May 06, 2006

As competition reduces the profitability of basic Internet access, service providers are offering bundles of managed services to generate revenue and retain customers.

"The basic premise is that [selling access is] a commodity and providers are looking for upsell [opportunities] and customer lock-in," said Danny McPherson, chief research officer of Lexington, Mass.-based Arbor Networks, at the ISPCON conference in Baltimore.

"Providers are offering managed security solutions -- they want to generate more revenue and protect their profitability," McPherson said.

Managed services have become important for independent local and regional Internet service providers (ISPs) as they try to hold onto a shrinking customer base. Competition between cable providers and telecom companies over broadband access has dropped the average cost of DSL services sufficiently that price-conscious customers are abandoning dial-up access.

According to the Pew Internet & American Life Project, the number of U.S. residents with broadband Internet connections at home grew 40 percent year-over-year, reaching 84 million in March 2006. Nearly half of the new Internet subscribers bypassed dial-up in favor of broadband.

Overall, the market share of digital subscriber line (DSL) connections has reached 50 percent of U.S. broadband users, overtaking the 41 percent share of cable modems. The average monthly cost of DSL connections is $32 (often with introductory pricing starting at about $13 a month), compared with $41 per month for cable subscribers.

As they see their customer base shrink, ISPs are offering managed software services such as security, network management, remote file backup and surveillance camera monitoring to small and medium businesses (SMBs), as well as to consumers.

Mike Cassidy, managing partner of consulting firm ISP-Market in San Jose, Calif., said that because SMBs already depend on their service providers for Internet access, ISPs can build on that trust and act as an advisor to help small businesses with technology-related services.

Many SMBs typically receive technology assistance from equipment vendors, local consultants, electronics retailers, employees with hobbyist-level computer skills, or their ISP's tech-support hotline. Many SMBs would like alternatives that are more reliable than electronics retailers or non-tech employees, but they can't afford to hire a dedicated technology staffer.

"Small businesses are looking for someone to [manage their network] for them," Cassidy said. "They don't want to keep looking for a guy to come in full-time and run their IT systems. The customers are going to turn to [their ISP] when they have problems, so they're going to be willing to listen when [that provider] offers new services."

McPherson of Arbor Networks said ISPs' typical network-based security offerings include managed firewalls, spam filtering, denial-of-service attack prevention, intrusion detection and content filtering.

"Small and medium-[sized] businesses don't want to have to worry about security, so they're willing to pay a premium for Internet access with security services built in," Cassidy said.

In one approach, a business' incoming Internet traffic can be diverted to the security providers' data center so spam and other threats can be removed. Under this technique, known as "off-ramping," the cleansed traffic is then sent along to the customer.

Brad Miller, CEO of managed security services provider Perimeter Internetworking, in Milford, Conn., said it's usually more cost-effective for most SMBs to enlist outside help in managing their network security needs.

"Small and medium businesses generally don't have the budget or resources to integrate a large number of necessary technologies," Miller said. "For most companies, the biggest hurdle to effective security is the cost."

Compliance is also a factor in the adoption of managed security, as smaller companies in regulated industries, such as regional banks, need help in meeting security mandates, as well as documenting their controls.

Depending on the size of the company and its traffic volume, basic managed security packages for small businesses generally start in the range of $75 to $100 a month. The price typically includes a portal for business owners to receive security alerts and review network performance. Customized services and access to consultants are often available for additional charges.

In addition to security, ISPs are providing network management services such as setting up Wi-Fi connections, enabling PCs to share printers and backing up files to a remote server.

Another emerging application is online monitoring of remote security cameras. Cassidy said small companies with warehouses and consumers with second homes or elderly relatives are often willing to pay an additional $15 a month to view images over a Web browser or video streamed to a wireless phone.

The idea of offering security services to consumers is also attracting the attention of the software industry's largest players. Microsoft, for instance, has announced plans to launch OneCare Live, a service that will automatically update a PC's virus protection and firewall software, and will provide file backups and other updates. The service, which is scheduled to launch in June, will require a $49 annual subscription that covers three PCs.

Overall, Cassidy said, ISPs should focus on how they can remove the complexity of installing or managing technology among their SMB and consumer bases. In addition to being profitable, Cassidy said helping customers avoid technology-related frustrations can help ISPs reduce technical-support calls and expenses.

"Think about plumbers or mechanics -- people don't know how to do what [those professionals] can do, so they're willing to pay for their services," Cassidy said.

By Dave Pelland, Managing Editor, Technology Insider
Courtesy of http://www.kpmg.com

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