From...

July 14, 1999
Web posted at: 12:29 p.m. EDT (1629 GMT)

by Jason K. Krause

(IDG) -- If you live in a small town in the United States, there's a good chance your best bet for Net access is a mom-and-pop shop, rather than a top-tier national Internet service provider. The cost of building coverage in these areas is not worth the effort for ISPs that are trying to build enormous subscriber bases.

But OneMain.com, an ambitious, fast-growing ISP, sees promise in the small-town Internet-access market. The company, which raised $215 million in a March 25 initial public offering, has been on a buying binge, acquiring 20 ISPs in small markets. The spree has built OneMain's subscriber base to 450,000, which makes it one of the country's 10 largest access providers.

Buying small ISPs and rolling them into a national brand isn't a new idea. Companies like MindSpring and Verio have also chosen to grow via acquisition. But OneMain has applied a new twist to the strategy, shopping only in small markets largely neglected by other national providers.

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OneMain isn't the only company taking a down-home approach. Espernet and Voyager.net are other ISPs with national ambitions that are buying out small-town access providers, although Espernet is also picking up a few in metropolitan areas. Espernet, which plans to go public in the fall, says it intends to build its subscriber base to at least 500,000. To help it get there, the company has signed on entertainment-industry mogul Barry Diller as an investor and board member.

While targeting small markets has its advantages, the strategy of focusing on sparsely populated areas has obvious drawbacks, as well. "I'm surprised that these companies are taking this approach," says Mike Gustin, the owner of Wisconsin Rural Internet of Wautoma, Wis. "The major ISPs usually have no interest whatsoever in serving rural areas because the expenses involved in these regions make it a lot tougher to show a profit. And I don't even want to think about how expensive it will be to integrate all these little companies."

Gustin says he's turned down buyout offers from both OneMain and Espernet in order to remain independent. He gave up a rich payday: He says Espernet offered between $500 and $700 per subscriber, while OneMain offered $400 to $500 per subscriber.

Those are startling prices, given that the typical cost of customer acquisition for ISPs this year has been running about $200 per subscriber. But as the ISP business continues to consolidate, with telecom giants like AT&T raising the bar by offering broadband services in major metropolitan markets, the small-town market provides one of the few remaining opportunities for building an Internet-access business.

Serving those markets requires solving some special problems. For one thing, Net users in small towns and rural areas tend to be hard to find: Internet users in those places make up about 10 percent to 12 percent of the population, as opposed to 30 percent in urban markets. The major ISPs see this as one more reason to skip those markets -- but OneMain CEO Stephen Smith sees only opportunity.

"Because there are fewer entertainments in rural markets, I don't see why, with a little push, we can't go from 10 [percent] to 12 percent penetration to closer to 40 percent," Smith says.

Smith also believes in the loyalty of small-town Net users, for whom access to a national provider can be expensive. In half the markets served by OneMain, for instance, connecting to America Online requires a long-distance call.

Smith says OneMain has a monthly churn rate of just 2 percent, which compares favorably to the 4 percent to 6 percent monthly churn at national ISPs.

OneMain works to keep customers loyal by maintaining the small-town feel of the ISPs it acquires. The company has hired former Oracle exec Chris Dolan to look for content partners to help build "geographic communities."

In Tennessee, for instance, OneMain is forging a relationship with the University of Tennessee football program for inside coverage. In Arkansas, it's developing local hunting and fishing reports. OneMain says that kind of information isn't available at sites like Yahoo, CitySearch or Sidewalk. The company's sites will also include local auctions and classified ads.

OneMain and Espernet are shopping for profitable, well-run ISPs with large subscriber bases. Alas, ISPs that fit the bill are getting harder to find. "It's hard to be profitable with less than 10,000 subscribers," Smith says. "There's a huge gap between the top and the bottom of the ISP market, and it's becoming a hard gap to bridge."