With a big acquisition, the nation's largest founder-owned ISP vaults up the subscriber rankings (update due later this week).

by Alex Goldman ISP-Planet Managing Editor [December 19, 2005]

Williamsville, N.Y.-based LocalNet has grown again. When we profiled LocalNet (see This Local ISP Has Grown) in 2003, we learned that it had grown from being one computer with four Galacticom modems into a national player with nearly 100,000 customers.

On December 7, 2005, the company closed on the acquisition of CoreComm, a subsidiary King of Prussia, Pa.-based ATX, a company that emerged from Chapter 11 bankruptcy earlier this year.

Terms of the deal were not disclosed. The deal was handled by Denver, Colo.-based ISP broker Daniels & Associates.

Combined, the two companies will have around 250,000 customers, consisting mostly of residential dialup but with some webhosting as well.

Marc Silvestri, founder, owner, and president of LocalNet, says it makes sense to retain the LocalNet brand name, CoreComm's brand name, and the Voyager.net brand name that CoreComm acquired in 2000.

As early as 2001, ATX started looking for a buyer for voyager.net, noting in its Q1 2001 financial results press release, "The Company also stated that it had started evaluating strategic alternatives for its Voyager.net consumer ISP business as well as other assets not linked to its two primary businesses, including its Ohio LMDS licenses." (We don't know what happened to the LMDS licenses.)

At the time, ATX did not want to sell CoreComm. Barclay Knapp, the company's chief executive said, in the same press release, "CoreComm has continued on its path to become one of the successful new entrants into the business and residential telecoms Markets in the U.S."

Pleased with the purchase
Silvestri is pleased with the company he acquired. The acquisition is about growth, not about changing businesses. We're surprised to hear this, because we've been advising ISPs to acquire the skills needed to enter the business services Market (see, for example, today's other article, on RCN's acquisition of Con Ed Communications, Adding Financial Services to the ISP Portfolio).

Silvestri says that CoreComm was appealing because it is similar to LocalNet; Con Ed Communications was appealing to RCN because it brought a new set of skills to RCN.

"It looks like a big acquisition because it doubles our size, but we really understand what they're doing. They're providing high quality dialup Internet service at a good price, and so are we. They're running a sizable call center, and so are we. They have a CRM system, and we have a CRM system."

Service is all about people. At ISPCON, Elliot Noss, president and CEO of Toronto, Canada-based TuCows said that it's important to provide a career path for the people in the call center (see Common Sense in Selling Services). "I try hardest to retain personnel in positions that touch customers," Noss said. At TuCows, he said, support staff can move up out of tech support.

Silvestri says he does the same. "Our senior vice president and chief operating officer Dave Kaplan once worked in tech support." Silvestri heard the company had a tech support employee who had a degree from the University of Pennsylvania in Economics. Silvestri talked to him, showed him some corporate numbers that didn't make sense to him, and found that Kaplan understood what the problem was.

"I talked to him and I was impressed. He became the accounting guy. Then I got him into HR, operations, Marketing, and now he is absolutely the key operations person. A lot of where we are now would not have happened if it weren't for Dave."

Reflecting, Silvestri jokes, "I feel like the quarterback who knows how much he owes to the offensive line."

The call center has provided more than just the COO to LocalNet. "A clear majority of the people here at headquarters were in the call center at one time or another," says Silvestri.

The reason is simple. "When we have an opening, we post it in the call center first, and then we open it up outside."

Dialup is golden
Silvestri says that although many pundits say dialup is a commodity, that's just not true. LocalNet provides good service, and its subscriber base is growing. "I like to paraphrase Mark Twain: reports of dialup's demise have been greatly exaggerated."

Growing business, falling costs
The key to success is knowing what your costs are (see Tim Sanders' essay for WISPs on the same topic: Pricing to Survive, and the upcoming Jupiter Webcast he's hosting on the same topic).

Silvestri says that if you've been in dialup long enough (LocalNet started in 1994), your infrastructure is all paid off. "The plant has been paid for. The RAS devices are sunk costs that have been paid. And if you need to replace anything, equipment prices have been going down."

That makes dialup distinctly different from the high bandwidth end of the ISP business. At the Ethernet end of the data center business, companies are spending money like it's 1999 all over again, chasing new technologies that allow them to offer faster pipes to businesses. Todd Narwid, president of RCN business solutions, told us that customers want their links to the data center to be as fast as the links within the data center. To do so, companies need to invest in Gigabit Ethernet and 2.5 Gigabit Ethernet and 10 Gigabit Ethernet and even faster technologies.

Meanwhile, Silvestri continues making money off of 56 Kbps links, using technology that has not changed for years.

Actually, that's not exactly true. While the hardware hasn't changed, software improvements now allow LocalNet to offer accelerated dialup for $12.95, $3 more than the regular price of $9.95.

The combined businesses expect to have about 250,000 dialup customers, about 6,000 webhosting accounts, and, overall about $40 million in annual sales—most of it from dialup (250,000 accounts x $10 per account per month x 12 months = $30 million, and that ignores the revenue from accelerated dialup).

Are more acquisitions planned? "We're in a good business and can still afford additional acquisitions," says Silvestri. "Of course, the terms of the deal are important."

—End