Business Plan for Internet Service Provider
1. Introduction
This business plan is for the creation of a new Internet Service Provider based in _________. The new company, XYZ.Net, will offer access to the Internet via high-speed modems for home and business users.
This plan outlines the market in this area, the investment required, and the launch and operation strategy of an Internet Service Provider (ISP). Financial projections are included as well as an "exit strategy" for establishing a value for the venture after two years of growth.
2. Executive Summary
This year has seen some dramatic changes in the Internet world. A stock market correction has changed the focus of investors and the press away from content and e-commerce businesses to Internet Infrastructure. The one area of the Internet that has not seen any signs of slowing down is the growth in users. This industry has been doubling in size every 6 months for the last 6 years.
As major communications companies such as ATT, MCI, Ameritech, and UUnet have been formulating their Internet Strategies an explosion of smaller firms have begun to offer dial-up access to the Internet. Over 1,300 new ISPs were created in 1995 alone. Despite popular press accounts of a "consolidation" this growth rate has extended into 1999. This growth in small entrepreneurial ISPs will continue because the large companies have to invest tens of millions of dollars to reach their current customer base. Whereas, a smaller firm can justify investing less than $150,000 to meet the demands of a local population or a business community.
There are several ways to look at the Internet. For an ISP the model of interest is the "distribution" model. An ISP is a service-based company that resells bandwidth. It pays a monthly or annual fee to an upstream provider for a high-speed link to the Internet Backbones, and resells connectivity in smaller chunks to its customer base. A dial-up ISP in this market usually has a T1 (1.54 MBPS) connection to an upstream provider and sells 56 KBPS connections via modem. A T1 connection allows the ISP to support 200 modems simultaneously. Because all subscribers do not use the service at once, a subscriber-to-modem ratio of ten is possible. This means that a customer base of 2,000 subscribers can be supported with one T1 connection. As the ISP grows beyond this, and as it offers higher speed services it purchases more bandwidth from its upstream provider.
This plan is for the creation of a single Point Of Presence (POP) dial-up Internet Service Provider (ISP). The services that will be provided to the local calling area include:
High speed reliable Internet connectivity at 56 KBPS.
Web page hosting -Email accounts
Domain Name Service
Network News Service
ISDN -T-1 connections for businesses
Other services that will be offered in later stages of development include:
DSL -Shared office space
Web/e-commerce consulting services
The launch of this enterprise can be accomplished in as little as eight weeks from ordering equipment and lines. Based on past reported experience of other startup ISP's new subscribers will be added at the rate of 100/month after the initial ramp up. The assumptions in the attached pro-forma spreadsheets are that the subscriber base will reach 1,100 by the end of the first 12 months of operation, and 2,200 by the end of the second year. Break even cash flow will be achieved in the ninth month. Sales in the second year will be $482,000; profits will be $120,000. The investment in this venture will consist of capital equipment $41,000 and working capital of $49,000. An investment of $91,000 will thus generate a return of 131% in the second year.
There are several ways to value a subscriber-based business for eventual sale. One way is multiple of cash flow. Internet businesses are commanding over 20 times cash flow today but it is hard to predict what the "market" will be in two years. If a figure of 10 times cash flow is used the value of the company would be $2.6 Million (based on projected 3rd year cash flow). Another way is to look at other industries such as cable television. The going rate in that industry is $2,000/subscriber. Since Internet revenue is similar to cable subscription revenue per user this factor could be used. Based on that the value of the company would be $4 Million. These valuations are good returns on an initial investment of $91 Thousand (4 to 8 times return). The proposed investor equity stake of 24% will yield at sale of the company, $624K-$960K. A 6 to 10 times return over three years.
3. The Internet
4. The Market
5. The Competition
6. The Management Team
7. Launch Strategy
8. Growth Strategy
9. Exit Strategy
10. Financials
11. Conclusion
Even though there are over 4,000 ISP's in the United States there are still many communities that are under-served. The local ISP provides a key service to its community by being the catalyst for e-commerce development. The ISP can tailor services to fit many different needs. Consulting, web hosting, Internet Security, and maintenance are all add-on services that can add to our business. With our launch our community will finally have a service provider that plans to grow with the community and understands its needs.
3. The Internet
By now everyone has become acquainted with the vast potential of the Internet to expand communications, provide entertainment, and increase commerce. Every major print publication has articles on the Internet in every issue. New Internet Magazines are proliferating. Ads for most Fortune 500 companies include their URL (web address) as often as their 800 number. This is the fastest growing market/industry in the world. While the number of Internet users is doubling every six months the number of Web pages is doubling every 53 days!
There are several models of the Internet that are important to an ISP. The topological model deals with the Internet infrastructure. The distribution model is how an ISP fits into the market. The commerce model is how the ISP's customers look at the Internet.
Internet Topology
The Internet consists of high-speed circuits connecting routers that transmit data in the form of IP packets. The circuits are maintained by large telco's (Qwest, Sprint, Worldcomm) the routers are owned by ISP's. The national ISP's such as UUNet, Level(3), Savvis, EUNet, and SprintNet lease circuits from the telco's to connect their routers in their various Points Of presence (POPs). Regional and local ISP's purchase connections from the national ISP's. The national ISP's have connections to the Network Access Points (NAPs) where they exchange routes and traffic. Thus the Internet Backbone is really several backbones owned by the National ISP's that come together at the various NAP's.
Internet Distribution
The Internet business model is based on distribution of a commodity. That commodity is bandwidth. The market consists of several National Service Providers. They are MCI-Worldcom-MFS-UUNet, Sprint, PSI, Netcom, Savvis and ANS. Each of these companies operate networks of high-speed lines across the United States. Several of them also extend to the rest of the world. The NSPs "meet" at the Network Access Points (NAPs) where they exchange traffic. The backbones are currently 655 MBPS OC-12 circuits. New fiber optic cables are being laid constantly and new technology is allowing bandwidth to be increased dramatically.
Most Internet Service Providers get their initial T1 (1.54 MBPS) Internet "feed" from these NSPs. They then resell connections at 56 KBPS to dial-up customers.
Internet Commerce
A dial up customer sees the Internet as a resource for getting information, communicating, conducting commerce, and doing business. Generally the value to them of an Internet connection is hundreds of times greater than the monthly fee of $18. And of course the entertainment value of the Internet plays a predominant role in its growth.
The customer at the end of the Internet distribution channel is totally unaware of the topology and workings of the Internet. Their only concern is getting connected when they want to and getting reliable throughput and service. Providing live customer support at all hours is the key to customer retention and gaining new customers. Our plan calls for having enough staff to respond to all customer calls between 9:00am and 12:00 midnight every day.
4. The Market
The market for Internet dial-up services is growing at 10% per month. In the US and Canada one in three people has direct access to the Internet. Many more have accounts with on-line services such as America On Line. Based on the competitive studies we have done only one in five people have direct Internet access in our area. This represents a tremendous opportunity to provide a service in a market that will grow very rapidly to catch up to the national averages.
This plan is based on operating from a single Point Of Presence located in near our office. The population of adults in the immediate local calling area is 34,000. Based on the national percentages there is a potential market of 10,000 dial-up Internet subscribers. The competitive analysis we have done shows that there are only 2,450 subscribers currently in our market. Our prediction of 2,000 subscribers in the second year of operation represents a 20% market share but only 5.9% share of the potential market.
5. The Competition
The competition for Internet Services in this market can be broken into four categories: AOL, National ISPs, Local ISPs, and cable. Because a local ISP has so many advantages for the customer over the National Providers and AOL, it is the existing and future Local ISPs that have to be studied most closely. There is significant competition based on price and service. The key to obtaining significant market share is to offer the best service. A reputation for good connectivity, no busy signals, courteous staff, and breadth of service will allow us to grow steadily at profitable pricing.
On-line Services
The On-line services are actually the source of most new Internet customers. AOL is the training ground for the consumer to become familiar with computer information resources, interactive forums, and the Internet. Because of their pricing policies and inflexibility they force their customers to seek alternatives as soon as they find they are online more than about 30 hours a month. Some drawbacks to AOL include:
Unprofessional email addresses (TheSmithFamily22@aol.com)
Busy signals
Slow modems (33.6 KBPS)
Unresponsive help desks
Lack of security
National Service Providers The national service providers include FlashNet, Mindspring, Microsoft Network, and ATT. All three have dial-up Points Of Presence in our target market. These are true Internet Service Providers but have some of the same drawbacks as the On-line services:
Busy signals
Slow modems
Impossible to reach help desk
Local Service Providers These are the true competition for our business. Their business model is the same as ours. For one reason or another each one of them has failed to meet market demand for reliability and service. Here is a list from our competitive analysis. (local ISPs) ISP Number of Modems Number of Customers
ICYNet 24 500
Rustynet 60 1,200
Eaglesnet 200 1,800
NuNet 60 40
Totals 180 3,540
ICYNET is based in Slumberville. They provide local calling to the entire County by back-hauling all calls over a T1. This means they are limited to 23 simultaneous calls. Their investment in additional lines will put them at a competitive disadvantage to us.
RustyNet was until recently the biggest concern. Their main Point Of Presence is located here and they have the biggest market share. After the recent acquisition by a National firm they have changed their focus to "business" clients and have abandoned their effort to gain market share. We predict that attracting their disgruntled customers will be an immediate opportunity.
EaglesNet is run by a very competent Jim Polk out of the basement of his father's house. They provide good service but they will not be able to grow due to lack of funding to hire 24 hour support staff, etc.
NuNet is the most recent entry into this market. They are an offshoot of a local cellular phone franchise. It is assumed they have adequate capital to grow and that they see long term benefits to being in this market. They plan on buying market share by being the "low cost" provider. Because they will be after the mass market they will probably have rigid constraints on what services they offer. We will be able to meet this challenge by offering free Web pages, family accounts, info-responders, etc.
6. The Management Team
The management team consists of three key people. John Person1 is the founder and president of JP Consulting, a computer networking and software development company that has been very successful. He will act as President of the venture. Jim Person2 has been in telecommunications sales for three years. He is very familiar with the end user market and will be key to marketing our service to business. Jane Person3 has worked at one of the major ad agencies in The City and will continue to do so as she launches a Web design/consultancy that will be tied to this venture.
See the appendix for complete resumes of each of these key people as well as three of the technical support people that will be called on for specific technical issues.
7. Launch Strategy
XYZNet will open its doors for business on January 1, 2001. John Person1 is already devoting full time to this venture. Jim Person2 and Jane Person3 are contributing many hours to the planning and launch phase of this business. They will transition to salaried contributors as the business evolves.
Equipment will be ordered on September 1, 2000. The long lead item is the T1 line to Savvis which was ordered on August 1, 2000. The install date promised by the local Telco is December 1. This allows time for debugging and testing of the system.
The POP will be housed in the existing offices of JP Consulting. Because this building also housed an answering service for several years it has over 700 pair of unused copper. This will allow adequate expansion without pulling more cable from the street. Jim Person2 is responsible for the lead off marketing. We have firm interest from two professional societies that will recommend our service to its membership.
Jim Person2 is scheduled to speak at their monthly meetings in February. Ads will be placed in the People's Gazette which has a readership of 15,000. John Person1 has already been "working the news groups" to generate interest and pre-announce the launch. Press releases announcing the launch are already written and will be targeted at the technical writers here in town. Jane Person3 has completing the Web Page design for XYZNet. (see www.xyznet.net)
8. Growth Strategy
Growth is expected to be very fast. After the third month it is expected that 100 new users will be added each month. Our current staffing will be able to accommodate this until the sixth month when two additional part-time technical people will be hired to handle the phones. We will hire Computer Science majors from the local University. The key concern is to be prepared for growth that is twice as fast as this. We must have sufficient resources (funding) to meet the demand in this burgeoning market.
Several key changes will be investigated when the subscriber base reaches 1,000. The first major change will be to upgrade our bandwidth to 10Mbps. The next step is to open our second POP in Community 2. Simultaneously we will work with Covad or NorthPointe to offer DSL services.
9. Exit Strategy
The logical exit strategy for a local ISP is to be combined with a larger dial-up ISP, perhaps a National ISP. It is hard to predict who this will be three years from now. But, using current multiples being offered for ISPs several predictions can be made.
The initial investment of $91,000 represents 24% of the stock of this venture. The final valuation of the company will be between $2 and $4 Million. This represents a 6 to 10X return on investment over 3 years.
10 . Financials
The appended spreadsheets show the initial investment of $91,000 for equipment and launch costs. There is also a two year pro-forma cash flow analysis. Break even is expected within the first year.
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