Wiring Rural America

Ignored by many major ISPs, the boondocks are being targeted by smaller providers.

Jason K. Krause, The Industry Standard

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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 initial public offering, is on a buying binge. OneMain has acquired 20 ISPs in small markets, reaching 450,000 subscribers to become one of the country's ten largest access providers.

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

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 also picks up a few in metropolitan areas.

Big Payoff for Little Independents

Targeting small markets has its advantages, but focusing on sparsely populated areas has obvious drawbacks, as well.

"I'm surprised that these companies are taking this approach," says Mike Gustin, owner of Wisconsin Rural Internet. "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 to stay 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 runs 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 is one of the few remaining opportunities to build an Internet-access business.

Nurturing Small-Town Loyalty

Serving those markets requires solving some special problems. For one thing, Web users in small towns and rural areas are 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 Chief Executive Officer 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 small-town customers will be loyal because access to a national provider can be expensive. In half of OneMain's markets, for instance, connecting to America Online takes 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 turnover at national ISPs.

OneMain also tries to keep the small-town feel of the ISPs it acquires. It partners with local organizations to build "geographic communities."

For example, in Tennessee 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. The company's sites will also include local auctions and classified ads.

OneMain and Espernet may be succeeding too well; ISPs ripe for acquisition are becoming rarer. "It's hard to be profitable with less than 10,000 subscribers," Smith says.

For more in-depth coverage of the Internet Economy, visit The Industry Standard.

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