ISPs Pause at a Fork in the Road

Not so long ago, the advertising business was the undisputed Achilles' heel of Internet service providers. But now, it turns out the Internet business has two heels to worry about.

Once pushed to the side by greater concerns about the weakening Internet advertising market, subscription profitability has emerged in recent months as an equally knotty problem, one that is entangling Internet stalwarts like AOL Time Warner's AOL America Online and EarthLink ELNK.

The ISPs are caught between a rock and a hard place. Demand for their cash cow -- dial-up Internet access via telephone lines -- is slowing down or even declining as subscribers move to high-speed access or cut-rate dial-up suppliers. But though the ISPs look to the high-speed, or broadband, Internet business for growth, that avenue is littered with hazards that make the cash flows of the next few years much less certain than those of the past. For starters, broadband is less profitable than dial-up for AOL and EarthLink, and the path to profitability is uncertain at best.

If that isn't discouraging enough, new research provided to TheStreet.com indicates that subscribers to dial-up service, or narrowband, are hardly paragons of loyalty. The predicament of the narrowband incumbents makes 2003 a crucial year for Internet access subscription issues, one in which the odds for a revival at AOL, for instance, will become easier to handicap.

Boom Town

Certainly, AOL and EarthLink have to do something to catch the broadband wave. While the growth of AOL's narrowband subscriber population slows and EarthLink's dial-up base shrinks, broadband subscriber counts are booming. From March 31, 2002, to March 31, 2003, households getting high-speed Internet connections via cable TV will jump from 8.1 million to 12.2 million, estimates Bruce Leichtman, president of broadband research and consulting firm Leichtman Research Group. High-speed Internet customers over telcos' DSL technology will grow from 4.5 million to 6.6 million, he says.