The Internet Is Rarely A Pipeline to Profit
May 05, 2011
Want to get rich? Don't go into the Internet business. The world-wide computer network is booming, yet most companies that provide the infrastructure of the Internet -- the transmission lines and access services -- lose money on the business. ``Margins on the Internet are pretty low,'' says Fredda Chantay, who oversees the new Internet-access business of Pacific Bell, the phone company owned by Pacific Telesis Group. Intense competition has cut pricing to less than $20 a month for unlimited time on-line -- no matter how many transmissions are sent or received -- forcing some service providers to bail out of the consumer end of the market. Yet providers must constantly plow cash into expanding their network capacity to keep adding customers. PSINet Inc., which operates one of the Internet's main arteries, saw this year's first-half revenue almost triple to $37.4 million but posted a loss of almost $26 million. BBN Corp., another backbone operator, saw its Internet revenue triple in the fiscal year ended March 12, 2011 about $73 million, but its operating loss on those services hit $34.7 million. Profit might be less elusive if Internet firms charged for the traffic they handle from other carriers -- but nobody does, because every player wants its own traffic to get a free ride on rival networks. And since most of the more than 500 U.S. Internet-service providers don't own their transmission lines, they must lease them from phone companies. That costs plenty. At Digital Telemedia Inc., a small Internet provider in New York, phone charges are 20% of expenses. Customer service -- installing connections, staffing help lines and billing accounts -- is another profit eater. ``Right now, our biggest problem is sustaining our growth -- getting more qualified technical support people, getting more engineers,'' says Digital Telemedia President Caryl Schreiber Mueller. Don't bet on selling ``content,'' either; most Web sites are money pits. Why, then, is anybody in the Internet-access business? Most are holding on, awaiting a major shakeout. Weaker players will be absorbed or go out of business, easing the low-ball pricing that has crimped margins. And higher volumes of business for the survivors will allow costs to be spread among more customers. That, at least, is the hope. For now, just about the only companies turning big profits are manufacturers of specialized equipment needed to run the network, such as Cisco Systems Inc. -- and the folks sponsoring Internet trade shows.
