ISPCON: The Banker's Optimism

An ISPCON veteran gave his regular speech on ISP valuations, focusing on the hottest parts of the industry and studiously ignoring the laggards.

by Alex Goldman ISP-Planet Managing Editor [November 27, 2006]

Paul Stapleton, banker and former author of the I$P Webhosting Report (now working at DH Capital), opened ISPCON's financial session by saying that he views the ISP business as grouped into two categories, access and hosting, and sees hosting as profitable with growing revenues while access is unprofitable with declining revenues.

However, he added that even the most basic services, such as e-mail, qualify as hosting, so if you say you're a profitable ISP offering access, he might reply that your profit comes from your services.

"Access is a commodity business," Stapleton said.

Stapleton further subdivides hosting, the part of the business he's interested in, into two categories: Mass Market Hosting (MMH) and regional high end hosting. The business process of an MMH company focuses on automated services and a cheap sales strategy, while higher level hosting companies sell the services they provide. The regional high end hosting company uses local contacts, a known brand name, and superior customer service.

Stapleton did not talk about the access business and specifically disparaged dialup companies. "I'm not answering the question about what a dialup subscriber is worth," he said. Dialup is not what he does.

Making hosting valuable
Both MMH and high end hosting business can adopt specific strategies to increase their value, Stapleton said.

The following are key valuation drivers:

Scale. Once a business has covered its fixed costs, Stapleton noted, each sale contributes a high percentage of revenue to the bottom line. We pointed out that Bell South is an access business experiencing the same benefit of scale (see DSL Prime: Remarkable Margins in Telco DSL) but Stapleton pointed out that no ISPCON attendee has Bell South's scale.

Growth. Acquirers like a business that is growing fast, Stapleton noted.

Revenue Composition. Stapleton admitted that many hosting companies have been in the business for a long time and grew out of dialup outfits. Stapleton said that some customers want only part of the business and will not pay a high price for the part they do not want.

A member of the audience asked whether regulation is affecting ISP valuations. "It's a problem," Stapleton admitted. "Regulation is partly why we prefer hosting to access. Access businesses have to deal with a landlord. They have to deal with regulated monopolies for both bandwidth and power."

However, Stapleton had another good reason to mistrust the value of access businesses. "Another reason we prefer hosting to access is that we cannot point to anyone in the access business who ever raised their rates."

Looking at your balance sheet
Self-awareness is an important part of selling your business. Stapleton said that capital expenditures, for example, can be divided into two categories. Maintenance Capital is the money you use to keep your business growing, such as replacing routers because they're old. Growth Capital is the money you spend because your business is growing, such as buying new routers to support new customers.

He said that anyone selling to a private equity firm needs to understand that private equity wants an exit strategy.

Rich Bader asked, "I've listened to your ISPCON presentations for the past ten years. Would you say this is the most optimistic you've been since the bubble?"

"Yes," Stapleton replied.

—End