Getting Into the ISP Business - part 1:
Viability Analysis

The desire to be in business is an important ingredient for success, but the ISP industry is maturing rapidly and, these days, startup plans need a stiff dose of reality checking. Prescription: Business viability study.

by Christopher Knight [September 19, 2000]

So, you want to be an ISP? Before you rush out and start ordering equipment and talking to upstream providers, you need to do some major homework.

Back in 1994, no one entering the ISP space did viability studies. Hundreds of Internet pioneers simply charged into the Internet access service business because of the fun, challenge, culture—and the sheer market demand for it.

Today you'd be a fool to enter this business without a solid business plan, plenty of capital, as many 'unfair' competitive advantages as you can possibly muster, and an aggressive sales/marketing strategy as part of your core being.

In case no one has mentioned this to you, dialup Internet access has become a commodity in much of the world. In developing countries, if it isn't already a commodity, it will be soon.

If you take a look at the many publicly traded ISPs who have lost hundreds of $millions off their market capitalization over the past year, you'll begin to realize that the market has decided that no one is going to get rich in the ISP space . . . at least as of right now.

If you've read my columns, you know that I believe the "market is always right." On the other hand, I believe you still can get rich in the ISP space, but it will require you to adjust your thinking, going beyond what may look like a typical ISP today to what a typical "profitable" ISP will look like tomorrow.

Two Components of Viability
Component 1, Business Viability, is largely subjective, but can be gauged by the following:

1. Proven management/leadership team. Any prior success in this field increase your business viability rating and improve your odds of succeeding.
2. Capitalization: Do you have enough capital? How long can you go on before negative cash flow shuts you down? Or to put a more positive spin on the question, Can you find a way to stay alive until achieving profitability or a successful exit?
3. Flexibility: Are you willing to do whatever it takes—including abandoning everything you thought about the way 'things' should be done—in the name of achieving business viability? Your current thinking that has gotten you this far is the same thinking that will not be able to solve your new problems. Business viability requires the top leadership to evolve in order for the company to become successful in the long term.

Component 2, Market Viability, is more concrete and quantifiable. It can be determined by:

1. Significant market demand or market receptivity to your services within the geographic region you wish to serve.
2. Significant market size.
3. Lack of significant aggressive competitors in the region.
4. Getting past the critical mass needed to break even and sustain growth.
5. Company strengths that are in line with the market's needs.

Running the Numbers
Here is a simple formula for calculating ISP market viability, as it relates to Internet access services:

Market size = (Number of computers x Internet access penetration) / Total number of competitors.

Here is a highly simplified example based on this formula:

In the city of Vulcan, there are 200,000 people and 10,000 businesses. We know that 55% of the residents have computers and 85% of the businesses have computers. There is about 60% market penetration. We know there are 35 competitors in the region, including regional and national.

Here's the calculation:

• 200,000 x 55% = 110,000 individuals have computers that potentially could use the Internet.
• 10,000 x 85% = 8,500 businesses have computers that potentially could use the Internet.
• 110,000 + 8,500 = 118,500 computers (or networks) in this population.
• 118,500 computers x 60% Internet access penetration = 71,100 people and businesses that need Internet access services.
• 71,100 / 35 competitors = 2,031 subscribers per competitor—if every competitor were equal, but experience tells us this is a 'survival of the fittest' game and that every competitor will not be equal.

What if there were only five competitors?

• 71,100 / 5 = 14,220 per competitor, which means there is a serious chance for you to come in and achieve success in this market.

Details, details
Missing from this oversimplified formula are yearly growth rates and the effects of increased penetration of more computers and more folks wanting Internet access in your region.

You must also assess your competitor's strengths and weaknesses. If, in the above example, 30 of the competitors were national ISPs and 5 were local, then perhaps your local approach and aggressiveness might be able to displace the distant, almost non-caring national ISP player.

Where to Get the Market Data
To do a competitive analysis, you need good data—not data that tells you what you want to hear. Don't be afraid to pay for market data. Most of the best ISP market information from in-depth studies is available for sale from these ISP Industry Research Analysts:

• The Burton Group: Focuses on analysis of emerging network-computing technologies
• Cahners In-Stat Group: Helping you make better business decisions through real-time research
• internet.com's CyberAtlas: Internet Statistics and Market Research for Web Marketers
• Forrester Research: Helping business thrive on technology changes
• Gartner Group: Access to extensive collection of IT research and analysis
• International Data Corporation: The industry's most comprehensive resource on worldwide IT markets
• META Group: IT research and unlimited analyst consultation
• NUA Internet Surveys: Often covering the online/ISP access industry
• Patricia Seybold Group: Strategic technology and business solutions
• StatMarket: Accurate Internet statistics and user trends in real time.
• Yankee Group: Strategic planning, technology forecasting, and market research
• Zona Research: Information and advice for the Internet industry
  

To Your ISP Success!
Christopher ("Sparky") Knight
Founder & Managing Editor of the ISP-Lists Discussion Community

—End

Related article series: Build an ISP Business Plan