ISPs: Defying Difficult Times

Internet service providers say profitability is the greatest challenge now facing their businesses and that adding subscribers is essential to enhancing their bottom line profit. They also rate keeping churn rates low and customer satisfaction high as equally challenging issues according to a recently released survey of visitors to InternetNews’ sister site ISP-Planet.

InternetNews parent company, Corp., together with Edgix Corp. and Insight Express LLC, surveyed more than 1,000 visitors to ISP-Planet in order to determine how ISPs plan to survive and thrive in today’s market.

The resulting study, The ISP Market: Challenges and Strategies for the Future, found that service providers recognize offering plain-old dial-up access isn’t enough anymore. Shrewd ISP operators are actively diversifying revenue sources by firing up broadband programs and deploying value-added services.

In fact, more than 70 percent of the respondents said they currently offer broadband access, adding that high-speed services would become increasingly important to ISPs as the connectivity market matures.

Overwhelmingly, the most popular form of broadband access offered is Digital Subscriber Line, with 72 percent of the ISPs surveyed saying their high-speed access is delivered over DSL. But that is also likely to change because DSL access presents a number of problems for ISPs looking to make a splash in the broadband market segment.

Some of those issues include:

  • Industry experts put the cost of acquiring new DSL users in the range of $600 to $1,000 per client, compared to $105 for picking up each new dial-up subscriber.
  • Several recent studies indicate that cable subscribers are more satisfied with their broadband service than DSL users, compounding the cost of acquiring new customers as a factor of potential customer churn.
  • While DSL access remains popular among small businesses, residential customers remain largely ignorant on the subject of broadband connectivity options.

Indeed, most of the residential revenues earned by ISPs are still derived from dial-up access. But ISPs will find it difficult to increase revenue from residential users unless they can convince them to adopt high-speed technologies or pay for value-added services like training, e-mail filtering and anti-virus protection.

Meanwhile, fixed wireless is another factor that may further erode DSL market share. Of the ISPs currently providing high-speed access, 30 percent utilize fixed wireless technologies. And 40 percent of the ISPs that currently don’t offer broadband access said they intend to offer fixed wireless solutions for home and office use. The ISPs are eager to adopt the technology because fixed wireless systems don’t present the last-mile bottlenecks that DSL and cable-based services face.

ISPs are also branching out in an effort to increase revenues. Eighty-four percent of the respondents said they generate additional revenue from services other than Internet access, including Web hosting, e-commerce and collocation services, as well as communications infrastructure services. These value-added services can be marketed to existing clients for much less than it costs to attract new customers, so value-added services are an opportunity for ISPs to produce higher profit margins from services sold to current clients.

But those value-added services are still a relatively small part of most ISPs’ businesses. Half of the ISP respondents said less than 25 percent of their total annual revenue comes from value-added services. Among those ISPs that offer additional services, more than 80 percent said add-on programs account for half of their total annual revenue.

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