ISPs That Rely on Europe's Smaller Firms Must Adapt or Die

Transcription

1 Research Brief ISPs That Rely on Europe's Smaller Firms Must Adapt or Die Abstract: Internet service providers that focus on Europe's smaller businesses must adjust to falling profit margins and growing demand for broadband services and wireless access. ISPs that fail to adapt will go out of business. By James Woodcock Recommendations ISPs that focus on small and midsize businesses (SMBs) in Western Europe should: Adapt to a changing market, because inflexible ISPs are falling by the wayside. Target a wide area. Pan-European ISPs enjoy economies of scale from blanket advertising campaigns, shared costs and large customer bases. Offer a varied range of services at speeds from 512 Kbps to 2 Mbps to suit businesses with between 10 and 40 Internet users as Tiscali does, for example. Sell managed services to offset falling prices for standard broadband access. Devise a long-term technology strategy. 512-Kbps to 2-Mbps broadband is SMBs' first choice now, but demand will grow for fixed wireless access, symmetric digital subscriber line (SDSL) and very-high-bit-rate DSL (VDSL). Offer service-level agreements (SLAs), where possible. Maintain high standards of customer service. Online service portals are vital. Recognize that the growth of broadband for consumers as well as businesses threatens the future of dial-up access as a profitable service. Take advantage of wholesale broadband offerings from incumbent operators (former stateowned monopolies) in the short term. Install equipment in incumbents' local telephone exchanges in the medium term. This will let you take full control of your services. Publication Date: 16 September 2003

2 2 ISPs That Rely on Europe's Smaller Firms Must Adapt or Die AdaptorDie Inflexible ISPs are falling by the wayside during hard times for the telecom industry. Competition by a larger number of players is causing the price of standard 512-Kbps to 728-Kbps broadband access for businesses to fall and profit margins to thin. To survive, ISPs focused on Western Europe's small and midsize businesses (SMBs) must offer a varied range of broadband services to a wide market, adapt quickly to market forces and differentiate themselves in any way they can. Price of Standard Broadband Plummets for SMBs in Germany and France The period August 2002 to February 2003 brought big change to the retail price of 512-Kbps to 728-Kbps Internet access for businesses in two of Western Europe's main markets. Prices fell by 72 percent in Germany and 55 percent in France. In the United Kingdom they fell only 2 percent. Sweden saw no change, as its prices were already low. These differences ended the relative conformity of prices in France, Germany and the United Kingdom during the 12 months to August By February 2003, Germany and Sweden had the lowest prices, at 57 euros per month; France charged 86 euros; and the United Kingdom had become far more expensive than its peers, at 154 euros (see Figure 1). Figure 1 Average Monthly Retail Price of 512-Kbps to 728-Kbps Internet Access for Businesses Monthly Price (Euros) France Germany Sweden United Kingdom 0 Oct 2000 Aug 2001 April 2002 Aug 2002 Feb Source: Gartner Dataquest (September 2003), based on data from Oftel ThreefactorsaccountedforthehugedifferencebetweenthepricedeclinesinFrance and Germany and those in the United Kingdom. Incumbent operators in France and Germany cut their retail prices to combat growing competition from ISPs that bought their wholesale broadband offerings. These cuts exceeded the United Kingdom's because French and German incumbents had only offered wholesale broadband in earnest since 2002, when the regulators

3 3 forced them to. In the United Kingdom, BT has sold wholesale broadband offerings since The price of wholesale broadband fell in France and Germany. In France, it dropped by a quarter from August 2002 to February 2003 even though faster, 1-Mbps lines became available and alternative ISPs passed the savings on to customers in the form of lower tariffs. By contrast, the price of wholesale broadband in the United Kingdom was static until mid The composition of France's broadband market differs greatly from the United Kingdom's. In France, cable modem operators made inroads, which forced DSL providers to cut their prices. In the United Kingdom, cable technology is more established. Cable and DSL each accounted for half the U.K. market at the end of This level of cable penetration is rare in Western Europe; only the Netherlands has more. Broadband Threatens Dial-Up Internet Access Thegrowthinsalesofbroadbandservicestobusinessesandconsumersbringsinto question the future of dial-up access as a profitable service for ISPs. Uptake of broadband has already slowed growth in Western Europe's dial-up market, and this market will shrink as early as 2005 in the Netherlands and some other countries. The long-term outlook for the region's dial-up market is bleak. The number of broadband subscribers is likely to equal the number of dial-up subscribers by And broadband's penetration will keep on rising, to account for three-quarters of subscribers by 2014 and 90 percent by But Leased Lines Won't Suffer Because of Broadband The market for leased lines won't be reduced by broadband services, because they are typically bought by a different type of customer. Broadband services are usually bought by SMBs that need affordable high-speed Internet access for fewer than 40 users. For them, a 512-Kbps to 2-Mbps service is currently adequate. Leased lines offer a higher level of security. This makes them especially attractive to large businesses, which have more need to protect sensitive s and internal files from unauthorized external access. SMBs are less likely to be the target of criminal intrusion and usually find leased lines too expensive. Alternative ISPs Should Offer Their Own Services in the Medium Term In the short term, alternative ISPs targeting SMBs in Western Europe can compete with incumbents by buying their wholesale broadband offerings. This lets alternative ISPs attract customers without having to maintain network infrastructure. Once their subscriber base has grown, they should aim to offer distinctive services, prices and speeds by installing their own network equipment in the incumbent's local telephone exchanges. For most, this won't be until after 2006.

4 4 ISPs That Rely on Europe's Smaller Firms Must Adapt or Die How to Maximize Your Chances of Survival ISPs that rely on Western Europe's SMBs must do four things to survive. Create Service-Level Agreements SLAs are a crucial part of an ISP's business offering. SMBs want services that are backed up with assurances. ISPs that resell services bought wholesale from an incumbent can't guarantee highquality service at all times, as they don't control the network. The best they can do is guarantee the delivery time for a broadband connection and round-the-clock support every day. Incumbent operators and cable companies have an advantage in this area. They can offer comprehensive SLAs for their services' capability, speed and reliability. Only when alternative ISPs offer their own services through the unbundled local loop can they offer comparable SLAs. Provide Excellent Customer Service ISPs that offer excellent customer service through SLAs are likely to be rewarded with long business relationships with SMBs. Support for this view comes from Gartner Dataquest's 2001 survey "SMBs: User Demand for Internet Services," TCEE-WW-UW-0103, which found that customer service is one of the most important criteria for those choosing an ISP. ISPs should create customer service portals. It's essential to let SMBs monitor their own metrics, view billing information and pay bills online. Sell Managed Services to Offset Falling Prices for Access The standard broadband access charge for SMBs in Western Europe will continue to fall. By 2006, the price of a basic 512-Kbps business offering will be less than 35 euros a month, as regulators demand price cuts for wholesale offerings and ISPs become more efficient. ISPs will have to develop other areas to offset the fall in access revenue. Many offer free activation and modems for those connecting to business broadband packages. This can attract new users in the short term, but gives them no incentive to stay. To win extended contracts and boost average revenue per subscriber and overall profit margins, ISPs must offer managed services like router management, firewalls, Web hosting and instant messaging. They should include these in new contracts designed to retain customers and lure others away from competitors. A simple way for an ISP to attract new business is to publicize its prices. Showing them on a Web site gives SMBs the chance to compare ISPs and favor those with the keenest prices. Meet Demand for New Access Technologies ISPs that offer alternative technologies to fixed asymmetrical DSL (ADSL) such as cable, wireless and satellite have the potential to reach a wider base of customers. They should form partnerships with operators that can provide infrastructure for Wi-Fi-certified wireless interfaces. Incumbents in France, Germany and the United Kingdom are already doing this.

5 5 SMBs will need faster DSL technologies, too. Currently, many ISPs offer ADSL business packages of between 512 Kbps and 2 Mbps. They must prepare for demand for speeds of up to 8 Mbps by There will also be demand for SDSL, whichprovideshighspeedsbothupstreamanddownstream.(adslsupportsa maximum of only 640 Kbps upstream.) These technologies must be made more widely available. In the long term, SMBs' e-commerce operations and other advanced services will require even higher speeds. Operators in many European countries are already deploying VDSL. This offers maximum speeds of 52 Mbps downstream and 16 Mbps upstream.

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