Outside of the music industry, perhaps no other industry exemplifies the disruptive power of the internet connected world better than the internet service providers (ISP). An ISP primarily provides internet access as a service to its customers.

This has helped create the perception that ISPs are de facto gatekeepers of the internet; a position which brings with it some considerable additional challenges.

As a business, ISPs have to focus on providing a consistent and high quality service to its customers as well as delivering a good return on investment for its shareholders. But lately it seems ISPs are being pulled in so many other directions which, in some cases, appear to be in direct conflict with their primary objective. So where has it all gone wrong? This paper discusses some of the key issues and challenges; it examines various options and influencing factors; and provides some recommendations on the best way forward.     

ISPs are the original internet company in as much as their services were necessary for the internet to reach the critical mass of users to make it the ubiquitous and ever growing phenomenon it has since become. Ever since the introduction of a domestic internet market, it has been a rollercoaster ride for the ISPs and their business models.

An interesting historical observation is that early ISPs did not have any prior business model upon which to base their services, therefore they borrowed freely from the business models (and services) of existing communication service providers such as the telephony companies. As a result, and perhaps because they also recruited heavily from these companies, ISPs ended up with a Telco-industry biased look and feel to initial their service offerings.

This same pattern of talent and business model migration was also evident in the transition from telegraphy to telephony services in the previous era. In any case today's ISPs, having largely gone past the transition phase, and are now faced with the daunting task of defining their own future, and relevance, to a more sophisticated communication technology user base than at any other time in the past.

Declining markets and increasing competition

The phenomenal growth of internet access is tempered only by the fact that there is a finite amount of people on the planet. Once 50 per cent or more of the populace get connected, in any market, the potential customer pool starts to shrink, therefore individual ISPs are left to fight amongst themselves for the remainder, and for each other’s customers. The UK market is in just such a situation because, according to the Office of National Statistics, 61 per cent of the population of Great Britain, (comprising nearly 15 million households), already have internet access as of December 2007.

A direct consequence is sharply increased competition among UK ISPs, which is only exacerbated by new market entrants, with innovative and often disruptive business models (such as the introduction of free dial-up internet access by Freeserve and others in the late 1990s).

Currently, UK ISPs are faced with added competition from mobile internet services provided by the mobile Telcos. Such services, which are mostly based on 3G wideband connectivity, enables users to access the internet on the move, even at home. This development has the potential to render traditional fixed line ISP obsolete unless they can maintain their lead in offering even faster connectivity via developments like fibre to the home (FTTH).

Broadband and wireless internet connectivity

As hinted above, ISPs often compete with each other based on their speed of connectivity; therefore the introduction of broadband internet heralded an enhanced internet experience, especially for bandwidth hungry multimedia content and applications. Unfortunately, it also encouraged the take-up, by consumers, of ever more bandwidth hungry media streaming and/or content download applications and services (such as the BBC’s iPlayer, 4oD, Joost and sundry file sharing, peer-to-peer applications).

This virtuous / vicious cycle of feeds and needs battle between the ISPs has led to a downward pressure on the price of connectivity, despite increasing bandwidth consumption by their customers. It may have also affected the implementation of even higher-bandwidth, fibre-based connectivity, which appears to have stalled on the perception that it may not deliver a good return on the investment required to provide it. However, the government is under pressure to ensure faster connectivity in order to maintain the UK's position as a leader in the provision of ubiquitous broadband access for its population.

Convergence and adoption of new business models

Competition from multi-play (or bundled service) propositions, by Mobile Telcos and Cable / Satellite operators, has virtually brought about the demise of the standalone ISP. These days it is not unusual for a consumer to buy their Telephony, Television and internet services from a single provider such as: Virginmedia, BSkyB and BT, which are all starting to look very much alike in their interpretation of the converged communication service provider.

It is therefore not surprising that, in order to compete, they must try to differentiate themselves by exploring ways to enhance their customer appeal, especially on price and service enhancements. To this end, there is an urgent need to adopt and implement more customer focused strategies based on better insight of their customer's needs. This may include the use of ad-supported business models, such as behavioural / targeted advertising, to subsidise the cost of increasing bandwidth demand at a fixed or declining price point (and in which case free broadband services may not be out of the question in the near term). 

Pressure from content owners to help prevent piracy

Widespread adoption of broadband, and the consequent increase in content consumption / applications, has exacerbated the problem of illegal content sharing and copyright infringement to an unprecedented level. This has forced content owners to look for various ways in which to combat the threat to their extant business models; (a quest that saw the introduction of DRM technology and law suites against the content pirates / customers in the recent past).

This fight, which has now extended into ISP territory, has seen increased calls for ISPs to play a more central role in detecting, monitoring, and preventing illegal file sharing; in addition to their ongoing contribution to the fight against other, perhaps more serious, criminal activities like: online fraud, identity theft, phishing, terrorism and paedophilia. Perhaps, as a result, there were some strong reactions to the prospect of a three-strike rule on illegal content downloads, to be enforced by ISPs. The proposed regime could require ISPs to adopt a three step procedure in dealing with illegal content downloaders as follows:

  1. First offence - A warning email is sent to a suspect user account.
  2. Second offence - The user's account is suspended for a certain period of time.
  3. Final offence - The user's account is terminated by the ISP.

Not surprisingly, some ISPs have pushed back on these demands, on the grounds that ISP only provide a dumb conduit to the consumer, therefore the onus should be on content owners to do their own policing.

Internet regulation / law enforcement versus personal privacy of the users

ISPs already play a significant role in helping regulators and law enforcement agencies to detect, monitor and prevent certain serious illegal activities on a global scale. It is unclear whether this was a mandatory responsibility to be adopted by all ISPs before they are granted a charter, or if it is left to the instigation of said regulators or law enforcement agencies; however it relies on the ability of ISPs to track and monitor the traffic of all computers connected to their network.

This means that ISPs have the capability to disregard the privacy of their consumers under certain circumstances, but it also reinforces the perception that they are best positioned to play the role of internet gatekeeper on other, arguably less critical, offences like casual content piracy. Also the use of traffic shaping mechanisms, by ISPs, to manage or curtail heavy bandwidth usage by specific consumers, only lends further support to this position.

The available options

In order to reach a reasonable conclusion about the best way forward, ISPs need to fully understand the available options; not only from an individual business perspective, but also in relation to the likely impact on the industry as a whole. The following are just a few of the factors that influence these options:

1. The role of targeted advertising and other ad-supported business models
Online advertising has quickly come to be seen as a key revenue strategy by many online service providers. As such, targeted advertising can indeed bring competitive advantage for an ISP by subsidising the cost of service to their customers, which in certain cases may even allow for the provision of free internet access.

These days, it has become commonplace to bundle internet access into multi-play offerings that include TV and telephony which presents tempting opportunities for cross subsidies across the different services (e.g. TV advertisers can reach broadband / telephony customers and vice versa). However, it still remains to be seen whether online advertising can indeed offer the cure-all killer application that is hyped.

For one thing, targeted advertising and ad-supported free internet models may not provide the same level of revenue as straight-forward subscription charges. Furthermore, the subsidised nature of ISP offerings means that any initial returns must be directly applied to address the subsidy before any real return is delivered. This option may be viable for a few individual ISPs, but it may become unsustainable if the entire industry decides to adopt it.
2. Industry self regulation
The threat of regulatory intervention with measures like a mandatory three-strikes rule to be enforced by ISPs, has made clear that ISPs are seen as de facto gatekeepers of the internet, (regardless of whether they see themselves in that role or not). The pressure from content owners such as film and record companies will not cease unless ISPs take, or are forced to take, a proactive stance on the issue of online piracy via their pipes.

Self regulation will not be an easy accomplishment for the ISP industry, but it will provide many benefits including a collective voice / stronger representation in areas where individual ISPs are currently too small and fragmented to be effectively heard. This option would primarily benefit the entire ISP industry, but less so for those individual operators that need to make major compromises in order to make it happen. Furthermore, a self regulated ISP industry would be in a better position to influence the significant issues that affect them, and other industries, to their advantage.

3. Do nothing
This is not really an option because inaction could result in more negative impacts from external events as a likely outcome. In this scenario, on the one hand, ISPs could eventually become state-owned, or consolidated into a few large and heavily-regulated utility companies (that look and feel like state owned entities anyway).

On the other hand, and as is more likely to happen, ISPs could become so absorbed into their evolving multi-service media / communication parent companies that they simply become a service utility for pushing content and services. Either way, ISPs appear doomed to become utility service providers and nothing more, unlike the heady old days when an ISP (e.g. AOL) could takeover an established media company (e.g. Time Warner).

4. New opportunities and new technologies
Several developments around internet infrastructure, and innovative content services, may offer yet another option for ISPs to evolve into something more. One such development, i.e. the impending adoption of IPv6 (or internet 2.0) connectivity, promises several opportunities to enhance internet experience by resolving the threat of insufficient internet IP addresses and removing the need for a network address translation service (NATS), which is essentially a work around the threat using the current internet protocol (aka IPv4).

This development, along with ever faster internet connectivity, could help provide ISPs with the means to deliver a guaranteed quality of service, which is especially attractive for high bandwidth, content and internet broadcast propositions. Finally, and perhaps most crucially, is the ability to better enable dynamic business models for most internet based enterprises like ISPs and online content providers; the latter may no longer need to operate their own content delivery networks if ISPs are positioned to do this far more cheaply, and with a guaranteed quality of service.

The way forward

The previous section examined the factors influencing the various options that ISPs need to consider in order to address the numerous challenges they face. However, because these options, and their influencing factors, are not really independent of each other, the best way forward is to be found in combining the above options to create a suitable roadmap that will guide and help each ISP to achieve their objectives. In so doing, it will be necessary to keep three key points in mind regardless of which combination of options, and influencing factors are considered, as follows: 

1. Do not alienate or irritate the customer - Bearing in mind lessons learned from the music industry, it would be far less painful to include customers in decision making, (e.g. via opt-in schemes for ad-supported models), than to end up losing market share and / or possible vilification for invasion of privacy.
2. Resist excessive pressures from content industries - They all need ISPs as much as ISPs need them (perhaps even more so). Although the content industry / owners may threaten all manner of retribution (e.g. via governmental and regulatory intervention, or by setting up their own content delivery networks), but the fact remains that consumers will always need access to the internet, and to content, hence protecting the customer relationship must count in favour of the ISP.

3. Take the initiative - Perhaps the most difficult and daunting point to consider, not least because of the uncertainty associated with predictions about the internet and consumer behaviour, is that it would be prudent for ISPs to be more proactive in offering even more customer-pleasing, and regulator-friendly, propositions / business models, on their own terms, instead of being forced into it. 

There is no easy way to prevent what might eventually turn out to be a natural result of the internet’s evolution, (i.e. from a limited and metered beginning, to a ubiquitous resource as commonplace as electricity). But just like electricity distribution, it requires an ecosystem of service and infrastructure providers to make it run smoothly; therefore the greatest challenge for ISPs is how to pick the right roles, at the right time, in order to avoid losing their critical position as a key gateway, for most users, to the information superhighway. ISPs must embrace and protect their niche role in this ecosystem or risk extinction.