Aros Net, Utah’s second-largest independent Internet service provider, grew into a $10 million business in large part by selling its brand of Internet over Qwest’s copper phone lines.
Now Aros, along with hundreds of independent ISPs across the nation, may face possible extinction because of new rules that allow Qwest and other phone companies to kick ISPs off their high-speed Internet, or DSL, lines.
“This could mean major financial difficulties for us,” said Aros chief executive Michael Winsett. “This will also raise prices and limit Internet options for consumers. It’s putting a monopoly back in action.”
ISPs offer e-mail, security features such as spam-blocking, and content. EarthLink, AOL and MSN are the three largest independent ISPs.
But phone companies such as Qwest and cable companies such as Comcast offer competing ISP services over their own broadband networks. Qwest bundles ISP service and broadband access – at 1.5 megabits per second – for $39.95 a month, plus taxes, for current phone customers.
EarthLink, which resells Qwest DSL service, also charges $39.95 a month.
Under new Federal Communications Commission rules, phone companies won’t have to carry competing ISPs. A recent Supreme Court decision gave cable companies the same power to exclude competitors.
The new FCC rules rip down the decades-old edifice of phone regulation given the growing broadband competition from cable and wireless companies. The FCC and the Bush administration also hope deregulation will spur the market to roll out broadband across America, which slumped to 16th in a recent study of worldwide broadband penetration by the International Telecommunications Union.
But deregulation may cause a shake-out.
“The ISPs are all in trouble,” said Phil Weiser, associate professor of law and telecommunications at the University of Colorado. “Regulators have pulled the protections that ISPs have historically enjoyed.”
Aros Net and foreThought.net, a small Denver-based ISP, are hatching separate survival plans. One involves wireless, while the other is banking on new DSL equipment.
Aros Net has a two-year contract with Qwest that locks in its wholesale price for DSL. During that time, Winsett hopes to move most of his customers off Qwest’s copper and onto a new wireless technology known as WiMax.
“I look at bypassing the telecom companies altogether,” said Winsett.
ForeThought.net chief executive Jawaid Bazyar, on the other hand, will continue to use Qwest’s bare copper lines. But instead of reselling Qwest DSL, he plans to approach other small ISPs in the Denver metro area to raise $1 million for their own DSL equipment that will tie in to Qwest’s network. The new equipment will allow foreThought.net to sell its own DSL at faster speeds than Qwest.
Qwest DSL maxes out at 7 megabits per second, Bazyar said, while he hopes to hit 20 Mbps. The difference between 7 Mbps and 20 Mbps is downloading a movie in 2 minutes as opposed to 40 seconds.
“To the extent that ISPs do offer real value to consumers, they will find a way to survive,” predicts Weiser. “If they don’t, they will disappear.”
Larger ISPs have more bargaining clout with Qwest and other Baby Bells.
“We think there is a good business case for keeping us on their networks,” said Dave Baker, vice president of law and public policy for EarthLink, the nation’s largest independent ISP with $1.34 billion in 2004 revenues.
But EarthLink is not taking any chances. The company is making a huge push into a new generation of wireless phone services. “A few years from now, we will be generating customers and revenues from a variety of voice products,” Baker said.
Most ISPs are relying on the benevolence of Qwest, which benefits from the customers that ISPs bring to their networks. Qwest will not deny access to the 450 ISPs that use its network, according to Steve Davis, Qwest’s senior vice president for public policy.
“We are large enough that we can talk to Qwest,” said Bill Ward, president of Front Range Internet, a Fort Collins-based company that last year had $4.8 million in sales. The company has grown by acquiring four ISPs, including its chief competitor in Fort Collins.
Baby Bells SBC and Verizon also say they will continue to allow competing ISPs on their networks. But they will probably increase the price of wholesale DSL, experts say.
That’s exactly what happened last year when the FCC removed regulated pricing by which Qwest sold competitors access to its local phone lines. That gave Qwest and the Baby Bells an advantage in bundling local and long distance phone service. Soon after, MCI and AT&T announced they were exiting the long distance business. Both became takeover targets. Verizon is buying MCI and SBC is buying AT&T.
“Some of this industry consolidation and restructuring is a natural process,” said Weiser. “But the concern is, will it lead to a concentrated industry structure? That is a grave concern, to which we do not know the answer.”
Staff writer Ross Wehner can be reached at 303-820-1503 or rwehner@denverpost.com.
