Investor's Business Daily, March 23rd, 2007
United Online is on the fast track of Internet access.
In November the company began began reselling Verizon Communications' VZ high-speed Internet access services for the first time under the NetZero brand in addition to the company's slower dial-up service.
United UNTD struck again earlier this month, this time it teaming up with Covad Communications DVW to sell that company's high-speed access services.
United is making the jump at a time when fewer customers are signing up for slower dial-up Internet access than a few years ago, says Mark Goldston, United's chief executive.
"I think we would all agree candidly that the dial-up market is not going to be a growth market even though it is still quite large," he said.
Other Internet service providers are also scrambling to boost their revenues by adding more services such as Web conferencing, streaming media or unified messaging.
The days of surviving by selling just one service are long gone, says Courtney Munroe, analyst for IDC, a research firm.
"Internet service providers are looking at what other value-added services they can add," he said. "You have to be able to provide something else to keep those customers because there are a lot of companies doing the same things."
1. Business
Companies in the Internet services group sell some kind of service to businesses or consumers.
But the category encompasses a wide swath of companies, each with its own set of business models, challenges and opportunities.
Of the 18 companies in the sector only seven trade above 10 a share. Six are profitable. The other two, Cogent Communications Group CCOI and EarthLink ELNK are losing money.
A few, such as United and EarthLink, sell Internet access services mostly to consumers. They compete with much larger cable and telecom firms that don't appear in IBD's Internet services group.
The others are a mixed bag. WebEx Communications WEBX is the leading seller of online conferencing services. The company, now being acquired by Cisco Systems CSCO, is also the sector's best performer. Its fourth-quarter revenue of $101.9 million was up 22% from a year ago. Earnings jumped from 28 cents a share to 33 cents in the quarter.
"Web conferencing is addictive," said Mark Levitt, an analyst for IDC. "Once you start using it you want to use it more."
Other companies included in the group are J2 Global Communications JCOM, which sells unified messaging services. Cogent and Internap Network Services INAP sell Internet access services directly to businesses. All three are relatively small, with less than $50 million in revenue in the fourth quarter.
Though small, the Internet service provider group ranks at No. 13 among IBD's 197 industry groups.
The growth shows the Internet is starting to live up to yesterday's hype, says Rodney Ratliff, analyst for the Stanford Group, an investment bank.
"We truly are seeing right now the promise of the Internet bubble of seven years ago -- it's coming true," he said. "It just didn't happen nearly as quickly as everyone thought it would."
Name Of The Game: Differentiate, diversify and use the Internet to enable new forms of communication.
2. Market
The markets for Internet service providers, or ISPs, are all over the map -- literally.
By 2010, global sales of Web conferencing services will reach $1.4 billion, up from $810 million in 2005, says research group IDC.
The market for unified messaging services -- which let users manage e-mail, voice mail and text messages from just about anywhere -- is much smaller. IDC expects sales to jump to $625 million by 2010, up from $404 million last year.
Basic Internet access generates about $35 billion in sales in the U.S. alone, IDC says.
Some of the companies are working to broaden their reach with new services.
United has branched into so-called social networking sites and rewards programs for advertisers.
In the fourth quarter of 2006, about a third of the company's revenue came from ads and subscriptions to non-Internet access services vs. 20% a year ago.
In February, Internap acquired VitalStream Holdings, which streams audio and video programs on the Internet. The move could increase Internap's revenue by around $21 million this year.
Internap finished 2006 with record sales of $181.4 million, up 18% from a year ago.
3. Climate
It's tough -- and getting tougher.
Over the years, Cogent has spent millions building its broadband service. Now it's just a face in a crowd. AT&T T and Verizon offer the same service, says IDC's Munroe.
"The problem for Cogent is that all of the big telcos have figured out that (broadband) is great. So it's growing fast, but everyone is in the market now," he said.
Last year Premiere Global Services PGI increased its focus on Web conferencing and other areas to make up for a decline in its broadcast fax business. Customers were spooked over a threat to include broadcast faxes into laws regulating unsolicited e-mails known as spam.
So far, online faxes haven't been added. But it matters little, says Stanford Group's Ratliff.
"People realized that on a marginal basis it was much less expensive to send a broadcast e-mail than a broadcast fax," he said. "The genie was out of the bottle."
Earlier this month J2 helped cement its leading position in unified messaging by getting a favorable settlement in its patent litigation suit against rival CallWave.
In the settlement, CallWave agreed to pay $4 million and at least 10% of its fax revenue to license J2's technology.
"The settlement also allows J2 to retain its competitive advantage in the fax-to-e-mail market." wrote Youssef Squali, an analyst for investment bank Jefferies & Co.
ISPs also are watching the controversy over net neutrality, the notion that Internet access providers should treat all Internet traffic the same.
ISPs contend they should be able to charge content providers for faster Internet access or quality-of-service guarantees.
While some Republicans have agreed, the Federal Communications Commission and Web content providers such as Google and Yahoo want neutrality rules.
"That's one issue to keep an eye on to see how it shakes out," said IDC's Munroe.
4. Technology
The Internet services game is all about having a technological edge.
Last year, Premiere Global launched a program to bring all of its services online, which could push its growth, analysts says.
Internap's acquisition of VitalStream, meanwhile, could help the company appeal to more customers. But it also creates problems. Internap had been a reseller of services of Akamai Technologies AKAM, a VitalStream rival.
"They have gone from being an Akamai reseller to an Akamai competitor, which of course puts them in Akamai's sights," Ratliff said.
ISPs must also keep up with the increasing demand for services such as phone, Web conferencing and video, says IDC's Munroe. Such services use much more bandwidth than the simple Web browsing and e-mail of the 1990s.
"Video is driving the growth of traffic on the Internet backbone so these guys have to spend a lot just to maintain their network and to maintain capacity," he said.
5. Outlook
The demand for Internet speed is ever-growing.
A record 10.2 million subscribers in the U.S. signed up for high-speed Internet access last year, says Leichtman Research Group.
Lower prices and bundled services are one reason for the increase. But speed is still No. 1, says Bruce Leichtman, president of LRG.
"People know that broadband is a much more pleasurable experience," he said.
Upside: Internet service providers will cash in as more companies do more online.
And despite digital signatures and other advances, businesses will likely always rely on services such as online faxes, Ratliff says.
"You still need the image of a paper document in many cases," he said. "Digital signatures still haven't caught on."
Risks: Companies can no longer hope to survive in the long term by selling one or two services.
Late last year WebEx paired with Time Warner's TWX AOL to develop a service to let customers access services such as Web conferencing and customer relationship management systems in one platform.
Later this year Microsoft MSFT will begin selling a software service that will merge videoconferencing and other communications.
With competition increasing, companies like WebEx can't afford to be a one-trick pony any longer, says IDC's Levitt.
"The biggest long-term risk is that Web conferencing will become more of a feature than a product," he said. "We are not there yet, but that's the risk."
Copyright 2007 Investor's Business Daily, Inc.
