Posted: 11/1998

ISPs Dress Up Offerings by Reselling Premium Services

By Denise Culver

As the number of Internet service providers (ISPs) in the United States continues to
increase (one estimate predicts triple-digit growth between 1996 and 1999), the big
question for smaller ISPs is how to keep a leg up on the competition when price appears to
be the driving force behind most consumers’ choice of service provider.

"We’ve seen many more local ISPs getting into the business over the past year.
Everyone wants to offer dial-up," says Kent Lanum, director of brand development with
UniDial Communications, Louisville, Ky., a nationwide switchless reseller of
telecommunications services, including Internet products.

Indeed, statistics show that ISP growth has been nothing short of phenomenal since
1994, says Erica Henkel, senior analyst with Frost & Sullivan, a research house based
in Mountain View, Calif. According to Frost & Sullivan’s research, revenues earned by
ISPs have grown from $1.06 billion in 1994 to $12.39 billion thus far in 1998. (See chart,
ISP Revenues.)

"Add to that the fact that the compound annual growth rate in this marketplace
will be 31 percent through 2004, and you can see that it remains an explosive
market," Henkel says.

Research from eMarketer, a New York-based firm providing information on online
business, shows that growth in the number of providers has been equally compelling,
projecting the number will triple between 1996 and 1999. eMarketer foresees a continued
buildup in the number of ISPs through 1999 to nearly 5,000 nationwide, followed by a
gradual consolidation as the smaller, less competitive players get weeded out. (See chart,
ISP Growth Pojections.)

Image: ISP Revenues

Furthermore, customer retention is expected to become an increasing challenge for ISPs,
according to results of a survey of nearly 4,000 Internet users by World Research Inc.,
San Jose, Calif., which found that 16 percent of them plan to switch their access service
within the next six months. Their complaints, according to the survey, were slow log-in
times (45 percent), too many busy signals (26 percent) and expensive prices (25 percent).

With stepped-up competition and increasing provider-hopping, smaller ISPs now are
seeking ways to differentiate themselves in the marketplace in terms of both residential
and business customers. As such, a number of companies are offering specialized Internet
services for resale to help the ISP round out its product offering. If you ask some
service providers, they balk at the suggestion that customers can be swayed by these mere
window dressings. Ask others, though, and you’ll hear that the ISP that doesn’t expand its
service offerings to include such services will be the ISP of the past.

Take, for instance, .comfax. Founded in August 1997, the New York-based company created
a service that enables customers to send faxes over the Internet via a system similar to
voice over Internet protocol (VoIP) networks. The customer simply dials into .comfax’s
server, which sends the fax over its Internet backbone as far as possible before putting
it back onto the public switched network. Because much of the transmission is carried over
the Internet, the cost of sending a fax–a major consideration overseas–is significantly
reduced.

.comfax’s original business plan called for direct sales to end users. In the past few
months, however, the company has altered that plan and now is focusing on reseller
channels, says Director of Marketing Joe Covey.

"We realized that we could cover much more ground via a resale channel," he
says. "It’s not as efficient for us to reach 500,000 people through our own direct
efforts as it is for us to reach 500,000 people who are already the customers of one of
our resellers."

Image: ISP Growth Projections

Typically, .comfax offers companies one of two options for reselling its service. In
the first, which is marketed predominantly to domestic resellers, the reseller simply
charges its customers the same rate that .comfax charges–10 cents per minute for domestic
faxing with varying rates for overseas faxing. .comfax then gives the reseller a flat 15
percent of the revenues. In the other scenario, .comfax provides a wholesale rate to the
reseller, and the reseller develops his own margins for the service.

Covey says competitive local exchange carriers (CLECs) and cable television (CATV)
companies are .comfax’s best resale channels because they have more sophisticated
marketing personnel than most ISPs do.

"ISPs may not be the best marketers, but they are beginning to view our service as
one more tool they need to round out their business offering," he says. "We’re
definitely seeing more interest from that segment."

Bob Cox, CEO of MobileWord Communications, New Rochelle, N.Y., agrees it’s becoming
increasingly important for Internet resellers to add new services to better address
customer segmentation. The evolution his company has taken over the past six months is
evidence of the fact that resellers are doing just that, he says.

Essentially, MobileWord is a dictation service targeted to mobile business customers.
Customers call MobileWord’s toll-free number, speak into a dictation device and within 24
hours (the average time currently is 12 hours), a fully edited version of the dictation is
sent to the customer via the Internet. Cox’s team primarily has focused its attention on
wireless carriers and developers of personal digital assistants (PDAs), many of which have
wireless modems that allow for wireless downloading of documents from the Internet.

DuPont is using MobileWord to automate its sales force of nonwoven products in
Wilmington, Del., a move that has saved the company between $10,000 and $15,000 per
salesperson. "They’re utilizing the service as a time-reduction tool that enables
their sales force to spend more time selling and less time typing documents," Cox
says.

Despite the fact that Mobile-Word hasn’t attempted to market its service to any
Internet resellers, Cox says the interest from that segment has been significant. Although
the company is still in negotiations and no margin strategies have been developed yet, Cox
feels confident MobileWord soon will be a part of many resellers’ value-added packages.

"We have several large carriers that are interested," Cox says. "They’ve
heard what we’re doing, and they recognize that we provide them one more way to set
themselves apart from the competition."

Other companies are looking at instituting internal changes that will create a
competitive advantage. UniDial’s Lanum says UniDial is making a number of internal changes
to its service offerings–such as the development of virtual private networks (VPNs), web
hosting and new computer telephony applications–that will be part of its network by 1999.

Another reseller, SouthNet Telecomm Services, Atlanta, has turned carrier and is
bringing Internet access and other services to the wholesale market.

"We saw Internet resellers making a natural migration from simple Internet access
to VoIP access," says Bob Morris, vice president of operations. "We knew there
would be a number of resellers looking for a national provider who could address those
needs, and we felt we could better position our company if we changed our focus from
resale to carrier."

In addition to VoIP, Morris says the company is testing e-commerce solutions, website
development and web hosting, as well as other Internet services that resellers can use to
round out their service offerings.

Analyst Jilani Zeribi, Current Analysis Inc., Sterling, Va., gives high marks to a
Sept. 29 announcement by NetworkTwo Communica-tions Group, Ann Arbor, Mich. The company
launched NetBusiness Edge for smaller ISPs that target business customers to outsource all
of part of their network services to NetworkTwo, including virtual private networks
(VPNs), firewalls, transaction processing and customer service.

"As the ISP market matures, small ISPs have been hit the hardest as industry
heavyweights offer services such as nationwide POPs [points of presence] and high-end
content for free," Zeribi says. "NetworkTwo’s announcement explicitly targets
the small ISP market, attempting to provide a competitive differentiator for this
segment."

While Zeribi says that value-added services such as those offered by NetworkTwo will be
a key differentiator, he questions whether smaller ISPs’ target customers–small and
medium-sized businesses–have a need for such services from their ISPs, and, if so,
whether they would trust those needs to a community ISP instead of a national carrier with
brand equity.

"Business services, by definition, are mission-critical," he says.
"Services become even more critical when it comes to transaction processing, VPNs and
extranets. National carriers … are more known to the customer and are more likely to be
picked for business services."

Keith Pinter, executive vice president with Epoch Internet, also questions whether
value-added services will help smaller ISPs compete. VoIP, telephony and faxing are
"neat concepts," but no one is really using them, he says.

"Our customers are using Internet access for Internet access," he says.
"There is more hype about the value-added services than demand for them. Our
customers are asking for virtual private networks and firewalls, and that’s what we’re
going to give them. We’re not going to waste the time or resources on value-added services
that sound neat but that no one really wants or is going to use."

Pinter says that many resellers are looking to value-added services because they simply
don’t understand their core business enough to make a success of it. "Many people who
get into Internet resale simply don’t understand the cost or time involved or the way that
it’s going to affect their business model," he says. "We believe it’s more
important for resellers to focus on training and education that’s needed for them to
succeed in their core business.

"That certainly doesn’t mean we’re not a leading-edge carrier," he says.
"We’re just not ready to fall on the sword and watch the blood pour with every new
service that comes along."

Denise Culver is a Spring, Texas-based freelance writer specializing in
telecommunications issues. She can be reached at [email protected].