by Don Hamilton (wiz@wwwiz.com)

In the beginning, the Government created the Net and on the seventh day, It rested. While no one was watching back in 1994, and the beginning of 1995, commercialization occurred on the Web, WWWiz came into being and Bill Gates decided to bet his company on the future of the Web. Back in those days, when I talked to someone about a banner ad, most of the time I had to explain to them what a banner ad was. CERFnet was the big local provider and still is. Network Intensive, Speedgate, Earthlink http://www.earthlink.com and many more providers were in the Web business or thinking about it. I was on AOL and had been for some years, but I had signed up on Netcom for the Web. AOL didn’t even have Web access until the middle of 1995.

Two of the people I’ve talked to over the years, who have had unique views of the growth and change the Internet has undergone, are Sky Dayton and Pete Ellis. Both started small and have become very significant players on the Internet topography. Both started in Southern California. Sky now runs the third-largest provider in the U.S., and Pete now has one of the busiest Web pages on the Net.

When I first talked to Sky Dayton, he was working with just a few guys in a frenzy to get a T1 line up and running. In July of 1995, traffic on the Internet had become dominated by the Web. It was the first time that more traffic was attributed to the Web than to any other cause. For those of you who don’t remember, ftp was one of the big things, along with Telnet, ARCHIE and tons of other tools that most people don’t use or even know about. Those were heady days. Yahoo had the best map to the Web. It’s still the best for most people, but did you know it was a bookmark list back then? It turned into a database only after Netscape tossed them off the front page of their site in December of 1995. They became a database and were quickly reinstalled.

Pete Ellis who was the first to advertise a Web page during a Super Bowl game. About two years ago he had four people and "a closet" they worked out of, trying to get Auto-by-Tel (http://www.autobytel.com/) off the ground. One day Pete told me he was struggling with his provider and didn’t have time to do that; he just wanted to sell cars and couldn’t allow technology to get in his way. I suggested he go to CERFnet and call my friend, Klaus. That day CERFnet put him online and solved all his technical problems. Today Pete is his own provider and is still hooked to CERFnet.

Sky: The Internet has continued to segment as we had predicted three years ago. There are basically layers of the network, and we would occupy the top layer and not necessary concern ourselves with far-flung backbone infrastructure, and put our investments in things like customer service and managing the content experience of our members. So far, that has paid off for us. We provide some of the best technical support in the industry and we are continuing to refine the content experience. We have a partnership with snap that has really blossomed, and we have what we call the Earthlink Personal Start Page, which provides an Internet desktop for each of our members. They will start with a friendly page that will tell them how many emails they have, what the local weather is, and provide the best content on the Web with just one click.

Sky: If you look at the kind of service that a content provider like AOL provides, they bring a lot of content together in one place and make it convenient, but to this day no one has really tried to do that on the open Internet. We think we are the first to put those pieces together.

Sky: We mostly just connect people. We see ourselves as a gateway to dozens of partners that specialize in creating content. We are not going to try to be CNN or ESPN, or Snap for that matter; instead we partner with them.

Sky: Yep. We have presence from Europe to Hong Kong. We have presence all over the place.

Sky: We have approximately 370,000.

Sky: Not in Europe. In Europe we are focused on providing service to our customers who travel. We don’t actively market our services in Europe or Asia. We’re really trying to focus on this market right now.

Sky: Yeah, it’s getting better every day. Our margins are improving, and they went from 27% to 50% gross margin in the last four quarters. We posted our fourth consecutive quarterly reduction in loss just this last quarter. From last year we increased revenue 100% and we decreased our loss by close to 100%

Sky: A lot of that is misguided. There are a few misunderstandings about the Internet space. They come from people not really taking a hard look at the differences and similarities between this and other traditional spaces. One of those mistakes is that you can never make money at $20 per month. That’s just incorrect. The other one is that Internet access is a commodity business. That’s also incorrect. Certain components of it are a commodity but if you put everything together with technical support, rich email and a personal home page, then it’s not a commodity—it’s a whole experience. It can’t be replicated elsewhere and that has a lot of value. The other sort of lie that has been floating around to one degree or another is that telcos will dominate Internet access and that is just flat wrong. They have had four years, many of them in this space, and today Earthlink is larger than most of the RBOC Internet access services combined.

Sky: Right! And I am not going to take shots at their service quality; it’s just that at the end of the day this has turned out to be a very different business than they thought. They thought it was just a natural extension of their traditional telephony business, but it’s not; it’s a very different business. We have been saying that for three years.

What I think is going to happen over the next five years…we are going to have two very different tiers of Internet service providers. I think both tiers provide for viable economics. The top tier is going to be a few major international or global players—Earthlink is definitely one of them—that have hundreds of thousands, or millions, of customers, and have a major reach and economies of scale. In the retail business, they’re sort of the Walmarts of the Internet access space. At the next tier will be thousands, maybe hundreds of thousands, of very small Internet service providers that focus on a small town, local regions providing tailor-made access services for businesses and communities in ways that we could never provide because we don’t have that much of a local flavor. Just as the corner grocer coexists with Walmart in the same area, I think the big mammoth ISPs will coexist with thousands of small ISPs.

What this means is that there is going to be a shake-out in the middle tier. The middle tier is not viable. It’s the dead zone between 10,000 and 300,000 customers where you have to build out your infrastructure into a growing base, but you don’t have enough revenue to support that. Many of these companies hit sort of a brick ceiling. They have way too much demand and they can’t handle it.

Sky: Those kinds of services are critical. What a lot of these analysts miss is that the Internet is truly a grass-roots phenomenon and depends for its growth on that local touch these ISPs provide. I’m very bullish on small ISPs.

Sky: Netcom (http://www.netcom.com/) or AT&T (http://www.att.com/), depending on how you count their numbers.

Sky: No, I think they needed to because they own a backbone, and they are stuck with that backbone, and they need to offer services that take advantage of that. Business clearly provides a more viable alternative for them. We’re much more nimble and able to compete in a consumer space than they are because we don’t have that sort of backbone. We’re not encumbered by a legacy of lines stretching around the world. I think if you went back they would say they wish they had never built the backbone.

Sky: We grew faster than I thought we would. It was apparent to me then but I didn’t know how vast this thing was going to become. The Internet provides such amazing reductions in the cost of communicating. The cost comes down by orders of magnitude. It is the type of change that will literally gobble billion-dollar industries overnight. It will shake up everything. None of the accepted laws of today necessarily apply. I think that the whole telecommunications industry is going to change and look totally different in 10 years.

Sky: It’s a viable alternative. We have embraced it and launched the first Internet cable service in Los Angeles County just a couple of weeks ago.

Sky: Yes, but we are not going to go out and lay cable.

Sky: Sure, no question. One of the basic principles we run this business on is that we don’t care what the underlying medium is as long as it transmits bits; that’s all we care about.

Sky: Having the best time of my life!

Pete: Our business has easily quadrupled in terms of volume of business coming through. In terms of revenue, we have also quadrupled. Both the people using us and the revenue steam have grown four times. We tend to go through accelerated growth spurts and then we stabilize for a few months. We’ve found that when we go into mainsteam media to promote the site we see a short burst for a while, and then a leveling off. To sustain marketing efforts in mainstream media is not productive. You don’t need to stay out there all the time. Our dealer base had doubled from 1,200 last year to 2,400 this year.

Pete: Everything is in-house now.

Pete: We have been migrating for over a year.

Pete: Ah…[long pause]. Technology is a constant issue [lots of laughs]. When you start working with routers and firewalls and all that other stuff, when you have so much volume, it gets crazy.

Pete: Oh, we’re getting somewhere between 100,000 to 200,000 page views a day. We’re probably seeing about 500,000 new unique individuals a month. This is just our site. Outside our site, a huge part of our volume domiciles on other companies that vendor to us, that is, send us customers. We count that in our volume, but not in our site traffic. Other sites like Edmunds (http://www.edmunds.com/) or Kelley Blue Book (http://www.kbb.com/) see customers, but we are the fulfillment. Customers come into our site to purchase a car.

Pete: You’re still at Edmunds.

Pete: Half of our business is off or outside our Web site. We have vendor agreements with a variety of sources on the Internet.

Pete: Gosh, I wish so. This thing is getting so dynamic that when you first interviewed us last year, we were profitable. We turned profitable a year ago May, and then we took investment capital in and we accelerated our technology investment. I mean huge; we spent half a million a month on technology. We spent a lot of money on technology development infrastructure support and training. We have allocated six million dollars this year for training. We never had that expense. Our training expense before was like fifty grand. It has cost us to accelerate the growth of the company. From the beginning, our objective was quality. There’s no way we could have quality if we didn’t spend a lot of time holding dealers’ hands on the fulfillment side. If you put requests in with any of the other companies, generally you won’t get a call from a dealer. With ours, we really monitor that.

Pete: I think we still do some stuff with them. They still provide some back-up services for us.

Pete: We have always done all of our databasing internally. We just migrated last year over to SQL, off a Fox Pro data base.

Pete: I think you’re right. Where it becomes worthwhile is where you just have so much stuff happening and you need to have access to it. With our volume and the amount of data we domicile on our pages, we just need to be in control of the process.