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This chapter is from the book

This chapter is from the book

Challenges in Becoming an ISP

A new breed of businesses are looking to enter or expand their business in the ISP market. Entering the ISP market presents daunting infrastructure challenges. The entrance to the ISP market typically involves a significant commitment and a substantial cost associated with services. Infrastructure challenges include managing a large number of subscribers, subscriber and service provisioning, and operation and management.

Key Challenges

For the vast majority of companies, what it takes to be an ISP is far removed from their core business. A key factor for success in this market is delivering reliable and consistent services in a fast-moving market.

As small to medium-sized businesses approach this market, they lack the infrastructure and technical expertise to deliver services in an economical way. Most solutions require a large amount of time and effort, as well as a significant initial investment and on-going support costs. These costs include—and are not limited to—recruiting and retaining qualified technical and management staff. These businesses face a market where there is a severe shortage of skilled IT professionals, making it increasingly difficult to be self-sufficient in managing a variety of applications and platforms in-house.

Significant hardware, software, and integration costs are required, often amounting to hundreds of thousands of dollars. On an annual basis, operations and management costs can be as much as the initial entry costs. For many of these businesses, this investment can be a considerable financial strain.

Planning for applications in-house can be very difficult, if not impossible, without an army of qualified professionals. The need to anticipate growth rates and forecasts in volatile markets can lead to inaccurate estimates and costly mistakes. Consider the following advice to ISPs for defying difficult times:

The greatest challenge facing ISPs is profitability, and the perception of many ISPs is that adding subscribers is essential for enhancing their bottom-line profit. Keeping operating costs low and customer satisfaction high are equally challenging issues.

ISPs seeking to increase revenues understand that they must extend their service offerings beyond providing Internet access and basic services alone. Responding to a survey, 84% of the ISPs stated that they generate additional revenue from services other than Internet access.4

Many ISPs are marketing add-on services to current subscribers rather than spending large investments to attract new subscribers, because it is much more cost-effective. Value-added services can produce higher profit margins for services sold to current subscribers.

Most revenues earned by ISPs from residential subscribers are still a product of dial-up Internet access. However, market indicators show that ISPs may find it difficult to increase revenue from dial-up residential subscribers unless these subscribers either adopt high-speed technologies or sign up for value-added services.

In a market that includes multi-national conglomerates, it would be wise for independent ISPs to rely on the same business strategies that have helped other small businesses succeed when facing larger rivals—personal service, quick responses to customer service inquiries, and the idea that the customer always comes first. Local and regional ISPs should also utilize their geographic service area to their advantages by offering content or services specifically designed to appeal to local audiences.5

Considerations

The first, and foremost, consideration for any company entering the ISP market is whether it is necessary to build a new ISP from the ground up to serve its subscribers.

There are a variety of ways to provide ISP services without committing large capital expenses and ongoing operating resources necessary for a new ISP. In particular, some applications have become a commodity, and now it is easy to outsource to ASPs. Each of these relationships inherently has its own advantages and disadvantages. However, all of them off-load the expertise and much of the capital expense needed to build and operate an ISP. If an ISP does not have in place the qualified staff and expertise, then off-loading to ASPs is generally the best option, because these companies have core competency in the service provider market.

For mission-critical applications that drive a business, ISPs increasingly rely on a service provider's applications, such as accounting and provisioning, for essential and critical business processes.

The outsourcing model offers service level agreement (SLA) and around-the-clock dedicated operation and management staff. The outsourcing solution provides a level of operation and management excellence far beyond that economically viable for small businesses, at a very attractive rate.

Specific applications, such as a billing system, auto-registration, and customer self-care, can be outsourced, while others might be retained in-house. Small to medium-sized businesses can leverage professional expertise from outsourcing, instead of facing the high-risk and high-cost approach of the past. In fact, with variable costing models, minimal commitment terms, and often minimal integration work, tactical decisions on short-term outsourcing can be used in an economical way, allowing businesses to focus on their core business and leave provisioning, operation, and management to qualified professionals.

The trends driving outsourcing are clear: leveraged expertise, channel strategies, and financial challenges faced by small and medium-sized businesses. The variety of outsourced solutions is almost unlimited, available today from most ASPs, and will likely grow rapidly, depending upon the pace of broadband access in the residential market. Those that do not adapt to this model may find the cost pressure to compete under the old model unbearable.

  • For small and regional ISPs, performing everything in-house usually draws IT resources from critical marketing and sales initiatives. Without a focus on their core business, these small and medium-sized businesses quickly fall out of step with their market, relying increasingly on unprofitable and limited service offerings.

  • The purchase of commercial off-the-shelf (COTS) products for these small ISPs proves to be a difficult business case to make.

  • Low-end applications provide some required features, but lack the robust end-to-end functionality, the flexibility to add new value-added services, and the scalability to keep pace with the exponential growth in subscribers and new services.

  • The full-feature, carrier-grade billing systems, necessary hardware, technical support, and deployment expertise required are impractical for small and regional ISPs. The high-cost of meeting these requirements cannot be justified within the business case. This fact leaves them settling for short-term tactical home-grown or low-end solutions, which obviously do not solve the problem of flexibility, reliability, and scalability.

Requirements

The following are some key requirements that small and regional ISPs should look for in an outsourced solution:

  • Resource leverage - The decision to outsource provisioning is due to the fact that small ISPs can get a better solution than that available via purchasing.

  • Variable costs – Small ISPs are looking for low up-front investment.

  • Flexible terms - The solution must be low risk, without excessively long-term agreements.

  • Service level agreements - Much of the value that a large service provider offers relates to the reliability and availability of a carrier-grade solution, including but not limited to, provisioning, online billing and payment, subscriber self-care, autoregistration, guaranteed availability, and disaster recovery.

  • Integration – Small ISPs are looking for a seamless offer. Everything from online billing and auto-registration interfaces to subscriber self-care applications must be integrated with directory services.

These requirements create some significant infrastructure demands. While it is relatively easy to implement home-grown systems, this approach is proving to be unprofitable and difficult to differentiate. The support systems that facilitate these basic offerings are typically unable to scale to manage the phenomenal growth of the Internet, and they lack capabilities to generate revenue from value-added service.

Alternative Approach

An alternative for companies entering the ISP market is to enter a co-location or managed operation agreement with an existing ISP or hosting service provider. With this approach, a company commits capital resources necessary to build its own computing environment. This investment includes, and is not limited to, hardware, software, data center footprint, and Internet connectivity from a NSP or a telecommunication service provider.

The advantage of this alternative is that it gives a company as much control over the services as it wants, while still limiting the capital and operation expenses of building a new ISP from the ground up. In particular, this approach eliminates the need for a company to maintain its own in-house technical, operation, and management staffing. Also, it eliminates the need to build and maintain an expensive data center environment. At the same time, it allows a company to determine exactly what services to offer and what software to use to support services. Perhaps, most importantly, this approach allows a company almost complete flexibility to customize its product offerings and pricing, while reducing the up-front capital investment to start an ISP. Although this approach is a far less expensive option for entering the ISP market than building and operating an ISP infrastructure from the ground up, there is still significant capital investment needed. Some hardware and software investment is necessary to support this model.

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