Consumer ISP Market in for a Shakeup

The market share of the dominant players in the US consumer ISP market may be threatened by new business models, such as free ISPs and services offered by telecom companies, according to a report by Cahners In-Stat Group.

AOL, AT&T, Microsoft Network, and several others have been the only dominant players in the fragmented US consumer ISP market to date, according to the report “The US Consumer Internet Market: Who’s Got Share? Who’s Got Momentum?”, and their numbers are already slipping. At the end of 1997, AOL owned nearly 24.3 percent of the US consumer market, but by the first quarter of 1999, its share dropped to 21.5 percent. MSN owned 3.6 percent of the total US consumer ISP market in 1997. In the first quarter of 1999, with only 1.5 percent, MSN now retains only one half of its previous share, according to the report.

“Waking up from a competitive slumber, telecom companies are creating service bundles and undertaking marketing campaigns that are substantially increasing their presence in the market,” said Cahners’ Rick Miller. “Adding to the woes of the established market leaders, free-service ISPs like NetZero and the recently announced AltaVista Internet service are expected to attract fair numbers of recreational Net surfers. To be successful, ISPs must escape the vicious cycle of low-margins and find alternative revenue that does not require the massive infrastructure buildouts seen last year.”

The report found that consumer ISP customers are migrating to non-traditional service providers. Regional Bell Operating Companies (RBOCs) and other telecommunications carriers have emerged from the middle of the pack to carry a higher profile as consumer ISPs for 1999, according to the report.

Consumer ISP Market Share
End of 1997 Q1 1999
AOL 24.3% 21.5%
MSN 3.6% 1.5%
Source: Cahners In-Stat

During 1998, the combined subscriber base for these non-traditional service providers grew 137 percent, compared to only 37 percent growth among traditional ISPs (including AOL, MSN, Mindspring, Earthlink, Prodigy, and Flashnet). Top telecommunications-owned ISPs now account for 6.5 percent of the US consumer market, up from 3.9 percent at the start of 1998.

Cable providers (RoadRunner and @Home) also began to broaden their sliver of the overall consumer market. Cable subscriptions grew almost tenfold although their share of the overall US consumer market remained low, accounting for only 1 percent by the end of 1998.

According to the report, free Internet access is also shaking up the industry. AltaVista’s agreement with to deliver free Internet service paid for by advertising is one example.

“Although it seems unlikely that a $2 billion Internet advertising market will support many free-service ISPs for long, it will only take one free-service ISP to become dramatically successful to cause significant shifts in marketshare,” Miller said.

Cahners’ report details the top 17 players (over 200,000 subscribers) in the US consumer ISP market in terms of market share and revenue. It provides subscriber and revenue data overall, as well as breakdowns in subscriber and revenue market share for access and value-added services.

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