistance and time.

The Internet is based on packet-switchedtechnology, so no dedicated circuit is setup. Because of this, the quality of VoIP isdegraded somewhat compared to PSTNtelephony. In spite of this disadvantage,many callers are more than willing totolerate a slight reduction in quality inexchange for inexpensive calls.As traffic prioritisation schemes improve,it is hopeful that VoIP will improve tosuch a level as to be indistinguishablefrom traditional telephony.

Because of the interest channelled towardsVoIP, the provision of this service by ISPswill be essential in order to attract manycustomers. The threat of this service totelcos (telephone companies) has seen theentry of many of them, often by ISPacquisition, into the service provisionmarket. Telcos and their entry into theISP market will be discussed in section4.3, Telco SWOT Analysis.

The use of FaxoIP (Fax over IP) is alreadywell underway. Although fax is generallyclosely associated with the telephonenetwork, it does not require real-timetransmission. Because of this, there is noreason why FaxoIP should not be used. Itis the simple transmission of data (whichneed not have a dedicated channel) overthe Internet, and can be very cost-efficientcompared with traditional fax.

2.5 Integrated Voice/E-mail/MessagingA number of mobile telecommunicationscompanies have already begun to offersome sort of integrated system, allowingcustomers to check their e-mail over their

mobile phones. These services may alsoallow the sending of messages from theInternet to a mobile phone directly.

The Short Message Service (SMS) allowsusers to send short e-mails or to notify therecipient to log into their e-mail account inorder to receive an urgent e-mail or file.Many companies, including Vodafone,Deutsche Telekom, and T-Mobil(partnered with T-Online) willautomatically notify their customers whenthey have received an e-mail, usuallygiving date, sender and subject, providedthey have the right software installed ontheir PC.Deutsche Telekom have an extension ofthe above, by way of their NOVICEsystem, which uses voice-synthesissoftware to convert the e-mail messagesinto speech, and customers can have theirmessages read over the phone to them.Other companies provide serviceswhereby information such as footballresults or stock market quotes can beobtained on mobile terminals via SMS [2].

The demands of the mobile user arereadily listened to, as the mobile telephonymarket is already so large, and is probablythe fastest growing market in the world.The integration of mobile and Internetservices is likely to grow rapidly,particularly when affordable wirelessbroadband technologies are available.

It is presently possible to use a mobilephone to access the World Wide Web, butis painfully slow and extremely expensive.Cisco Systems and Motorola recentlyannounced a joint project to deliver areasonable wireless Internet service,investing up to $1 billion over the next 4-5years [5].This was announced the same day (8February 1999) as Motorola, NextelCommunications, Unwired Planet andNetscape Communications gave details oftheir plans to offer a wireless telephonepackage combining voice, data andInternet services [6].

2.6 Web HostingThe idea of web hosting can be brokendown into two areas: web page hosting,

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and the actual hosting of networksattached to the Internet.

2.6.1 Web page hosting, where an ISPwill offer server space to a customer, isnot a new idea. Some ISPs have beenoffering small amounts of web space,either at a price or for free, for a few years.However, it now appears that all ISPs willoffer a reasonable amount of space(usually about 10Mb) in any initialpackage offered to a customer.

Residential users may wish to set up theirown homepages for recreational oreducational purposes. For businesses, theavailability can be very much moreimportant. While many businesses mayrequire Internet services merely for e-mailand browsing capabilities, most businessesnow want a web presence, which involvesa number of company web pages.Although some establishments (inparticular universities and largebusinesses) choose to set up their ownservers, it is more economical forresidential users and small businesses toacquire or lease space on an ISP’s server.

2.6.2 The other area of web hosting ismore complex, and adds much value forthe customer.An intranet is a network (usuallybelonging to a business) that is connectedto the Internet in such a way that its userscan use the Internet, but other users on theInternet cannot access the network. Thissecurity is usually accomplished by atechnique known as firewalling.

The main advantage of an intranet usingthe Internet is that a company with manysites can use the Internet to connect thesesites, rather than leasing lines expensivelyfrom the telephone company to ensureprivacy.

An extension of the idea of an intranet isan extranet. If a company wishes to allowa customer onto its network, an extensioncan be made to the intranet to enable this.The customer’s computer is then allowedaccess to the intranet, and that extension isknown as an extranet.

A Virtual Private Network (VPN) is aprivate network that makes use of theInternet, maintaining privacy through theuse of a tunnelling protocol and securityprocedures. Companies today are lookingat using a virtual private network for bothintranets and extranets [7].

Because leased lines tend to be veryexpensive, particularly in Europe, there ishuge benefit to the company in using theInternet to connect their sites. From theISP’s perspective, intranets, extranets andVPNs are reasonably easy to set up, andcan reap significant profits.

2.7 Web Page Design and ConsultancyMany business customers choose tooutsource the design and maintenance oftheir web pages, at least until they believeit is reasonable to employ someone full-time to do the job. Many ISPs will, atsubscription, offer to maintain a companywebsite for a price. This does not justinvolve hosting the web pages, butdesigning, coding and updating them as isnecessary.

It is reasonably easy to create a simplewebpage, but many businesses do notwant to allocate that job to a member ofstaff, lest it interfere with their other work.In the early stages, the work involved doesnot merit an entirely new member of staff,so it is left to the ISP to create a page withnecessary company information, news andwhatever else the company deemsimportant. The ISP is then responsible forupdates to these pages whenever the clientrequires this.

The amount an ISP charges for this serviceis dependent on how complex the pagesare to be. A simple static page of text andimages, requiring infrequent update, willcost relatively little. However, a complexpage with Java applets, other dynamiccontent, forms and complex layout will bereasonably costly to the customer. It iswhen such pages become necessary thatbusinesses tend to consider employingsomeone in-house to do the job.

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2.8 Bundled/packaged servicesBundled services can be enticing to thecustomer who does not wish to go to thetrouble of dealing with a separatecompany for each service or utility theyrequire. ‘One-stop shopping’ has thepotential to be an important area of thefuture, giving the customer the ease ofhaving one provider for many services.

Bundled e-commerce might involve apackage deal comprising web access,Internet services, banking and homeshopping along with other services.Although this may not appeal to all, theidea of one bill for many services is oftenseen as a huge convenience.

Similarly, bundled utilities can be of greatconvenience. CableTel already offerscable TV, telephone and Internet accessfor a bundled price, and only one bill isnecessary. Because of reduced overheadsand administration costs, this type of dealcan also be more economic, for instance,CableTel can offer the above bundle forthe same price as BT line rental.

Although these deals are attractive, theyare usually restricted to certain ISPs –those with the resources to provide them.Telcos that have acquired, merged with, orbecome ISPs can offer Internet access andservices, but for the time being small ISPscannot offer bundled services unless theyset up certain contracts with telcos.

When digital powerline technologies areavailable, power companies will be able tooffer power, telephone and TV services,and there is no reason to believe that theywill not enter the ISP market to offer atotal bundled service.

2.9 Quality of Service and ReliabilityFor many Internet users, particularlybusiness users, the quality of service givenby the ISP is of particular importance.When using real-time applications such asVoIP and video, it is important that delaysare minimised so as not to degrade service.Although the Internet often causesunpredictable delays, new protocols canminimise the delays encountered and ISPs

are in a position to be able to guarantee acertain Quality of Service (QoS).

The current version of IP, IP version 4,does not allow for the prioritisation oftraffic. The newer version, version 6, hasa class field to distinguish traffic types.Although version 6 has been standardised,it has not yet been deployed.Used with IP version 6 will be a higher-layer protocol known as RSVP (ResourceReservation Protocol). A host uses RSVPto request a certain QoS from the network,on behalf of a data stream.For those customers requiring real timeservices, QoS is to be of great importance.

There are some concerns regarding the useof reservation protocols, the first being thecapacity required for the protocols. Inmany instances, the capacity required willcause overload of switches and bedetrimental to carriage. There is also theidea that many customers are requiringcapacity reservation over the same pipe,and thus contending for capacity. If therequired reserved capacity exceeds theactual capacity, Service-Level Agreements(SLAs, the concept that service providersgive their customers a contract for aguaranteed level of network trafficdelivery) cannot be kept.

3. The ISP Market – the Nearand External Environments

The nature of competition in an industry isa huge determinant of strategy, especiallybusiness-level strategy. The profitpotential of an industry is determined bycompetitive interactions. Where theseinteractions are intense, the profit earnedis lessened by the activities of competing.Where they are mild, profit tends to behigh.

Michael Porter of the Harvard BusinessSchool has identified five basic forces,which together describe the state ofcompetition in an industry [8]:

1. The intensity of rivalry amongcompetitors

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2. The extent to which substituteproducts present a threat

3. The threat of new entrants to themarket

4. The bargaining power of theindustry’s suppliers

5. The bargaining power of theindustry’s buyers.

In the ISP market, all these forces exist,some more intensely than others.

Fig. 2 shows these forces diagramatically.

3.1.1 Rivalry Within the IndustryThe centre area represents the rivalry inthe industry. On the left are the maintraditional players in the industry, with anindication that there is a large amount ofconsolidation occurring between thesecompanies. On the right are the areas inwhich the market is being fought.

As in any industry, there is competitionbased on price. If one company can dosomething as well as another, and for acheaper price, then the former will have an

advantage and thus be successful incompetition. In the US, there appears tobe a ‘$19.95 per month flat rate’ norm,which many companies are offering,although there are reasons to suggest thatthis will change, as will be discussed insection 6.3, Move to Usage-Based Pricing.

In the basic access/basic services arena,many companies are offering the samedeal – access and basic services, and sothose that are doing it more cheaply thanothers will attract customers. Otherwise,ISPs will have to offer something specialto differentiate them from others.

As discussed already, guaranteed qualityof service is of great importance wherereal-time traffic is concerned.The availability of service-levelagreements will soon be ubiquitous, andacquisition of customers will be foughtover price of QoS rather than availability.

The speed of access, although improvingwith each new technology, is still far frombeing satisfactory.

Fig. 2 Porter’s 5 Forces Model for the ISP Industry

NationalInternationalLocal/regionalOSP

consolidation

PriceQoSAccess/speedServicesCustomer ServiceContentSecurity

Backbone (peering)TelcosWholesalers

TelcosCable cosFree access providersOther motive providersPortals

Low barriers to entry(low capital requirements)Low regulation

many small new entrants

Consumers - won’t payhigh prices, low switchingcostsBusiness - QoS, reliability,value-added. Little or noability to backward integrate

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The Internet can be seen as a series ofbottlenecks, with delays occurring at eachjunction. The speed of an Internetconnection is also only as quick as thespeed of its slowest link, which is usuallythe last mile from the ISP to the home. Ifan ISP can guarantee a certain speed to acustomer, he may be willing to pay morefor the privilege.With the constant increase in bandwidth, itmight be expected that at some stage therewill be no shortage. Although thiseventually may become true, the presentincrease in bandwidth is paralleled by aneven greater increase in desire forbandwidth. Those companies that are ableto keep up with newer, faster technologiesare more likely to be able to keep up withthe needs of their customers.

Services, as described previously, are themain area in which the market is beingfought now. Basic services have becomecommodities and customers want more fortheir money. ‘Value-add’ is the keyphrase, and if it does not add value, thencustomers will not pay for it.

Emerging in all industries in the recentpast has been the need and desire for goodcustomer service. Because customers maywant to be online at any time, there is adistinct need for a 24 hour/7 day customerphone service. Many ISPs offersubstantial online help, which may be ofuse, and convenient, to customers.However, if a connection cannot be made,online support is of no use.There has also been an emphasis oncustomer support in the last year, whenmany computer-illiterate users joined theInternet. As computer familiaritydecreases, the requirement for customersupport increases greatly.Prior to last year, most ISPs focussedlargely on providing access-orientedservices and have left content-relatedservices to the online providers.The problem ISPs have with content isthat their network engineering skills havelittle relevance when it comes to buildingcontent. However, it has been establishedthat content is to be one of the maindifferentiators in the ISP market. Those

that can secure lucrative and exclusivedeals with popular content providers(entertainment companies, newspapers,music companies, stock marketinformation) will have a distinct advantageover those that cannot.The acquisition of NetscapeCommunications by America Online(November 1998) and the recent merger of@Home Network and Excite Inc. (January1999) [9] are indicative of the fact thatISPs are moving into the content market.At the same time, content providers andportals are looking to join the ISP market,and partnerships and acquisitions are theeasiest way for them to join each other’smarket.Lycos, which has been in talks withpotential suitors such as NBC,Bertelsmann, Microsoft and Time Warner,will most likely be acquired in the nearfuture. Although nearly as popular asYahoo! (in terms of usage), its marketcapitalisation is just $5.5 billion comparedto $33 billion for Yahoo! [10]

For business customers, security is a bigissue. A business connecting to theInternet does not want its integrity to becompromised, and so will shop arounduntil it finds an ISP that can as-good-asguarantee security. No matter how securea connection appears to be, there is alwayssome chance of an unauthorised usermaking his way over the connection. Theonly way to ensure absolute security is notto connect to the Internet at all.

Although the market is very segmented,there is an enormous number of companiesproviding Internet services. An explosionin the number of ISPs over the last fewyears has meant intense rivalry within theindustry. Because there is such anenormous growth in the customer base, themarket is still far from saturation. This isan attraction to still more companieswishing to enter the market.

3.1.2 Threat of Substitute ProductsThere is a tremendous attraction forcompanies other than ISPs to offer Internetaccess and services, especially if they

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know they can enter the market at a highlevel.Telcos have the resources andtelecommunications know-how to besuccessful in this industry. They are alsoaware of the threats of not being a part ofthis industry, and are entering at atremendous rate, either by acquisition,merging, or simply becoming ISPs. Theirstrategic positioning will be discussed insection 4, Who are the Key Players?.

As with telcos, cable companies see anopportunity that they can take advantageof. They can provide similar services, andsometimes at a reduced rate. They canoffer bundled services which are mostconvenient to some customers. These too,will be discussed in section 4.

A number of free access providerslaunched in the US, have been advertising-based and have been unsuccessful.Companies such as @Bigger.net havegranted free access to customers agreeingto have an advertising window active ontheir screens, and use targetedadvertisements in order to fund their freeservice. However, this alone does notseem enough to fund the service,@Bigger.net going bankrupt twice withinthe space of a year.In the UK, Dixons’ Freeserve service waslaunched in September 1998, and isalready the biggest ISP in the country,with 900,000 subscribers (January 1999).Dixons have many benefits emanatingfrom this venture.Their computer sales have increased sincethe launch of Freeserve, as customers arenow more likely to buy a computer if theyknow they can connect to the Internet forfree.They have also adopted the strategy ofdistributing Freeserve’s software inDixons stores and other stores of theDixons group, thus attracting potentialcustomers into their stores.There is tremendous ease of collection ofdata, which, without the Internet, is bothtime-consuming and expensive togenerate. Each web site a customer visitscan be noted, and a detailed profile of eachcustomer can be easily built up.

Many new users, particularly those withlittle computer literacy, require muchcustomer support. Dixons are generatingprofits here by charging £1 per minute fortechnical support.Most importantly, Dixons are receiving apercentage of the revenue generated by BTfor the local calls made in using theFreeserve service. Because local callstend to be free in the US, no suchagreements could be made, and this maysuggest why such companies have failedto survive there.

In spite of all these points in favour ofFreeserve, other aspects threaten its future.It is my own experience that the servicehas become incredibly slow recently,presumably due to overloading of theirservers. With the emergence of a numberof new free ISPs, one cannot afford tooffer an unsatisfactory service.

A regulatory issue is perhaps the morethreatening for free ISPs. Dixons canoffer a free service because of the way inwhich the money paid for calls to localrate numbers (0345 and 0845) isdistributed, BT getting a proportion of themoney and the connecting operator gettingthe remains. These numbers were neverintended to be used by ISPs, rather bycompanies offering information andservice lines, and although they work verywell under light load, large customernumbers and long holding timesassociated with Internet usage are causingproblems. Next month (March 1999) thetelecommunications watchdog, Oftel, is toask the industry for ideas how to solve thisproblem. It is likely that BT will receivemore money to offset the cost of handlinglarge amounts of calls to ISPs, thereforemaking it harder for providers to offer afree service [11].

Non-technical companies have seen theopportunity to develop a web presencebeyond just web pages. Companies suchas Tesco have entered the ISP market, butnot necessarily to make money fromprovision. As with Freeserve, Tescoenjoys the ease of information gatheringregarding their customers. There is alsothe opportunity to develop an online

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storefront. Tesco has also recently begunto offer a free service to its clubcardholders [12]. Supermarkets tend to have aname people know and respect. Theyhave customer awareness and experiencedealing with a large customer base. Therealso tends to be a great customer loyaltytowards supermarkets, which is why theyare moving towards banking, and nowInternet service provision.

A portal is a gateway to the World WideWeb that is, or proposes to be, a majorstarting site for users when they getconnected to the Web. Portal companieshave started to show an interest in serviceprovision. Because there is to be a greatdifferentiation based on content, portalsare setting up partnerships with ISPs, orbecoming service providers as well ascontent providers. Yahoo! has launched afree access service in an attempt to winmarket share. It has also acquiredGeoCities, a provider of free web sites, for$4.6 billion (January 1999) [13].

The above entrants are capable ofproviding the same services as ISPs,usually at a discounted price or for free.Although they may not have theexperience of established ISPs, they stillpose a significant threat, particularly asaccess and basic services becomecommoditised.

3.1.3 Threat of New EntrantsDue to the nature of the ISP market, thethreat of new entrants is reasonably strong.There are low barriers to entry - all that isneeded to become an ISP is a smallamount of capital and some technicalknow-how. Much of the ISP’s activity canbe outsourced, which can reduce initialcosts.Regulation in this area is low, meaningthat anyone wanting to enter the marketcan do so easily. Due to the concept ofinterconnection, companies need not ownany sort of network – they can use othernetworks at a price.There have been, and continue to be manynew entrants to the market. In the last 18months, the number of ISPs has levelledoff. However, there has been atremendous number of mergers and

acquisitions within that time, suggestingthat for every merger or acquisition therehas been a new entrant.Although many of these new companieswill fail to survive in the long run, thosethat find a niche market and provide asatisfactory service will always have asufficient customer base to continue.

3.1.4 Bargaining Power of SuppliersThe suppliers to ISPs are those that ownthe networks. These tend to be telcos andbackbone providers. Backbone providersgenerally own what is the absolutebackbone of the Internet, and controlrouting and switching of traffic. Telcosown the local loop copper pairs, whichmost customers use to connect to theirISP, the lines that ISPs lease to connect tothe Internet, and much of the Internetbackbone.Large ISPs are often the suppliers ofcapacity to smaller companies, and theidea of peering and interconnectionagreements between ISPs will bediscussed in section 6.2, Interconnectionand Peering Agreements.Because it is impossible for every ISP tobuild their own entire network, it isnecessary that companies use the existingnetworks. They have to do this, whichgives the suppliers some power. However,because there are many suppliers offeringthe same service, this competition has ledto their power being lessened.

3.1.5 Bargaining Power of BuyersAlthough an individual consumer has littleor no say about how much an ISP charges,due to the rivalry within the market, ISPsgenerally have to offer their services atreasonable prices. They will lose theircustomer base if they charge more for aservice someone else provides morecheaply. Switching costs are low, and sochurn rates are high.Businesses have a little more bargainingpower, particularly if they are a significantclient of the ISP. However, if a businessis happy with its ISP it is unlikely tochange, and because there is essentially noability to backward integrate, thecustomers tend to have little bargainingpower.

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3.2 The External Environment - APEST Analysis

A PEST (Political, Economic,Sociological and Technological) analysisis a scan of the outside environment to tryto spot changes that might impact uponbusiness. These changes might be seen asopportunities or threats.

P – PoliticalThis can be formal or informal.Formal refers to government andregulation. Informal refers to areasoutside of government where politicalactivity occurs (such as the media).

E – EconomicThis refers to the nature and direction ofthe economy in which a business operates.It can be basic up/downswings in thegeneral level of economic activity, orchanges related to structural change withinrelevant sectors.

S – SociologicalThis can refer to demographics, lifestyles,social values, culture and the like.

T – TechnologicalThis relates to research, development andoperations. The emergence of a newtechnology can dramatically impact uponan industry.

ISP PEST Analysis

Fig. 3 ISP PEST Analysis

3.2.1 Political: the regulation of theInternet and associated businesses hasalways been low. This has allowed for the

Internet to flourish without being stunted.Low regulation of ISPs has meant lowbarriers to entry, and hence intensecompetition in the market.

There are many areas in which theregulator may have an effect.Presently, ISPs are not responsible forcontent on their networks up to a certainpoint. If a customer stores offensivematerial on their web site, the ISP has noobligation to know of its existence or toremove it. If another user complains aboutthis material, then the ISP can remove itwithout the compliance of the owner, or itis seen as a publisher of the material, andthen becomes responsible.Because there is no censorship of theInternet, and many users are concerned, itis possible that in the future ISPs willwork in conjunction with the regulator totry to eliminate some content.

Presently free access is given to schools,universities, libraries and hospitals. It isthe choice of the government whichestablishments to grant free access to. Ifany of the above are denied access in thefuture, a whole new target group will openup to ISPs. Similarly, if another group isgranted free access, many ISPs may loseimportant clients.

The idea of universal service is one thathas not really been discussed in relation tothe Internet. Because the Internet isgrowing at such a fast rate, it is likely thatit will soon be seen as so important thatevery citizen should be granted cheap andeasy access, as they are to the telephonenetwork.Due to the breakdown of the NAPs(discussed later, see section 6.2), ISPs areentering into private agreements regardingthe carriage of traffic from otherproviders.Small ISPs tend to serve rural areas. Thisis because large companies seem to seethese areas as ‘not worth bothering with’,even though a high proportion of smallcompanies are making profits. Becausesmall companies do not own their ownnetworks, they have to lease capacity fromothers, and pay premium rates for this.The power of large companies may be

Political Economic

Sociological Technological

Low regulation nowResponsibility for contentAccess to schools, libraries, hospitalsUniversal service

GDPStructural change since telecoms deregulationRecession: less computers bought?less spent by consumers and providers?

Language barrierReluctance to accept new/foreign technologyDemography: age (changing), ethnic mix Geography: urban/rural

Rapidly changing technologies and services fuelled by the Internet:transport, switching, backbone, local loopDisruptive technologiesReliance on technology

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such that high charges to use theirnetworks will have a severe effect onsmaller companies, and oust them fromthe market. If this begins to happen, it islikely that there will be some interventionfrom the regulator. The regulator will notbe concerned about the well-being ofsmall ISPs, rather the ability of users inrural areas to connect to the Internet. Ifsmall companies are put out of business,then the only opportunity for the rural userwould be to connect long-distance, whichwould be too expensive – not considered auniversal service.

Because there has been so little regulationof the Internet, it cannot accurately bepredicted how regulation will impact whenit arrives. There are areas where manycompanies have lobbied for regulation,e.g. telcos demanding that VoIP be treatedas a voice service rather than a dataservice. However, it is not known howand when any sort of regulation will occur.The above examples may be an indicatorof the future, but ultimately, it will be leftup to the regulator to decide.

3.2.2 Economic: in any market, the GDPcan be an indicator of the potential uptakeof a product or service. However, a highGDP has not necessarily meant highInternet penetration, as discussed below(see Sociological Environment).

Since telecommunications liberalisation(1996 in the US, 1998 in most of Europe),there has been structural economic changewithin the sector. There are many newentrants in all involved markets, andincumbents have begun to lose out to newentrants that have been granted use of theincumbents’ networks.

Upswings and downswings in the level ofeconomic activity may or may not have aneffect on the ISP market. Although theUK is supposedly experiencing arecession, more computers are being soldthan ever before, and more people areconnecting to the Internet than everbefore. An economic boom may enhanceInternet penetration further, but it does notseem that the present recession is having anegative effect on the ISP market.

3.2.3 Sociological: a language barriermay be a deterrent to many from theInternet. Although other languages arenow making their place on the Internet,there is still a strong bias towards English,as the Internet has its origins in the US.As other languages become commonplaceon the Internet, the ISP market will growin many countries.

The reluctance to accept new and foreigntechnologies has stunted Internet growthin some countries with high GDP. Forexample, Japan is a very wealthy countrywith an excellent telecommunicationsinfrastructure, but Internet penetrationthere has been slow. The Japanese,although at the forefront of technologicaldevelopment, are not very accepting offoreign technologies, and this couldexplain why there is no strong desire toconnect to the Internet. Similarly, theFrench tend to avoid foreign inventions,and penetration there has been low. Thiscan also be attributed to the fact that theFrench have their own internetinformation system, Minitel. Before theInternet can be seen as a worthyalternative, it will have to provide muchmore than Minitel does.

The community of Internet users, in thecourse of a few years, has turned from oneof computer scientists and academics toone comprised of a diverse mixture ofcultures, ages and occupations. Access isfreely available in most developedcountries, and ease of use has becomesuch that anyone owning a computer and atelephone can connect to the Internet withrelative ease. Demography and geographydo not play the role they used to indetermining who uses the Internet, andwho would be a likely target for an ISP.

3.2.4 Technological: Internet technologiesare developing and improving at anenormous rate. In a feedback loop ofsorts, new technologies are fuelling newservices, which in turn are fuelling newtechnologies.Each part of the Internet (backbone pipes,routers, local loop) is becoming faster,temporarily satisfying customer demand.

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Although many new technologies havebeen hailed as the ‘killer application’(Asynchronous Transfer Mode (ATM),videoconferencing, VoIP), these have notshown the uptake expected of them.

The phenomenon of the Internet could nothave been predicted, and so it would befolly for an ISP to assume that a newtechnology capable of totally restructuringthe industry may not appear. Such atechnology would be regarded asdisruptive. Disruptive technologies can beseen as those that initially present apackage of performance attributes that, atthe outset, are not valued by existingcustomers. Although the product areamay be established, the disruptivetechnologies’ value proposition is usuallyvery different from that which waspreviously available. When launched,they will be targeted towards a whole new(and non-existing) customer base, one thatis happy to pay a lower price and iswilling to settle for lower quality.However, the performance attributes thatexisting customers value will improve atsuch a rate that the new technology canlater invade the established markets.The idea of VoIP as a disruptivetechnology, and its effect on both the telcoand ISP markets is to be the focus of afurther study.

In a society that has become so reliant onand familiar with technology, new andbetter products are being developedcontinuously, and any ISP that hopes tosucceed should be aware not only of whatis available, but what is in developmentand production.

4. Who are the Key Players?

In an industry that involves so manyplayers of all sizes, for the purposes ofanalysis it is difficult to define exactlywho the key players are.

In a huge generalisation, traditional ISPshave been broken down into two keygroups: large and small ISPs. Althoughmany factors (revenue, geographical

scope, partnerships, customer base,growth) may influence the perceived sizeof an ISP, it has been decided to definesize merely on the basis of customer base,with a bias towards number of businesscustomers.Although revenue can be an indicator ofsize, an ISP with few, but lucrative,business customers may generate morerevenue than a company with significantlymore, but residential, customers.Generally the larger ISPs have a widegeographic scope, but specialistcompanies may have only one POP ineach country, and so the mostgeographically diverse ISP may notactually have a great customer base.An ISP may be in a number ofpartnerships in order to increasegeographical scope, but may not be such abig company itself.The growth of an ISP can be indicative ofthe potential of the company to succeed,but it is not really an indicator of its size.

Therefore, in the following discussion, thesize of an ISP is defined in terms ofcustomer base. Because of the profitassociated with business customers, a biashas been given towards businesscustomers in determining the size of anISP.

At present, ISPs of practically every sizeranging from a few hundred customers upto many millions of customers exist.However, medium-sized ISPs are beingacquired by larger companies, or aremerging to become larger. There is ageneral move in the ISP market towardsbig or niche, suggesting that within a fewyears, we will have a market that has asmall number of large companies and alarge number of small companies, cateringfor specialised markets.

For the above reasons, and for simplicity,the traditional ISP market has been brokendown into two categories: large and small.A small ISP could be considered as onewith less than, say, 10,000 customers, anda large ISP, one with more than 300,000customers. As mentioned, it appears thatintermediate companies will disappear.

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At present, the two main threats totraditional ISPs are the telcos and thecable companies. These two groups willalso be examined in the followingsections.A SWOT (Strengths, Weaknesses,Opportunities and Threats) analysis isused to identify where a company shouldplace themselves in an industry, wherethey can improve, and what they shouldlook out for from their competitors.

Each of the four ISP groups to bediscussed (large, small, telco and cablecompany) have their distinct strengths,weaknesses, opportunities and threats.

Some factors, such as technologicalchange (e.g. the introduction of advancedlocal access mechanisms) will act asgeneric opportunities or threats to all ISPs.Many others apply to one or more of themain groups.

4.1 Large ISP SWOT Analysis

Fig. 4 Large ISP SWOT Analysis

Strengths: because large companies areoften those that have been in the marketfor quite a while, large ISPs tend to havemuch experience in the ISP market. Theyhave come to be familiar with a largecustomer base, and generally know theindustry.

A company such as AOL has a knownname. New customers who know littleabout ISPs and the industry are morelikely to subscribe to a company whosename they know, rather than look aroundfor a deal that might be more suited to

their needs. This is one of the mainreasons that AOL, with all its critics,continues to attract so many new users.

Large ISPs have the ability to carry outtheir innovation. Although smallcompanies may have wonderful ideas,without resources and capital they areunable to deploy them. Large companiestend to have capital, and that paired withideas can result in new, profit-makingproducts and services.

Large companies are further up theInternet hierarchy (discussed in section6.2), and can abuse this position bymaking smaller companies pay them forthe use of their networks. Owning parts ofthe network can increase this strength.Large ISPs can afford qualified personnelto deal with complex tasks such asnetwork management and detailedeconomics. This can ensure a qualityservice for the customer, and smoothrunning of the business side of thecompany.

Weaknesses: in large companies,customer service is often lackingsomewhat. This is a weakness in the ISPindustry because, as computer literacyamong customers decreases, the need forquality customer service increases.

Local content can be a big advantage formany customers, particularly smallbusinesses. Large ISPs have a nationalbase, and do not supply any sort of localcontent. They may provide content thatwill appeal across the board, but they areostracising many customers by their lackof intimacy.

ISPs dealing with customers (as opposedto backbone providers who deal with ISPs)however large, don’t tend to own anyInternet backbone, meaning that they stillhave to rely on other providers.

Opportunities: there are massiveopportunities in this industry for allcompanies.

For large ISPs, relationships with telcosare becoming manifold. Telcos want to

Strengths Weaknesses

Opportunities Threats

Experience in the ISP marketKnown name (e.g. AOL)InnovationPeering agreementsExperienced personnelNetwork management and economics knowledge

Customer service lacking somewhatNo local contentUsually don’t own infrastructure

Relationships with telcosMergers with content providersBuyoutAcquire smaller enterprisesDevelopment of web applications

Entry of telcos/cable companiesSome market squeezeSaturation of the market

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enter the market, and ISPs do not want torun the risk of losing out to the telcos, somany partnerships arise.

Mergers with content providers are alsooccurring. This is the easiest way for bothtypes of company to make their way intothe other’s market.

Those who set up an ISP before the ‘gold-rush’ may wish to be bought out. DemonInternet was set up in 1992 and sold inMay 1998 to Scottish Telecom for £66m.The owner, an entrepreneur, wished tomove from the ISP market and channel hisprofits into other entrepreneurial ventures.

It has been established that the value percustomer of an ISP increases withcustomer base, from £70-£100 percustomer for small ISPs up to £220-£270for large companies [14]. Therefore, if anISP acquires a number of smallercompanies, its increase in value faroutweighs the price of the companiesalone. As there are many small companiesthat may wish to be bought out, there isopportunity here for those that can buythem. Verio has hugely increased both itscustomer base and its geographic reach byacquiring many small providers.

Because large ISPs have the resources andthe know-how, they may wish to developweb applications as well as new Internettechnologies. Certain applications couldprove to be very attractive, particularly ifthey were provider-exclusive.

There are usually opportunities for largecompanies to branch out into otherindustries. Large ISPs may wish toconsider related industries in the generalarea of computing. When moving into arelated area, brand name and customerbase can be invaluable.

Threats: the largest threat to large ISPs isthe entry of other established companies,such as telcos and cable companies intothe market. These companies have goodexperience, may have large resources, andmay have the ability to buy ISPs out.

There is to be some market squeeze, whichwill result in only those that are providingsomething special surviving. ISPs canmerge, acquire and partner, but there isstill the threat of losing out in animmensely competitive market.Eventually the market will becomesaturated. This may not happen for someyears, but small ISPs that have found aniche will survive, and large ISPs thathave sufficient power will survive andthere will be no place for others.

Large ISPs are in a position now wherethey can grow and make a profit, but thereare still areas in which they can improve,and they are still at a great risk of losingout to new entrants.

4.2 Small ISP SWOT Analysis

Fig. 5 Small ISP SWOT Analysis

Strengths: small companies have theability to change rapidly. In a dynamicmarketplace, this is a great strength.Although small companies often lackcapital, with the emergence of a newtechnology small ISPs only have theproblem of updating their small amount ofequipment. Larger companies, which mayhave large capital reserves, must updatemuch equipment, a task that is morelabour intensive and time consuming.

The reason small ISPs will survive is thatthere are niche markets to be catered for,and small companies are in a goodposition to provide these services. Smallcompanies like to do business with othersmall companies, so there will always besuch a market.

Strengths Weaknesses

Opportunities Threats

Ability to change rapidly in dynamic marketplaceIntimate services for niche marketsAdept at dealing with problems and concerns of customersUnderstanding and knowledge of customersFeatures tailored for the marketCan take advantage of best tariffs in their area

Cannot offered bundled servicesPurchasing behaviour depedent on profitMarketing generally only by word of mouthDifficult to make money without many business subscribersNo control over backbone

Move into hardware/software salesLong term contractsBuyoutReselling offerings from larger players

ShakeoutAcquisitionNot having capital to expand servicesBreakdown of peering agreements

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Customer service, which is often soimportant, is generally of the highestquality from a small ISP. They have anunderstanding and knowledge (often on apersonal level) of their customers, and areadept at dealing with their problems andconcerns. Again, this intimacy is of greatimportance to many customers,particularly local businesses.

Small ISPs can offer features that aretailored for the market, such as local newsand information, something a largecompany cannot do. Although manycustomers may wish to have the latestDisney or Financial Times information,local news is of equal importance toothers.

Taking advantage of the best tariffs in thearea is something that small ISPs are ableto do. A large national company may setup a deal with a telco or backboneprovider, and have to use the sameprovider all over the country. Althoughthis may give them the best deal in someareas, it is unlikely that it will beadvantageous everywhere. A smallcompany may only need to provide serviceto one location, and therefore can ensurethat they get the cheapest deal.

Weaknesses: unlike telcos and cablecompanies, small ISPs cannot offerbundled services of telephone, TV andaccess.

Their lack of financial resources meansthat their purchasing behaviour isdependent on profit, regardless of theirgrowth or potential. There is generallylittle money available for marketing andadvertising, so this has to be by word ofmouth.

Small ISPs own no infrastructure andtherefore have no control over the Internetbackbone. They may be forced to payhigh rates for using networks, this being adisadvantage that may put many smallISPs out of business.

Opportunities: the fact that small ISPsknow their customers opens upopportunities that are not available to

larger companies. Because it is relativelyeasy for a company to expand into arelated area, there is opportunity for smallISPs to become vendors of software andhardware. They know their customers,and their customers know and trust them,and would likely buy computer equipmentsold by them.

As with larger ISPs, buyout is an option.For smaller companies that are threatenedby larger ISPs, or for other reasons want tosell up, there are always many willing tobuy them.

Although small companies do not have theresources to set up sophisticated servicesthemselves, they may be able to resellofferings from larger players. Securinglong-term contracts with larger companiescould help provide more to their customer,as well as keeping abreast of what largeISPs are doing.

Threats: threats to small ISPs are mainlygeneric threats to any small company in acompetitive environment.There is a shakeout occurring in theindustry, and the only way for a smallcompany to survive bankruptcy may be tobe acquired.

The breakdown of the NAPs, and theintroduction of peering agreements(discussed in section 6.2) may lead to thedownfall of many small ISPs who cannotafford to use the networks of others.

4.3 Telco SWOT Analysis

Fig. 6 Telco SWOT Analysis

Strengths Weaknesses

Opportunities Threats

Own infrastructure (backbone and local loop)Understanding of scaled network managementGlobal presence and/or outlookHuge capital resources, both existing and potentialLarge existing customer baseName recognitionSome understanding of their customersAbility to bundle different services (1-stop shopping)

New networks not wholly analogousBusiness processes outdatedAversion to cannibalising existing lucrativebusinessMain focus for regulatory attention

Sign deals and alliances to generate economies ofboth scale and scopeRelationships with large ISPsAcquire small/medium ISPsLeveraging revenues at all points of the networkUnified service and billing proposition forcustomerSqueeze competitors on price and serviceofferings

Effective marketing and customer service by competitionConsolidation amongst competitionTechnical breakthrough on quality of IP voiceConsumer choiceEmergence of ITSPsLack of corporate understanding for the new competitive environmentInability to adapt to volatile market conditions

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Strengths: telcos own the local loop, andoften own parts of the Internet backbone.This is a huge advantage because a highpercentage of costs can be eliminated.

Telcos have been providers oftelecommunications services for a longtime, and have accumulated knowledge ofnetwork management, dealing with largecustomer bases, and the general outlook ofa multinational company.

They already have a large customer base,and due to loyalty and convenience, manycustomers of a telco will be happy tochoose that company as their ISP, ifpossible. Because telcos can offer theconvenience of bundled services, they maywin many Internet customers from theirexisting base.Telcos have names that are known. Theyalso have huge capital resources, bothexisting and potential, and are big enoughto undercut many other companies onprice.

There is enormous potential for telcoswishing to enter the ISP market, but alsomany disadvantages that should be takeninto account by the new entrants.

Weaknesses: the weaknesses telcos mayexperience on entry into the ISP marketwill be due to its expectation thattelecommunications provision is the sameacross the board. They may fail tounderstand that the new networks andtechnologies with which they are dealingare not wholly analogous, and thus useprocesses which are unsuitable oroutdated.

Many telcos may steer away fromproviding VoIP. There is huge profitopportunity in the provision of VoIP, butsome telcos will have an aversion tocannibalising existing lucrative business.Although this may ensure maximum short-term profits, it will undoubtedly cause thecompanies to lose out in the long term.

Because of the controversy surroundingVoIP, telcos are the main focus forregulatory attention in this area. Althoughthis may only be seen as a threat, it is

more than likely that VoIP will beregulated soon, disadvantaging telcosoperating as ISPs somewhat.

Opportunities: telcos entering the ISPmarket will experience many of theopportunities of large ISPs, such asmergers, and acquisitions of small andmedium-sized companies. Deals andalliances may be formed to generateeconomies of both scale and scope.

Large telcos that own much of theirnetwork will have the opportunity toleverage revenues at all points of thenetwork: local loop, leased lines,backbone, as well as avoiding having topay others to carry their traffic.

Because they have much experience in thetelecommunications industry, and becausethey can offer one-stop shopping (bundledservices), they may be able to squeezemuch of their competition on price andservice offerings.

Threats: because the telcos are to enterthe ISP market at a high level, there willbe not only competition amongstthemselves, but competition from theestablished players.

Large ISPs have been in this market for anumber of years, and know theircustomers. They have an understanding ofthe ISP corporate environment that telcoswill have to learn. Customer service andmarketing by their competition will beproficient.

The technical breakthrough on quality ofVoIP has lead to the emergence of ITSPs(Internet Telephony Service Providers),companies specialising in VoIP. Withsuch a strategic focus towards one service,these companies may grab a large share ofthe VoIP market from telcos and ISPs.

Large companies may not be able to adaptto volatile market conditions and to updateto the latest technologies as rapidly assmaller companies, and in such a dynamicarea, this can be a great threat to them.

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4.4 Cable Company SWOT Analysis

Fig. 7 Cable Company SWOT Analysis

Strengths: cable companies have adistinct advantage in that they can offerhigh speed Internet access over their ownexisting network. The idea of leasing aline or employing some sort of fast localloop technology is not an issue.

Bundled services are also something thatcable companies can offer. As mentionedpreviously, CableTel are offering amonthly deal providing telephone, cableTV and Internet access for one price, andwith one bill.

There are high cable penetration rates inthe US and Western Europe. The numberof houses that can be connected to cable(i.e. are on the cable path, but notconnected) is also far greater than thenumber actually connected.

Media-rich local content can be providedby cable companies, either on TV or onthe Internet. As in the case of small ISPsproviding local content, there is demandfrom local businesses for this sort ofcontent, and cable companies are in aprime position to provide it. Many cablecompanies already have deals with localcontent providers such as local newschannels and local newspapers.

Weaknesses: although many homes areconnected to cable, in some countries fewbusinesses are, and may wish to employother methods of connection. Cablecompanies also have the disadvantage thatthey have no experience working with

business customers, and have littleawareness of their residential customers.They also have no experience with qualityof service guarantees.

Cable companies will have no problemtelling customers of their cables’ capacity,but what they may neglect to tell them isthat a number of customers may becontending for this capacity. A 10Mbcable is attractive, but if a large number ofusers will be using this cablesimultaneously, the actual capacity percustomer is very much decreased.Because cable systems were designed totransmit one-way television signals, manynetworks are only configured for one-waytransmission. Although most Internettraffic is downstream, a channel isrequired for upstream traffic, such assending http addresses etc.

Opportunities: there are opportunities forcable companies in offering interactivecontent and entertainment. Their networksare actually capable (when correctlyconfigured) to handle two-way, high-speed traffic.

Because cables do not reach manybusinesses, there is an opportunity toexpand to businesses to try to win theircustom. However, this may involvesignificant sunk costs, which most cablecompanies simply cannot afford.

Threats: the necessity for high investmentcosts may prove to be the downfall ofmany cable companies. Although cablecompanies make enough money tosurvive, they do not tend to have largecapital resources needed for large-scaleexpansion.

Emerging high-speed local looptechnologies such as xDSL will have aneffect on the cable industry. With thedeployment of other high-speedtechnologies over existing infrastructures,cable systems will no longer have theaccess speed advantage they have now.

Digital TV, although indirectly, may be abig threat to cable companies offeringInternet access. When the uptake of

Strengths Weaknesses

Opportunities Threats

High speed availableCan offer bundled services (1-stop shopping)Own infrastructureHigh penetration rates in US and Western EuropeMedia-rich local content

Many homes have cable, but few businessesNo experience with business customersLittle consumer awarenessOpinion of weak customer supportMany customers contending for capacityMany networks have only 1-way broadcastNo experience with quality of service guarantees

Interactive content/entertainmentExpand to businessesMergers/Acquisitions

High investment costsXDSL, emerging local loop technologiesDigital TV

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digital TV becomes significant, manycustomers will move away from receivingtheir TV by cable. Because TV is themost notable service on cable, it isunlikely that customers moving from cableTV to digital TV will stay with their cablecompany for the sake of Internet access,particularly when other high-speed optionsare available.

As with the emergence of digital TV,cable ISPs are particularly threatened bynew local access mechanisms discussed insection 1.2.

5. Threats to ISPs

Broadly speaking, ISPs facethreats/challenges in four inter-relatedareas: customer relations, technology,regulatory framework, and resources [4].

Fig. 8 Threats to ISPs

All four areas are of significantimportance.

5.1 Customer RelationsFrom a service point of view, goodcustomer relations are necessary. Theretends to be volatile customer satisfactionof ISPs, and no matter what technologyand services are available, customers willnot stay with a provider they aredissatisfied with.

Customer churn is a huge problem,particularly among large ISPs, and can beover 30%. Because it costs so much towin customers, it is very important that anISP holds on to the customers it has.

Because customer demands are onlytemporarily gratified by new technologies,there is always a need for new services inorder to keep the customer satisfied.

5.2 TechnologyFor obvious reasons, technology is ofsignificance.ISPs have to figure out how to integratethe available technologies and providethem in a satisfactory way. This is anongoing challenge, as technologiescontinue to change.

As new services emerge, ISP must cometo terms with delivering these in real time.They must always be aware of thedevelopments and management associatedwith a rapidly expanding infrastructure.

5.3 ResourcesLarge ISPs, particularly those which arepart of another company such as a telco,have large amounts of capital. Thisgenerally enables them to acquirenecessary resources. Issues such asupgrading technology may be a hugechallenge to small ISPs who, althoughthey may be efficient and profitable,cannot afford to make large investments.Acquiring capital investment forinfrastructure will be a great challenge formany ISPs.

The lack of experienced employees mayalso be a problem. In such a new area, itis not surprising that the number of totallyqualified potential employees is low. Thiswill, of course, change.

5.4 RegulationThe intervention of the regulator will raisenew issues and challenges. Because theInternet is so unregulated, it is hard topredict what effects regulation will have,but it will probably result in some sort ofcollaboration between ISPs and regulatorsregarding content control and other issues.Charging above that of today is also likelyto result, associated with value-addedservices such as VoIP.

Regulation of the Internet has also beendiscussed in section 3.2.1, concerning thepolitical environment.

Customer Relations

Volatile customer satisfactionCustomer churn, customer trustNeed for differentiated services

Technology

Integrating ever-changing technologies Delivering new services in real timeDeveloping and managing rapidly expandinginfrastructure

Resources

Telcos have more resourcesAcquiring capital investment for infrastructureHiring experienced employees

Regulatory framework

Censorship of the InternetResponsibility for contentPossible charges for services such as VoIPUncertainty

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6. Trends in the ISP market

As the industry is maturing, differentiationand financial performance are becomingincreasingly important. This is drivingfive major trends in the market:• Consolidation: mergers and

acquisitions• Introduction of enhanced/value added

services• Company to company interconnection

and peering agreements• Differentiation based on content• Web hosting

6.1 ConsolidationThe trend of consolidation has beenevident over the last 18 months, withmany partnerships arising between ISPs,and between ISPs and other companieswishing to enter the market.

Large companies have been merging withother large companies, and have beenacquiring medium-sized and smallcompanies. This is a quick way toincrease geographic scope and subscriberbase, and hence to increase both thefinancial value and customer value of thecompany. To most of the largercompanies, small rural ISPs are not seenas worth acquiring, however Verio hasbuilt up a huge geographic scope andsubscriber base through the acquisition ofsmall ISPs, and has made a great successof it, now offering services to 41 of the top50 US Internet service areas (January1999) [15].As discussed in section 3.1, there looks tobe an emerging differentiation based oncontent. Content providers and large ISPsare partnering and merging in order toenter each other's market as quickly aspossible.

The reasons for the entry of telcos into themarket are detailed in the Strengths part ofsection 4.3. They are entering the marketquickly by acquiring ISPs and makingpartnerships with them.

The total number of ISPs in the US (theoldest and largest market) has stabilised.For each merger or acquisition there is a

new entrant. Many of these will besqueezed out over the next few years, butmany will find a small market in which tothrive.The new enhanced and value-addedservices which are to be offered by ISPsare detailed in section 1, 'What Services doISPs Offer?'

6.2 Interconnection and PeeringAgreementsPeering is the mutual sharing of resourcesthrough direct links between two ISPs, oran ISP and an exchange which acts as ahub peering point for several ISPs.If one ISP has a packet for another, andthey have a peering link or both participatein a peering exchange, then the packet issent via the peering link rather than theirexternal Internet link. There is no trafficcost.

Peering in this way saves both endsmoney, as the packets do not travelthrough external providers. It also reducesbandwidth requirements on the defaultInternet link, which may be more relevantto smaller providers.

Over the last couple of years, due to theexplosion in Internet traffic, the mainexchange points of the Internet backbone,the Network Access Points (NAPs) havebecome congested and many ISPs havechosen no to use them anymore. It is alsothe case that they have not receivedfunding from the National ScienceFoundation since last year, 1998, and sothere has been a move to privatelyoperated exchange points.

These arrangements began as a means ofconvenience and are now breaking downas the larger ISPs and backbone providersrealise that they can begin to charge otherproviders for using parts of their network.

A number of peering arrangements areexplained below [16]:

6.2.1 SKA (Sender Keep All)This is the method that existed while theNAPs were in full use. The Internet was a'free for all', and everybody used

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everybody else's network as if it were theirown. This was either because a networkowner did not care if traffic symmetryexisted between ISPs, or because theoverheads involved with metering andsettling would outweigh the convenienceof having no agreements.

6.2.2 Peer-to-Peer BilateralHere peering agreements exist betweenISPs of similar size, experience,technology and customer base. Thesecriteria usually guarantee trafficsymmetry.Although a large ISP might wish to enterinto such an agreement with a smallercompany for advantages such as lesstraffic from that company, there are alsodisadvantages. A smaller ISP mayproduce less traffic, but it is also likely tohave a lesser network - both in terms ofsize and technology. Even if thetechnology is up to date, the disadvantageof a smaller network is that there will bemore hops in traffic delivery (due to morenetworks being traversed) and this is likelyto cause undesirable delays.

6.2.3 HierarchicalLarge companies that own much of thenetwork are now beginning to treat smallerISPs as clients. Similarly, backboneowners will treat large ISPs as clients.The huge disadvantage to small ISPs isthat they will have to pay for the use ofothers' networks, while not receiving anycompensation from larger companieswhose traffic they may carry. It is also thecase that they may not be able to avail ofwholesale deals, and will then pay moreper traffic than larger companies. Thismay be a case for regulation.

6.2.4 Third Party AdministratorA paid administrator may set up andmanage an access point, and for a fee anyISP may join and use that point tointerconnect with others. Payment is byway of a fee rather than pay-per-traffic.These types of interconnection points arefast becoming congested bottlenecks fortwo reasons: there are no criteria forjoining these points, and because ISPs arenot charged per traffic, they are sending asmuch as they can through them. The

following is a solution of sorts, but may bebiased against smaller companies.

6.2.5 Private PeeringAs above, except there is no administrator- all companies involved manage a point.The joint management also chooses whichcompanies may join the point, and so aresafeguarding against congestion bylimiting the number and hence the amountof traffic.

The ideas of differentiation based oncontent and web hosting have beendetailed throughout.Two further trends that are expected in theISP market, but have not yet begun tooccur, are the move to usage-based pricingand the specialisation and servicepositioning of ISPs.

6.3 Move to Usage-Based PricingThe original pricing model which cameabout in the US was flat rate pricing - asubscriber paid a flat fee and was entitledto unlimited usage. Because local callstend to be charge-free, many subscribershave taken advantage of this. They willstay online for long periods of time, evenif they are not using the Internet, and thushold up resources that other users arecontending for. Some ISPs have begun totime these users out after 15 minutes ofinactivity, but this is still causing muchinefficiency.

The reason for flat-rate pricing, asmentioned above, is that billing is easy,and customers like to know their budget.

Because usage of the Internet has becomeso widespread and heavy, ISPs arebeginning to realise that the £19.95 pricingmodel so popular in the US simply cannotcontinue if they want to be profitable.Until recently, billing other than flat-ratebilling was complex, and insufficientsoftware did not exist for many pricingstructures. However, software has beendeveloped with the ability to bill forquality of service, services, time of dayusage and various other aspects that mayeffect billing [17].

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The availability of this software will be agreat push towards usage- (and service-)based billing.

6.4 Specialisation and ServicePositioningThe term ISP is used very loosely. Anycompany supplying access or services fallsunder the description ‘ISP’.

The present strategy of offering access,content, services etc. has a lack ofstrategic focus, and therefore may lead oneto believe that companies focused on justone aspect of Internet service provision,working together, may be able to providean end product of high quality to the user.If this were to occur to some extent, ISPswould fall into two broad categories:network-focused and content-focused.

Fig. 9 ISP Specialisation

Network-focused companies would focuson connectivity for businesses and otherISPs. They would be able to offerbusiness packages with service-levelagreements.For the consumer, these ISPs wouldintegrate technologies to offer premiummultimedia access to the Internet.

Content-focused companies, in their purestform, would have no network at all. Theywould manage customer accounts andoperate services, while the connectivityservices would be provided by a network-focused ISP.Premium information would be providedto business customers, and premiumentertainment to consumers.

It is believed that, with such strategicfocus, these companies, working together,would offer a better service, both in termsof content and network quality, than acompany trying to cater for everyone.

7. Conclusion

The above has discussed the structure ofthe market, looking at competition,regulation, introducing its main players,and looking at its trends, both those thatare occurring and those that look likely toemerge.

Mergers and acquisitions have shown tobe popular methods of growth, both ingeographic terms and in terms of customerbase. These have been occurring not justamong ISPs, but among many companiesentering the market. In spite of the largeamount of mergers, the total number ofISPs has stabilised due to the huge numberof new entrants.

Telcos, cable companies and others haveentered the market, either by mergers andacquisitions, or by creating ISPsthemselves. These companies, amongstothers, are proving to be an immensethreat to existing ISPs.

There has been a tremendous emphasis onvalue-added services and on content.Basic services have become commoditiesand customers are looking for newservices to add value. ISPs securing dealswith popular entertainment andinformation companies will have a greatadvantage in winning customers.Additional offerings such as quality ofservice, bundled services, banking, e-commerce etc. are also becomingattractive to customers.

There is a clear change of strategy bothwithin an ISP and between ISPs.Pricing models are changing, as areservice offerings. It is predicted that manycompanies may wish to specialise in onepart of the market rather than trying to

Consumers

Content focused Network focused

Businesses

Integrated messagingE-commerce services

IP telephonyWeb hosting

Premium entertainment Multimedia access

Premium information High performance access

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provide everything involved with serviceprovision.

Between ISPs, agreements regardingcarriage of traffic have arisen due to thebreakdown of the NAPs. Theseagreements will convenience somecompanies, but may put others at adisadvantage.

All in all, Internet service provision is anextremely complex and dynamic area, anddetailed investigation of any part of it isbeyond the scope of this report.

References:

[1] ‘Internet Telephony: Costs, Pricing and Policy’, McKnight and Leida, MIT Internet Telephony Consortium, 1998

[2] ‘Combining Mobile and Internet Services’, Griffiths, N., Dataquest, June 1998

[3] ‘Access to Bandwidth: BringingHigher Bandwidth Services to theCustomer’http://www.oftel.gov.uk/competition/llu1298.htm

[4] 'ISPs: From Protocols to the Market',McPhillips, E., University of Strathclyde, September 1998

[5] ‘Motorola, Cisco in Pact’http://abcnews.go.com/sections/business/DailyNews/cisco990208.html

[6] ‘Nextel, Netscape Go Wireless’http://abcnews.go.com/sections/business/DailyNews/nextel_netscape990208.html

[7] ‘WhatIs?’http://whatis.com/

[8] ‘How Competitive Forces ShapeStrategy’, Porter, M., HarvardBusiness Review, Volume 57, Issue2, 1979

[9] ‘@Home, Excite Announce $6.7Billion Merger’http://www.internetnews.com/isp-news/1999/01/1901-merger.html

[10] ‘Lycos Races Ahead’http://abcnews.go.com/sections/business/DailyNews/lycos_rising990206.html

[11] Daily Telegraph Connectedsupplement, 28 January 1999

[12] TescoNethttp://www.tesco.net/index.htm

[13] ‘Yahoo! to Buy GeoCities’http://www.geoworld.com/ResearchTriangle/6551/

[14] ‘Smaller ISPs Face Misxed Future inDeregulated Europe’http://www.techweb.com/wire/story/TWB19980226S0002

[15] ’Verio Inc. Acquisition ExpandsCompany’s Local Business InternetServices and Support’, January 1999http://newsroom.verio.com/pr/pr_01_04_99.shtml

[16] ‘Scaleable Internet InterconnectionAgreements and Integrated Services’http://ksgwww.harvard.edu/iip/cai/mcknight.html

[17] ‘IP Billing Systems and Processes’,G2R Inc., May 1998

[18] ‘Internet Access Winners’, Delhagen,K., People and Technology Strategies,Forrester Research Inc., VolumeFour, Number Nine, January 1998

[19] ‘Core Internet Subscription Service,Internet Service Markets’, Mine, H.,Module Two, Volume One, 1998