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Summary:

Sonic.net, a Bay Area ISP, has a service package and ethos that could disrupt the broadband market. Today it’s brand of disruption is limited to California, but Dane Jasper, the company’s CEO, says that Sonic.net plans to expand outside California.

The Sonic.net employees. Look for them in your neighborhood, San Francisco.

When you apply the innovator’s dilemma to the broadband market, you might end up with a company like Sonic.net. A California ISP serving about 36,000 customers, Sonic.net has taken an outsider’s view to selling broadband, and may end up disrupting the industry more than Netflix and Google combined. Today Sonic.net’s brand of disruption is limited to California, but Dane Jasper, the company’s CEO, says that will change. Before the end of next year, he said, Sonic plans to expands outside California.

Already the 17-year-old ISP is building out networks outside its Bay Area home base, with plans to begin serving Los Angeles and Sacramento this year, says CEO Dane Jasper. He won’t disclose where he plans to build, but stresses that dense populations are important for his economic model. “Look to the top 20 MSAs in the country, and some of those we will be likely to build in first,” he said. “We need to look at the cost to cover a certain number of square miles and whether there’s 50,000 people or 5,000.”

Sonic doesn’t sweat its assets.

The rest of the country should get excited, because his company is a fairly unique broadband provider; it doesn’t cap speeds. It’s currently in the news for fighting a government request for subscriber information. And it’s much, much cheaper than most wireline broadband services provided by the large cable and telecommunications firms.

Sonic.net offers customers wireline voice and 20 Mbps broadband connections for $40, or two phone lines and 40 Mbps down for $70. Most cable companies charge about $70-80 for a single digital voice line and some form of 12-14 Mbps service. Of course, for a little more, the cable company will also throw in TV. Many will also seek incremental revenue in the form of additional features as they seek to raise the amount subscribers pay each month. Jasper explains that for incumbents who have invested in physical assets over time and need to grow revenue from an existing base of customers, they’re stuck trying to squeeze their customers for more money in order to get their growth.

“If you don’t engage in market segmentation, if you offer uncapped, unlimited and the fastest broadband at the entry-level price point, that is not economically efficient [for incumbents],” he said. “It’s not the way to ‘sweat your assets,’ which is what the dominant incumbents with limited customers need to do.”

For Sonic.net, growth comes in the form of new subscribers, who are attracted by the lower price points. Because he doesn’t have this expensive triple play revenue to protect and grow, he can afford to charge such low prices. It’s not the capital expenditures of building out a network, but the operational ones that force the incumbents into protecting their video business using caps or offering metered service, he says.

“Our products are profitable at their current price point, and fundamentally if you adopt a simple product design, you have a lower cost of customer acquisition and operations,” Jasper says. “The cost structures around a simplified product are substantially lower and we are willing to accept lower margins. But [Sonic.net's products] are wildly profitable either way.”

Preparing for broadband’s Sonic boom.

Jasper’s business started out reselling service from the existing telephone companies after the Telecommunications Act of 1996. However, unlike a lot of the other companies that got into that business and were thwarted by uneven enforcement of the law, Sonic.net managed to build a base of customers. And since it doesn’t have a TV business to protect, its policies are a lot more consumer-friendly than those of Time Warner Cable, Comcast and AT&T.

However, caps do make sense for businesses that can look ahead and see the future of TV and music is streaming content over the web. “ISPs are using caps and congestion as an obstacle on the track miles down the road to derail the over-the-top video train,” he says. “But if you’re a triple-play operator, that’s the right thing to do.”

Much like Google and its fiber to the home effort, Jasper is looking for those next generation applications such as TV and trying to build out an infrastructure that requires customers to buy higher speeds and can support his profit margins. And despite all the FUD from ISPs, he’s not concerned about the cost of access and is fine building out infrastructure to match his customers’ demand. It’s not breaking his bank. “The cost of transit is moving to zero,” he says.

Jasper’s company doesn’t offer TV yet, although it has applied for a video franchise from the California Public Utilities Commission. It has also started overlaying fiber to the home on top of its existing ADSL2 network to offer 100 Mbps speeds and gigabit speeds for the exact same price it’s offering the ADSL service. It will upgrade homes with fiber after take rates in its markets get above 30 percent, and it’s beginning in San Sebastopol, Calif. It’s possible that some areas won’t make it, but that’s not stopping him from continuing to expand his ADSL2 network to more cities in California and to those beyond.

He wouldn’t give out his revenue or profit details but he did assure me that he does make money selling broadband, which he puts back into the business to pay for expansion and network upgrades. So today, he says that the company’s network reaches 60 percent of the homes in the Greater Bay Area with construction occurring in Sacramento and in Los Angeles. After that he’s taking on other parts of the country. Broadband lovers should stay tuned.

  1. I hope Sonic comes to Davis, CA.

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    1. We will be offering Fusion service in Davis, in partnership with local ISPs in the area.

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  2. How exactly is Sonic.net disrupting anything?
    They are doing the exact same thing everyone else is, except without caps and at a lower price point.

    Disruptive Innovations create new markets which compete with existing markets.
    This isn’t a new technology, or even a new business model, and it competes in the exact same market as other broad band providers. I wouldn’t even call this a “sustaining innovation” since there is no innovation involved.

    Please, don’t throw around “Disruption” as a buzz word.
    It’s cool that Sonic.net is aggressively pricing their service and they are expanding, but there is no disruption involved.

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    1. Significant pricing differentiation is a disruptive move.

      Take the basic fusion plan ($40+t/f) – Some families pay $20-30 for a wired phone line itself. To combine with competitive-speed internet access, you require cable or a very high-end DSL, which will run $60 or more.

      So for around half the price, you get broadband with a better ISP? Sign me the hell up (they don’t offer fusion where I live yet).

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  3. Brett, he is very clear in the story that the service is profitable.

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    1. I’d pay real money for their fiber but if they want 30 percent take rates they are delusional. They are a nice company, but an Indy ISP isn’t getting 30 percent take rates anywhere. So I guess they have no actual plans to roll out fiber. Too bad.

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    2. Sonic’s been in business for quite some time, as Stacey points out. I was a customer of theirs in 2002 or so, when they offered their service over PacBell/SW Bell’s DSL. It cost more than the phone company’s DSL, but Sonic provided static IP addresses that were useful for my web server, SMTP, and that sort of thing.

      The web server thing turned out not to be so good because they used NFS in-house, and Moveable Type had problems with record locking over NFS at the time.

      The low-cost, build your own network thing is fairly new for them, so we’ll have to see how well it works out.

      Cherry-picking rich neighborhoods (“Sebastopol” is said to be an Ohlone Indian word for “land of many Volvos”) which is generally a winning strategy for ISPs.

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  4. I know Dane is probably lurking here. Quick question, has Sonic.net considered using a wholesale company like Megapath/COVAD to sell out of market service?

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  5. I keep hearing about these guys but all they seem to offer in nor cal iat least is utterly conventional DSL 3-6 dl…. Meh. No double lines, no uncapped speeds clearly… Where exactly is all this disruption going down?

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  6. The service has to be profitable. They don’t have investors, and they’re growing like mad.

    It’s so profitable that they are entering the fiber game. This isn’t ClearWire, or WestPac – it’s the future of how we’re going to communicate.

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  7. I’ve been with Sonic.net since the year 2000. Love it!

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  8. I switched to Sonic.net from AT&T two years ago and I love them! Their fusion service rocks and I’ve had not one, but TWO rate DECREASES in the last year or so. Plus they just gave us a free fax service, which is a nice bonus. I have better, friendlier service and my bill is the same, every single month. I’d recommend them to everyone. Wish more companies ran like Sonic.net.

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  9. As a long-time Sonic subscriber before I moved to Seoul – I’m glad to see one company both pushing creating new footprint and charging the kind of prices for kind of speeds I see in Korea… But in the United States. Keep it up! I intend to sign up for Sonic the moment I move back to Los Angeles. And my studio? Yeah, we’ll be signing up too.

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