An Exit Strategy for Dialup ISPs
by M. Eric Furlow

Business owners, particularly those who own ISPs, need to be aware of the current stage of the industry evolution. The reasons are obvious, but the most important reason is the exit strategy. Technology companies are particularly vulnerable to technological obsolescence. Many new technologies inevitably destroy the market demand for a previous technology. Ask this important question. When is the most beneficial time for a technology company owner to sell out as opposed to continuing to grow? Many entrepreneurs have built and sold many times. They never stay with it for the long haul realizing this recurring process. Some of them stick to growth from 3 employees to 50, others prefer starting out with notable debt and growing from 25 employees to several hundred before selling out. But the amazing thing is that most successful ones sell out close to the same time in an industry's evolution.

What is happening now in the dialup business is unique. While there is no doubt that the optimal time to sell a dialup company has passed, there is a rare and unique exit opportunity which is being presented to small dialup ISPs. This activity is happening with the small dialup ISPs having less than 5,000 subscribers. There are still several dialup ISPs which have 30-60,000 subscribers. They are still profitable due to the economies of scale which are not attainable by the small ISPs. The broadband Internet access business is still in a growth stage and the fixed wireless Internet access business is still in early growth

Dilemma
No one would argue the number of dialup ISP subscribers in the US is decreasing. It has been a commodity for a few years now. Not only is the market shrinking, but with no pricing power, the revenue per sub/month decreasing and most fixed operating expenses rising, the future looks very bleak. The paging, long distance and local phone businesses are just a few examples of what happens post-peak in a technology industry which first starts to become a commodity then starts to shrink. It's just the way it is. Call it economic Mother Nature.

An industry comparison with remarkable similarities, a personal note:.
I worked in the paging industry from the very early growth stage until its demise, a truly fascinating evolution to watch. The industry grew from a hot new wireless product, to a flood of competitors, an acquisition binge by private and public carriers, to the commoditization of the service, then to the eventual 90% decline in the size of the industry. Several billion dollars were created, more importantly raised, then spent and lost in this industry. The product simply became obsolete as cellular carriers built out their wireless systems, prices decreased, and the number of cellular/PCS carriers per market increased from 2 to 7 (counting ESMR providers). It was wonderful watching all of the entrepreneurs "cashing out" by selling their small private companies to consolidators in the late growth and early mature stages of the paging industry's evolution. What followed 2-3 years later, as the industry reached late maturity, was that valuations for paging company acquisitions started to decrease rapidly and the number of buyers willing to acquire paging companies for anything close to a reasonable value decreased. At this point it was too late to sell a paging company for anything greater than ten cents on the dollar.

Currently, what happened to most paging companies in the 1990's is happening to dialup ISPs. As the recurring revenue decreases and many of the variables expenses decrease as well, the fixed expenses continue to rise. This is an irreversible trend with no end in sight. Many dialup ISPs are no longer cash flow positive. The truth is, if a company has any debt, the owner will have to dig into his pocket to pay the interest and the principle.

I introduced the paging industry example because there are fascinating similarities, with one exception. The present owners of small dialup ISPs do have a good option.

Exit strategy for dialup ISPs
There is almost no doubt that given the same management team and business environment, an ISP with 30,000 subscribers is more profitable than an ISP with 2,000 subscribers operating with the same management team under the same conditions. There are a number of dialup ISPs at the 30-50,000 level who are still entertaining acquisitions. However, they are not offering greater than 20%+- cash at closing (unless it's a fire-sale) and rightfully so. Currently the way 90% of dialup ISP acquisitions are being done now is through payment plans. This is the best option for many dialup ISPs.

The buyer

  • takes over the customer base, customer service responsibilities
  • reduces the number of employees and shuts down offices
  • integrates billing
  • agrees to spend a negotiated amount per month in the sellers market advertising the sellers brand name to reduce churn
  • pays the seller a negotiated amount per subscriber/month based on retention

In the best case customers

  • keep the same e-mail addresses
  • keep the same dialup numbers

The seller is now able to exit without shutting down the business and to double dip if another job is secured. This is the best option for the customers as well. Turn them over to someone who will be in the business for a while and can take advantage of economies of scale. Being the last man standing in an industry is not for everybody.