For quite a while, you could start an ISP on $ 10k worth of equipment and a smile. Karl Denninger's MCS-NET (mcs.com) did that and became a sizable presence in Chicago very quickly.
Congratulate him. It's not so easy anymore, especially in areas with present competition. You probably have your best shot if existing ISPs have dreadful reputations. In fact, I decided to start my provider after noticing Netcom's bad service; Netcom is the main provider I know of for Southern California. (I am based in Van Nuys, California, which is in the San Fernando Valley. I believe myself to be the only full-access provider native to that area, although there are a couple of BBSs that offer various forms of access to newsgroups).
Bryant Durrell
My thanks to Draper Kauffman
[NOTE: This is a brand new section of the FAQ, written by yours
truly with minimal input from the outside. I'd greatly appreciate
comments or corrections].
One of the most controversial aspects of Internet provider lore is
how much load you can put on your system and its Internet connection
before things become intolerable to your customers.
To run a high-quality, conservative service, the consensus seems
to be the following:
28.8K SLIP: You can run three phone lines and get reasonable, but
not great, service for all of them. This is what I'm doing at
present, and it does work well, although the lag in telnet connections
(caused by high latancy on the phone lines) is bothersome to many.
CSLIP (compressed SLIP) seems to produce a dramatic improvement over SLIP.
56k: You can run up to eight phone lines and get satisfactory service.
However, see our new section "What about a 56k line?" for some details
and some evidence from 56k defenders.
T1: Now we're motoring! A T1 line can support up to 27 times more
lines than a 56k - thus, around 200 phone lines.
Here are some rough rate calculations, together with the provider
that supplied them:
Cinenet 28.8 SLIP US$ 125.00 20.00 145.00 48.00
Internetworks 56k US$ 350.00 100.00 450.00 56.00
Net-99 T1 US$ 1,999.00 500.00* 2,499.00 12.00
------------- --------- ------------ --------- ---------- -------------
* This number is off the top of my head; quotes I've seen for T1 connections
range from a shade under $ 400/month to well over $ 1,000.00.
Net-99 has recently announced a discount price of $ 1,699, but it requires
a three-year contract period. I'm not sure if a three MONTH
contract period isn't too risky for this business! :-)
Net-99's connection allows full resale, including SLIP. Internetworks'
allows shell account resale but no SLIP or other IP sale. Cinenet
is unlimited, but resale of a 28.8kbps connection, even as SLIP,
doesn't make a great deal of sense. Internetworks would charge
$ 500/month for a full resellable connection. Net-99's fully-resellable
56k is $ 999/month. Their non-resellable T1 is $ 999/month, so
you can see that resale is supposed to bring a substantial burden
to the backbone provider.
Cinenet is my present provider for SLIP; Internetworks is a provider I've
been considering for 56k, and Net-99 is the provider I would most likely
use for T1 if I got that far. (Internetworks does not offer T1 in my
area; Net-99's 56k charge is a rather stiff $ 999/month).
The "Cost/Incoming" column is the cost of the connection per each
incoming dialup line. Each line should be able to accomodate about 10
subscribers, using the most conservative calculations.
It's easy to say that the T1 is by far the most appealing option here,
unless you don't have investors able to pay $ 2,500/month until you're
properly settled.
Let's dream a little and assume we could run each one of these options
at full capacity. The numbers run like this:
Connection Phone Rate/L Cost/ Cost/ Gross
Connection Cost/Line Lines Commercial Line User Income/L Total
Here are some sample European rates, kindly contributed by Hans
Michalec
FYI the recent rates for the data lines in Austria (via EBONE). Rates
are in ECU (approx. =1$)/year. So, a 64 kbps line does approx. 33.000 $ a
year - LUCKY AMERICA!
speed/kbps: 9.6 19.2 64 128 192 256 512 1024 1536 2048 3072 4096
commercial
cost/kEcu: 14 20 33 60 91 118 206 292 376 442 694 832 *)
academic
cost/kEcu: 8 11 15 27 41 53 92 122 153 174 275 320
*) commercial members whith their own US line get a reduction of
3 kEcu per 64 kbps access.
(end of quote)
The cost per user assumes 10 users per line, the standard. Gross income
per line assumes rates of $ 10/month for 56k or below, going up to
15/month for T1 service. Running the numbers shows extremely low gross
profit for 56k or 28.8 SLIP connections using the standard measures.
Of course the T1 user can also be a SLIP account, which commands
about a $ 20/month or more fee. So you can see how much better a T1
is than a 56k; you can not only sell more accounts; you can sell more
expensive ones. To make matters worse for the 56k connection, the
standard of 10 users per phone line is effective for about 16 phone
lines and up. For fewer lines, you may be talking about 7-8 users
per phone line, because the concentrations of users tend to clump
more for a small number of people.
Louis Epstein [lepslog@j51.com] reminds us that in some areas, a
fractional T1 can be a good investment. Where he is, for example, he
can get a 384k connection for $ 1,600, while a full T1 would cost him
$ 2,200 a month. I had talked to people about fractional T1 service
before, and my impression had always been that it was not that good a
deal compared to a full T1. This example doesn't exactly refute this;
for only 50% more a month, you get four times the bandwidth. But if
you're in a tight budget, and don't have use right now, it sounds like
an option well worth checking out. In the case of his provider, they
will upgrade to the higher speeds for just the price difference
between the fractional and full T1. So when you're ready, it's easy
to switch. This is a big black mark against the 56k, whose service
needs to be completely changed and re-installed when you convert over
to T1.
28.8K SLIP deserves mention as a viable option for the start-up provider,
just to get its personnel familiar with the various pitfalls of running
a system connected to the Internet. I've learned a great deal with my
28.8, and recommend it very highly to anyone considering a start in this
business. As you can see by the table above, it's no moneymaker, but
it's not a dramatic money loser, either. Anyone with a more or less
decent daytime job could maintain a 28.8 SLIP provider for as long as
their interest continued.
The main problem with a 28.8 SLIP is its main advantage: You do not
use a router or a CSU/DSU. It's good, because you don't need to cough
up the cash for them. But you're not going to get to know one,
either, and that can be a problem when you upgrade to a better
connection. Another disadvantage is that you can't distribute the
load between machines; SLIP connections are pretty well confined to a
single unit. (I am having this problem now; expiration of news is
taking a long time on my system, so I would benefit greatly from
having a news server. Alas, I can't hook one up because I'm just
connecting a single machine and not a network).
The 56k option looks like an extraordinarily unhappy compromise. If
we subtract basic expenses of $ 86/line from the gross income of $
100/line, we get only $ 14/line in gross profit, or $ 112/month for an
8-line system. Obviously, nobody's going anywhere on a 56k connection
unless they either charge a lot more than the going rate as I know it,
or bend the rules to the breaking point. However, it certainly is a
way to get to know your router and CSU/DSU without spending massive
amounts on them.
Finally, if you are lucky enough to be able to afford a T1 connection
to the Internet, and have a successful marketing plan, the T1 option
is very clearly an excellent viable business. If you could fill up
all 200 lines a T1 is capable of serving at a rate of $ 15/month,
you'd have 2,000 users and $ 30,000/month to dispose of. You'd probably
need to hire a few employees at that level - it couldn't be done
properly with just one person - but you'd be able to afford them.
At this level, you could also resell 56k network connections to
companies that needed their own net presence. Joe McDonald
Tony Sanders
T1 people can also sell SLIP connections reliably, which are generally
significantly more expensive (in the $ 20/month and up category). SLIP
is generally a high-bandwidth eating operation, so normally you won't
want to sell this form of connection on a 56k or lower line. However,
note well: Joe McDonald
Craig Warner
Probably the most tempting option for the 28.8K or 56k provider who'd
like to get some decent profits out of his system is to oversell the
connection - that is, to exceed the recommendations listed in the
previous section.
The argument is seductive: Many people are cheap. They'd rather have
an inexpensive connection than one that worked perfectly. I (the
start-up provider) am just one person, and I can't provide a perfect
system in any case; I just don't have the capital for a T1 or a
24-hour staff. Could I play the ISP game anyway, by just selling an
overstressed connection for less money than other providers?
The main problem with this game is that it's too easy to play. If
you offer cheap service at cheap prices, there are bound to be people
with more resources than you who can offer cheaper service at even
cheaper rates. This is Karl Denninger of MCS.COM's comment: There
will always be someone who can undercut you. Quality service,
though, is very hard to come by in the Internet provider business.
Many very large providers, such as Netcom, are highly vunerable to
complaints about terrible service. If you can capture some of their
customers by offering excellent service - even for more money - you
probably have a very good shot at gaining market share, even over
very large companies. So you may want to at least consider the high
road, not the low.
Craig Warner
Michael Krause
The aforementioned Craig Warner suggests: "Intelligent local
caching is another way to survive with lower bandwidth. A
3-5GB cache on a server could cut bandwidth requirements
significantly."
From personal experience, I know that users will stick around after
just about any disaster, as long as access is free, and it's
understood beforehand that the system is experimental. I knew that
my system would be unreliable due to the new software I was writing,
and my inexperience as a system administrator. As a result, I
started by running it at no charge, with the understanding that lost
mail, connection problems and such would be accepted as typical
experimental system pains. So far, the overwhelming majority of my
users are very loyal, but that may change when I start charging even
a nominal amount of money. In short, giving service with problems at
a low price may be a reasonable strategy, but unfortunately there's a
big difference between "low" and "free" in most people's minds.
A couple of my users have told me that they don't want to pay for the
system as long as telnet connections are so slow, so even my strategy
may not pay off. This may, however, be due in part to problems with
runaway processes I've had on my system, which have decreased
performance for all users. Since then, however, I've solved my
runaway problems and gotten a CSLIP connection, which is much faster,
and I seem to have silenced the doubters.
News and mail reading and writing, of course, use virtually no
bandwidth at all, and you could run a news/mail only system on a very
slow SLIP connection. However, the value of this to the general
public is questionable. Still, if this is the primary interest of
your users, they'll probably be pleased with virtually any bandwidth
level. Note, however, that even a 28.8k SLIP doesn't seem to be
enough for a full newsfeed through INN, at least through my present
provider. (Things have improved dramatically since I started using
CSLIP with them, but how much I'm not sure at this time).
Many people get Internet access through their work or school, but
those institutions normally censor the content provided. For example,
it's pretty tough to find alt.sex.bondage on a corporate machine,
unless you're its manager. This opens up a surprisingly large market
of people who have access already, but want to telnet in to check
out the "forbidden" topics and sites out of their school or employer's
wary eye. This is likely to grow with the recent decision at a major
university (I think it was CMU) to halt access to sexual newsgroups.
This might make a system with an excellent news connection and nothing
else a viable site. It's also an excellent way of competing with the
Freenets, which are cheap but heavily censored. Many providers,
including MCS (Karl Denninger's
I have noticed that, as long as FTP works, the slow speed doesn't
bother me much. What does bother me is delays in character echo when
I type. This seems to indicate that, if your system hardware is fast
enough, you may be able to deliver service that's perceptively better
than Netcom's even with quite a sluggish link.
My conclusion to all this is that many ISPs can get away with bending
the rules for a while, at least until the competition gets a T1.
Then, all that careful business planning and development may go to
naught. As Tony Sanders
Several people have written recently that I have significantly
understated the potential of a 56k line. Apparently many people are
running between 10 and 20 simutaneous users off a 56k with
considerable success and happy customers.
The reason for the discrepency has to do with the usual use people put
to the line. In a traditional Internet provider, a large percentage
of users were engaging in FTP sessions; the minimum allowable
bandwidth was based on a large percentage of users continuously FTPing
stuff. Now, most people who were formerly FTPing are using the Web.
Fortunately for providers, this means that most of the time they are
just looking at documents, instead of sucking them up and departing.
As a result, people stay on your system longer, but use less of your
bit pipe.
Christopher X Candreva
"I'm currently running off a 56kb: Full news feed, 20 dial-in lines.
It's just getting tight. Large FTPs are slow, but PPP people are
still limited by their 28.8 modems. The only people who complain are
shell FTPers.
"And I'm upgrading to T1 by the end of the month."
Jacob Westfall
"I run a small ISP with SLIP/PPP users. We have 20 incoming lines and
get 150M of news a day. Typical transfers for the 14.4 users is
1-2k/s. Most of them use WWW and speeds on those lines are pretty
good. Most pages load in a couple of seconds, the longest page to
load I have seen was 1 min. The only complaints about speed I have
ever had were first time Internet users who have just finished using a
BBS and complain that they aren't getting the same transfer rates.
Some of my users were signed on with larger Internet providers who
have full T1s and they say the speed with my company is the same as
with their previous provider. The main issue is not overcrowding the
line. 20 lines on this 56k is as far as we are going. Interesting
note: Our provider has a T1 and says he is only using about 256k of
it. What most people have to realize and this is sysadmins included
is that IP is not constant traffic. Watch the lights on a modem
transferring IP sometime and you get the drift. 80-90% of the time
the lights are idle while customers are using the web. What you have
to look for in a Frame Relay 56k which is what we have, is that the
provider you get it from has a large enough link into the cloud. Our
provider had 128k into the cloud and just doubled that to 256k. Our
speeds have almost doubled in terms of NNTP transfers from them and
overall user speeds have jumped about 20 percent."
One way you might be able to stretch a 56k is to use 14.4kbps modems
instead 0f 28.8. Most people still have 14.4kbps, and they are likely
to be quite happy with service off a 56k line. 28.8 might be somewhat
more probematic, at least for all your lines.
Note, however, that many of those people are in places such
as Canada where T1 lines are prohibitively expensive, and 56k service
costs almost as much as T1 here.
Still, even in the US it would appear that you can get a 56k line to
work as a provider, as long as your service offers a stripped down
newsfeed. A full newsfeed of around 450 megabytes a day is definitely
not going to fit well within a 56k. Many 56k providers solve this
problem by getting a Pagesat newsfeed (around $ 500-800 for equipment
plus $ 30/month); this significantly decreases the burden on the
connection. More information on Pagesat is available elsewhere in
this FAQ.
Note that if your newsfeed is slow, you may have the equivalent of a
partial newsfeed without realizing it. INN will not use all of the
data pipe for transferring news, at least not in my experience. As a
result, my system, running off a 28.8k SLIP, probably isn't getting
anywhere near a full feed, even of the groups (alt, rec and misc) I'm
getting. This may make your 56k or lower connection appear to work
better than it actually does.
Despite this apparent good news, everyone I've seen is going to a T1
or trying to do so. Once you hit that 20 user barrier, you're almost
certainly going to need one, and need it yesterday.
If you can afford a T1, get one by all means. But if you're on a
shoestring, and have some way you can compete with other providers in
your area, a 56k just might do the job. If nothing else, it'll tell you if there's
demand for your service before you take the plunge and start
spending the big money.
This message is both so scary and so dramatic that I can't resist keeping
it in the FAQ, even though I've summarized many of the financial arguments
above. The message is that if you have a 56k connection, you have at
most a $ 500 gross profit, even with a $ 20/month rate. And $ 20/month
is unsustainable in today's market. Here's what that $ 500 would cost you,
if you could even get it at all:
From Draper Kauffman
How hard do you have to work to get that? To begin with, if you are
growing fast you've recruited a lot of new users recently. They'll have a
million questions and requests. You're also doing all the accounting,
putting out accurate monthly invoices for 100 erratic users, depositing
70-80 checks, and deciding what to do with the no pays and late pays.
Meanwhile, you're trying keep your system up and your 8 bargain modems
working, and deciding what to do when mail runs 2 days late, or your
newsfeed stops coming, or whichever of the normal Net-crises hits you that
day.
All told, you probably put in 50-70 hours per week, maybe a lot more. You
make less than a ditchdigger, and you aren't getting paid for the use of
your equipment, so you haven't got any source of cash for upgrading or
expanding your system.
But you're still adding customers! And here comes the crunch that
threatens almost every low-capital ISP these days: too many users asking
too many questions, not enough bandwidth, people bitching about how the
system slows to a crawl every time you get your newsfeed, programs crashing
because the user disk is full, and so on.
Too many problems are allowed to fester and turn into flames, and suddenly
you just can't cope. There aren't enough hours in the day or dollars in
the bank.
Angry customers quit and bad-mouth the system and new people stop coming.
If you keep your rates at a moderate level you won't have enough volume to
cover your costs. If you drop your rates to bargain levels, you keep more
customers, but you're losing money on every one, so that's no help. You're
bleeding cash, and pretty soon some unforeseen expense will put you out of
business. You probably won't even know it until your check to the telco
bounces, since you haven't had time to do the bookkeeping for months.
That's the nightmare. Even if you can raise more capital at that point and
try again, you have to fight the bad rep of having run a shoddy operation.
And bad word of mouth hurts you more on the Net than in almost any other
business.
What causes this scenario? Here are ten good reasons:
1. Having insufficient capital.
2. Underestimating the time and routine expenses involved in a startup.
3. Overestimating the owner's knowledge, abilities, and stamina--the
heroic programmer complex.
4. Grossly underestimating the manhours needed to get the system up and
keep it running smoothly under load.
5. Starting with inferior services: slow connection, inadequate disk
space, skimpy software (gopher, lynx, etc.), slow or partial
newsfeed, and/or running too many functions (news/mail/users/etc.)
on one CPU and drive.
6. Charging too low a price (as a result of points 2 through 5).
7. Using cheap hardware and no backups.
8. Starting with a system with insufficient capacity to produce enough
profit to finance continued growth.
9. Allowing growth to exceed the sustainable system capacity.
10. Sloppy and inadequate accounting--it's easy to get behind, and
usually fatal.
(I would add inadequate marketing to the list, except that that can easily
be a blessing. One highly successful marketing effort could add 2-300
users in a week, completely overloading the system.)
Here's Draper's summary of the present environment:
Although there is market to market variation, today's ISP startup faces a
significantly more difficult challenge than those that started in the last
few years. Quality expectations are up and user fees are down. The result
is that low budget/low volume/low quality/low cost systems can no longer
expect to find a profitable initial niche in most markets. Without new
capital or a steady stream of profits, they have no way to increase quality
or capacity
Increasingly, a new service in a competitive area needs to offer a full
range of services, good user support, and a fast, reliable, and accessible
system in order to charge a premium price. Success will require larger
amounts of capital or inventive ways to overcome the numerous barriers to
low-volume profitability.
These are my personal suggestions as FAQ maintainer on what to do if you're
a low-budget IP startup and somewhat intimidated by all this:
(1) Create some innovative services. For example, I'm coming up with a
unique program to make it easier to access the net. I'm also developing
a fresh new Pipeline-like GUI system. A more viable example for less
technically oriented people would be to spend a few hours a week net
surfing and reading net oriented publications like Wired. Then, you
can announce the "newsgroup of the week", "URL of the week" and "Telnet
Site of the Week". It would also not be a bad idea to put out a monthly
newsletter that contained that information and told people to be sure
to come online for that and similar events.
I think if you make your system a valuable resource to show people what
they can do on the net, you'll build loyalty that will pay off when
the crunch comes. And you don't have to do that just through direct
personal communications; inexpensive media such as a simple informational
menu and newsletters will do fine.
(2) Try to find a backup source of capital. From what we've seen in
previous sections, it's highly doubtful that 56k is a viable solution,
especially if you need to share your returns with investors. As a
result, it's pretty much T1 or nothing. Costs for this seem to vary
dramatically depending on your market, as I've covered previously.
(3) Don't quit your day job. A 28.8k system will work fine for you
to test your ideas until you can get financing to get closer to the
big time.
Next section: The Big-Time Competition: Should you worry?
4.2 How do things pencil out? Some reasonably hard numbers
------------- --------- ------------ --------- ---------- -------------
Provider Service Monthly Cost Line Cost Total Cost Cost/Incoming
---------- --------- ----- ------------ ----- ----- ------- --------
28.8 SLIP 48.00 003 30 (bus) 78.00 7.80 100.00 300.00
56k 56.00 008 30 (bus) 86.00 8.60 100.00 800.00
T1 12.00 200 30 (bus) 42.00 4.20 150.00 30000.00
------------- --------- ------------ --------- ---------- ---------
/-------------------------------------------------------------------\
A note to our European and Asian friends: Rates for you are much |
higher. In fact, they're over TEN TIMES more than this chart! |
I believe Net-99 is planning international expansion; you might |
want to contact them if you're interested. |
\-------------------------------------------------------------------/
4.3 What if I oversell my connection?
4.4 New Information on the Viability of a 56k line
4.5 Draper Kauffman's 56k Connection Sudden Death Scenerio
4.6 So, what can we do about this?