CLECs as ISPs – Challenges and Opportunities

By Joel Maloff
President, Maloff Group International

December 1, 1999 – You’re a CLEC and see the Promised Land in the world of Internet. But what exactly does that mean and how do you get there?  It helps to start by understanding your company, your specific objectives, and how to offer Internet services.

Are you interested in providing value-added services to existing customers but without investing the time, effort and money to create an Internet infrastructure? Are you interested in diversification and becoming perceived as more of a full-service provider including Internet, long distance, wireless, paging, and whatever other services you can muster? Each of these – and the wide range in between - has substantial implications relative to time to market, associated investments, and personnel.

The Amazing Technicolor Internet
Let’s start with the types of Internet services a CLEC can offer. Remember that these can be offered directly by you or through a partnering arrangement with another organization. The key is that all of these services must fit the needs of your specific clientele. For example, if you cater exclusively to businesses through broadband private line services, residential dial-up services may not be the best place for you to launch into the world of Internet.

Internet services can be divided into the following categories:

• Connectivity
• Hosting
• Geography-specific Portals
• Value-Added Services
• Consulting and Design

Let's begin by discussing connectivity in this article.  We'll continue with the others in upcoming issues.

Connectivity – the Heart of Internet Services
Internet connectivity can be further subdivided into the following:

• Dial-up, including ISDN
• DSL
• Dedicated access (Leased Lines)
• Wireless

For a CLEC to provide Internet connectivity, there must be a connection to either a larger backbone Internet provider or connectivity to one of the many Internet “peering” locations. This can be accomplished by acquiring T-1, T-3, OC-3 or other similar bandwidth “pipes” to networks like Qwest, PSINET, UUNET, AGIS, Sprint, AT&T, or dozens of others.

Pricing can be a flat rate per month or a burstable rate depending on the volume used. Bandwidth pipes are becoming more and more of a commodity, so it is a good idea to shop around and compare between multiple vendors.

Also, for redundancy purposes, it is a great idea to have more than one provider of Internet backbone connectivity. For example, if your connection to your primary provider were to go down for any reason, you would still have access – albeit strained – from your alternative provider. Keep in mind that YOU are the Internet to your customers and, with the growing use of Service Level Assurances (SLAs), quality of service will be increasingly important.

For dial-up services, you will need to provide non-toll local access to your customers. This may very well mean multiple groups of dial-in trunks. In addition, you will need a modem pool sufficient to meet anticipated traffic. A good rule of thumb these days is a “user to modem ratio” of 8-to-1 but certainly not greater than 10-to-1, and the lower the better for your customers. Busy signals are one of the fastest ways to jack up your churn rate and compress your rate of return.

ISDN also is considered a dial-up service and still quite viable where DSL has not been introduced.

Other services considered part of the package in dial-up Internet includes Usenet News or Network News feeds, electronic mail, and some level of domain name hosting.

Why Offer Dial-Up Services?
Some CLECs feel that they must offer dial-up to compete with ILECs, cable Internet providers, or others. This may very well be true. There are a growing number of vendors vying for the minds and hearts of communications users. CLECs are no different in this regard.

The bottom line questions are the direct and indirect financial benefits, how much it will cost, and can it be done well.

The generation of revenue is a major issue. Today, there are substantial competitors for Internet access charging fees that run the gamut from $30 per month down to zero. NetZero is leading the way for a new breed of ISPs that are entirely driven by advertising rather than subscription revenues. As a CLEC, have you based your Internet business plan on the assumption that you can charge $19.95 a month for the next three years? You had better think again more carefully!

It is certainly possible to generate revenue from traditional subscription methods, advertising fees, or indirectly through the enhancement or retention of other products or services. Dial-up Internet service traditionally carries fairly narrow margins. NetZero and their brethren will not make it any easier for newcomers. On the other hand, generating $20,000 to $100,000 per month in advertising-driven revenues is quite reachable. That’s equal to 1,000 to 5,000 dial-up subscribers at twenty bucks a month!

Do It Yourself, Or Outsource?
Another issue that you should seriously consider is the do-it-yourself or outsource dilemma. It is quite conceivable for you to fill your central office with racks of modems and servers, linked together with various access trunks. You will need a solid staff of server technicians. It’s your choice to use NT, UNIX, or Linux. Your staff will also need to be skilled in IP routing issues, domain name service, and modem operations.

One problem you'll face is finding personnel to manage all these issues.  Good people in these areas are hard to find and equally difficult to retain. People that are readily available are probably so for good reasons.

You will need a customer service or help desk in addition to any similar functions you already have in place as a CLEC. It is possible that your existing customer service people can be the first line of entry, but they will quickly need Internet experienced back-up.

There are many memorable anecdotes from Internet and computer help desks. Some of the classics were about persons that complained that their coffee cup holder on their computer kept breaking off.  We know the "coffee cup holder" by another name: a CD-ROM drive.  You need a help desk that is experienced and can cut through challenges quickly and efficiently. It also needs to be available most of the time if not twenty-four by seven.

The Partner Approach
When you add up all of these issues, dial-up services become a substantial investment and risk. An alternative is to retain control and contact with your customers but contract with another organization to actually deliver the dial-up services. This allows you to offer service anywhere in the world that your partner has POPs – not just in your own location.  Also, most of the investments described above are absorbed by your partner and, since you will be paying on a per customer or total volume basis, they become much more predictable.

There is one major drawback: You are not filling your own circuits. Nevertheless, you get to control the customer rather than having a competitor steal them away. Given the growing interest in ISPs becoming CLECs as well as everyone else out there looking for a piece of the pie, retaining control of the customer is critical.

In our next column, we will cover DSL, leased lines, and wireless services for Internet access.

Joel Maloff is founder of Maloff Group International, an Internet business consulting organization. Maloff has been an executive in local exchange and interexchange telecommunications since 1973, and has been involved in various aspects of the Internet since 1987. Maloff is the author of four books and hundreds of articles regarding Internet.