Telcos gobbling up ISPs

ICG Communications (IGCX) isn't exactly a household name. Neither is WorldCom (WCOM). The two now have something else in common: Both have purchased Internet backbone companies.

Today's merger announcement between ICG and Netcom (NETC) serves as further evidence that the Internet provider sector is consolidating.

WorldCom bought backbone provider UUNet (UUNT) last year and has been on a buying spree ever since. In addition, it announced plans to grab the lucrative business divisions of both America Online (AOL) and CompuServe (CSRV). (See related story)

Analysts have long predicted that larger players would snap up smaller ISPs. It appears they were right.

Telephone companies--especially smaller, nimble ones--appear to be gobbling up ISPs in order to have a strong Internet presence without having to start from scratch.

Allen Weiner, an analyst with Dataquest, looks at the mergers and sees the future.

"We're seeing what I believe will be the profile of a 21st century telecommunications company," he said. Unlike giants such as AT&T and MCI Communications, smaller companies are able to move quickly.

Companies like WorldCom and ICG will be able to offer companies complete "end-to-end" solutions, Weiner added. "It's the kind of leveraged strategy that allows a company to go in and get the entire telecommunications budget. There's a window of opportunity in which companies like WorldCom and ICG will be able to swoop in and grab market share from AT&T, and they won't be able to get it back."

Medium and larger ISPs just need to find a good asking price, according to Weiner. Small ISPs, however, will have to work harder to occupy that special niche and to stay competitive by providing excellent service or catering to special clients.

Abhishek Gami, vice president at Nesbitt Burns Securities, predicted that the Netcom purchase itself will have a moderate impact on the industry.

But he agreed with Dataquest's Weiner that this deal, most importantly, underscores the shakeout in the marketplace. "Consolidation is beginning as facility-based companies acquire companies with data networking expertise."

Netcom was an especially good buy because it owns its own routers and can "peer" at all the network exchange points, meaning that it doesn't have to pay other providers to carry its traffic. It also has a Web hosting service that made it even more attractive as an acquisition target.

"The issue is what is your value-add," said Ted Julian, Internet research manager at International Data Corporation. "It's not a black-and-white issue. The more you own your network, the more choices you can offer your customers."

Reporter Courtney Macavinta contributed to this report.