Perspectives

There's No Magic Number to Profitability

You may hear some business analysts or presenters at conferences suggest that ISPs need to have certain, rather high, subscriber numbers in order to be profitable.

First, it's no secret that presenters at large conferences are interested in selling their services. Presentations at these conferences are often little more than "dog and pony shows" for the presenter's business or service. So, it's wise to approach statements made at such moments with caution.

ISP profitability is not solely a function of subscriber numbers. Several variables affect an ISP's profitability, from price elasticity (i.e., what the market will bear vs. competitor pricing) to internal operating costs and operating costs within various markets. There's no magic number or one key to making your ISP profitable.

Cost structures for ISPs are not consistent, but can vary based on region, Local Exchange Carriers (LEC), ISP business model (see below), and Internet access provider (i.e., backbone provider). The variable cost structure includes overhead, telephony charges (i.e., dial access lines, local loop charges), equipment (e.g., dial access, authentication, e-mail, and other Web servers for hosting), customer technical support, facilities, Internet access (i.e., backbone services), technical staff, and customer acquisition costs.

Because of these variables, the number of subscribers alone isn't itself the determining factor in achieving profitability. In fact, several available case studies feature profitable ISPs with as few as 250 subscribers and those still losing money with tens of thousands of subscribers. In the TrueBand community, we have members who are profitable. Future articles in our series on profitability will feature these members.

Business model can affect profitability strategy

Perhaps it is best to discuss ISP business models and some of the associated costs within each model in order to better understand the keys to profitability. Essentially, there are three types of ISPs today:

Facilities-based ISPs. These ISPs own their own Internet access servers and provision in-bound access lines. In addition, they may own their own authentication and e-mail platforms, and other equipment. In many cases, they provide their own 24/7 or variation of technical support.

Non-facilities-based ISPs. These ISPs outsource their access equipment to a third party wholesale provider. Most national providers (e.g., AOL, Earthlink) use this model in order to provide service in hundreds of cities without costly infrastructure.

Facilities/non-facilities-based hybrid ISPs. These ISPs combine the two models above in structuring their ISP business. In this model, the ISP owns the Internet access servers and provisions the access lines but out-sources key components such as e-mail, authentication, hosting, 24/7 technical support, and managed NOC services that are too costly and/or labor intensive for the local ISP to manage. This method is more common among regional ISPs looking to go national without building out hundreds of additional POPs. This model enables those ISPs to extend their regional infrastructure with a national virtual dial platform from a wholesale provider (i.e., typically a backbone provider such as Sprint, AT&T, UUNet, etc.). This hybrid method is most common with the members of TrueBand ISP Services.

Ancillary services and retention strategies: keys to profitability

In all of these business models, ancillary services and retention strategies play a key role in an ISP's profitability. Ancillary services can include but are not limited to dedicated access for business customers (e.g., Fractional T-1, T-1, DSL, etc.), hosting services, Web site design, domain registration, e-mail related services, and e-commerce services.

Retention strategies that reduce churn such as "satisfaction guarantees," SLAs, etc., and strategies that reduce costly bad credit disconnects ultimately reduce customer acquisition costs.

Look for feature articles in The Provider on subscriber retention and related issues, such as churn.

TrueBand Internet Services is your partner in profitability

We're here to help our members. TrueBand Internet Services is invested in the long-term profitability of its members. We can help you assess marketing strategies, market penetration, and expenses. We can work with you on strategies to increase visibility and pinpoint ways to reduce overhead. Call 800-995-5592 and ask to speak to your regional business coordinator to get started.