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Research by Industry/Sector October 30, 2014  
Internet Service Providers-Outlook

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SOFTWARE & INTERNET TECHNOLOGIES
INTERNET ACCESS TECHNOLOGIES
Internet Service Providers


HIGHLIGHTS

The number of ISPs in the US is stabilizing as companies seek to shore up and create new revenue streams. ISP revenue in 2000 was $23.7 billion.

ISPs seek to offer more value-added such as web hosting and email services, as free access services decline in subscribers.

ISPs growth overseas is accelerating at a rate of 25%, especially in Europe and Asia. Internet use in these regions grew 76% in 2000.

The number of DSL and Cable Modem Internet Access users continues to grow.



Industry Sector Definition & Glossary

Definition

An Internet Service Provider (ISP) is a network operator, who provides direct access to the Internet, and whose core revenue is based on the billable use of this network. Some ISPs also provide additional Internet utilities and services, such as e-mail, news group readers, chat rooms, and other items of interest to their subscribers. Users access ISPs by dialing up over a phone line using a computer modem or via a dedicated line installed by the access provider.

ISPs are divided into three categories:
Tier 1: Network Service Providers
Tier 2: National Internet Service Providers
Tier 3: Regional/Metropolitan ISPs

Glossary

IDSL ISDN Digital Subscriber Line: Generic term for a basic symmetrical service that uses digital modems to achieve speeds of up to 144 KBPS in both directions over ISDN-loop equivalent distances (about one mile).

ADSL Asymmetric Digital Subscriber Line: Digital modems attached to twisted pair copper wiring that transmit from 1.5 MBPS to 9 MBPS downstream (to the subscriber) and from 16 KBPS to 640 KBPS upstream, depending on line distance.
HDSL High data rate Digital Subscriber Line: Digital modems on either end of one or more twisted pair wires that deliver up to T1 or E1 speeds. At present T1 requires two lines and E1 requires three.

VDSL Very high data rate Digital Subscriber Line: Digital modem for twisted-pair access operating at data rates from 12.9 to 52.8 MBPS with corresponding maximum reach ranging from 4500 feet to 1000 feet of 24 gauge twisted pair.

Kbps: one thousand bits per second
Mbps: one million bits per second




INTERNET ACCESS TECHNOLOGIES

Internet Service Providers


Industry Structure & Companies


There are about 7,800 Internet Service Providers (ISPs) in the United States and approximately 15,000 globally according to ISP-Planet. They include large companies that operate on a national and international scale and small firms that cover small territories. They also differ in terms of business models. Some offer free Internet access and rely on advertizing as a revenue source, while others charge a subscription fee and provide value-added information and other services to their customers. According to ISP-Planet and other sources, the largest ISPs in the United States in 1st q/2001 were AOL (29.2 million), NetZero (7.3 million), MSN (5.0 million), EarthLink (4.7 million), Juno Online (4.0 million), and AT&T (2.2 million).

Internet Service Providers (ISPs) are divided into three tiers:

Tier 1: Network Service Providers (NSPs)

NSPs include companies that operate high performance national backbone facilities (usually a 45 Mbps infrastructure) and focus on leased line connectivity. Tier 1 companies concentrate on the wholesale connectivity business and sell to the following types of companies:

Local and regional ISPs
Regional Bell Operating Companies (RBOCs), SBC, Verizon, Qwest, BellSouth
Competitive Local Exchange Carriers (CLECs)
Cable Television companies
Other network operators entering the ISP business

Tier 1 includes ISPs that may also have a retail business focused on business and residential customers. These companies peer directly at the National Science Foundation approved Network Access Points (NAPs) and own their backbone.

Companies included in this category include WorldCom/UUNet, AT&T and Sprint.

Tier 2: National Internet Service Providers

Tier 2 companies don’t have a backbone. These companies lease connections from Tier 1 companies and are typically defined as ISPs with 100,000 or more subscribers. National ISPs still lead the industry. Analysts believe that only 20 percent of U.S.-based ISPs currently operate nationally, but they generate 80 percent of total revenues.

Companies in this category include AOL, EarthLink, MSN, RCN, and the RBOCs.

Tier 3: Regional/Metropolitan ISPs

Tier 3 companies do not have a national customer base. These companies focus on a specific geographic region. Currently there are over 4,000 Tier 3 companies. Examples include CCS out of Austin, Texas, Rt. 66 Internet in New Mexico and Quik Internet in New Jersey.

There is a certain amount of consolidation occurring in the ISP sector. The most notable case was the purchase of Time Warner by AOL last year which created the world’s largest media company. This merger brought together the world’s largest ISP, with over 30 million subscribers and the well known Time Warner brands including, CNN, HBO, Time Magazine as well as America’s largest cable provider.

The effects of this merger puts AOL in a unique situation vis-a-vis other ISPs. AOL now has access to a large slice of the cable Internet access market as well as an extraordinary amount of media content. This merge places AOL firmly in position as the leading undisputed next-generation media company. The question remains what effect this merger will have on the rest of the ISP industry. Other providers may begin to seek out media partners to compete with the new giant.




INTERNET ACCESS TECHNOLOGIES
Internet Service Providers


Market Size & Demand Factors

Despite the recent slow down in Information Technology spending, the number of Internet Service Providers (ISPs) continued to grow in 2000 to record levels. Internet use is continuing to rise and is expected to hit 400 million users worldwide this year. Most of this growth is occurring overseas, since the United States already has an Internet penetration rate of almost 60%. This rapid increase in users will require ISPs to expand their capacity and operations. Large companies continue to dominate this sector and are generating increased revenue by wholesaling their national networks to regional and metropolitan providers.

In the United States, the number of ISPs grew from 5,775 in 1999 to 7,785 in 2000 representing a growth rate of 36 percent, according to ISP-Planet. ISPs are expected to generate $32.5 billion in revenue in 2001, after posting $23.7 billion the previous year.

Much of the increase in the number of ISPs is a result of the proliferation of small, issue specific players that represent various political, religious and civic groups. These ISPs offer users catered Internet access in contrast to the mass marketed general product of the larger national ISPs. These ISPs are usually not in business to be a revenue generator, but simply an additional service to a specific group’s membership. The fact that it is relatively inexpensive to start an ISP contributes to the expanding number of small ISPs today.

Many ISPs are searching for new and steady sources of revenue, while some are developing profit-based business plans. They are moving beyond providing only web access, although this is the source of over half of their revenues. Many are also adding value-added services in an attempt to entice subscribers away from rival companies, despite the fact that consumers are still unwilling to pay for value-added services and access subscriptions account for close to 70 percent of all consumer revenues.

In today’s ISP market it is normal to get free home pages and extra e-mail boxes. AOL has been a leader in providing consumers with more than just Internet access. The challenge for all ISPs is to persuade consumers to pay for these additional services and to turn them into new revenue sources. So far this strategy has been ineffective.

A recent trend in the industry is an increased focus on Web hosting as a source of revenue. With more business migrating to the Internet, Web hosting now accounts for 30 percent of all business revenues. A recent example of the move towards Web hosting took place last year when WorldCom bought Intermedia Communications Inc. for just under $3 billion, the main purpose of this acquisition was to get access to Intermedia’s majority stake in Web hosting entity Digex Inc.

ISPs are also beginning to offer customers multiple access technologies, such as wireless, cable and Digital Subscriber Line (DSL), in addition to dial-up options.



INTERNET ACCESS TECHNOLOGIES

Internet Service Providers


Overseas Market Developments & Opportunities


Europe


The number of ISPs in western Europe has risen to 4,000 in 2000 as result of the increasing web penetrations rates of most western European countries. The number of ISPs is expected to continue to grow as more subscription-free and unfettered access services are increasingly made available.

The European ISP market is highly competitive and as a result services provided by one company are quickly duplicated by its competitors. Forecasts indicate that by 2005 less than 15 percent of ISP revenues will come from value added services, such as e-commerce transactions. ISPs will rely on providing Internet access for up to about 50 percent of their sales according to IDC.

Europe’s ISP market will show strong growth over the next five years. IDC has valued the Western European ISP market at $4.3 billion in1998 and forecast a 28 percent growth rate through 2003. International Data Corporation's latest report reveals 53% growth in European ISP revenues during 1998 and 44% expected growth during 1999, demonstrating that the Internet is fueling the fastest growth ever seen in European telecommunications markets. "Broadband access is the fastest-growing segment of the Internet access market," according to IDC and European governments have recently begun to realize the value of broadband and beginning to change their regulations to encourage the growth of broadband Internet access in Europe.

All European countries are expected to experience growth rates near, or over, 100% from 2001 to 2003. From 2002, revenues gained from corporate Internet access will begin to slow down, although the segment will still outgrow nearly all other IT markets.


This is due to:

Increasing market penetration
Falling prices of leased line service charges due to competitive pressure
Falling prices of leased line service charges due to increased weighting of higher-value services such as hosting and Intranet/Extranet services
Rapidly increasing use, from 2001, of lower-priced broadband alternatives to leased lines.

Europeans are following the global trend and will diversify their revenue sources by further developing value-added services such as Web/application hosting, commerce, security, IP VPNs, Extranets, and voice/fax/unified messaging.

Asia-Pacific

In 1999 the ISP market in the Asia-Pacific region was valued at $6.1 billion according to IDC. Revenues in 2004 are predicted to rise to $22 billion. The trend has been to provide free Internet access. This is due to expectations of earning significant online advertising revenues, establishing B2C transaction-based revenue streams, and enjoying low user acquisition costs. However, with revenue from online advertising and B2C transaction unexpectedly low, several ISPs have been moving away from the free Internet access business model. As a result, many ISPs are changing their focus towards the provision of value-added services like web hosting, co-location, virtual private networks, and security. This is particularly true in countries with high Internet penetration rates, such as Hong Kong and Australia. Value added services formed about 7% of the total Internet revenue in 1999 and are expected to grow to about 23% of the total by 2004.

In the past, a strict regulatory environment in the region had limited the development of adequate bandwidth capacity. This has changed recently as the various governments have recognized that promoting the growth of the IT and telecommunications industries is one way to increase government revenue. Regulations on preventing private investment in submarine cable systems have recently been lifted to meet the demand for increased Internet connectivity. As a result, multiple global carriers have initiated the formation of strategic alliances to build new fiber optic cables, which would be landed in the region. Examples include, Global Crossing, Southern Cross, and the Asia-Pacific Cable Network.

Latin America

Estimated ISP revenues in Latin America grew 63 percent in 2000 to $2.16 billion according to IDC. Currently 98% of Internet accounts in Latin America are dial-up and about two-thirds of these have unlimited access plans. Boosted by the free access phenomenon, access from home accounts increased to 83% of the market in 2000. IDC predicts that from 2000 to 2005, revenues will show a compound annual growth rate of 32%, reaching $8.71 billion by 2005. Growth is hindered because only a small segment of the population in Latin America can afford Internet access devices and subscription services.


Brazil is the largest Internet market in the region, accounting for 60% of sales over the Internet, and competition among ISPs has been intense. Terra Networks, a spin off of Spain’s Telefonica, purchased full-service Internet portal and service provider ZAZ, which was the number two provider in Brazil. Terra has announced that it will start offering free Internet access in Brazil matching similar service provided by smaller Brazilian ISPs. The company intends to offset loss access fees with e-commerce advertising revenue despite the recent downturn in e-marketing demand.


Africa & the Middle East

Africa’s largest ISP, Africa Online, has merged with UUNet and is expected to expand service to 14 countries. The new entity, UUNet Africa, will be located in South Africa, which is host to almost two million of Africa’s 3million users. Other key markets will be on Ghana, Cote D’Ivorie, Kenya, Tanzania, Uganda, Zambia, and Zimbabwe. There are major obstacles to increasing Internet usage in Africa, including the lack of adequate infrastructure, low income levels, and restrictive public policies. Despite this, Internet penetration continues to rise, especially in South Africa.

Internet use in Israel, which is home to a robust domestic IT industry, is enjoying rapid growth. Online use grew 26 percent in 2000 to 1.27 million people. There will be a projected 12 million Arab Internet users by the end of 2002, which is a significant increase from the current number of 1.9 million. The United Arab Emirates has the highest Internet penetration rate of 15 percent. Growth is expected to increase throughout the region as governments adopt IT development plans. The government of Jordan has been especially proactive in reaching out to the U.S. IT sector for help in establishing a viable domestic IT sector.








INTERNET ACCESS TECHNOLOGIES
Internet Service Providers


Technology & Product Developments

The ISP sector is undergoing rapid changes, especially in the way consumers access the Internet, which strains ISPs and users alike, who must commit time and resources keeping up with these changes. The traditional dial-up mode is being replaced by cable and digital subscriber line (DSL) technologies, as consumers demand more bandwidth and faster connection speeds. Growth in cable access has risen from approximately 4.2 million to 5 million, while DSL subscribers have grown to 2.7 million. (Link to table)


Internet Access via DSL

DSL (digital subscriber line) technology offers faster Internet connection than a standard dial-up connection. DSL uses existing 2-wire copper telephone wiring to provide 24/7 analog voice and digital Internet access/data services. In most cases, these services can be provided simultaneously over one phone line. DSL offers users a choice of speeds ranging from 144 kbps to 1.5 mbps. This is 2.5 to 25 times faster than a standard 56 kbps dial-up modem. DSL can deliver bandwidth-intensive applications, like streaming audio/video, online computer games, application programs, digital telephone, and video conferencing.

DSL takes existing telephone lines that connect customer premises to the telephone company's central office (CO) and turns them into high-speed digital data links. At the customer’s premises, a DSL router or modem connects the DSL line to a local-area network or an individual computer. Most ISP's offer Symmetric DSL services at speeds that vary from 144 kbps to 1.54 mbps, so customers can choose the rate that meets their specific needs. Some DSL speeds have approached 6.0 mbps. DSL speed is determined by the distance between the customer site and the CO. The maximum range is between 12,000--20,000 feet depending on the level of performance the service provider wants to maintain. Customer service has been a problem with the DSL industry because of installation backlogs, the unavailability of the service to sometimes contiguous users, and the confusion over who is responsible for support–the local telephone company, DSL vendor, or ISP.

The most popular DSL technologies are IDSL ISDN (speeds of up to 144 KBPS in both directions); ADSL (speeds from 1.5 MBPS to 9 MBPS downstream to the subscriber and from 16 KBPS to 640 KBPS upstream); HDSL (T1 or E1 speeds); VDSL (rates from 12.9 to 52.8 mbps). (See glossary for definitions.)

The largest DSL providers in 2001 (1st quarter) are Verizon (720,000 subscribers), SBC (600,000), Qwest (255,000), BellSouth (215,000), Covad (74,000).


Internet Access via Cable

Internet access via cable is an increasingly popular means to access the Internet. (Link to chart). Like DSL, cable access allows for a 24 hour Internet connection. The cable industry claims that cable access is 100 times faster than a dial-up Internet connection and can reach speeds of 5 mbps. While this speed is achievable, many consumers actually experience connection speeds closer to 1 mpbs or 20 times faster than a typical 56 kbps dial-up connection.

Cable access is provided over the same coaxial cable that delivers cable TV to the premises. The local cable company is responsible for installing the cable modem and managing the quality of service. At the cable company’s main network office, the user is connected to the cable ISP’s national backbone. The ISP actually provides the Internet connectivity, while the cable company provides technical support.

The main difference between cable and DSL is that DSL provides a dedicated connection over a single phone line, while cable connections run over a dedicated, but shared, medium. Although cable connections have greater bandwidth capabilities, users have to share bandwidth with others in their geographical area, which may slow connection and loading speeds. Cable companies also have to complete major upgrades, such as adding fiber optic lines and specialized two-way equipment to their networks. In contrast, DSL service operates on lines that are already installed in every business and home that has wired telephone service.

According to a report by Allied Business Intelligence (ABI), there was a total of 2.1 million U.S. cable modem subscribers versus a half a million DSL subscribers in the United States at the end of 2000. The U.S. is the leader in cable modem subscribers, which ABI predicted would jump from last year’s 2.1 million users to 14 million by 2005. Global, subscribers to data over cable services will increase from 3.3 million subscribers worldwide to 58.6 million by 2005.

Other regions experiencing growth in cable Internet access are South Korea as well as France and Germany. European countries like Spain and Latin America are lagging behind because they have underdeveloped cable systems.

While ABI gives cable modems the edge over DSL in the residential market, a survey by eMarketer said that DSL would overtake cable modem access by 2003. EMarketer predicts that there will be 32 million broadband users by 2003, with 10.95 million subscribers using DSL.


Internet Access via Satellite:

The demand for satellite capacity for IP traffic has been growing exponentially over the past few years. Over 11% of the world's ISPs now use a satellite link to connect to a Internet backbone. New supply side drivers who look set to drive the Internet via satellite industry forward include business-to-business e-commerce and rural communications. According to the 2000 Internet via Satellite report, the major geographic areas for growth for ISP links have been in Central and Eastern Europe, Turkey, Israel, Australia, South America and South Africa. Hybrid services have seen most of their growth in geographic areas close to the core of the Internet such as the United States and Western Europe.

Internet Access via Wireless Technologies

Wireless technologies, such as 3G, represent the future of Internet access. 3G wireless is the is the third generation of wireless communications following analog and digital. It will emerge as the MultiMedia generation of wireless communication, which will provide higher speed broadband, mobile information transfer, allowing for new voice, video, graphics and audio applications. 3G allows new applications that have limited availability over current mobile networks because of limitations in transmission speeds. These include web browsing, file-transfer, and home automation, which is the ability to remotely access and control in-house applications and machines.

While transmission speeds of up to 2 mbps are achievable with 3G, actual rates will depend upon the environment within which the call is being made. The fastest speeds will be achieved in stationary situations indoors, while rates of only around 144 kbps (about three times the speed of today’s fixed PC modems) are expected in highly mobile applications.

Japanese network operators will be the first to implement 3G networks in the year 2001, and Japanese terminal manufacturers, who have not had much market share outside their home market, will be first with 3G terminals.















INTERNET ACCESS TECHNOLOGIES
Internet Service Providers



Market Forecasts & Future Outlook

ISP revenue is forecast to grow to $ 37.4 billion by 2003 up from and estimated $32.5 billion this year. These figures include dial-up and dedicated connections, public Internet access and intranet and Extranet networks, but wholesale ISP sales are excluded. Value added services, such as web hosting, are a major growth engine. In 2000, the ISP sector as a whole grew 36 percent according to TR’s Online Census and Telecommunications Reports International.

The first downturn in the total number of U.S. customers subscribing to online services occurred in 1st q/2001 according to ISP-Planet. The number declined by only a few thousand from the previous quarter to 68.5 million households. This is partially the result of the decline in subscribers to free ISP services, which dropped by more than 19 percent. Alta Vista’s free access service stopped operating in December 2000 adding to the list of other failed free access providers such as Spinway, WorldSpy, Freewweb, and FreeI.Paid. NetZero is the one free-ISP that continues to accumulate subscribers and is the second largest ISP in the US. The remaining free-ISP providers are beginning to charge for premium services and online access beyond an established limit of free hours. This tend is expected to continue as long as revenue from advertising on the Internet declines.

Both cable modem and dial-up access have continued respectable growth at rates of 18 percent and 8 percent respectively in the first quarter of 2001. Cable access has reached nearly 5 million subscribers. DSL demand has begun to slow, although growth in DSL access was 86 percent in 2000. The demise of providers such as NorthPoint Communications contributed to this decline. Verizon has been the only DSL provider to show significant increase in subscribers at the beginning of 2001 and has surpassed SBC as the dominant DSL provider.










































References:


Business Week, 1221 Avenue of the Americas, 39th Floor, New York, NY 10020.
GOTOBUTTON BM_2_ Http://www.businessweek.com

Cahners In-Stat Group, 1101 S. Winchester Blvd., Building N, San Jose, CA 95128.
GOTOBUTTON BM_3_ Http://www.instat.com

CyberAtlas. GOTOBUTTON BM_4_ Http://www.cyberatlas.internet.com

eMarketer. GOTOBUTTON BM_5_ Http://www.emarketer.com

International Data Corporation, 5 Speen Street, Framingham, MA 01701.
(508) 872-8200. GOTOBUTTON BM_6_ http://idcresearch.com

ISP Planet. GOTOBUTTON BM_7_ Http://www.isp-planet.com

ISP World. GOTOBUTTON BM_8_ Http://www.ispworld.com

NUA Internet Surveys. GOTOBUTTON BM_9_ http://www.nua.ie/surveys/

TR’s Online Census and Telecommunications Reports International. GOTOBUTTON BM_:_ http://www.tr.com/

ZDNet, Suite 4000, 650 Townsend Street, San Francisco, CA 94103. GOTOBUTTON BM_;_ Http://www.zdnet.com



GOTOBUTTON BM_<_



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