Connecting With Consumer ISPs
The market for consumer ISPs is growing along with the number of online households, and has expanded into two markets: dial-up providers, with a broad range of value propositions; and broadband, with multiple tiers of service and value. "The Forrester Wave: Consumer ISPs, Q4 2005" breaks down seven major providers and their subofferings by their strengths and weaknesses, showing how a commoditized service can differentiate itself for the buying public.
The overall Internet access market grew from 59 million households in 2000 to 72 million at the end of 2004, a 22 percent increase, and is expected to reach 90 million households by 2010. In that same time frame, Forrester predicts that the percentage of households with broadband access will grow from 43 percent to 79 percent.
This bodes well for in the short term for providers of full-featured dial-up, of which AOL and EarthLink are the Forrester Wave leaders. Full-featured dial-up service is characterized by unlimited 56 Kbps access coupled with value-added features such as security software and multiple email accounts, with regular prices ranging from $15 to $24 per month and as low as $12.95 during promotions. There is also room for value-priced services, which focus on "cheap access without all the bells and whistles," according to the report. These basic dial-up services, including NetZero, Juno, Netscape, and PeoplePC, are attractive to new users or those seeking to reduce their outlay for Internet service, because of their $9.95 to $14.95 monthly pricing, with promotional rates as low as $5 per month.
However, dial-up's chief advantages over broadband--price and ease of access--are eroding in the face of strong competition from providers of the so-called fat pipe. DSL, high-speed Internet service provided by local telcos like AT&T and Qwest, includes a bundle of services matching or exceeding the best of the dial-ups, as well as an always-on connection with speeds ranging from 5 to 40 times that of dial-up (256 Kbps to 6 Mbps). DSL can cost consumers as little as $15 per month, or as much as $60. While DSL, like dial-up, is transmitted over phone lines, DSL does not tie up the line and prevent voice calls; in fact, it can be used for VoIP. Cable modem broadband, from operators like Comcast, Cox Communications, and Time Warner Cable, is the current leader in U.S. broadband sales and sits within the span of DSL pricing, at $35 to $55 per month. Cable is generally faster (3 to 10 Mbps) than DSL and more generally available, but Forrester notes that DSL providers are closing the gap in terms of price and availability. Cable operators, however, have started offering attractive bundles of TV, high-speed Internet, and VoIP.
A fifth category is emerging in consumer Internet: fiber to the home. This telco-based service offers speeds of 5 to 30 Mbps via a dedicated fiber optic line, at prices equivalent to those of cable broadband. SureWest and Verizon lead this new category, but limited availability of the service places it at the back of the pack for market penetration.
The top performers in overall value to the customer are AT&T and Verizon, both DSL broadband providers. "Regional providers AT&T and Verizon offer a range of bandwidth speeds and prices that provide consumers many choices," the report states. "They couple these access products with Yahoo!'s customizable portal, IM, and email services to provide a best all-around value." The Yahoo! partnerships also give these providers access to competitive features such as music content, digital photo services, and gaming. Both providers also have taken steps to make their pricing more attractive, notably Verizon's $14.95 entry-level DSL product.
The second tier of leaders includes dial-up portal providers AOL and EarthLink, as well as cable vendors Comcast and Time Warner. "AOL, the pioneer of the ISP space, has experienced competition as telcos and cablecos enter the space with broadband access," the report notes. "Yet AOL has managed to minimize its losses by constantly delivering additional value" including specialized content for children and parents, and numerous security and social networking tools. Time Warner appears to be the strongest broadband player at this level, according to the report, which says that the provider rivals Comcast in speed and content, and also "leads the cable industry in the sale of digital (VoIP), offers solid content on its portal, and is aggressively pursuing a triple-play strategy" of TV, Internet, and VoIP.
"In the past, the availability of local numbers and the reliability of dial-up connections made ISPs desirable; but with the always-on connections broadband provides, the market has become more complex," the Forrester report states. Providers will continue to differentiate their offerings on the bases of cost, convenience, and speed. Cost appears to be a race to the basement, so ISPs will likely emphasize their services or raw power to successfully compete.
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