US Online: Dialup and DSL are Dead

Dialup provider US Online is exiting the ISP wholesale business (as his ISP customers learned last week) to focus on value-added services. Wire-line may not be dead everywhere, but in Washington state, there's so much fiber they're beyond Fiber to the Home (FTTH); we're talking Fiber to the Cow (FTTC?).

by Alex Goldman ISP-Planet Associate Editor [June 4, 2003]

Things have changed quickly in the ISP business since 2001. Steve Klock, CEO of US Online, a dialup wholesaler based in Wenatchee (in eastern Washington state), says his company entered the broadband wholesale market just two years ago. "We were worried about ISPs getting access to broadband," he says, "so we did wholesale deals for satellite (with StarBand) and for DSL, with Qwest and all the ILECs."

Lessons of life
Since then, the market has shifted dramatically. Klock says his company learned two harsh lessons:

"First of all, we found that broadband is not profitable. If it had been break-even, that would have been okay, but we found that the margin we were making could not support the cost of tier-2 technical service and network management."

"The second lesson we learned," he says, "is that there's a train wreck coming in the whole access world. The FCC clearly intends to reinstate the monopoly. The monopolies are setting wholesale prices that are equal to or higher than the retail prices available directly from them or from their partners like Yahoo! And you cannot blame them for cutting prices—they're being killed by the cable companies. While some companies will continue to make money at wholesaling dialup, we decided that the ILECs have too much control over the success or failure of their CLEC and ISP competitors."

Paradigm shift
US Online will, instead, focus on value-added services. The company sells e-mail filtering and spam and virus filtering. Its most innovative service, however, is a portal and opt-in e-mail program called SuddenSpecials that links small businesses with local customers. The small business buys a service from US Online that allows them to do permission-based e-mails to people who have signed up to receive the e-mails. Customers get coupons and discounts and receive e-mail only from those vendors they have signed up with.

Klock explains, "We give a business what we call a counter stand and sign up cards. They sign up customers at their place of business, which might be a sandwich shop. ISPs can get involved, too, by sending an e-mail to their customers once each month saying, 'would you like coupons from any of these businesses?'"

"We went to one business today to sell one service—localized marketing," Klock relates. "By the end of the sales visit we had sold phone lines, a DSL line, a computer, several Web pages, and even additional network services. ISPs have to be selling services. It's software that sells PCs, not the other way around. The message to ISPs is that you're going to have to look at value-added services outside of Internet access to build your future."

Klock feels that, in retrospect, it should have been easy to predict the telecoms train wreck. He says, "Any time you mix a large government subsidy and private industry, you have an opportunity for corruption. Let's face it: All infrastructure in the U.S. is subsidized. I think the telecommunications infrastructure needs to be public, like the U.S. Interstate system, with private services sold over public infrastructure. Monopolies cannot build for the future. They cannot build a line out today if traffic on it will only be 10 percent of capacity."

The elusive beauty of fiber
In contrast to this copper wasteland, Wenatchee is a fiber paradise. Klock boasts, "I have a 2 Mbps connection to my home. It's great, but the payoff on fiber is 15 to 20 years, which isn't something Wall Street accepts readily. On the other hand, if we regulate and hold up private monopolies, we'll never get great service. I'm working with CISPA and GoFiber."

Meanwhile, Klock believes that ISPs must enter the services market or perish. "I do believe ISPs will make the jump to selling non-access services," he says. "One of the challenges we've seen for ISPs is that a lot of people got into this business because of their technical background. Some have reinvented themselves and become really great marketers."

But Klock warns, "The ILECs have made the decision on broadband that they're not going to let it get past them like dialup did. They've decided they're not going to let the ISPs and CLECs get a foothold in broadband. ISPs could do something about this. They have huge customer bases they communicate with on a daily basis. But they need to organize, and that costs money and requires professionals. Also, we need to put down our independent streaks and set aside our competitive edge."

"Meanwhile, the FCC feels like it's not being watched," Klock laments. "I'm not complaining about Powell and his decision. We believe that the future of telecom involves structural separation and that the infrastructure will be fiber to the door. Innovation happens in electronics. Fiber's been around for decades, but now we can multiplex the fiber and 1 strand can do what 64 used to. That innovation came from electronics companies. It's not the line in the ground that makes the business, it's the VPN service that some ISP delivers. There's one thing our government does do well, and that's build roads."

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