ISP Stocks TKO'd

Stocks in ISPs declined as analysts voiced fears about all existing ISP business models—all except AOL's.

by Jayson Matthews
of siliconvalley.internet.com
[August 14, 2000]

It doesn't pay to be an Internet service provider (ISP) these days, even if you're a free one.

Amidst a recent flurry of Digital Subscriber Line (DSL) and cable growth, a widely held opinion by many analysts was that only free ISPs (those placing targeted advertising on a user's screen in exchange for the service) would be the dial-ups to survive the growth of broadband.

Now it seems that while they will still fare far better than their pay-for counterparts, even the free ones won't escape unscathed.

ISPs across the board hit year lows on the stock market this week, with several downgrades biting into Redwood City-based Excite@Home Corp and Juno Online Services Inc., the largest of the free ISPs.

"ISPs have got to try and hold onto their existing subscribers with the promise that they (the ISPs) will be upgrading to broadband soon," forecasts Dylan Brooks, an analyst at Jupiter Communications.

Spinal pain
Unfortunately, the backbone for broadband is still being built and cannot yet meet demand. The DSL market grew at a rate of 51% last quarter, according to Telecommunications Reports International, and cable modem access grew 21% to nearly 2.8 million customers. Brooks says most ISPs won't have the ability to extend their markets at this rate, leading to widespread consolidation.

"The rest of them will be absorbed by the big ISPs, most likely the big free ones, he says.

Despite the downgrade, Jeremy Schwartz, senior analyst at Forrester Research, says Excite@Home should fare the best in the long run. In the interim, he says, they'll have to tough it out while the groundwork for broadband continues its growth.

"The ISP with the strongest broadband potential is definitely ExciteAtHome," he says. "They have a background of working with cable companies, and they know the technology behind them.

AOL still strong
The only dial-up provider the market seems to like as of late is America Online (AOL), which saw its stock up 1 7/16 to 53 at market close yesterday. Because of its consumer base and diversity of content offerings, analysts say the company won't lose many of its customers during the forecasted explosion of broadband over the next year.

"AOL's typical consumer is like me," says Tomi Yasui, a motorcycle mechanic in San Francisco. "We aren't technical, and we don't give a hoot about broadband until it costs what AOL does and is reliable like AOL is."

AOL currently serves more than 23 million registered users.

—End