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New rental deals allow anyone to be an ISP

It's only a matter of time before companies like your local hardware store begin offering their own ISP services, as firms offer network equipment leasing programs.

It's only a matter of time before Joe's Hardware down the street starts offering its own Internet access service, and it might even be free.

Joe isn't about to install a bank of modems or string high-speed wires connecting his store to the Internet. Instead, as prices for network bandwidth fall, telephone companies and start-ups have shown a new willingness to provide leased access to the equipment that connects users to the Internet. This combination is making it possible for virtually any firm to offer its own Internet service.

This may shake up the ISP market, as more Web firms follow search directory AltaVista into the Net access business and as companies such as newspapers and banks begin pitching connection services to their customers. Already, companies like Microsoft and AOL have crafted cut-rate plans and other incentives to keep subscribers flowing in.

"I don't see a lot of existing subscribers moving over," said Joe Laszlo, an ISP analyst with Jupiter Communications. "But I do see these services playing an important niche role, getting 10 percent or more of the market a few years out. And that's a lot of people, given how quickly this market is growing."

Rock stars and billionaires The marketing pitch is simple: ISPs control the connection between the consumer and the Internet, a conduit through which hundreds of billions of dollars in e-commerce will soon be flowing, if analyst estimates are to be believed.

Having a consumer use a Sony- or a Bank of America-branded service would be an invaluable marketing opportunity on its own. But to boost the value of that initial connection, a company could also provide its own Net services, such as banking or online entertainment.

A few companies and individuals jumped on this idea early. David Bowie, a rock star well versed in adapting to the leading edge of current trends, began offering his own BowieNet ISP service a year ago.

Computer manufacturers, such as Dell Computer and Compaq Computer, represented the first industry to take advantage of this new market opportunity. Many firms now offer their own services--bought from MCI WorldCom or another wholesaler--or send customers to a single preferred ISP partner.

But it is the advent of free services that have begun to alter the market fundamentally.

AltaVista, the Web portal now owned by CMGI, jumped into the game in August, offering an ad-supported service to its subscribers. The offer attracted 225,000 subscribers in just two weeks--though the company has not released figures detailing how many of these people actually stayed on board to use the service.

Last week, teen Web site Bolt.com signed its own deal with free ISP wholesaler 1stUp.com, and 1stUp executives say more deals with online and offline companies are on the way.

"Online firms have more experience with online advertising, and so were quicker to see the advantages of adopting this model," said Jonah Steinhart, 1stUp's vice president of marketing. "But we believe that traditional retailers, particularly banks and newspapers, will see this as a good medium to help build out their online presence immediately."

AT&T, MCI WorldCom's UUNet, Level 3 Communications, and PSINet all have been active in selling their Net access services wholesale to other ISPs and to companies which don't yet offer Net access.

ISPs have long outsourced parts of their network infrastructure to other companies. But many of the large ISPs have preferred to keep as much of their equipment under their own control as possible.

"In a sense, companies like AT&T risk cannibalizing their own ISP customers with these offers," Laszlo said. "Their WorldNet customers could go to whatever company AT&T sells the bandwidth to. But they're beginning to think it's better to keep that traffic on their networks, rather than losing the business altogether."

Level 3 helped jump-start the market almost inadvertently when it offered a cut-rate offer on network bandwidth early this year. Three firms--EarthLink, free ISP NetZero, and start-up ISP Liberty Bay--jumped on the offer, winning extremely low costs for network space for a period of several years.

Liberty Bay now uses Level 3 for all of its infrastructure needs, offering only customer support and billing functions on its own. The firm has found that this "virtual ISP" model allows it to offer dial-up service for just $8.95 a month--far under the industry average.

But this low price means that other ISPs and large Web players are now asking to buy Liberty Bay's service and resell it, putting the company in the unexpected position of a wholesaler, largely because of its Level 3 contract.

"This wasn't even in our original business plan," said Todd Ostrander, CEO of Liberty Bay. "We were just in the right place at the right time."

Analysts say many small ISPs will likely begin moving toward this wholesale model in the future, as the deals offered by AT&T or Level 3 wind up being cheaper than their own infrastructure costs. Larger ISPs, which have their network in place, will likely be less amenable to this model, however.

But the type of company that will buy wholesale service and set up an ISP is likely to change radically, analysts say.

Church groups, entertainment companies, grocery stores, or any other group with a compelling reason to attract subscribers will have a shot at becoming an Internet "distributor," some analysts say.

A recent Jupiter Communications survey found that 47 percent of Web users would consider switching to one of these company- or group-branded ISPs if there was some incentive involved. These could run from simple free service to special filtering for church groups, free flyer miles for airlines, or secure checking services for banks.

"The more of that incentive a company is able to offer, the more likely they are to succeed," Laszlo said.