The African ISP is dead! Long live the African ISP!

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The African ISP runs the risk of becoming an endangered species. Most of them are small, undercapitalised businesses that exist in the rather tight margin between greedy incumbents and price sensitive customers. The introduction of DSL broadband has shifted the power balance decisively against most ISPs and by the time regulators level the playing field again, there will be significant numbers of casualties. As if that were not enough, unified licences are encouraging  the new incumbent – the mobile operators – to play in this space. Russell Southwood looks at what’s happening and how African ISPs can craft ways of fighting back as the market changes.

Like having a cyber-café, opening an ISP seemed to be the perfect business opportunity. This flourishing of small ISPs was fine when the number of users was growing but as growth has levelled off, most competitive Internet markets have more ISPs that subscriber numbers will sustain. As a result, consolidation is already beginning to occur: the merger of ISPKenya and Wananchi is the first of what will be a number of mergers or closures. Small ISPs have almost no development capital and therefore have little or no ability to roll-out their own infrastructure, either at a local or national level.

A clear sign that scale is a problem is that a significant number of ISPs are multi-market businesses, offering many services and specialising in none: a cyber-café, PC training, selling PCs, hosting and web design. It is all too clear that many do not know exactly which business they are in. The majority are not making technical innovations that affect their business fundamentals, particularly the cost and supply of bandwidth. For all these reasons, there could be as little as a quarter to a half the number of African ISPs in competitive markets in three years time.

The introduction of broadband in one form or another in at least two-thirds of African markets represents both a strong threat and a great opportunity. The introduction of DSL broadband by incumbents has put many of the cards back in their hands. Issues of pricing and supply which had just become settled for dial-up are now all back on the table. And in many countries, the incumbents lost the dial-up round and are determined to squeeze out the troublesome ISPS.

Most are going for a “land-grab” that will enable them to become the majority players in this new market. The exceptions are those that are only doing wholesaling. Regulators have tended to follow in the wake of the incumbents making moves rather than anticipating this shift of power. The net result is that it could be at least a year to two years before they get to grips with this new slew of anti-competitive moves.

But the exciting  part that ISPs themselves are in the main failing to keep up with is the steady ramping up of capacity to customers, where they are at last getting more capacity than the current download speeds for less money. KDN’s plans to introduce ADSL2 are another straw in the wind.

Unified licences – where licensed entities are allowed to do pretty much anything – will allow the big players to move into the internet space with a vengeance.  Mobile companies are currently engaged in the technological equivalent of an arms race. Each is working their way through the alphabet soup of upgrades: GPRS, EDGE, EVDO, 3G, HSDPA. It’s not clear that there is really a business strategy behind any of these moves but the rational part is trying to hold on to their high-value customers. And if MTN Rwanda can get 800 broadband customers in just four weeks, it’s not hard to see that this could lead to there being one less ISP in the market. It’s clear that broadband will largely replace dial-up – Senegal is almost at that point – but few ISPs seem to have a strategy to make this transition. So what might the elements of new business strategy be?

- Wireless broadband offers a number of distinct cost advantages. There is often a price arbitrage advantage to be found at the local loop level. It takes a lumbering incumbent longer to match this price advantage with their inflated staffing levels. If well set, wireless broadband also offers distinct capacity and service advantages. For the ambitious ISP, there is also the opportunity to get almost completely out of the clutches of the incumbent.

- Legal VoIP in the majority of African countries is only a matter of time. At least a dozen are lined up to join the vanguard that have already made the jump. There is a very good price arbitrage opportunity at the international level despite most incumbents having had more years than we care to remember to prepare themselves for this moment. But the opportunity is not just at the international level as national calling is deeply uncompetitive  and there are several retail and corporate opportunities at that level.

- Mobile VoIP is still probably about two years off but the smart will look to offer fixed wireless. Reliance in India was able to leverage its fixed wireless operation into a mobile operator and in so doing rewrite tariffs in favour of consumers. The opportunities are not so large-scale but they exist both within urban areas (particularly outside main cities) and in rural areas. Wireless standard like WiMax look unlikely to be a substitute for their mobile equivalents but may well provide sufficient capacity for smaller scale players. It’s sufficiently interesting for MTN to have rolled out WiMAX for data in two countries and be readying a third. When Africa’s regulators wake up to the fact that there is almost no price competition between the increasingly consolidated mobile operators, what would be easier than to let in a few small-scale players to ginger things up a bit?

- The arrival of broadband has allowed operators to look at delivering new products to users like IP voice and IP-TV. Television content – particularly at the international level – is currently a monopoly whose name is DSTV in the majority of African countries. But such a position is unsustainable and the media regulators will in due course look to introduce a bit of competition. Several African countries had problems obtaining World Cup rights and in a football-mad continent, this might surely become a “bread-and-butter” issue. What’s the media equivalent of a cyber-café? A bar showing pirate TV content. Surely much better to sell to these places at a reasonable price and create a legalised market.

Not all of the elements above may be relevant in all countries. They may not play out as suggested but even if only one does, now is the time to place your bets.

There are several competing wireless broadband standards:TD-CDMA/UMTS-TDD; Wi-MAX; Flarion’s FLASH-OFDM OFDM. TD-CDMA is owned by IP Wireless, which is a partner of UT Starcom (developer of UMTS standard). FLASH- OFDM is owned  by Flarion which is in turn owned by Qualcomm, keepers of CDMA mobile voice standard. The Wi-MAX alliance is an industry alliance that includes Intel. It is planning to release a Wi-MAX enabled chip for laptops next year. One of the two Wi-MAX standards is able to offer fixed wireless. TD-CDMA has a number of implementations on the continent including in Cameroon and Sentech in South Africa. Wi-MAX is has the most implementations on the continent and is already being used to deliver satellite VoIP payphones in DRC. By contrast, FLASH-OFM is nowhere to be seen.

Wireless broadband seems to be able to deliver greater data capacity at a lower cost. Opinions vary considerably but those that have “got their hands dirty” estimate that it is about 15-20% cheaper per subscriber than current equivalents. It can offer a relatively stable VoIP platform and if you offer fixed wireless, it’s surprising how much mobility can be achieved: just the sort of mobility that local cab companies and private security companies will almost certainly find attractive. Kenya’s KDN “butterfly” service will eventually combine Wi-Fi and Wi-Max and be able to offer voice mobility. The question is then whether mobile companies will work with KDN or it will go its own way.

This road is not with out obstacles. There will need to be cheap wireless-enabled handsets but since this implementation will probably cost $1-2 then it cannot be that far off. Nokia’s current VoIP phone is aimed at high-end corporates to protect its other markets but this is how everything starts: the question is how long before the downward migration starts? There are spectrum allocation issues that are more to do with who currently has acquired spectrum in some countries rather than fundamental issues around allocation. Finally there is network investment costs. The pessimists (who strangely are nearly always mobile voice standard promoters or mobile companies) argue that the costs will be the same or more. The optimists believe that data-derived standards are more robust for IP voice and will work well so long as no-one tries to launch a mobile company equivalent with millions of subscribers. We shall see….

So what of “triple-play”? Once “real” broadband is in place it will be possible to provide VoIP and media content as well as Internet access. There are already nearly half a dozen countries testing IP-TV including: Sonatel (Senegal), Gamtel (Gambia), Telkom (South Africa) and Mauritius. The operator at this point is a delivery vehicle, not really a content provider but that might change. The current race is for incumbents to provide cheaper delivery to DSTV first and then other content operators. For ISPs, the opportunity has to be to leverage their relationships with their customers to offer a wider service offer.

So what are the requirements of this new business model for ISPs?

- Markets with only 3-5 main competitors where a strong market position (reflected in customer numbers) can be leveraged to sell other services.

- Opening up growth in new markets. For example, the number of satellite TV subscribers is often considerably larger than the equivalent for the Internet. The aim is to create larger subscriber bases that will grow with the economy.

- Getting outside the capital city. In a number of African countries, there still exist significant opportunities in other cities and towns. Stop taking just the cream, try getting some of the cake.

- Creating more complex service offers to cover range of needs (home, mobile, office, content, voice)

- Selling use-value to consumers, not technology. ISPs are often set up by engineers that are fascinated by the technology itself. Start asking what it does for customers.

- In more competitive markets, find the lowest price infrastructure suppliers – use them to drive down the cost of main commodity, bandwidth

- Have access to capital (Probably $1 million but maybe more…)

African ISPs have to ask themselves will you watch this happen or will you make it happen? You have to make the choice yours.