[asterisk-biz] OT: Independent ISPs in the US (was: Experimental/new VoIP rate search engine.)

[Alex Balashov]

Trixter aka Bret McDanel wrote:

> On Sun, 2009-01-04 at 18:09 -0500, Kristian Kielhofner wrote:
>> On 1/4/09, Alex Balashov <abalashov at evaristesys.com> wrote:
>>> I think if this gets traction you will see a lot of providers doing
>>>  ultra-low bait-and-switch rates. Most cannot afford to be in a price
>>>  race to the bottom.
>>>
>>   Agreed.
>>
>>   This current race to the bottom, while somewhat inevitable, is not
>> necessarily a good thing for customers.
>>
> 
> to a point this is where the ISP market was just over 10 years ago in
> the US.  Race to the bottom, then they discovered things like churn rate
> costs, and all that.  They started charging set up fees, many providers
> went under or were so strapped for cash they sold to the competition
> that had the resources to float at/near cost and all that.
> 
> When the dust settled there were far fewer providers, and any provider
> with fewer than 3000 customers basically was gone.  

Speaking as someone whose professional background prior to getting into
VoIP was in the small, independent ISP industry (US), I will observe
that this is a very controversial subject.  The history of that industry
is heavily tied up in the regulatory and legal climate, within which
even relatively small shifts had tectonic effects in their creation and
destruction of business models.

The most immediate cause of the all-but-death of the independent ISP
industry in the US is widely seen to be the FCC's reclassification of
DSL as an information service that the ILECs have no obligation to lease
wholesale components of at regulated rates to competing ISPs.  There
were others, of course.

There are two basic prevailing moods within that discourse, and it's
worth taking a look at them to see what lessons can be taken away for
the small VoIP world--the one most of us are participating in here on
this list.

Fundamentally, there were two structural "waves" on which the
independent ISPs capitalised:

1) Early to mid 1990s -

The first was the appearance of dial-up Internet access:  order PRIs,
get a RAS box (Portmaster, TNT, TotalControl, etc.), set up a mail and
web server, provide tech support, and pocket cash.  Then the ILECs - the
folks who owned the physical copper plant and transport network from
which all this value was being extracted in such a lucrative way -
decided to get into that game themselves, on a much lower cost basis
since they own the stuff.

The price of monthly unlimited dialup crashed to under $10 as a result,
and so simply offering it no longer amounted to any kind of value
proposition in itself.

Of course, the emergence of mass-market broadband was the other key
reason why dialup was moribund and why the window of opportunity there
was only a few years (the so-called modem boom).  By 2000 (that's an
optimistic stretch), if you hadn't sold your formerly prosperous dial-up
ISP and walked away, you were screwed.

2) Late 1990s to middle postmillenial 00s --

The Telecommunications Act of 1996 opened the local exchange loop to
competition.  Most people in the VoIP world know TA96 for having
essentially created the legal phenomenon of the interconnected CLEC.
What somewhat fewer people know is that TA96 also required that the
ILECs lease certain parts of the ADSL broadband delivery infrastructure
stack (DSLAM ports, ATM/Layer 2 backhaul and handoff, line sharing,
provisioning, etc.) to competing ISPs at rates that were, until about
2005 (+/-), regulated and fixed to a certain extent.  So, big bad telco
could provide DSL, but it also had to allow other ISPs to use their
plant to provide DSL with room for a semi-decent margin in a relatively
turn-key.

(No such obligation was levied upon cable companies.  See:
http://en.wikipedia.org/wiki/National_Cable_&_Telecommunications_Association_v._Brand_X_Internet_Services)

While the ILECs dragged their heels on actually getting a lot of the
infrastructure and B2B backoffice / provisioning stuff to make this work
rolled out in the wake of the ruling, in the end it fundamentally opened
up an arbitrage opportunity for small ISPs.  They could use ILEC
facilities to provision DSL while delivering as little or as much
value-added service differentiation as they wanted and still remain at
least rudimentarily price-competitive, although of course the relatively
thin margins scale better at the level of a multibillion dollar
corporation than a local/regional ISP with a few hundred or a few
thousand customers and cost basis was always a problem.

This game ended with a 2005 FCC ruling that reclassified DSL and
effectively ended tariff controls, allowing the ILECs to float the
pricing for wholesale access to private commercial agreements and
effectively price the independents out.  The ILECs weren't so uncouth as 
to simply deny access;  mostly, they just raised prices so that a lot of 
ISPs' wholesale loop costs were close to the price at which they 
retailed the product.

The margins were pretty shabby to begin with, there was plenty of ILEC 
"slamming" of wholesalers' customers going on, and support costs and 
overhead were high.  So, among those ISPs that were left by 2005, there 
is a broad consensus that that's the day of the industry's death, but 
some will say the end of profitable dialup was really the end.

...

As mentioned above, there are two dominant reactions to this situation 
in the community.  One is that the ILECs are corrupt, vicious predators 
whose collusion with the Bush FCC and the Administration's connections 
to megacorporate telecom lobbyists suffocated a valuable and important 
business model.  A lot of the ISP owners sit around and gripe still 
about how the assholes at AT&T did this to them and Verizon that.

There is the additional - and very justifiable - cause for resentment 
that has to do with the fact that the ILECs' buildout of their networks 
and physical plant over the last century has been anything but the 
purely private endeavour that they attempt to characterise it as when 
arguing that there is no reason they should be required to lease it to 
competitors on advantageous terms.  On the contrary, they have been the 
beneficiaries of billions in grants, subsidies, funds (stuff like USF), 
state-sanctioned legal advantages (i.e. easements, rights-of-way, 
leases), revolving-door nepotism in government regulatory bodies, 
monopolism, and so on.  The argument here is that in this respect, the 
last mile of the PSTN operated by the telcos is more of a public utility 
- like the road system - than a fixture of adventurous and innovative 
private investment;  thus, the least they should do is be forced to open 
it up to competition on favourable terms.

On the other side of the coin, it could be reasonably said that TA96 was 
conceived as a modernisation initiative to incentivise the build-out of 
competing *physical* *networks*, with the idea that increased 
competition will drive down prices and spur innovation in broadband and 
other telecommunications services.  Instead, most of these small 
independent ISPs latched onto easy money in the form of legally 
supported arbitrage/resale opportunities without actually building 
anything of substance themselves, with a few notable exceptions (mostly 
from wireless-ISP-in-the-boonies land).  POPs and RAS boxes and circuit 
orders out the yazoo, but no parallel fiber transport cores, FTTH, etc, 
etc, etc.  In other words, the "meat" of the service.  Instead, most of 
them put faith in the small business mystique (your small, friendly 
local company that knows you by name and gets you superior customer 
service as compared to scripted, outsourced/offshored call-center 
monkeys from the Bells and cable MSOs) as a marketing technique.

Instead, they just resold Bell facility while they could.  And in the 
end the market rationalised away this inefficiency (with a little help 
from some regulatory bodies) and gave them the finger.  It turns out, 
according to this account of the situation, that the companies best 
equipped to provide pricing efficiency and value in consumer-grade 
broadband are the ones that literally own the network (or at least 90% 
of it)  it's all framed over.

There are survivors, of course;  folks that hang on providing 
higher-margin business services (whatever the justification for $150/mo 
"business DSL" that is the exact same product as residential, some 
businesses are willing to buy into it), value-added service

Anyway, it's obvious that the VoIP ITSP business is not like this in 
many ways.  What keeps VoIP wholesale PSTN O/T providers going isn't so 
much that they are taking advantage of a legally mandated arbitrage 
lever as that most of the big carriers that offer this stuff wholesale 
don't want to deal with small amounts of traffic.  But there's always 
pressure to "cut out the middle man," and as these carriers roll out 
newer and improved SIP trunking products, the pricing efficiency and 
dimensional flexibility of that offering (as it relates to volume 
commitments) will increase.

In the end, what you are offering as a wholesale O/T provider is going 
to become commoditised and come down to price.  More and more people are 
going to simply find a way to go around you and go to your suppliers. 
Domestic LD in the US has already collapsed to the point where I fail to 
see how anyone can make any margin off customers that have even a little 
bit of commercially viable volume (100,000+ minutes) to the table and 
actually know how to shop for deals.  And no market opportunity that 
relies on people simply not knowing how to get what you're getting will 
last forever;  you have to add real value.  Some of that can be achieved 
through neat rating engines and nice OSS/BSS systems and other business 
process-related value propositions, but at the end of the day, when the 
gap in quality narrows, people are going to want to go straight to the 
farmer to buy their wheat.

-- Alex

-- 
Alex Balashov
Evariste Systems
Web    : http://www.evaristesys.com/
Tel    : (+1) (678) 954-0670
Direct : (+1) (678) 954-0671
Mobile : (+1) (678) 237-1775