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Net Provider Targets Apartments

August 6, 1999

IRVING, Texas (AP) _ Matt Hutchins thinks most businesses have apartment dwellers figured all wrong, which is why competitors in the high-speed Internet access market have overlooked a potential gold mine.

Lack of homeownership to many companies signals lower income. But Hutchins is betting that assumption is off the mark.

``The people who live in these apartments are young, urban professionals. They have a higher-than-average income and they’re almost three times as likely to go online as the rest of the population,″ said Hutchins, president of I3S, which specializes in providing high-speed Internet access and content to apartments.

The Irving company is looking for part of the emerging market that it hopes will be ignored by the two giants that dominate high-speed cable access to houses, Excite At Home, which is majority owned by AT&T, and Roadrunner, a joint venture between Time Warner and MediaOne.

Privately held I3S has fewer than 1,000 subscribers, but like other Internet entrepreneurs, Hutchins is convinced the market and his company will grow exponentially.

Analysts say there may be some logic to I3S’s strategy, but they also suspect the owners may be angling to attract an acquirer.

``This industry is sort of a classic case of the 90-10 rule, where 90 percent of the market will be served by 10 percent of the players, or, in this case, the top two players,″ said Shaun Andrikopoulos, an analyst in San Francisco for Bankers Trust New York.

``But that doesn’t mean there isn’t plenty of opportunity for the smaller players,″ he said. ``And down the road, they become acquisition targets.″

The strength in the competition is access to homes. Roadrunner and At Home are owned by cable companies, giving them a powerful competitive advantage.

``They own the customers,″ Andrikopoulos said. ``It’s not about technology.″

In its own pursuit of customers, I3S has negotiated with real estate investment trusts and other companies that own large numbers of apartment complexes. Operating in several markets in Texas and California, the company hopes to reach 3 million apartments by year end, including expanding its cable-modem and digital subscriber line service into New York, Boston, Los Angeles and Seattle.

Scott Cleland, an analyst for Legg Mason Precursor Group, said I3S’s play for the apartment niche is intriguing _ but perhaps its only option.

``In their bread-and-butter market, At Home and Roadrunner are very formidable,″ he said.

Befitting a company that is filling an unusual niche in the Internet-service market, I3S itself is an unlikely product of a more traditional business.

It was started by brothers Jim and Bo Price, who bought the computer division of typewriter company Olympia USA from Daimler Benz in 1994 and rechristened it I3S, which originally stood for Innovative Integrated Information Services. They stripped away much of the company but kept its engineering group.

The new company began as an Internet service provider for business clients, but according to Jim Price, the chairman and chief executive, it hit on the idea that upscale apartment owners would gladly offer tenants high-speed Internet access as a valued new-age amenity.

They began selling their idea to property owners, including large real estate investment trusts, private cable operators and GTE Media Ventures.

``Our strategy has been to partner _ we partner with the owner of the property or, in some cases, a local utility,″ Price said.

I3S is is looking to expand into the office-building and hotel markets, although analysts warned that those markets are already very competitive.

Price said the 80-employee company is well-financed and debt-free, but added, ``We may be looking at a public offering in the near future.″

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