internet service provider

HISTORY AND DEVELOPMENT

Prior to ISPs, access to the Internet required an account at a university or government agency and a working knowledge of Unix. The Internet began accepting commercial traffic in the early 1990s, but commercial users had to honor the peering protocol of swapping data free of charge. The National Science Foundation commissioned four private companies in 1994 to build public Internet access points, and in 1995 the federal government closed its own Internet backbone. Those four public access points—located in Washington, D.C.,  and Chicago—came under the control of WorldCom, Pacific Bell, Sprint, and Ameritech. As Internet traffic increased, those public access points became clogged, and the major telecommunications companies began building their own faster, private access points and building out the Internet backbone. For a while the larger backbone providers established peering agreements with smaller ISPs, whereby they would swap Internet traffic for free. In 1997 UUNET, Sprint, and AT&T stopped peering with smaller ISPs and required them to pay fees to gain access to their networks.

At the beginning of 1995 there were approximately 160 commercial Internet access providers in the  According to PC Magazine, average monthly fees were about $17.50, with connect time billed at $3 per hour. Some ISPs could only be reached through a long-distance telephone call. ISPs offered Internet access through three basic types of accounts. Shell or terminal-emulation accounts connected the user to a Unix system with either a command-line interface or a proprietary GUI (graphical user interface). SLIP or PPP dial-up accounts used a modem to make a temporary direct Internet connection and required TCP/IP software. Permanent direct connections for LANs over leased lines were provided primarily for business customers. At the time America Online, CompuServe, and other online services offered limited Internet access. IBM and Microsoft were in the process of building Internet software into new versions of Windows and OS/2.

During 1995 the ISP market became more competitive. The dominant ISPs in 1995 were UUNET Technologies (annual revenue of $94 million), Netcom Online Communications Services ($52 million), and PSINet ($39 million). UUNET was focused on business and corporate customers, while Netcom pioneered flat-rate pricing for the consumer market. In addition to these national and international ISPs, the ISP market included large interexchange carriers, such as AT&T and MCI Communications Corp., and regional ISPs, which numbered in the thousands and were growing daily by mid-1996. Netcom began providing Internet service in 1995 and had 400,000 subscribers after one year in business. AT&T also entered the ISP market in 1995 and claimed it signed up 200,000 subscribers in the first few weeks. Both AT&T and MCI offered unlimited Internet access to consumers for a flat rate of $20 per month, while Netcom charged a flat fee of $20 for 400 hours per month. Sprint Corp. followed with a plan similar to its long-distance competitors, AT&T and MCI. UUNET, on the other hand, charged businesses an average of $1,000 a month for Internet service. Consumers were more interested in low-cost access, while reliability and speed were priorities for corporate customers.

At this stage the Internet was growing rapidly, and ISPs were challenged to build out their infrastructure, improve their router technology, and increase their access points. By 1996 regional Bell operating companies (RBOCs) and long-distance carriers were forming new subsidiaries to provide Internet service. After AT&T rolled out its WorldNet service in 1995, the RBOCs saw Internet service as a way to leverage their large networks. Pacific Bell, through its newly formed subsidiary Pacific Bell Internet, began offering Internet access in April 1996 to 75 percent of its residential customers in the San Francisco Bay area, and San Diego, as well as dedicated frame relay access for businesses. Bell Atlantic's Internet Solutions began offering dedicated Internet service to businesses and flat-rate dial-up services to residential users in mid-1996.

PROLIFERATION AND CONSOLIDATION

According to Boardwatch, the number of ISPs increased from about 1,400 in early 1996 to 3,000 at the beginning of 1997. By mid-1997 there were an estimated 4,000 ISPs in the United States and Canada. Many of them were small operations that served consumers and small businesses in local markets by leasing and reselling the Internet services of larger ISPs. To stay in business smaller ISPs merged with the telephone companies to provide customers with a single source for a range of telecommunications services. Earthlink Network Inc. emerged as one of the largest national ISPs serving consumers, with 320,000 customers. Its strategy was to acquire smaller ISPs and make them part of the Earthlink network while letting them retain their local identities. Earthlink provided the smaller ISPs with Earthlink startup CDs, then handled the billing and services and paid the ISPs for the new customers.

Consolidation among ISPs and telephone companies began in earnest in 1997. Long-distance carrier WorldCom Inc. acquired UUNET's parent company MFS Communications Co. for $12 billion, giving WorldCom the second-largest Internet backbone in the United States. GTE Corp., the largest U.S. provider of regional telephone service, acquired Internet backbone operator BBN Corp. for $616 million. Digex Inc., an early ISP, was acquired by another ISP, Intermedia Communications, for $150 million.

ISPs also formed alliances to network and share their customers with other ISPs, so that users who traveled abroad could save on long-distance connect charges. Peering arrangements were established between ISPs who agreed to carry each other's traffic. By 1998 it was more common for bandwidth wholesalers who operated their own networks, such as UUNET and PSINet, to sell access to their shared-use modem pools and other equipment to local ISPs. That made it easier for start-up ISPs to go into business without investing in equipment, while fast-growing ISPs could lease infrastructure from a larger provider.UUNET and other providers also offered turnkey ISP services to smaller telecommunications companies and others interested in entering the ISP market.

MAJOR PROVIDERS FOR CONSUMERS AND BUSINESSES

As electronic commerce became more widespread in 1999, corporate customers favored ISPs that could provide audience reach. According to a mid-1999 survey by Data Communications, UUNET serviced 178 of the 500 largest domains, followed by Exodus Communications Inc. and Cable & Wireless Inc. UUNET also handled a large number of dial-up users on behalf of major consumer ISPs such as America Online, GTE, and Earthlink. Another 1999 survey of ISPs by Inter@ctive Week found that BellSouth.net, UUNET, IBM Global Network, MindSpring Enterprises, and AT&T WorldNet were leading ISPs for business customers. According to the survey, key factors in selecting an ISP for business users were reliability, network performance, cost-effectiveness, customer service responsiveness, network capacity, and technical support.

According to a 2000 survey by Inter@ctive Week that measured customer satisfaction among business users, the top four national ISPs were MindSpring, EarthLink, PSINet, and UUNET. Regional ISPs as a group ranked fifth. While weak in network reach and brand awareness, regional ISPs scored well in getting their customers' service up and running, customer service responsiveness, value for price, and network reliability. Value for price and network reliability were the two most important factors in choosing an ISP, according to the survey. A 2001 survey of ISPs for corporate customers by Network Magazine ranked Cable & Wireless, AT&T, and UUNET as the top three national ISPs.

Inter@ctive Week ranked the following ISPs as the top five among consumers in mid-2001: EarthLink, Excite@Home, The Microsoft Network, Prodigy Communications, and America Online. At the time the survey was conducted, America Online was the largest ISP for consumers with 23.2 million subscribers. EarthLink had 4.7 million subscribers. By 2001 EarthLink was pursuing a broadband strategy; the company was under contract with Time Warner Cable to deliver Internet access over cable into 20 million homes. From 2000 to 2001, EarthLink experienced a 760 percent increase in the number of DSL customers and a 0.2 percent drop in dial-up customers.

In the early 2000s, the Microsoft Network boasted nearly 5 million U.S. subscribers and was expanding globally, while Excite@Home had 3 million home subscribers. Much smaller in terms of revenue and subscribers, Prodigy Communications was accessible to more than 90 percent of the United States. Prodigy had strategic partnerships in place with Covad Communications and SBC Communications to boost its DSL resale business. The company claimed to be the largest DSL retailer with 600,000 customers.

By 2001 ISPs providing free Internet access were having difficulty surviving. While offering free Internet access could succeed in gaining new customers, anticipated revenue from advertising, electronic commerce, and connect fees proved disappointing. A report from Jupiter Media Metrix stated that the free ISP business model was not sustainable. Toward the end of 2000 several portals terminated their free ISP services, including Alta Vista and Terra Lycos. In mid-2001 NetZero, the last pure-play free ISP, announced it would merge with Juno Online Services to form a new company, United Online, which would continue to offer free Internet access under the NetZero brand. Later NetZero announced it would reduce the number of free Internet hours from 40 hours per month to 10 hours per month. The company also reduced its staff by 26 percent.

Kmart  managed to purchase the assets of the infrastructure provider for its free Internet access service in order to keep its customers online in 2000. After introducing a two-tier model of 100 hours of online access for $9.95 per month or 12 hours of access per month for free, discontinued its free Internet access service in July 2001. Instead, the company offered unlimited access for $8.95 per month and gave customers the opportunity to get free Internet service in return for buying products at the Web site.

COMPETITION BETWEEN LARGE AND SMALL PROVIDERS

While no one owns the Internet, by 2000 it was clear that much of the infrastructure on which the Internet ran was controlled by a handful of very large corporations. With access to 300,000 miles of fiber and cable, UUNET owned an estimated 30 percent of the Internet's infrastructure. Other major U.S.-based players included AT&T, GTE, Global Crossing, Qwest Communications International, and PSINet. Control of the Internet infrastructure gave companies the power to charge smaller ISPs for peering arrangements and to charge fees for operating network access points (NAPs) where ISPs traded packets with each other. Large national ISPs, such as America Online, were able to negotiate better deals than smaller ISPs from infrastructure providers. According to some analysts, the result has been less competition in the ISP market, higher barriers to entering the ISP market, and more consolidations and mergers. The end result, they say, is fewer choices for users.

Smaller ISPs can be frustrated by a lack of connectivity to high-speed network hubs owned and operated by large ISPs such as UUNET or Qwest. An estimated 30 percent of Internet traffic traveled over UUNET's network. UUNET, Sprint, Cable & Wireless, AT&T, and GTE together controlled about 80 percent of long-distance Internet traffic. When a local or regional ISP cannot connect to a high-speed hub, its Internet traffic is much slower. While smaller ISPs have to pay a fee to access the larger backbone operated by the major ISPs, the backbone owners generally swap traffic among themselves at no charge under peering arrangements.

Smaller regional and local ISPs have been able to compete with national ISPs by offering better service. What they lack in network reach and brand awareness, smaller ISPs make up for by offering a range of value-added services, including Web design and e-commerce services.

Although the ISP market experienced consolidation and was dominated to some extent by large national providers, businesses and consumers could choose from an estimated 7,000 ISPs in 2001. While millions of consumers gained Internet access from well-known portals such as America Online and the Microsoft Network, there was enough demand to support countless smaller local and regional ISPs. Businesses appeared to prefer large national ISPs, some of which operated their own Internet backbone and could thus guarantee a wide reach and high-speed Internet access.