ISPs Say Profitability is Priority No.1

Internet service providers say the greatest challenge facing their business today is profitability, and they perceive that adding subscribers is essential for achieving, maintaining, or enhancing their bottom line. Keeping churn rates low and customer satisfaction high is essential for ISPs to profit in today’s market, according to a survey of visitors to the ISP-Planet Web site.

Internet.com (the publisher of this site and ISP-Planet), together with Edgix Corp. and Insight Express LLC, surveyed more than 1,000 visitors to ISP-Planet in order to determine how service providers plan to thrive while addressing current technical and business challenges.

“This report provides a window on current market realities in the ISP community at a time when its facing momentous changes,” said Ted Stevenson, executive editor of internet.com’s ISP Channel. “ISPs have told us where they’re felling the pain and what steps they’re taking improvide their profitability.”

The study, “The ISP Market: Challenges and Strategies for the Future” found that service providers recognize offering plain-old dial-up access isn’t enough anymore. Shrewd ISP operators are actively seeking to diversify revenue resources by firing-up broadband services and increasing revenues from offering clients value-added services.

More than 70 percent of the respondents said they currently offer broadband access and that high-speed services would be increasingly important to ISPs as the connectivity market continues to mature.

Currently, the most widely used platform for high-speed connectivity is DSL access. Seventy-two percent of the ISPs surveyed that offer broadband services do so via high-speed copper lines. But this is likely to change, because DSL access presents more problems than solutions for ISPs looking to make a dent in the broadband market segment. Specific issues include:

• Industry experts put the cost to acquire new DSL users in the range of $600 to $1,000, compared to $105 for picking up a new dial-up customer.
• Several recent studies indicate that cable broadband subscribers are more satisfied with their service than DSL users, which compounds the cost of acquiring new customers as a factor of churn.
• While DSL access remains popular among small online entities, residential consumers remain largely ignorant on the subject of broadband connectivity.

ISPs are already deploying one broadband solution that could further erode DSL market share. Of those ISPs currently providing high-speed Internet access, 30 percent do so via fixed wireless technologies. And 40 percent of the ISPs that do not currently offer broadband access intend to offer fixed wireless solutions for home and office use. Because fixed wireless systems do not present last-mile bottlenecks like DSL and cable-based services, ISPs are readily adopting the technology.

ISPs seeking to increase revenues seem to understand that they must extend their service offerings beyond providing Internet access alone. Eighty-four percent of the respondents said they generate additional revenue from services other than Internet access. These services include Web hosting, e-commerce and collocation services, as well as communications infrastructure services.

Because marketing add-on services to existing clients is much more cost effective than marketing campaigns designed to attract new customers, value-added services offer ISPs the opportunity to produce higher profit margins from services sold to current clients.

Unfortunately, half of the ISP respondents indicated that they derive less than 25 percent of their total revenue from value-added services, more than 80 percent said add-on programs account for half of their total annual revenue.

Most of the residential revenues earned by ISPs remain a product of dial-up Internet access. However, ISPs will find it difficult to increase their revenue from residential customers unless they can convince them to adopt either new high-speed technologies like fixed wireless access or pay for value-added services like training, email filtering and antivirus protection.

In a market that includes multinational conglomerates, the report suggests it would be wise for independent ISPs to rely on the same business strategies that have helped other small businesses succeed when facing larger rivals–Personal service, quick responses to customer service inquiries, and the idea that the customer always comes first. Local and regional ISPs should also utilize their geographic appeal to their advantage by offering content or services pecifically designed to appeal to their local audiences.

This is not impossible. But independent ISPs must be willing to spend some money marketing their programs in order to convince customers that they offer services large distance companies could not possible provide.