Internet Access Providers' Year in the Sun

P> Retrospective stories in both mainstream and technology publications call 1995 the "Year of the Internet." In Washington Technology's Fast 50 list, it certainly was a good year for Internet access and content providers, which supports the claim of economic development types that the Washington area is home of the Internet.

The Washington area is also home to two of the fastest growing access providers, UUNET Technologies Inc., Falls Church, Va., which debuted at No. 33 on the list, and PSINet Inc., Herndon, Va., which entered at No. 39. Both have become international players in the Internet business. UUNET grew 794 percent; PSINet jumped 597 percent.

But although analysts predicted 1995 as the Internet access companies' year in the sun, this year holds a future of consolidations and failures for Internet service providers.

The Internet honeymoon is over, said Greg Wester, research director at the Yankee Group in Boston. "We expect to see scale-backs in everything from Internet development plans to the number of Internet network providers," he said.

Yankee Group estimates that out of 1,420 Internet service providers in 1995, only 640 will live through 1996. That number will be split in half each of the next three years, with only 60 surviving into 1999. This past year was really the heyday of Internet service; only 230 companies existed in 1994.

So how will that affect the Fast 50 Internet entries? WT's three Fast 50 winners were mentioned specifically in the Yankee Group's study as having a high shakeout risk compared to companies that offer systems integration, software and hardware for the Internet.

Even though UUNET and PSINet are in the Yankee Group's high-risk category, it is more likely that industry consolidation will eradicate the smaller regional operations. Such companies will be crushed by their own growth, the study said, as they become unable to manage more accounts.

In fact, said Steve Franco, program manager at the Yankee Group, 1996 will probably be the best year yet for PSINet and UUNET, pushing them up farther on the Fast 50 list. "It will be the year they'll be able to flex their muscle and take control of the market," Franco said.

Consolidation among Internet providers is not occurring only among the on-line access companies, but among cable and telecommunication businesses as well. Alliances are sprouting up all over as companies try to cover their bets. "PSINet and UUNET will be the benefactors of that consolidation," Franco said. He predicted that the two healthy companies will probably not try to buy smaller competitors because they don't want to inherit any dead weight.

A recent Yankee Group survey showed that 46 percent of all Internet households would prefer one integrated provider of on-line and telephone services. Showing name recognition is of paramount importance; 45 percent of those consumers said they would choose AT&ampT as their one-stop shopping provider. No other single company, including the baby Bells, Internet companies, or other long distance providers, received more than 10 percent of the vote.

When the baby Bells get into the Internet business, said Franco, even strong Internet providers will find it extremely difficult to fight the local and long distance phone companies, he said. "They have a leg in via every monthly bill," Franco said.

If the Internet access business does shake out as drastically as the Yankee Group predicts, it will be a heavy blow to most of the companies and shareholders now investing big bucks ahead of expected revenue. A recent report from Alex. Brown &amp Sons, Baltimore, suggests investors focus on companies that provide access to businesses or consumers, but not both sectors.