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Long live the little guy Stargate aims to hold its Internet ground against AT&T and Bell Atlantic Wednesday, April 14, 1999 By Ken Zapinski, Post-Gazette Staff Writer
Connecting to the Future
One in an occasional series
Picture telecom giants AT&T Corp. and Bell Atlantic Corp. slugging it out. Look down around their ankles. That's where you'll find Stargate Industries LLC of the Strip District, trying not to get stepped on.
After all, the two giants - with $59 billion and $32 billion in revenue last year, respectively - are greedily eyeing Stargate's core business of providing Internet access to home users. Not only can they provide new high-speed connections cheaper than Stargate, but they'll also be able to include them in a convenient bundle along with phone service, wireless phones and maybe even TV programming.
So why don't Marcus L. Ruscitto, Stargate's president and CEO, and Shawn M. McGorry, the chief operating officer, look like they're afraid of getting squashed?
Maybe because they're adding one new employee a week to keep up with Stargate's blistering revenue growth. Or because they just secured a $10 million war chest to snap up Internet competitors. Or because they are moving ahead with their plan to take the five-year-old company public.
"Our primary objective is to take this company to the next level," said McGorry, former general manager of Tele-Communications Inc's Pittsburgh operation. "We aspire to be a public company and that's what we're all working toward."
Not everybody sees such a rosy future for small local Internet service providers (ISPs) now that the big guys have focused their sights on the market.
"What is the role of the ISP in the future? It is extremely difficult to see that," Robert Rosenberg, of INSIGHT Research told Reuters recently. "Whether my neighborhood ISP will exist in the future is problematic."
Revenue
Connecting to the Future:
Battle Lines: Cable and phone companies want you online - all day and at high speed
Battle Lines: How the telephone and cable pipelines differ
Ruscitto concedes there will be some consolidation, but scoffs at the little-guy-is-doomed scenarios. "The people who have been saying those kinds of things are the people who had been saying four years ago there would be a few players," he said. "Now we have 6,000 ISPs [in North America]."
And the idea that people will flock to telecom companies that can offer everything on a single bill? To Ruscitto, that's a lot of hype. "At least at this point, the customer doesn't really care as much about bundling as telephone marketing people would have you believe."
With little prompting, Ruscitto and McGorry will eagerly explain why they see a bright future for Stargate.
First, new high-speed Internet access technologies offered by Bell Atlantic and AT&T are nice but expensive. E-mail and online chatting work just fine with slower connections, so there will always be a demand for conventional dial-up Internet access. With 30,000 residential customers, Stargate is the largest independent ISP in the region.
Second, an increasing share of Stargate's revenue is coming from businesses, whether for Internet connections or for computer networking jobs. For instance, Stargate provides Internet access for USX Corp., manages the computer firewall for J&L Specialty Steel and does both for American Video Glass, the Westmoreland County venture that makes picture tubes for Sony TVs. "We're probably more diversified than most ISPs," McGorry said. About 40 percent of Stargate's total revenue - $6.25 million last year - comes from business accounts.
Most of all, Ruscitto said, "we compete on service." Stargate likes to brag that it is the only local ISP that has technical support available around the clock, 365 days a year. And people are willing to pay for that attention, according to the company.
Stargate has typically charged more than any other local Internet provider, McGorry said. "But we think we can support it with our service," he said. "That's why people go to Nordstrom's instead of Kmart."
Not everyone agrees. "I don't think people care who provides the actual access," said Zia Daniell Wigder, an analyst with Jupiter Communications. "Service ... has been commoditized."
Indeed, it would be easy to write off the Stargate vision as unbridled optimism.
But in February, the company received a valuable endorsement of its business plan when Fleet National Bank of Boston provided a $15 million line of credit. Stargate will use some of the money to refinance existing debt and buy equipment. But $10 million is intended for acquisitions in Central Pennsylvania, West Virginia and eastern Ohio.
Stargate has yet to make a profit. Since the middle of last year, however, its revenues have covered its expenses before interest, depreciation and amortization, McGorry said. That's considered a key hurdle for high-tech companies with high initial equipment costs.
"Stargate has now reached a level of sophistication where it can borrow on its own from conventional commercial banks," said Charles Zappala, managing director of RRZ Capital Markets Inc., a Pittsburgh-based investment bank that holds a stake in Stargate. "That's a benchmark that will allow the business to grow exponentially."
The company has come a long way from the Peters apartment where Ruscitto, then 24, and his 16-year-old brother, Michael, founded Stargate in 1994, and where the fibers from the purple shag carpeting on the floor kept getting sucked into the fans of the computers.
The story has been told many times, how Michael, frustrated by his inability to get a good connection to the Internet, convinced Marcus, a rising financial service executive, to create their own network. The pair started selling Internet access, eventually outgrowing the apartment at their parents' home and moving the business to a family-owned building in Belle Vernon.
Stargate's big move came last year, when, with financial backing from RRZ Capital, it purchased the ISP business of USA OnRamp Inc. of Pittsburgh. By May, workers were settling into new quarters in a renovated Strip District warehouse. Less than a year later, they're running out of room. The company has 90 employees now and intends to have 125 or more by the end of the year.
Stargate is expanding its network, replacing two backbone connections to the Internet that now come out of the same Downtown building, for instance, with separate connections from three different locations to increase reliability.
Still, the new high-speed offerings from AT&T and Bell Atlantic show how Stargate is getting squeezed. AT&T is offering home data connections over TCI's television cables that the company says are 25 times faster than Stargate's fastest dial-up modem service at a price Stargate can't come close to matching.
On the other side, Bell Atlantic is pushing ADSL, or asymmetrical digital subscriber line, technology which crams bushels of data down conventional copper wires. Customers can purchase the data pipe from Bell Atlantic and still use Stargate as their ISP. But Bell Atlantic is only charging $50 a month for both the pipe and Internet access, or $20 less than Stargate's combination package.
And a Bell Atlantic-America Online partnership is likely to push the price even lower later this year.
"It definitely creates challenges," McGorry said. On the other hand, the new technology focuses more attention on Internet, McGorry said, "and getting people to think about the Internet really only helps us."
And while the telephone companies creep onto its turf, Stargate is not above returning the favor. It has applied to the state Public Utility Commission to be certified as a competitive telephone company.
Maybe, Ruscitto said, they'll use the status to buy Bell Atlantic service at state-mandated wholesale price and resell it to customers at a discount.
"When it comes to voice service, or voice over [Internet], we're going to keep our options open," McGorry said.
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1996: $700,000