Acquisition mania

In the few years that I`ve actively worked for Internet Service Providers, I`ve been acquired twice. In this innocuous statement lies encapsulated a lot of what working in South Africa`s access industry is currently like. You`ve all picked it up: ISPs merge, ISPs get acquired by big IT conglomerates. And balances of power in the world of technology can shift, almost overnight.

In the few years that I`ve actively worked for Internet Service Providers, I`ve been acquired twice.

We work in a climate that is hyper-competitive right now. Unlike in the United States, where it`s quite feasible to buy products or services from your competitors if they contribute to your prosperity, the South African IT industry is very cagey and polarised. Fact is, even if I publicly don`t seem to get along very well with my competitors The Internet Solution or newcomers M-Web, the people who work there may often be friends or friendly acquaintances who share the same vision and have similar goals. People, in short, for whom the Internet is the technology of the future and not only a vehicle to fill their pockets at another`s expense.

Acquiring an ISP these days seems like "the done thing" for most big South African IT groups. ISPs are bought and sold, as the acquisition of Global Internet Access (GIA) first by Mustek and subsequently by USKO shows. Much like there are companies that are either "Web-ready" or not, there are certain kinds of IT businesses for whom an ISP is an asset and some for whom it`s too far removed from the core set of activities to matter.

So let`s go through the list then. GIA now belongs to the USKO group, in a sense a relative newcomer to the IT field: USKO`s published annual report shows its main activities in the manufacture of electrical conductors and Aluminium products. USKO bought GIA for around R80m according to press reports, surely a major `declaration of war` on its rival IT groups, and certainly an expression of intent. Telecommunications and Internet services constitute an area of activity that any self-respecting IT company can`t be without, especially as deregulation will come one day. (I say "one day" as neither government nor large, listed companies move very fast; those with vision will have understood that it`s a good idea to buy now and wait it out.)

UUNET Internet Africa (UIA) (whom I work for) is part of the Datatec group of companies. SA`s first commercial ISP, UIA has a long history of beneficial mergers and acquisitions. In the latest such move, it was merged last year with Global One`s South African Internet company after Datatec acquired that business from Global One. UIA is expanding its strengths along two trajectories: access and services for consumers, where it remains the market leader, and access and services in the business segment, where the company works closely with Datatec`s other Internet companies and acts as an account management window. A minority share of UIA is owned by UUNET Technologies Inc., who in turn are a part of the WorldCom group of companies, a major US telecommunications carrier and network provider to the likes of AOL and CompuServe.

Then, there is The Internet Solution (IS), now a wholly owned subsidiary of Dimension Data, who had bought a substantial stake in the company previously. IS has a broad spectrum of Internet-related offerings, ranging from consumer services (ICON) to business access to its service ranges in building online commerce and Web sites, the latter somewhat eclipsed (at least in market awareness terms) by "free agent" (read: not group-owned) independent companies. Dimension Data as a group, however, seems to have firmly entrenched the principle of spreading its IT activities sensibly around a well-defined core of activities.

M-Web, a relative newcomer in the field of Internet access from the M stable, has acquired the CSIR`s ailing WorldNet Africa, PiX, GEM Internet and Interlink in the past year, ostensibly en route to building the country`s largest consumer ISP. They certainly appear to have a lot of money to throw around on both acquisitions and marketing. Although they seem to be some way down the road to building an access and content monolith, much will depend on their delivery on promise and what the merchant bankers and investment analysts think.

Radiospoor Technology Holdings owns a chunk of Club Internet, though I can`t seem to establish exactly how much (neither the Radiospoor annual report nor the company`s Web site shed any light).

Those exist too. Currently, the PQ group stands out in this field. Yes, they have a company called Q Data Internet, but - at least in my perception - they don`t focus on access infrastructure at all. QDI, like most of the PQ group`s activities, seems to concentrate on consulting work, only in this case the consulting activities revolve around Internet or intranet based technologies. What`s interesting, though, is the group`s focus on the so-called "value-added" services in its EC Net and SACA offerings, an electronic consumer commerce provider and a digital certification agency, respectively. To some it appears that the PQ group has made a conscious decision to let others concentrate on the slog-work of building networks and to reap the benefits of what goes on top of that infrastructure.

Mustek, together with Baobab Solid Growth, has shed its investment in GIA and is now once again "without ISP". This was probably a wise decision, as the PC hardware distribution business and the provision of Internet services are too far removed from one another to be co-manageable. It also strikes me that the distribution potential that lies in bundling Mustek`s Mecer PCs with Internet access was never exploited properly. Mustek will most likely continue to prosper in importing PCs and peripherals, and GIA might find a better home in USKO, though the exact thrust and outcome of this acquisition remains to be seen. At least I now have some former colleagues and friends who are being paid in share options and bonuses. Good for them.

A question I get asked a lot is, "What about the little guys?" An amazing fact about South Africa is that there are currently more than 75 other ISPs (by `other`, I mean that they`re not owned by a big IT group). Mentioning that there are, in all, about 80 ISPs in the country usually causes a conversation to stop in its tracks with disbelief. Who are these guys? Why do they do it?

As a quick `excursion`, perhaps, it has to be said that the Internet access business, especially with a small user base and without being able to exploit economies of scale and association, is quite profit-less. Unlike other areas of IT where a software development company with three bearded coders and a good idea can make a mint very quickly, the access business is thankless and very hard work for no obvious monetary return. Perhaps the return lies elsewhere, though.

Little access providers, often mom-and-pop or garage businesses, continue to have a role to fulfil in my opinion. We can go into the detail of this argument along two lines: (1) geography and (2) personal attention. Geographically, they can be where bigger ISPs struggle to be. Although UIA maintains more than 25 points of presence in all corners of Southern Africa, the access market in outlying areas is often so small that putting up infrastructure might not be economically feasible for a big ISP. This is where smaller, local companies can own a market. From a personal attention point of view, there is something to be said about an ISP where you can carry your PC in the door and receive help from the owner/operator. Often, these companies make most of their money as a PC dealership, so their support is comprehensive and encompassing.

As to why they do it, well, that`s a little harder to understand. There is a certain joy in running your own Internet node, with a couple of modems and a mail server. It`s nice to be able to bring people online, one person at a time, and see them discover what the Internet can do for them. However, quick money it ain`t, and discovering that one is not able to afford the next 64 Kbps of international bandwidth is a hard thing.

A lot of the smaller guys, often techies with little business sense, fell into what I`ll call the "SAIX trap". SAIX, Telkom`s IP product, offered them international bandwidth at costs well below market rates at the time. I know, some detractors of this argument will now point out that if you take the 8 or 16 Kbps of guaranteed international bandwidth that SAIX guarantees per 64 Kbps access line together, the cost for a dedicated 64 Kbps of international bandwidth through SAIX is effectively the same as what IS, UIA or other `independents` may offer, but it`s a question of "competing effectively for bandwidth". This could get a little technical for most readers, but suffice it to say that on a network whose international capacity is utilised sub-optimally, you don`t actually only get 8 or 16 Kbps, even if that is what`s guaranteed. The net result of SAIX`s bandwidth pricing has been an artificial lowering of the barriers to entry.

It is my opinion that many of the smaller, SAIX-connected ISPs will eventually suffer from this. It`ll be very hard for an ISP with 500 users to continue offering flat-rate access at R65 per month without, put simply, going bankrupt. This is assuming that prices for international bandwidth will eventually balance throughout the field. In a sense, I hope that I`ll be proved wrong in my opinion, because, as you can tell, I feel a certain kinship with those running smaller ISPs. Having been there myself, I know how cool it is to help connect people, one person at a time.

Going back to the big IT groups, then, readers might ask what the benefit is of owning an ISP, especially given that it`s not a high-profit business. The benefits are manifold and all centre around leveraging different, often disparate skills inside a group around a central, focal point or theme. Companies prefer buying similar services from one source, and outsourcing implies purchasing everything through a single point of contact. Typically, such services could be a selection of Web design, Web hosting, Internet access, mail server maintenance, electronic commerce development and digital certification. Since the technologies are similar, they might also include intranet development and setting up supplier extranets or VPNs to affordably connect geographically disparate networks.

An access provider is both a great business core and a strategic marketing vantage point. The Internet industry, as a friend once said, is the loudest part of the IT industry, even though its combined annual turnover is a fraction of that of, say, the consulting industry. We make a lot of noise. It`s hard to say exactly why that is, and a part-reason is surely that our status has been called into question by Telkom in its previous regulatory guise, but I`d like to believe that we`re loud because we have something to say.

I really believe that the Internet and everything that relates to it, technologically, conceptually and from a content and commerce point of view, constitutes the current future of the IT industry, and I can only compliment those big IT companies who have acquired one or more ISPs for having realised this.

Why did I call it the "current future"? Well, because futures change, just as the present continually alters its nature. In the second half of the 90s it`s been Microsoft Windows and the Internet. Hard to say what will happen to IT overall, and both operating system and communications trends might change, but I sure hope it won`t be Java toasters in the year 2001. To be perfectly honest, I`ve never understood why people talk about toasters whenever they discuss Java.

(Note: I work for UUNET Internet Africa, and it`s possible that some of my views expressed in this column might show that company in an especially beneficial light. I`ve tried to be fair, but your mileage may vary.)