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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 (s nflx) and Google (s goog) 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, (s twc) Comcast (s cmcsa) and AT&T (s 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 (s goog) 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.