The Financial Post
Tuesday, November 11, 1997

More ISP consolidation expected

by Amanda Lang

The market for Internet service providers is consolidating fast, and most industry players expect the trend to continue until the field has been narrowed to a handful of players.

In the past two weeks, two publicly traded Canadian ISPs announced they will be bought by larger, U.S.-based rivals. iStar Internet Inc. will be acquired by PSINet Inc., and HookUp Communications Corp. has sold its subscriber base to Netcom Canada.

The ISP industry was fostered by small "mom and pop" companies, followed quickly by regional players. Some of those soon merged to form national ISPs, including iStar, HookUp, Netcom, and PSINet.

In the process, many were forced to spend on costly infrastructure to handle the traffic, which loaded them with debt. The initial strategy of providing low-cost access to the Internet failed because the Canadian market is too small to balance the cost of developing a network across the country.

That prompted companies such as iStar and HookUp to focus on corporate customers to whom they could also sell high-margin software and services.

Analysts expect that, eventually, business will be served by two or three national ISPs, with niche players emerging to handle special needs in particular industries.

Ron Close, president of Netcom, said the acquisition of iStar is good news, in part because it helps dispel the impression that all ISPs are financially troubled. "It's not good for any of us if a participant in this industry is in trouble", he said.

But he expects the newly joined firms will run into trouble as management focuses on merging operations. Eventually, some ISPs will move into new, more specialized markets, he said. For instance, many customers will need help integrating corporate data with the Internet. He also believes niche players will emerge with particular ISPs focusing on specific markets, such as commerce or entertainment, and offering software and services tailored to those markets.

The present consolidation among ISPs leaves online services such as America Online Inc., Microsoft Network and Bell Canada's Sympatico chasing the consumer dollar.

Still unknown is how online services will evolve. For now they seem content to battle over the 10% of Canadian homes that are Internet ready, but the strategy could change.

Stephen Bartkiw, managing director of AOL Canada, said online services have developed a business model that relies on revenue from advertising and "transactions", or commercial use of the site, although he admits AOL still derives the lion's share of its revenue from user fees.

However, with its acquisition of CompuServe's online business, AOL will pursue a "dual branding strategy" for both consumer and corporate markets, he said.

Rival service Sympatico, which has more than 300,000 subscribers, does not plan to tackle the business market, according to Scott Remborg, senior vice-president at Sympatico parent, MediaLinx Interactive LP.

Copyright © 1997 by The Financial Post. All Rights Reserved. Reprinted with permission.