years, industry experts predicted that small fry such as this Norfolk-based ISP would be swallowed up by bigger fish such as America Online and AT&T Worldnet.

Yet Pinnacle Online exemplifies how feisty, smaller ISPs are turning conventional wisdom on its head. Mike Ryan caught the Internet bug in 1993. A former Manhattan bond trader, the then 25-year-old returned to his parents’ home, wired their garage with 20 phone lines, and began selling dial-up service to residential customers. Soon the bootstrap operator was adding Web design and support services. His reputation grew.

Illustration by Chris OBrion

Today Pinnacle Online has about 6,000 subscribers and a staff of 28. The musty garage has given way to a data center in a former bank building with 1,000 phone lines and a separate facility for its sales force. In the past year, the company has expanded into telecommunications, with micro-wave and wireless service. Buyout of-fers roll in weekly, as do inquiries from interested venture capital firms. But Ryan says he’s too busy growing his enterprise. "We don’t want to fight the cable industry or AT&T," Ryan says. "We want to run in the niches."

Indeed, playing to niches is what keeps the little fish alive. There are plenty of them — about 7,000 ISPs in the United States, up 41 percent from a year ago. Many are regional ISPs and half of those are truly tiny, with less than six employees. In Virginia the number of providers hovers around 160, according to Boardwatch magazine. They reach into every nook of the state and sometimes sport quirky names, such as Three Bubbas Innanet Ltd., an Internet provider based in Gloucester.

A 1998 survey by Forrester Research showed that 77 percent of local ISPs — those with less than 50,000 customers — were profitable, compared with just 7 percent of the national providers. A report by The Strategis Group, a D.C.-based research firm, says the majority of public ISPs continue to struggle toward profitability and are spending heavily to grow and service subscribers. According to that report, in the first three quarters of 1999 only one public residential ISP reported positive operating income — Dulles-based America Online. No public ISPs reported a positive cash flow.

Small ISPs, meanwhile, are proving that being little can be a big advantage. How? The big boys often can’t serve local markets as well as home-grown ISPs. Mom-and-pop service providers attribute much of their success to their ability to provide superior customer service with a personal touch, from house calls to computer training sessions. Their hands-on approach dictates that no one is too important or too high-ranking to deal with customer problems. Many Internet users find them appealing because they offer a local footing in an otherwise impersonal electronic marketplace.

Many small ISP customers are refugees from AOL, tired of a generic, mass-market experience or fed up with the visual assault of blinking banner ads and getting "spammed" by junk e-mail. "The reality is that for larger competitors their strength is also their weakness," says Robert Spekman, a University of Virginia business professor who tracks the telecom industry. "They can’t serve every part of the market equally well."

Enter Rockbridge Global Village, an Internet provider in Lexington with 1,500 customers. Founders Tom Ahnemann and Dusan Janjic, both computer workers at Washington and Lee University, surveyed the Shenandoah Valley and saw a virtual tundra. "There was nothing going on here," Ahnemann says. "People were using AOL and dialing long-distance and getting exorbitant bills. We both had kids in school here, and the schools had no Internet access, the library had no access, local businesses had no access." They spent about $15,000 of a home equity loan to launch Rockbridge Global Village in 1995. They offered free Internet access to area schools and subsidized it with slightly higher rates to subscribers. Ahnemann and Janjic say it’s about more than connectivity: They are community builders. One of their first steps was to create an electronic Main Street, an online village with links to local government, cultural attractions, regional publications, history, child care and more.

Many businesses that have shopped around for Internet providers have decided that smaller is decidedly better. PatriotNet, a 10-person ISP in Fairfax, scored a coup last year when it snatched the Northern Virginia Technology Council’s account from PSINet. The 5-year-old company, the brainstorm of three undergrads at George Mason University, has about 2,200 subscribers. The company saw $500,000 in revenues in 1999 and expects just under $1 million in 2000. "From a technical perspective we can compete with anybody," says president and founder Bob de Lorenzi. That’s because PatriotNet rents its infrastructure from AboveNet, a tier-one backbone provider.

The technology council decided to change vendors because PatriotNet offered competitive rates and was more attuned to its changing technical needs, says Christine Kallivokas, the council’s vice president of operations. "We were looking for the warm fuzzies of a small company that looked after the individual customer," she says.

Moreover, customizing Internet operations proved easier with PatriotNet because it didn’t have the cookie-cutter approach of a big corporation. Its staff looked at the council’s entire operation and charted the most cost-effective route to accomplishing its goals, says Kallivokas. PatriotNet also has 24-hour customer service and a warm body answering the phone. "I’m willing to crawl over broken glass to serve you," de Lorenzi says of his commitment to customers, and you sense that he’s only half-kidding. "It’s the only distinction I can truly have."

Niche-building aside, small ISPs still face considerable challenges. They can’t do business the way they did even several years ago. Residential subscribers, who account for a significant portion of many providers’ revenue, are going to become a fickle lot. Free and deeply discounted Internet service is coming on fast. The next big trend, according to analysts, is "virtual ISPs" — companies that are not in the business of Internet access but will offer it under their name, such as the Republican Party and the AFL-CIO. "It’s all going to become commoditized," says Janjic, of Rockbridge Global Village. "People will switch from one brand to another."

To survive, companies will have to look beyond their dial-up accounts for business. Value-added services will become the largest source of revenue for ISPs by 2003, exceeding revenues from either consumer or corporate access sectors, according to International Data Corp. in Framington, Mass.

Some small providers, like Rockbridge Global Village, have diversified. The company added a computer learning center and wants to offer one-stop shopping for technology services. Others, such as Pinnacle Online, are concentrating on business-to-business Internet services. PatriotNet is branching into teleworks and is focusing on so-called sticky services to keep people on its Web site. The company says it is now testing a portal similar to Yahoo or MSN that will be able to provide customers with custom stock quotes and news feeds, plus e-mail and a built-in information manager.

The nuts and bolts of the business has also changed, making it easier than ever to enter the fray. You can now buy an ISP-in-a-box. "The technology is such that you can look big but be small," says U.Va.’s Spekman. "You don’t need a supercomputer to do this."

Though it might be relatively simple to get set up, staying in business is a different story. "It probably looks easy, but brain surgery probably looks easy, too," Ahnemann says. "Debugging the problems and making everything work correctly is monumental."

Fly-by-night ventures are all too common. Bayside SurfCity, a 2-year-old ISP in Fredericksburg, closed without notice in April after it fell behind in payments to its wholesale Internet provider. Several hundred individuals and businesses were left in the lurch; some had paid for Internet services a year in advance. Recouping losses has been complicated by the fact that no one is claiming ownership of the company.

Some small ISPs are so wary of stumbling that they are imposing limits on themselves. Roanoke-based Rev.net, for example, has adopted a more conservative course than many. The company’s founder, E. Doyle Edgerton Jr., watched other independent service providers come and go and was determined not to repeat their mistakes. The failed Internet ventures "oversold their service and grew too fast," he says. "The sheer volume of business paralyzed them and they couldn’t provide the proper service."

So Rev.net set a self-imposed limit of 1,000 subscribers. When it hit that goal, it imposed a moratorium on new accounts while it evaluated whether it could handle more traffic, both from a system and personnel standpoint. Rev.net is now nearing the 2,000 subscriber mark, and Edgerton says he plans to impose another moratorium. Such self-discipline can have big payoffs. "There’s a lot of evidence that ISPs have a high failure rate," says Steven Harris, a senior research analyst with International Data Corp., which tracks ISPs nationally. "But a lot are locally focused, and that’s a big selling point."

If the tremendous growth of the Internet market is any indication, smaller ISPs may have plenty of room to dodge the jaws of the big fish. Today 47 million people have dial-up access, and the consumer Internet market is expected to hit 62 million by the year 2002, according to some industry estimates. Right now, it’s still in its infancy. "We’re just beginning to see how useful the Internet is," Spekman says. "As folks understand more of what it can do as a tool, it will become bigger — five to 10 times bigger."

Competition is entering a new arena. Small providers are no longer competing with the giants but with their peers. Everyone wants to expand their markets, often in the same directions. The advent of high-speed access through cable modem and digital phone lines is expected to make some ISPs bow out. Broadband technology, in particular, requires substantial infrastructure investment that some ISPs will not be able to afford. "There are not half as many ISPs as there were four years ago in Virginia," says Kitty Sachs, executive director of the nonprofit Virginia Internet Service Providers Alliance. "They’re not necessarily out of business, but they’ve just gotten out of the ISP business."

Another trend is that small ISPs are snapping up even smaller ones. Rockbridge Global Village has watched CFW Communications, for example, nab many small, independently owned ISPs in its service area. The buying fever isn’t limited to the big guns; local providers also are busy acquiring smaller versions of themselves to strengthen their foothold in the market. Pinnacle Online, for example, is negotiating to buy two ISPs in North Carolina. Lynchburg.Net recently bought the Roanoke-based Rova.net.

The picture for future consolidation is fuzzy. Analysts say the big will get bigger, but there continues to be room for local providers that slip beneath their radar screen. AOL’s market share in the past several years has shrunk from nearly 50 percent to 43 percent, according to International Data Corp. Most of those subscribers switched to local providers.

Many small-town ISP owners laughed at predictions of their demise. They’ve spurned buyout offers, saying their companies will be even more valuable in a year’s time. They say you can’t put a dollar figure on their value to the community. As PatriotNet’s founder, de Lorenzi says: "It’s harder to quantify good will."