Shakeout in internet market as free service bites

By Aimee McClinchy

Friday 2nd June 2000

New research shows free internet service providers have started to weed out smaller pay-per-view ISPs.

A shakeout of the 200 players in the ISP market is under way with many regional operations buying out others, merging or banding together for market strength.

Compass Communications has bought another ISP, Taranaki Net Source, to add to its initial purchase AIX. Other regional ISP companies have been brought together under Christchurch-based NetAccess and Auckland-based Planet Communications.

The consolidation began before the growth in free ISPs but has accelerated. Last December NetAccess announced it would organise a consortium of small ISPs to list together on the New Capital Market.

ISP casualties include Auckland-based Sinesurf 2000 and Christ- church-based WizKid, both of which have disappeared offscreen.

Research house IDC's new study, headed by analyst Pat Pilcher, showed many others have disappeared, and tipped further consolidation and collapses.

But industry sources claim many small pay-per-view ISPs will manage to survive in one form or another because they will find regional audiences want local service, with the high-quality connection of a local base.

Auckland-based ISP Ezysurf's chief executive Michael Spencer said the "second tier" ISPs, set up as corporates to make a return to shareholders, had faced the greatest threat from free ISPs.

They were now having to focus on differentiation and revenue streams other than just distribution, he said.

Ezysurf, which has grown its customer base 25% in the last quarter, was securing its place running behind-the-scenes infra-structure for "virtual ISPs": retailers or organisations marketing their brand by offering free services but relying on someone else's infrastructure.

Ezysurf has just signed a virtual ISP agreement with a Tauranga-based ISP to take its regional service national.

Despite the shakeup, Mr Spencer said Ezysurf had already won back half of a small group of customers it had lost because they were tired of the lack of service and lack of speed with the free ISPs.

"It is a false model operating in a temporary situation because of 0867. I think everyone understands that," he said. "But it's been a tough few weeks as the market adjusts to them."

Auckland-based Connected Internet (formerly known as Business Internet Solutions) director Larrie Newman agreed.

"Free internet was, to begin with, a novel nuisance for the established ISPs. However, with the arrival of Clear's zfree.net.nz, this market has been given credibility," he said.

"Free internet overseas has taken about 10% of the ISP market. But many established users who try the free services go back to their original ISP after being frustrated by the lack of service," Mr Newman said.

"ISPs must diversify to survive."

Connected was merged into and then later spun off from the AFL group last year. The National Business Review publisher Barry Colman is the major shareholder with Mr Newman.

Mr Newman said it had chosen to re-focus on the lucrative business customer sector rather than general consumers, after free ISPs muddied the market.

He said his company was offering high-speed wireless connectivity, and services such as a password-protected site and web sales-training resources, to stand out.

Large ISPs are feeling the pinch too: Ihug is continuing its plans to offer multi-media, video and fast-food services through its online delivery service E-mmediate, to give its subscribers incentives to stay put.

Despite negative market views, Clear disagrees the free ISPs causing such chaos are not here to stay. It insists its free ISP, zfree, is a viable model it sees as a long-term investment.

"It's about being smarter in terms of mixing these types of businesses," Clear's online director Ian Scherger said.

He said ISPs had to chose a direction in the maturing market and realise they could not "do all things for all people."

Clear and Telecom have reached a temporary ceasefire on interconnection battles, with Clear to encourage customers on to Telecom's 0867 number and Telecom to drop its 2c internet tax.

Clear said it could not reveal whether it was still receiving a share of interconnection payments for terminating calls, nor could it talk about the cut free ISPs received. But it said it was pleased with its "commercial package" and still believed any carrier should be able to earn interconnect revenues that way.

The industry says as a source of revenue for free ISPs, it is still highly uncertain.

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