ISPs share urge to merge

Feeling abandoned by his old Internet service provider (ISP) and ripped off by his new one, Chicago attorney Mark Bauer is piping mad.

Bauer is now on his fourth ISP in three years -- and not by choice.

"It was as if my ISP had changed overnight," Bauer says. "I started getting busy signals. And tech support became a 20-minute wait."

In fact, Bauer's ISP had indeed changed overnight. His old provider sold out to a new one.

Bauer is one of thousands of ISP casualties caught in the crossfire of a raging war among providers. ISPs are merging, selling out, and gobbling up one another on a daily basis.

Consolidation doesn't always adversely affect an ISP, and sometimes improves service. But for others, obligatory switches are akin to the paperwork headaches customers sometimes inherit when banks merge. Both experiences often leave customers feeling disenfranchised.

"Not only did the new service stink, I had to notify everybody of my new e-mail address, and reconfigure my system," Bauer says.

The Big Get Bigger

ISP consolidation is well under way, and is expected to continue until the field narrows to a handful of players. Once dominated by small "mom-and-pop" ISPs, those players are now overshadowed by large regional players. America Online, AT&T WorldNet, and Mindspring now dominate the field, says Greg Tally, editor at Boardwatch magazine.

Today there are 6,000 ISPs, but the top ten account for 80 percent of the estimated $US3 to $4 billion market, Tally says. Meanwhile, thousands of small to medium-sized ISPs are slugging it out for the remaining 20 percent.

Many believe that number will soon shrink to 500 and the ISP business will consolidate just as drastically as the telephone industry. But they're still waiting. Today, the frenetic pace of ISP consolidation is still outpaced by the exhaustive birthrate of new ISP startups.

Business is a continual case of "eat and be eaten," say participants in the booming ISP trade. This year, 17 million new users will go online for the first time, say market researchers. With that kind of explosive growth, there is still plenty of room for entrepreneurs to become millionaire ISP owners, says David McClure, executive director of the Association of Online Professionals, an industry trade group.

"There is virtually no barrier to entry," McClure says. "For less than $10,000 anyone can start an ISP."

In the last six months alone, 1,000 new ISPs popped up, says Tally. "Most will fail. But some will survive, merge, or acquire others," he says.

When Will It Stop?

It's still not clear when exactly ISPs will consolidate faster than new ones start up. Some suggest new technology like broadband Internet access will narrow the field by virtue of the exorbitant up-front costs associated with the technology.

"Right now dial-up is the only game in town," says Bruce Kasrel, analyst with Forrester Research "There is not a big difference between AOL and the mom-and-pop ISP."

Small ISPs can't afford to wire neighborhoods with expensive broadband cabling. And as the demand for advanced services rises, the little guy is going to get squeezed, Kasrel says.

Others say the vicious circle will continue as long as new users sign onto the Internet.

Marauders

"It's eat or be eaten," says Douglas Hanson, chairman and chief executive officer of Rocky Mountain Internet. "ISPs need deep pockets and reliable service to survive this consolidation frenzy." Most ISPs don't have what it takes, he says.

Rocky Mountain Internet is an ISP and an Internet backbone provider with dreams of offering its services nationwide someday. It buys about one ISP a month, which Hanson says is the easiest way to grow. Today, Rocky Mountain Internet has about 35,000 dial-up subscribers, making it one of Colorado's largest ISPs.

Competition from large players prompts many independent ISPs to sell out, Hanson says. Buyers are typically aggressive ISPs like Rocky Mountain Internet that wrote "buying the competition" into their business plans. Other frequent buyers are long-distance carriers, cable companies, and utilities.

Some deals have been huge. In November, Rocky Mountain Internet paid $1.7 million in stock for Kansas-based Unicom Communications, which had 3,500 subscribers.

The Train Wreck

Make no doubt about it: Internet access is a buyer's market. Consumers benefit from cutthroat competition among ISPs. The wars drive companies to offer an unlimited use model that challenges, if not eliminates, profitability for some of them.

The participation of long-distance carriers like MCI and AT&T haven't hurt the consumers' market position, either. Their experience of managing large networks and pioneering new DSL technology has brought enormous expertise and innovation to the industry, says Jill Frankel, an analyst with International Data Corp. (IDC).

Cable companies are also moving quickly to build capacity and stability. "It's not just about dial-up anymore," Frankel says.

"Consumers are just going to have to accept that change is the only thing they can count on, cliché as that may be," Boardwatch's Tally says.

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