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Boardwatch Reprinted Article

THE VIRTUAL ISP
Crossing the Chasm by Ron Lipof

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Outsourcing Internet connectivity and value-added services is increasingly attractive, but, depending on your background, the transition from traditional ISP to virtual ISP might seem a bit unnerving, like crossing a chasm into the unknown.

A 20,000-user ISP that elects to outsource over building a proprietary network would save over 40 percent a year in a national network configuration. These savings result from the ability to leverage individual cities over larger user groups and effectively share the burden of common costs such as ATM port fees and collocation costs.

For the “newbies” of the industry, who tend to be strictly business-oriented, outsourcing fits into a virtual enterprise model that they perceive as saving time and money over a complicated “build” decision.

But for technically oriented ISPs that pioneered the industry by rolling out their own networks, the decision becomes much harder. After that degree of nurturing a business, it’s hard to let go and turn your infrastructure needs over to a stranger.

NO BRAINER FOR NEWBIES
An example of one recent industry entrant is Drivetech. It is an engineering-savvy company, just not in the Internet connectivity area. Traditionally it delivered hardware systems to enterprises, but recently chose to diversify by delivering Internet connectivity to customers.

“Being a virtual ISP enables us to focus on a new business channel in addition to our traditional hardware sales,” said Gary Babbin, president of Drivetech. There is a lot of value-added along with the service we chose.”

“As for downside risks,” he continued, “we saw no disadvantages. Although there was a learning curve in terms of getting up to speed in offering Internet connectivity, this was a normal business thing. Versus building our own network, which just wasn’t an option, it was vastly more attractive. The time it would take to roll our own network plainly wouldn’t allow it as an option.”

OLD SCHOOL ISPs
VEI Internet wasn’t new to the Internet scene. It was one of those pioneering ISPs that developed its own network and enhanced services.

In its primary region, Chattanooga and surrounding areas, it does not outsource anything. “We mainly outsource the dial-up service so we can gain national coverage and reach more customers rather than just staying local,” said Neil Ulrich, CEO of VEI Internet.

“It is also a benefit to our customers because, if they travel, they can still connect to VEI in any of our cities. Now even the most die-hard techie must appreciate the virtues of outsourcing.

“ISPs found out that it was more efficient to outsource — to resell connectivity.” Ulrich continued. “The reliability is high, and the wholesale pricing makes it affordable. The issue of the increased reliability of the network is probably what most impresses the technically sophisticated ISP.”

Two or three years ago, it made sense to develop proprietary networks to deliver reliable connections — in those days it might take four or five attempts to establish a connection. Today connectivity and stability are assumed, much like that provided by the phone company. Given there are now wholesale Internet connectivity providers who specialize in deploying and maintaining highly reliable networks, the original reason for building the proprietary network is no longer valid.

“It is also a benefit to our customers because, if they travel, they can still connect to VEI in any of our cities. Now even the most die-hard techie must appreciate the virtues of outsourcing.

“ISPs found out that it was more efficient to outsource — to resell connectivity.” Ulrich continued. “The reliability is high, and the wholesale pricing makes it affordable. The issue of the increased reliability of the network is probably what most impresses the technically sophisticated ISP.”

Two or three years ago, it made sense to develop proprietary networks to deliver reliable connections — in those days it might take four or five attempts to establish a connection. Today connectivity and stability are assumed, much like that provided by the phone company. Given there are now wholesale Internet connectivity providers who specialize in deploying and maintaining highly reliable networks, the original reason for building the proprietary network is no longer valid.

VEI Internet found there were many advantages to being a virtual ISP, not the least of which is the ability to maintain a revenue stream without further investment in networking infrastructure. ISP-branded outsourced connectivity and value-added services are available on a national basis. These offer unprecedented time-to-market when compared to most other businesses.

THE FOOTPRINT FACTOR
Yet another competitive advantage to outsourcing connectivity is the footprint factor — achieving sufficient scale and geographic reach to be interesting to mobile, upscale users. Wholesale connectivity providers maintain SuperPOPs in most major metropolitan areas that enable quick and easy nationwide access.

A “build” decision by the ISP means a commitment to designing, maintaining and constantly upgrading a wide area network. In addition to equipment deployment and maintenance, relationships with local and national telecommunications companies must be established and maintained.

Implementing your own network requires maintaining the switching equipment and remote servers that make the network possible. This task is made even harder by equipment life spans, which grow increasingly shorter — currently running at 19 to 24 months.

If these challenges weren’t enough, the banks have not made things any easier for small- and medium-size ISPs. It becomes increasingly harder for these businesses to receive the loans required that make this type of capital investment possible.

Maintaining the network requires a network operations center (NOC) and an associated engineering staff. Additionally, connectivity is just part of the equation — competitive pressures demand the ISP offer value-added services such as DSL, e-mail, news, billing and Web hosting. DSL is difficult for small- to medium-size ISPs to offer due to the costly interconnections required and up-front capital expenditures. But, it’s a future that subscribers are interested in, and, as such, adds to your competitiveness.

PEOPLE
Another significant advantage to outsourcing is that someone else worries about all the personnel required for delivering national connectivity. This includes engineering staff, a development team, database administration, training and customer support personnel.

Providing quality customer support, which spans customer service and technical support, is a daunting task that demands excellent execution. The NOC positions must be staffed by IT personnel, and the availability of IT personnel is at an all-time low. There are just not enough trained people. The gap is in the 200,000 to 300,000 person range and it’s difficult to train and expensive to keep these people. Most ISPs lack the resources and skilled manpower to offer customer relationship management (CRM) applications, but Internet wholesale connectivity providers are staffed to offer these services.

DISADVANTAGES
The reasons for taking the virtual ISP route are compelling, but Ulrich admits some concern over making the decision. “What worried us was the absence of the direct network monitoring we had in the past,” said Ulrich. “Our focus is to take care of the customer. It’s hard for an ISP’s tech support to know what’s happening.”

It’s the duty of the connectivity provider to alleviate these concerns. A good business partner will alleviate these fears by offering a 24x7 NOC, frequent and periodic status reporting, a Web-alert interface, notifications over e-mail and pager and plenty of direct communications over the telephone.

In addition to the monitoring issue, there are other potential drawbacks in becoming a virtual ISP, depending on how you decide to go about it. For instance, “going virtual” could involve the coordination of several vendors, including services vendors, connectivity providers, CLECs, ILECs and long-haul carriers. This is an expertise in itself, requiring knowledge and skill to package these services as a single brand to your subscriber.

Fortunately, many Internet wholesalers can provide enhanced services; in addition to connectivity, coordination of the telco spans is part of their normal business operations. This means one-stop-shopping is definitely an option, and an attractive one. This provides a single point of control, greatly simplifying your own business operations.

CHOOSING A PARTNER
The bottom line is you have to trust your outsourcing partner. One of the first questions you want to ask a potential connectivity provider is whether or not he provides a dedicated account representative. Over time, you need to feel that this person is your dedicated advocate. As Gary Bobbin of Drivetech says, “Outsourcing with a good vendor brings peace of mind.”

Keep in mind, the chasm does have a bridge, which is to say, the ISP can operate in a hybrid mode of maintaining some of its own infrastructure while easing into the world of the virtual ISP. This is even true to the extent that you can choose not to go national with a wholesaler. Some wholesale providers offer as much or as little geographic coverage as you want. You may just be looking for coverage in Pennsylvania or Houston.

Here’s some more advice: Choose a partner that understands you want to private brand. Don’t choose a vendor that wants its name over everything. This makes it hard to private label, and will only conflict with your business goals and confuse your subscribers about who their Internet service provider is.

Chances are good you got into this business in the first place because of a love for one particular aspect. Outsourcing connectivity enables you to focus on this core area by removing the burden of maintaining the network infrastructure, and even the value-added services. You are free to concentrate on what you do best, or want to do most.

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