DCANet in the News - Philadelphia Business Journal - March 2002
ISP's, STRAINING TO COMPETE, RE-ENGINEERING GAME PLANS
Once upon a time, MilleniaNet Corp. thought it could live happily ever after by simply providing access to the Internet.What a fantasy that turned out to be.
In a recent episode that underscored the necessity to change its business plan or suffer the consequences, the Internet service provider lost a contract to resell high-speed access to the Delaware Department of Justice after Verizon Communications repeatedly rejected its order. Delaware officials told the Newtown Square-based company that Verizon had placed a block on anyone trying to resell its digital subscriber-line service to government accounts. Verizon denied any such block and told MilleniaNet to keep trying to place the order. In the end, it was too late. The state Justice Department, tired of waiting, signed up with Verizon.
"As a small fish in a big sea, we feel the crunch between our competitors, our carriers - who are also our competitors - and the end user," said Jeanette Farley, a vice president at MilleniaNet, which serves about 2,500 customers. In response, the ten-person ISP has started the process of becoming a Verizon authorized reseller of phone service. The formal certification costs about $100,000, Farley said. "Internet providers are almost forced to become a (phone company) just to compete," she said. Once it wins the reseller designation, MilleniaNet would save between 25 percent and 30 percent of the cost of accessing Verizon's networks, Farley says.
MilleniaNet isn't alone. During the early and mid-1990's, ISP's reigned as among the most lucrative of emerging telecommunications companies with monthly recurring revenue from relatively stable customer bases. Consolidation and competition have thinned local ISP's ranks to a couple dozen from more than 100. Nowadays, ISP's have found themselves facing off against not just the Baby Bells like Verizon but DSL and cable-modem providers, too. It's still a big market. Market research firm Cahners estimates business-oriented ISP revenue will reach $16.4 billion this year worldwide, up from $12.9 billion in 2000.
"In our different ISP surveys, we found that they're looking to diversify
their revenues beyond Internet access alone," said Darryl Schoolar, an ISP analyst with Cahners In-Stat Group in Scottsdale, Ariz. "Selling access alone is a very competitive and commoditized product. If all you're selling to an end-user is access, it forces you to compete on price alone." That's why ISPs nowadays are selling several kinds of Internet service, Schoolar said, from T1 lines to DSL to dial-up, offering services such as hosting Web sites and security services to keep hackers at bay, and even phone service.
DCANet Inc., an ISP to about 10,000 customers in Delaware and Pennsylvania, plans to begin offering phone service by the fourth quarter, said CEO Keith Duncan. "Once you get into the regulated space it becomes a very difficult environment," Duncan said, citing mountains of paperwork, interconnection agreements and the costs of getting regulatory approvals and developing a network. "As ISPs, we don't come from that mentality. But anymore, I don't think that you could find an ISP that's profitable on providing access alone."
"Unfortunately the broadband revolution killed the ability to make a profit through Internet access," he continued. "What they did succeed in doing is giving away installation fees, giving away this, giving away that and lowering prices to the point that it really hurt the product." Lansdales's NetCarrier Inc. also plans to start offering voice services in May to its more than 20,000 customers. Some ISP's have been doing this sort of thing for a while.
Pennsaukin, N.J.-based SNiP, for example, began offering phone service in early 2000 in a move that saves it $90,000 a month. That's how much it cost Snip to buy phone lines from Verizon to serve its 20,000 customers. For a 45-employee company that netted $10 million a year, becoming a phone service provider (rather than a mere reseller) resulted in a 10 percent reduction in the cost of accessing Verizon's network, said Pete Cava, Snip's CEO. In SNiP's case, offering phone service meant an involved regulatory process and paying nearly $3 million to build a data center and signing for a $5 million loan from a telecom-equipment company for the switch needed to route phone calls. Some 6,000 of Snip's residential customers, about 30 percent, have signed up for phone service, along with 300 businesses. Snip serves customers through T1 lines that it partitions to accommodate phone and Internet service. Cava would like to see two-thirds of SNiP's customers using its phone service by the end of the year. Still, Cava wants SNiP to stay focused on phone, Internet and related services, rather than jumping into all sorts of other ventures.
"We could be selling soft pretzels too to make money, but we don't," Cava said. "We're here as an integrated communications provider and we'll live or die by that. You only have to make a scratch on the giant (Verizon) and you'll be OK."
By: Jeremy Feiler
Staff Writer
2002 Philadelphia Business Journal