The boom times are long over for Internet service providers (ISPs). Since the dot-com bubble burst in 2002, a sector that was once able to sustain hundreds of suppliers simply through voracious demand for online services has become a battleground for survival, blighted by over supply and commodity pricing. Today, to win business and earn profits, ISPs have to do a lot more than just provide a pipe to the Internet.
There is certainly no profit left in reselling network bandwidth. In the last three years, prices have dropped by around 90% on some connection types and are continuing to be eroded at a steady rate, says Steve Barnett, managing director of BackChannel, a network monitoring software vendor.
And it's not just plummeting prices that are plaguing ISPs. With so many competitively priced services to choose from, customers are showing a distinct lack of loyalty. Today, says Barnett, annual churn rates that hovered between 3% and 5% in the late 1990s, have leapt pass 25% and show no sign of decreasing.
Given that, it is no coincidence that many of the world's leading ISPs and carriers have overhauled their senior management during the last year. And, in almost every case, these executives have been recruited for a common purpose: to change the focus from a pursuit of market share to profitability.
"Compared with a few years ago, we're seeing a huge shift away from the speculative development of networks towards the real profitability of networks and service providers," says James Eibisch, an analyst at industry research group, IDC.
To some extent, ISPs are being helped in their search for profitability by the accompanying fall in operating costs. But that is not enough to help them turn the corner. ISPs also have to learn new skills, and build new services.
As a result, companies that were once simply access providers are nowadays becoming expert in running secure, resilient, fully managed networks. With bandwidth relegated to commodity status, the quality of the network is what now differentiates the leading pack of ISPs.
However, to offer truly high quality network services, ISPs need end-to-end control of their networks, and with BT retaining near-exclusive control of the last mile, that is still proving difficult.
Sharing the network
Still, even if progress is slower than the ISPs, and most customers would like, local loop unbundling (LLU) is beginning to make a difference. With the regulator, Ofcom, keeping up the pressure on BT, analysts such as Forrester Research are predicting a sharp rise in LLU activity.
Since May 2004, BT has grudgingly cut shared-access charges by 70%, encouraging ISPs such as NTL and Cable & Wireless to plan on unbundling 300 and 400 BT exchanges respectively in the second half of this year. As a result, the UK Telecoms Adjudicator (OTA) expects today's 31,000 unbundled lines to be joined by 2.5 million more by the end of 2006.
LLU is vital to the health of independent carriers and ISPs. Without it, says market watcher Analysys Research, there is no way for them to ensure that their end-to-end quality of service (QoS) matches that of conventional leased lines.
Not surprisingly, ISPs like NTL are keen for LLU to accelerate, even though, as Lucy Green, director of product marketing at NTL Business concedes: "With the introduction of local loop unbundling, the competition is going to open up more and that's good and bad – we can extend our networks and delivery of products more effectively but there will be more competition."
To meet this competitive challenge, ISPs must ensure their services stay abreast of network technology trends, and right now that means investing in services based on multi-protocol label switching.
Multi-protocol label switching
MPLS is good news for network operators because it allows them to optimise their bandwidth consumption and reduce the cost of network management. It is also proving popular with customers, because it enables them to more closely match their capacity requirements and network QoS level with business requirements.
Now, all major ISPs offer MPLS, to varying degrees, and customers looking to migrate and converge disparate networks (usually as a result of acquisitions) invariably opt to adopt MPLS.
For example, radio broadcast network operator, GWR, opted for an MPLS IP network from Thus, the UK ISP, to replace a costly satellite network, and in doing so was catapulted into a new age. Using MPLS' ability to prioritise traffic and guarantee bandwidth to key applications, GWR can now route live broadcast traffic across its network, enabling it to dispense with expensive satellite links. And, there is the added bonus that its normal voice and data traffic now piggy-backs on its broadcast network at virtually no extra cost.
More and more customers are looking to move away from leased line networks that are driven by relatively inflexible frame relay and ATM switches, and are increasingly looking at converging their voice and data traffic onto one simple network.
According to IDC, voice traffic carried across a broadband link took off in Western Europe in 2004. Two million new connections brought the total number to 2.5 million, and that is expected to rise to over 22 million by 2008 when it will yield $7 billion in revenue.
Around 40% of this new revenue will come from the business market, and ISPs are already queuing up to grab their share. To boost revenues, they are rushing to bolster their services portfolio, offering customers a multitude of extras – in the form of web hosting, domain registration, co-location, security and managed services. Once inside a business, the cross-selling opportunities for ISPs are considerable – particularly as many customers are increasingly seeking the simplicity of paying a single bill for all their communications needs.
Hopefully, from the ISPs' perspective, as the services they offer become richer and more sophisticated, customers will also become less price-focused and more concerned with building relationships with trusted suppliers.
Certainly, MPLS can only help in this respect, says Alan Ryan, director of broadband at ISP Easynet. "Customers typically go for contracts of three or five years. I don't think churn is a risk when MPLS is involved," he says.
But not everyone is so optimistic. "A three-year contract may be acceptable if it allows for price negotiation (crucial given falling bandwidth prices) and technology upgrades, as well as exit clauses in case the ISP files for bankruptcy or undergoes a change in control," says Gartner analyst Lydia Leong.
Nor are all other ISP services likely to prove as sticky as MPLS. Despite ISPs offering a mass of services, only 22% of FTSE 350 customers are currently using their ISP as a hosting provider, according to BackChannel's Barnett, who believes that ISPs should offer incentives to get customers to make the switch. Sweetening the deal with added security guarantees may prove to be a good incentive for this.
Securing the network
"IT directors don't necessarily get fired for spending too much, but security is often the result of their downfall," says Nigel Stevens, product director at Thus.
ISPs have two ways of offering a security service: they can either partner with a security specialist or do it themselves. Forrester warns that before buying network-based security services from a network provider, customers should re-evaluate and simplify their Internet connectivity architecture and ensure they can trust in the security infrastructure and skills of their chosen provider.
Pipex, whose latest financial results show significant growth, provides security services bundled with its hosting products. "Security is a key driver," says Sean Stephenson, head of products at Pipex. But it is also a moving target. "Things that are seen today as value-add, such as denial of service protection, will one day become a commodity too," he adds.
Within the next 12 months, Pipex will be allowing its customers to choose the degree of embedded security they require, and will provide tools to manage and monitor unsolicited bulk email. "We see customers who are buying a single service looking closely at price. But when you provide a bundled solution people are looking more at overall value to the business," he explains.
And there is certainly a sizeable opportunity for ISPs to turn that value into revenue. IT industry advisor, Gartner, estimates the total worldwide market for IP services will reach $63 billion in 2005.
The question is, to what degree does the customer actually want these added services?
Richard Yeo, CTO of the EasyGroup chain, is not convinced. "We try not to partner with ISPs. There's no point agreeing a 'strategic price' because it's not worth the paper it's written on," he says. When opening a new Easy Internet Café, for example, Yeo's company selects the cheapest ISP to provide the bandwidth store by store.
"If we want a fully managed service, we go to a specialist," says Yeo.
The future of the network
Nonetheless, as ISPs move up the food chain and as customers increasingly consider switching from leased lines to IP-based broadband services, the ISP market will continue to consolidate. And that means that scrutinising the financial and technical strength of any prospective ISP partner is more vital than ever.
The battle for survival will start with the quality of the network but it will ultimately revolve around the types of services customers demand. At NTL, Green believes the ability to provide both mobile and fixed- line services will become increasingly important as more customers invest in wireless devices. Others are already pondering the impact of the next phase of MPLS development, virtual protocol label switching (VPLS). VPLS is more than just MPLS mark II, says James Eibisch, a research analyst with IDC. "It's a service that lets the service provider extend their customer LAN environment over the WAN." This capability is likely to be particularly attractive to more security-conscious companies.
It remains to be seen which services will prove most popular, but there is one constant in the ISP market. With a 53% rise in business Internet connections in 2005, ISPs know there are still lots of customers worth fighting over.