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Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Sarah Brouillard
May 2008

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Providers boost offerings to compete with price-cutters

INTERNET SERVICE used to be a huge expense for businesses, costing them hundreds of dollars a month. Today they can get it for loose change.

Like telephone service before it, connectivity has become a commodity, say owners and managers of Internet service providers (ISPs). Customers appreciate the low prices, but the trend toward bargain-hunting instigated by an increase in competitors and recent price wars of Qwest, Comcast and other big-box telecom companies has resulted in diminishing returns for many ISPs.

“We started out just offering ISP, at higher margins because there were fewer players doing it,” says Colin Bryant, territory account manager at LightEdge Solutions Inc.’s Minneapolis office. “But as the big boys and then also a whole bunch of the little companies started offering services, it became less of a money maker.”

Small boutique firms that traditionally cater to small businesses and residential customers have been hit the hardest. To stay viable in a changing marketplace, many local ones have retooled or completely reinvented their business models.

Some have enhanced their portfolio of products and services, adding hosting, Web development or even swapping out earthbound Internet for wireless, all to diversify their revenue streams and provide new touch points for customers.

“Some small ISPs have gotten into higher level Web services that a lot of the larger companies really aren’t that interested in providing,” says Jeff Hahn, president of Internet Exposure, in Minneapolis. “There’s a different type of revenue opportunity for that kind of environment than there is at the $19.95-a-month ISP service.”

Seeking to build strength through economies and efficiencies of scale, others have pursued mergers and acquisitions.

As a result, the number of Twin Cities-based companies offering Internet as their primary service has been winnowed to a fraction of the amount there was just five years ago.

“The ISPs in some regards are being squeezed out,” says Mike Sowada, CEO of Minneapolis-based VISI, one of the largest local ISPs. “Ones who haven’t grown up to that fact are struggling dramatically and are seeing 10 to 20 percent revenue loss.”

Changing identity

Sowada’s company is actually growing in revenue and customers, but it’s moving away from its identity as an ISP.

In the last two years, VISI has significantly shrunk its ISP segment and played up its other services. The company now prefers to call itself a hosting provider, and has branded itself as going Beyond Internet.

A hosting provider powers Web sites or runs servers for customers at its data centers. Many customers prefer to outsource these tasks since they require extremes in power and cooling, and distract from their core competencies.

The company also tries to make an acquisition every six months, says Sowada.

Its revenue numbers tell the story of a company’s reinvention in the wake of a changing industry. About two years ago VISI’s revenue was about 80 percent connectivity, with the rest coming from hosting and other services.

Today, the numbers have shifted dramatically. Connectivity only makes up 40 percent of revenue. The rest represents hosting and other services.

The future also appears to be heading away from Internet service as its bread and butter, as 80 percent of all new net revenue is hosting-related.

“We’re growing. Our revenue is increasing, our customer is increasing. But it’s not about ISP anymore,” says Sowada. “It’s about ISP plus all these other value-added features which, frankly, are more important than the ISP services.”

Customers looking for connectivity are also looking for e-mail, antivirus software, Web sites and backups, he says. All these extras and value-adds are where the money is.

“These services provide more value and good or bad more cost, equating to more revenue.”

US Family Net, based in Golden Valley, went so far as to create a competitive local-exchange carrier (CLEC) telephone company in an effort to diversify its services.

Incorporated in 2000 and run as a separate company, Velocity Telephone began selling to customers only a year and a half ago, a delay largely caused by regulatory hurdles. Like many other CLECs, Velocity buys the “last mile” of Qwest’s network from the ground to a customer’s home, and in some cases resells Qwest services.

Jim Hickle, president of Velocity Telephone, says he and his colleagues could read the writing on the wall even a decade ago. The new Velocity brand was launched “because we started seeing those changes in the ISP industry,” referring to the commoditization of Internet service provision.

The company offers basic phone, broadband, voice mail, as well as sophisticated mobile business services, including unified messaging, a system that sends voice, fax and regular text messages into a single mailbox that a user can access by e-mail or telephone; and find me/follow me, a call forwarder that locates a person by ringing a sequence of different phones.

Like large telecom companies, US Family Net and Velocity package their services into “bundles” as a way to keep down prices for customers. Getting everything on one bill one throat to choke, Hickle says jokingly also gives US Family Net one-stop shop appeal.

Outsourcing ISP

While Internet is still a very large part of its services, says Hickle, “we’re becoming a more full-service provider to end users so they really don’t have to look anyplace else.”

Hahn of Internet Exposure says he thinks the ISP market has become saturated.