ISPs find safety in small numbers

When Terry Womack offered Net access in Duncan, Oklahoma, two years ago, it made the front page of the small town's newspaper.

With 650 customers today, Womack doesn't sweat big-city analysts' bleak forecasts for most ISPs. Not only is Internet-Duncan profitable, but local customers pine for its hometown hospitality.

Internet-Duncan isn't the only Net service provider that has built a viable business--miniscule as it may be--offering reliable dial-up access and Web page hosting for around the same price as the big players. In fact, Womack's four-person company has a good chance of surviving the anticipated ISP shakeout, according to a new report by the Gartner Group.

Gartner predicts that 80 to 90 percent of the 4,500 ISPs in the United States will be out of business in the next five years, but the report noted that much of the consolidation will occur at the top level of the market. "We think small ISPs are going to be the ones that survive," Gartner analyst Eric Paulak said in a teleconference yesterday.

The effective combination of network reliability and hands-on service are helping providers like Internet-Duncan weather the coming storm in the ISP market, while bigger firms struggle with the imperatives of growth: expensive infrastructure upgrades (and the associated glitches in service) as well as limits in their ability to support a broad base of customers.

Most analysts consider an ISP with less than 10,000 customers to be small. Services with a clientele between 50,000 to 300,000 people are categorized as midsized, but some say the range is up to 500,000 subscribers. The "big Kahunas" are pushing the 1 million mark in members, with the largest provider in the land, America Online, boasting 8.5 million of them.

For small ISPs, staying afloat means giving tender, loving customer care, not cutting prices. In fact, Internet-Duncan charges between $24.95 and $29.95 per month, more than the going flat-rate of $19.95.

"Our main focus is on maintaining the hallmark of our business: a high level of customer support. People have a choice of where they want to buy commodities; how we set ourselves apart is personal care and quick response," Womack said. "If someone's modem is not installed properly, for example, we tell them to bring the computer down here. We'll solve these problems for free as a part of our basic service."

As less tech-savvy consumers increasingly get online, the demand has grown for customer support and personal interaction. For example, Womack takes calls at almost any hour from his customers. The banking sector also shows consumers are getting fed up with automated telephone help lines or speaking to a different representative every time they call. Local banks also are luring converts with promise of personalized service.

"People we've interviewed in the last six months are loyal to these little guys, because if they have a problem with their Net access they know the company is ten miles away," said Kate Delhagen, an analyst for Forrester Research.

"Some of them have managed to hang in because they have success with offering service to schools and local nonprofits--groups that may be too small to be on a large ISP's radar," she added. "When an actual body shows up to help set the service up, that's a useful thing."

Local outreach is the tool many small ISPs are using to stay in their customers' hearts. Internet-Duncan holds weekly classes for Net newbies and has given some schools free accounts.

U-Tech.Net in Southern California uses similar tactics. Serving the cities of Lompoc, Santa Maria, and Santa Ynez, U-Tech launched in November of 1995. It has 2,300 customers today, gained through local cable TV ads and by placing banners on the sides of buses. The 12-person company has lost about 15 percent of its customer base over the years mostly due to people moving out of the area, but its numbers continue to climb steadily.

Charging $20 per month for unlimited access, U-Tech is also making money. Owner Ronald Harris attributes his profits to being rooted in the community. "We provide free hookups for the libraries and focus on local advertising and the community," he said.

U-Tech will remain a small ISP, Harris added. "We can't compete with the corporate giants that have deep pockets. We have to look at what is cost-effective."

Mom-and-pop providers often have launch problems, which could lead to sudden death. But midsized ISPs face an even bigger hurdle when they try to surpass the 300,000 to 500,000 customer mark, analysts say. This is known as the "dead zone," the stage in which an ISP sinks money into beefing up its infrastructure to accommodate new customers. At the same time, customer service sometimes suffers.

Thousands of attendees at the Internet Service Provider Convention in San Francisco today will also explore these issues. Sponsored by Boardwatch magazine, the conference runs through Saturday.

The trend has caused the consolidation of some midsized ISPs, Gartner's Paulak said, pointing to GTE's purchase of BBN Planet, Intermedia's buyout of Digex, and WorldCom's ownership of UUNet Technologies.

"EarthLink got through the dead zone by investing heavily in infrastructure in the right areas and avoiding areas where we couldn't be best-of-breed," said Sky Dayton, founder of EarthLink, which has 340,000 subscribers. "We also decided to invest on technical infrastructure in [our] data center and not in a large-scale national backbone. It would make about as much sense as having our own power generation plant to serve our offices. Sure, we have generators, but the power company is better at generating power than we are."

Dayton also believes that the middle class of ISPs are feeling the squeeze. "There will continue to be a major polarity between lots of very small players and handful of large players who get scale. It's the difference between Wal-Mart and the corner grocer. Both provide a valuable service and can be profitable in their businesses, but their economics and scale are very different."

Still, some small providers have left a bad taste in customers' mouths. In June, Hyper Net USA canceled Cyberfreeway, which was promoted as all-you-can-eat access for a one-time fee of $29.95. In April, j3 Communications ended its free, advertiser-supported service after only three months. BOSnet Communications and an affiliated company, USFreeway, also offered nearly free access but fizzled out as well.

Womack said unlike other inexpensive small ISPs, his company won't disappear anytime soon. "We will lower prices where we can, but this is what it takes to pay the bills. Our profit is not huge, but we can pay salaries and we're not in the red. We're in it for the long run."