ISPs Search for New Revenue Streams

ISP subscription fees from US households are currently running at a rate of $7 billion per year, but as the Internet continues to evolve, ISPs must examine other revenue-generating opportunities to remain competitive, according to research by Gartner Group’s Dataquest unit and Frost & Sullivan.

According to Dataquest analysts, there are two emerging trends that threaten the income streams of ISPs.

“A serious issue for ISPs to consider is the rapid decline in the growth at which new households will become subscribers,” said Dr. Harry Hoyle, vice president for Dataquest’s e-Home: Telecom and Online Services US program. “This alone will result in the lower growth rate of consumer expenditure on home PC-based Internet access from 39 percent annually from 1996 to the middle of 1999, to a projected 8 percent annual growth through 2001.”

The second issue for ISPs to address is the expanding “free-to-user” mentality. Dataquest analysts said more US consumers will expect free Internet access in the future.

“Free Internet access at conventional modem speeds is already offered by email only services, as well as some smaller ISPs,” Hoyle said. “While it’s unlikely that US households will migrate en masse to free access providers, the growth in households with free Internet access will accelerate due to the intense competition for the remaining new subscribers and the need to retain existing subscribers.”

According to Dataquest analysts, US companies should examine how European ISPs are handling the free-access issue in the region. European companies have been finding ways to drastically reduce the cost of customer acquisition using relationships with major brick-and-mortar brands such as banks and retailers. In some instances, it is simply a case of merchants outsourcing to their ISPs, but others are co-branded ventures, such as Woolworth’s agreement with AOL’s Netscape Online service in the UK.

“These new relationships offer established brick-and-mortar retailers an opportunity to quickly launch a presence on the Internet,” Hoyle said. “Conversely, it offers ISPs a way of enriching their sites to attract more transaction income that will replace the revenue lost from Internet access subscriptions.”

The Frost & Sullivan report “US Internet Value Added Services Market” found that ISPs and Web hosting firms must distinguish themselves from the 4,000 competitors in the marketplace in order to succeed.

“It is not enough any more just to offer Internet access,” said Frost & Sullivan analyst Generosa Litton. “Services such as Web hosting and application hosting are both key value-added services that enable a firm to stand out in a ‘noisy’ market.”

According to the report, the market for Internet value-added services generated $1.47 billion in 1998, a 316 percent increase over 1997. The report also found the value-added services market to be poised for tremendous growth, led by the increasing use of the Internet as a marketing and distribution tool, the need for management and support services, and new technologies.

“The availability and affordability of broadband technologies, such as xDSL and cable modems, will increase the demand for complex Web hosting and application services,” Litton said.

Litton also said that companies able to maintain high-speed, high-capacity network infrastructures and offer security systems, redundancy, and scalability to support growth will be winners in the marketplace. Their ability to provide technical support, customer care services, a competitive pricing structure, and customization of products and services will help differentiate themselves from competition.

On the other hand, Litton said, if ISPs wish to survive, they must be aware of potential e-commerce taxation and competition from global telecommunications companies and large software firms. Consolidation could also threaten existing partnerships and reduce a firm’s ability to offer value-added services.