InformationWeek

Shakeout Online

By Tom Davey

he number of Internet service providers has exploded o ver the past year, but the ISP glut is beginning to show signs of clearing.

There are now just over 4,000 ISPs in the United States and Canada, according to Boardwatch, a magazine that tracks the industry. That's up from about 3,000 at the beginning of this year and roughly 1,400 in early 1996. Publisher Jack Rickard expects the ISP population to grow to about 5,000 by the middle of next year and then start to taper off.

Most new ISPs have been small companies that mainly serve consumers and small businesses in local markets. They've jumped into this crowded field expecting to strike it rich by simply leasing and reselling the Internet plumbing of larger ISPs. But the competition is fierce, and many are losing money. To stay in business, these small ISPs are merging with large providers and forming alliances to host Web sites and deliver high bandwidth to businesses (see box below).

ISP Crowd Thins Out Recent events that highlight ISP consolidation GTE Corp., the largest U.S. provider of regional phone service, has agreed to a $616 million purchase of BBN Corp., which operates a major nationwide Internet backbone. WorldCom Inc., the nation's fourth-largest long-distance company, bought MFS Communications Co., the parent of UUnet Technologies Inc., in a $12 billion deal that will give WorldCom the nation's second-largest Internet backbone. Intermedia Communications, an ISP serving business customers in the eastern half of the country, has agreed to buy ISP Digex Inc. for $150 million. Digex will broaden Intermedia's ability to provide higher bandwidth and Web-hosting services in its market area. Two consortiums, Aimquest Corp. and i-Pass Alliance, are linking small- to midsize ISPs worldwide to pool their resources so travelers in foreign countries can check their E-mail and access the Internet for slightly more than the cost of a local call at home. Verio Inc., a Denver startup, has purchased equity stakes in 19 ISPs to form a tightly knit alliance of small providers throughout the country. DATA: VENDORS

Speedier Connections
This bodes well for users. As ISPs combine their networks, there will be fewer network hops between a Web site and the end user, making for speedier connections. Also, a flurry of mergers and alliances between ISPs and phone companies should enable one-stop telecom shopping-and eventually one-stop billing. And ISPs worldwide are banding together so travelers can log on to local dial-up ports nearly anywhere in the world to avoid long-distance charges ( see related story ).

All of this is possible, merger proponents say, without sacrificing personal services offered by local ISPs, including Web-site development. Many of these ISPs will retain a local presence and identity.

EarthLink Netw ork Inc., one of the biggest national ISPs with 320,000 customers and a staff of 710, this week will announce a strategy to buy out the customer bases of smaller ISPs. "We'll have a program to work with owners of small ISPs to convert their customers to the EarthLink service," says Sky Dayton, CEO of EarthLink in Pasadena, Calif. "But instead of our buying these ISPs, they can keep their own identities."

EarthLink's plan, says Dayton, is to convince smaller ISPs to give their customers EarthLink Internet startup disks. If customers sign on, EarthLink will hook them up to its network and handle billing and services-and pay the smaller ISPs for the new customers. The smaller ISPs, many of whom got into the business because they design Web sites, can leave the day-to-day rigors of providing bandwidth and focus on Web design.

Many users benefit from their local ISPs aligning with larger providers. Powell's Books, a Portland, Ore., used-books vendor, for example, went on the Web in 1994 through a small ISP called RaiNet Inc., which is located in the same building as Powell's main bookstore. Last year, Powell's began selling books from all of its specialty stores on a single Web site. As business boomed, the company needed to increase its bandwidth to T3 capacity (45 Mbps), which is not available from most small ISPs. The bookseller also wanted more storage capacity on its ISP's servers, says Kanth Gopalpur, Powell's corporate marketing director. Powell's was considering moving to a larger ISP that could offer these services.

But then RaiNet became part of Verio Inc., a Denver consortium of 19 small ISPs providing service nationwide, and began offering higher bandwidth and other services such as database management. So Powell's is sticking with RaiNet.

Gopalpur hopes Verio will help RaiNet deliver even more sophisticated services. "Our coffee shop is the key literary center in Portland," he says. "We want to duplicate our physical store online, and we still need expertise for chat rooms."

The big gest corporate users are eager to see phone companies merge with ISPs. They expect this to result in one-stop shopping and eventually consolidated billing, says Chris Mines, an analyst at Forrester Research Inc. in Cambridge, Mass.

For example, the Texas Association of Realtors, which used to deal with three separate vendors for phone, cellular, and Internet services, now buys all three from GTE Corp. and receives discounts for bundled services. GTE has agreed to buy ISP BBN Corp. in Cambridge. "With GTE, we can negotiate better rates and options for our people in the field," says Sam Roberson, senior VP of the Austin, Texas, association. The average realtor pays $17.95 a month for unlimited access, "and that's through very good equipment," he says.

Alan Taffel, VP of marketing at ISP UUnet Technologies Inc. in Fairfax, Va., says a key reason UUnet merged with long-distance company WorldCom Inc. was so it could offer customers one-stop shopping. "We're spending more than $1 million a day in network improvements, and our traffic load is doubling every one to two quarters," he says.

No Cure-All
But Forrester's Mines says telcos won't immediately solve all users' problems. "I don't agree that the telcos are nirvana," he says. "Service, support, and vision are not the strengths they bring to the market." For telcos to do a good job providing a complete Internet service to corporate customers, Mines adds, they must incorporate security measures such as firewalls directly into their networks, rather than keep them on customers' premises.

Non-telco ISPs, meanwhile, say dissatisfaction with phone companies will increase demand for their services. "We've found that people going on the Internet are suspicious of the Bell companies," says Sean Brophy, Verio's VP of marketing. Brophy is betting that phone companies' technical and sales forces will have inadequate skills to deal with complex demands of users.

Also, even the biggest telco networks can get overloaded. A Boardwatch magazine stu dy appearing in the July issue will show that MCI-despite its boasts of having the world's largest Internet network-offers only mediocre throughput from its Web site.

ISPs that speed connections may well be the big winners. A major bottleneck in delivering fast Internet service, say heavy-bandwidth users, is the number of hops data must take across ISP networks as it travels from a Web server to the end user. As ISPs merge their networks, the number of hops is reduced, making for faster service.

Peering arrangements-points where ISP networks link with each other-are vital to Total Entertainment Network in San Francisco, a BBN customer that provides a service for users to play computer games over the Net. High bandwidth and an uninterrupted stream of packets are necessary for such a service, says Dave King, chief technology officer at Total Entertainment Network. "We have 800 to 1,00 0 customers playing games at peak hours," he says. BBN's planned merger with GTE, King adds, should let BBN more quickly expand its network and number of peering points.

As the ISP consolidation continues, users stand to benefit from perks such as increased bandwidth and one-stop shopping, while still enjoying personal services such as Web-site development. This is one situation where less could very well be more.

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