When Bruce Chatterley assumed the helm of Speakeasy, he wrote "ISP" on a white board and immediately drew a slash across it to emphasize at staff meetings that the company was no longer just an Internet service provider.
Rather, Speakeasy Inc. was to become a "broadband communications company." That meant conceding basic ISP services to cable and phone companies and focusing on higher-cost offerings that appeal primarily to niche markets such as small businesses and power users.
Chatterley has plenty of company nearly three years later as rival ISPs also try to evolve and diversify in the face of growing broadband adoption and intense competition from cable and phone companies that own the high-speed pipes into homes.
"The state of the independent ISPs today is a sad one," said Dane Jasper, president of the California ISP Association. "What we are selling today is by and large a commodity. Fast Internet is fast Internet."
Originally the mainstay of most ISPs, dial-up access remains profitable, largely because costs have mostly been paid off already, said David McClure, head of the U.S. Internet Industry Association. But near the end of any life cycle, he said, "you have to reinvent yourself with an entirely new product or simply let it die."
At AOL, for instance, subscriptions generated $1.5 billion in the first quarter of 2006, contributing to the unit's profits of $269 million. But that's still a 13 percent drop in subscription revenue from the same period last year.
So the company has strengthened its free Web and e-mail offerings to boost advertising, which generated $392 million in the quarter, up 26 percent.
EarthLink Inc. has expanded into voice and wireless, while United Online Inc., the company behind NetZero and Juno, bought properties like United Airlines' MyPoints loyalty program, which issues gift cards to leading stores as rewards for buying goods or participating in marketing programs.
In the early and mid-90s, the large phone companies focused on the Internet data highways, or backbones, leaving independent ISPs large and small to sell access to the onramps — via dial-up modems. Price was not the sole factor; some ISPs could tout fewer busy signals or more local numbers to avoid toll calls.
Smaller ISPs began to struggle when national ISPs like AOL expanded their pool of local numbers, eliminating a key selling point, said Lydia Leong, a research director with Gartner.
Americans abandoning dial-up
Today, even the national ISPs are struggling as more Americans abandon dial-up. According to the Pew Internet and American Life Project, 62 percent of U.S. Internet users have broadband at home, compared with 21 percent just four years ago.
Regulatory and court rulings have made it more difficult for standalone ISPs to gain access to the cable and phone lines. Some ISPs make deals to resell service, but costs can be high _ even as phone companies lower what they themselves charge their own customers to compete with cable.
Phone companies can afford to do that because they can pair DSL with higher-margin phone services and soon even television, said Kate Griffin, director of consumer technology and services at the Yankee Group research company.
In fact, EarthLink is trying to enter telecommunications businesses in response.
EarthLink formed a joint venture with South Korea's SK Telecom to launch a mobile service in the United States last month, and it launched in December an Internet-based home phone service in four markets to replace traditional local and long-distance plans.
"No longer are you able to collect a premium for just connecting people" to the Internet, said Mike Lunsford, the company's executive vice president for access and voice.
To further diversify, the company has been bidding for the right to build and sell citywide Wi-Fi wireless Internet services. It has won a 10-year contract to blanket Philadelphia with Wi-Fi coverage and is the leading candidate in San Francisco in a partnership with Google Inc.
Meanwhile, Time Warner Inc.'s AOL is ceding the high-speed access business by partnering with cable and phone companies earlier this year to provide AOL-branded service. It is also encouraging its dwindling base of dial-up users to move to broadband by raising prices to equal that of its broadband offering. The idea is to get users to spend more time online viewing articles, video and other ad-supported materials.
Mark Goldston, United Online's chairman, believes there will always be Americans on dial-up — they can't or don't want to get broadband — but that pool is shrinking.
So to draw subscribers from that smaller pool, United introduced an Internet-based phone service designed for dial-up.
And to reduce dependency on that business, it bought sites like MyPoints, Classmates.com and PhotoSite. In just two years, non-access services now account for nearly half of all paid subscriptions.
Microsoft Corp.'s MSN, too, is going after that smaller dial-up pool, temporarily reducing its prices following AOL's price hike. Kevin Mizuhara, MSN's marketing director for dial-up, said his unit is aided by an ability to share overhead costs with other businesses, such as the MSN portal.
(MSNBC.com is a joint venture between NBC and Microsoft.)
Small companies market specialized services
Solano Computer Resource, a small ISP in Vallejo, Calif., doesn't have that option. So lately, it has been emphasizing Web design, hosting and computer repair.
Sonic.net Inc. in Santa Rosa, Calif., has been experimenting with wireless broadband — but costs are so high that the company might succeed only in rural areas that phone and cable companies don't reach, said Jasper, who is also Sonic's chief executive.
Others market specialized services that the larger providers don't target.
Bway.net Inc. of New York, for instance, offers permanent Internet addresses for running personal servers and broadband speeds that are the same in both directions (speeds promised by phone and cable companies are typically for receiving files only).
Charles Roos, a Bway customer in New York, said he is willing to pay $50 more a month because he requires a highly reliable connection to run mail or Web servers for work, and he sometimes needs to reach a Bway technician quickly to change a configuration or two.
Some hard-core online gamers pay more for Speakeasy's DSL because better performance means faster bullets in shootouts, Chatterley said. For small businesses, the Seattle-based company has fatter T1 lines and Internet-based phone services.
Most people, however, are driven by price alone.
Expanding into new businesses carries its own risks, Leong warned. The Gartner analyst said ISPs offering Internet phones face competition from standalone players like Vonage Holdings Corp. and those seeking municipal wireless contracts must compete with phone companies eyeing the same.
Phone companies have even succeeded in getting some state legislatures to limit municipal services.
Steve May, owner of InKeeper Co. in Stone, Ky., said he's glad he sold off his ISP business in 2000 to focus Web hosting.
Had he continued, he said, "I probably would have been bellied up by now."