The telcos are pursuing online partners to ring up ISP subs.
When AT&T and Lycos finally announced last month that the two would join forces on an Internet access service, the industry shrugged. After all, MCI and Yahoo had cut the first, and at the time, most significant deal to build a co-branded online service in January. And AT&T was also about to enter into nearly identical alliances with Excite and Infoseek and a distribution deal with Yahoo.
AT&T's deal-making is more than just a case of one-upmanship between the Coke and Pepsi of the telecommunications industry. The underlying truth is that telecommunications companies need CPR in the form of content, portals and renewals if they are going to carve a profitable business out of the low-margin Internet service provider market. Indeed, MCI, Washington, and AT&T, New York, only struck their deals after realizing that solely giving Internet-hungry consumers the connection, without the content, is not a winning proposition. And it's no coincidence that the new services resemble what America Online has been providing all along. "They're just a pipe," says Boston-based Yankee Group analyst Joe Bartlett of the telco ISPs. "That's all the telcos are ... It's a concession by Sprint, MCI and AT&T."
The division of labor in each deal works like this: the telco provides the pipe and the customer service, and the search engine provides each subscriber with a portal to the Internet.
"I don't think anybody can do it by themselves," says Dean Colantino, sales and marketing director at AT&T WorldNet. "I think everybody needs help. I think everybody needs partners." What companies such as AT&T, MCI and Sprint get for their efforts, in addition to a hoped-for surge in subscribers, is Internet ubiquity that they can only attain with the search engines' help. For instance, in AT&T's case, the company will now have each of the top four search services plugging AT&T phone products, including its WorldNet ISP.
The lack of success by the telco-operated ISPs in gaining subscribers is in stark contrast to the success of AOL in both attracting customers and keeping them. The Dulles, Va.-based service's combination of connectivity and content has caused it to gain more new subscribers--after it introduced a $2 rate hike in January--than WorldNet, the largest ISP with 1.1 million subs, has amassed in more than two years in operation.
AOL attributes its success to the power of its name. "We really do have the benefit that consumers buy brands and we have the only true consumer brand online," says Barry Schuler, president of AOL Interactive Services.
But it's also about making the service "sticky" so that consumers who sign on don't sign off. AOL has been sweetening its service with offers galore, including a discount long distance plan for AOL users, free access to Bloomberg financial news, and of course, chat and email. Despite charging $22 per month--tops in the industry for home-based dial-up service--AOL has seen its subscriber totals grow from 7.8 million to 12 million customers in the past 16 months. Schuler believes AOL's portal-like personalization features, such as customized stock portfolios and buddy lists, have built customer loyalty.
"We don't figure out how to deliberately make it harder for people to leave, we think of it in the converse," Schuler says.
With more than 4,500 competitors in the ISP marketplace and almost as many discount sign-up incentives, customers continue to change their Internet access provider more often than their long distance telephone company. The churn, or rate of customer defection, has hovered around 40 percent the past year. In other words, online access services "can easily expect to lose half their customers from the beginning of the year to the end of the year," says Bartlett.
The road to creating a sticky service is reminiscent of the "Friends & Family" product which MCI successfully rode a decade ago to chip away at AT&T's lead in long distance market share. MCI thinks it has found the equivalent in its deal with Santa Clara, Calif.-based Yahoo. Prior to the March launch of the service, MCI officials figured the same word-of-mouth that built Yahoo into a traffic magnet, would trickle down to MCI's sagging Internet sign-up business.
AT&T's Dan Schulman, president of WorldNet, has a similar plan. "What we're trying to do is team up with partners who have both the reach and, more importantly, the communities that have formed around them so we can target WorldNet to unique communities and ultimately reduce churn," he says. In addition, AT&T vows to pay more attention to its existing customers with plans to sweeten the WorldNet offers by lumping it with other AT&T services. AT&T will also be able to sell its products through prominent placement on the search services.
In explaining the alliances, he boils it down to two necessary ingredients for building the coveted "sticky" Internet service. The search services with their loyal audience, he says, are "the eyeball magnets." The telcos, with their communications expertise, such as AT&T's plan for audio chat sessions, are "the velcro" that will make a Web viewer more inclined to stay put.
Of course, AT&T's existing customers are the biggest potential market. Because, as Colantino says, WorldNet customers who also get their long distance service from AT&T are "39 percent less likely to churn."
But not all of the co-branding arrangements center around content. Sprint struck a deal with Pasadena, Calif.-based ISP Earthlink, essentially purchasing its 550,000 subscribers. In so doing, it immediately leapfrogged MCI and the Baby Bells to become the second largest ISP with more than 675,000 customers.
"I think that in this particular case we couldn't go it alone," says Jim Dodd, vice president of Internet services for Kansas City-based Sprint. "We decided this was the smartest way to amass so many subscribers in such a short window of time."
With more subscribers, transaction and advertising revenue grows (the deals differ in how revenue is divided among the partners) turning a low-margin business, reliant upon monthly sign-up fees, into a more profitable one. But as the ISP market marches on, it looks more likely that future partnerships will emphasize content that builds brand-image rather than those that quickly bump up a service's subscriber numbers.
And with online household penetration expected to double by the millennium, online growth will be fueled by brand-conscious newbies, says Yankee Group's Bartlett. "The evolution for consumer online services will look more like a mass market opportunity," he observes, with prominent brands such as AOL having the advantage.
As it is in the real world, in cyberspace the brand's the thing.