Local ISPs may survive shakeout

In another doomsday pronouncement for Internet providers, the Gartner Group predicts that a large majority of the 4,500 U.S. ISPs will be forced out of business in the next five years.

Jeff Pelline Staff Writer, CNET News.com
Jeff Pelline is editor of CNET News.com. Jeff promises to buy a Toyota Prius once hybrid cars are allowed in the carpool lane with solo drivers.
Jeff Pelline
3 min read
In another doomsday pronouncement for Internet service providers, the Gartner Group predicted today that a large majority of the 4,500 ISPs in the United States will be forced out of business in the next five years.

In a teleconference today, the consulting firm cited increased competition and what it called user demands for upgraded "performance-guaranteed" services.

The big investment required to upgrade the Net infrastructure also will bring an end to today's flat-rate "all you can eat" pricing structure, the Gartner Group said. It predicted that 75 percent of the Internet services for large enterprises will move to usage-based pricing by 2001, adding that ISPs such as Netcom, BBN Planet, and UUNet already are making the switch.

"There's been a lot of talk that small ISPs have driven the industry, but we are expecting a large consolidation," said Gartner analyst Eric Paulak, who thinks that in five years 80 percent to 90 percent of today's ISPs will be gone, leaving 400 to 500.

But Paulak said much of the consolidation will occur at the top end of the market. "We think small ISPs are going to be the ones that survive," said Paulak, pointing to GTE's purchase of BBN Planet, Intermedia's buyout of Digex, and WorldCom's ownership of UUNet Technologies.

Like other pundits whose shakeout predictions have proven wrong, Paulak thinks telephone carriers pose the biggest threat to small Internet access providers.

AT&T has become the largest ISP that's not an online service largely based on its brand name. Although most Bell companies have been slower than AT&T to jump in, for both regulatory and strategic reasons, Paulak thinks the regional carriers will fare well with consumers and small businesses.

But he thinks the most viable ISPs to hang on will be concentrated in local or regional markets and will offer services beyond fixed-price Net access.

Paulak mentioned services such as Web hosting for both consumers and business customers and consumer-oriented local content, largely through partnerships with local media outlets.

For businesses, he thinks ISPs that offer remote monitoring of corporate Web services, security services, and local virtual private networks (VPNs) will be most likely to thrive.

Gartner Group also predicted that companies that are helping to fund the "Internet 2" project will begin to use the research and development dedicated to those efforts to introduce similar services to the commercial world. Internet 2 refers to a network being built by a group of 100 universities that want to build a speedy network to sidestep constraints of the public Internet.

Among the other predictions are the following:

  • Most consumers will continue to be "bandwidth constrained" through the year 2000, largely because they cannot afford the $50 to $60 monthly rates for cable modem access. Sixty-five percent of Netizens will still access the Net via dial-up modems by 2001, and up to one half of U.S. households will not be able to afford any Net access service through 2002.

  • XDSL will gain ground on both cable modems and ISDN services by the year 2002.

  • All of the Fortune 500 companies are expected to install frame-relay services during the next five years, so less than five percent will use the Net to support wide area intranet needs by 2001.