What Is ISP Shakeout?

Jupiter Communications may still be based in Silicon Alley, but it’s now an Uptown Girl with uptown ways.

It brings only the finest moguls to its gatherings, and perhaps as a result its analysts are now happy to make predictions that appeal to the uptown mind.

Take, for instance, the idea of an “ISP shakeout.” Ever since the web was spun, in the mid-1990s, analysts have been shocked – SHOCKED! – at the continuing presence of what they derisively call “mom-and-pop ISPs” all over the “Flyover Land.” Why the Bailey Building and Loans of the Internet haven’t sold out to the Mr. Potters remains a source of consternation.

Many of these ISPs began life as simple Bulletin Board System (BBS) operators in the early 1990s, often dedicated to providing a small, and often remote, geographic area with dial-up service. Once companies like Microsoft, AT&T and the Bells entered the business, these outfits were supposed to disappear. At their Consumer Online Forum in New York, Jupiter analysts once again predicted their demise.

Well, over the last five years those local ISPs have been evolving into dozens of forms. Some, like MindSpring and EarthLink, have become national powers. Others have become primarily web hosts, still others web designers, often focused on a vertical niche rather than a geographic one. Still others have become content providers, while others have stuck to their knitting and are now focused on providing broadband to their loyal customers. Those that didn’t evolve may sell out, but they’re often right back in business a week later under another name, in another niche, calling on the same customers.

As a result, there are still over 5,000 ISPs in the U.S. Jupiter expects most to disappear because of “broadband.” Despite the nicer talk recently from AOL-Time Warner, it seems only a few ISPs will actually be able to get onto cable (there are some good technical reasons for this), and the capital requirements of dealing with DSL are also challenging. When you bring in customers at 1.5 Mbps, you need a lot more upstream than a single T-1.

The experts are wrong again. They’re not wrong about the challenges – there are always challenges – but they are wrong about the results. The fact is that after five years the “big boys” still don’t know how to serve customers. (I recently left both AT&T and BellSouth because I was tired of poor customer service.) Big companies still prefer to invest in advertising than in problem solving and on the ground people know it.

Besides, when one opportunity goes away, others take its place. Many small ISPs have become CLECs, or competitive local exchange carriers that can offer voice as well as data service. Others have gotten into wireless, sometimes using unlicensed frequencies they can turn into broadband pipes. Still others have become application service providers (ASPs), combining software, hosting and connectivity. While all this has been going on, more ISPs have been founded, some starting as free dial-up providers like 1stUp.com or NetZero, others beginning as CLECs, wireless providers, ASPs, or web hosts.

The words of George Bailey in “It’s a Wonderful Life,” when offered a big buyout by Mr. Potter, still ring true: “You spin your little webs and think the whole world revolves around you and your money, but it doesn’t.”

The customers still rule, and so do the customers’ friends.

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