Internet access in SA: The year of uncertainty

"The Goldstuck Report: Internet Access in South Africa, 2002" reveals that growth in Internet usage in this country is slowing to a crawl as the industry wrestles with a factor beyond its control: uncertainty.

This is the key finding to emerge from a six-month research project led by Arthur Goldstuck, MD of technology research and consulting company World Wide Worx.

According to the report, the uncertainty factor has been fuelled by delays in licensing a second network operator, Telkom`s own uncompromising attitude towards Internet service providers (ISPs), and market ignorance about the continued value of the Internet in the wake of the recent technology market crash.

"It`s bad enough that the ISPs and their customers incur exorbitant costs for Internet access," says Goldstuck. "Add to this the absence of a healthy competitive environment, and the ISPs are facing the toughest year of the industry`s existence."

The research builds on Goldstuck`s surveys of the Internet market in SA, since its inception in 1993. He first published estimates of market size in 1995, and led Media Africa`s research into the ISP industry from 1997 to 2000.

The key findings of "The Goldstuck Report: Internet Access in South Africa, 2002" are:

* One out of every 15 South Africans had access to the Internet at the end of 2001. This compares with at least one out of every two people in countries like the US, Canada, South Korea, Singapore and Hong Kong. China, at one out of 18, is catching up fast despite its huge population and underdeveloped infrastructure. At current growth rates, there will still be only one in ten South Africans with Internet access by 2006.

* The total number of South Africans with access to the Internet at the end of 2001 was 2.89 million.

* This is expected to grow by less than 10% to 3.1 million by the end of 2002. This is the lowest growth rate since 1994, when public Internet access first became available.

* Sluggish dial-up growth stands in dramatic contrast to the growth in the total number of leased-lines - permanent connections to the Internet - installed in South African businesses. The number reached just under 7 000 at the end of 2001, reflecting an insatiable demand for bandwidth among corporate users of the Internet. This year the number of leased-lines will see a growth rate of around 20% in total market size.

* Only a small handful of ISPs are profitable, but there is no specific business model that guarantees profitability. Neither size (small or large), nor target market (corporate or consumer) is an indicator of success. In the corporate market, Internet Solutions is the most profitable ISP, while in the dial-up space World Online is the only major ISP operating profitably. An increasing number of ISPs are profitable on an EBITDA basis (earnings before interest, tax, depreciation and amortisation). In short, it is no longer uncommon for ISPs to be operating profitably, but they still have a legacy of debt.

* The number of ISPs has grown dramatically in the past year, largely due to the roll-out of a virtual ISP service by Internet Solutions and the continued heavy use of the equivalent service from SAIX.

* Business strategies in the ISP industry are maturing to the extent that it has become possible to create a model that explains not only how ISPs evolve, but also how they meet their clients` needs as those needs evolve. Goldstuck has been developing the model for several years, and presents the complete version for the first time in this report.

* Despite facing seemingly insurmountable challenges, the ISP industry remains stable. Only a tiny proportion of ISPs in SA have gone out of business through bankruptcy.

* Mobile access to the Internet has been a non-starter, with only a tiny proportion of those people who have appropriate devices actually using the devices to connect.

* The arrival of GPRS, the so-called 2.5 generation of mobile network technology, may alter the mobile access picture during 2003, but only if appropriate handsets become more readily available.

* Schools` Internet access will see the largest proportional growth over the next two years as connectivity initiatives like GautengOnline begin to bear fruit.

* Community centres, resource centres and digital villages in townships will continue to underachieve in their goals of bringing Internet access to a sizeable proportion of residents in disadvantaged areas.

The Goldstuck report is the first in a series of research reports to be released by World Wide Worx that will provide insight into the Internet, e-commerce, mobile commerce and information systems strategy in SA over the next year.

"We`ve long predicted that the Internet would fade into the background of general commercial and communications infrastructure," Goldstuck points out. "Not because it is becoming less important, but because it is becoming far more important. The Internet underpins so much of our business lives today, it would be near impossible for the corporate world to function without it."

Ironically, the collapse of the technology market has sped up this process. The attention of the business world is moving from Web front-ends to business back-end systems.

"The Internet is now about practical solutions and applications," says Goldstuck. "The bells and whistles will be back, but they will be little more than a sideshow. In short, the Internet has finally grown up."

The contents of the report include analysis of:

* Growth in dial-up user base from 1994 to 2002.

* Growth in corporate access from 1993 to 2002.

* Growth in academic use from 1987 to 2002.

* Prospects for schools growth.

* Prospects for growth in mobile access.

* The regulatory environment.

* Telkom`s role.

* Profiles of the major Internet service providers.

"Most of the negative trends in the ISP industry would turn around instantly if Telkom came to the Internet party," says Goldstuck.

"The situation has a negative impact at every level: corporates would be able to afford more bandwidth and speed up their networks; consumers would be able to remain online for longer at a lower cost; township resource centres would have a better chance of tailoring access services to the means of their communities."

On top of all these issues, comes the uncertainty factor. This, says Goldstuck, points an accusing finger at government and state-appointed structures, like the regulatory authorities, for failing to be more active in speeding up change.

The Goldstuck model of the ISP industry was first presented three years ago as a simple Internet Needs Hierarchy. It was based on Abraham Maslow`s classic Hierarchy of Needs.

Maslow argued that certain basic needs had to be met before more elaborate needs became relevant. Once the basic needs were met, it became necessary for the individual to attempt to achieve the next level of needs, moving up from physical needs to self-actualisation.

In the same way, Internet service providers are unable to provide advanced or "value-added" services before the basic needs of connectivity and reliability are met. Similarly, their customers also move up a needs hierarchy in their embrace of the Internet. It is this dual hierarchy that is encapsulated in the Goldstuck model.

The diagram shown here reveals how the needs hierarchy can be used to evaluate the business model of an ISP as well as the strategic Internet needs of organisations.

This diagram highlights how the needs hierarchy can be used to evaluate the ISP`s business model.

An understanding of the ISP industry in SA begins not only with services offered by the ISPs and required by customers, but also with the manner in which their networks are managed.

It has become traditional to talk of first-, second- and third-tier ISPs in this country, but the definition changes depending on who is doing the defining. Most ISPs will choose a definition that casts their opposition in a lower tier.

Some ISPs claim that only an ISP that owns and manages its international and local bandwidth can be classified as a first-tier ISP, but that would make only Telkom`s SAIX a first-tier ISP, and the definition would lose all meaning.

A generally accepted definition is that a first-tier ISP manages at least some of its own international bandwidth, meaning that it has its own routers in the country from which the bandwidth originates. A second-tier ISP not only gets all its bandwidth from a first-tier ISP, but also has that bandwidth managed by its supplier.

Few ISPs would want to be regarded as third-tier ISPs, and would probably argue against any definition that casts them in that light. In terms of bandwidth access, most ISPs in SA would be second-tier ISPs.

However, it could also be argued that virtual ISPs - which handle only sales and marketing of their ISP brand but own no infrastructure - are in reality third-tier ISPs. These include ISP services offered by financial services entities (such as the late Absa free service) and regional and community-oriented ISPs.

Although M-Web uses UUNet for its bandwidth and World Online piggybacks on SAIX and Internet Solutions, both manage a substantial infrastructure of their own and they are viewed as second-tier operators despite some arguments that they are really virtual ISPs.

Today we have five first-tier ISPs in SA - those that purchase part of their bandwidth from international suppliers or manage part of their bandwidth outside SA.

In the past year, the small handful of just four first-tier ISPs - Internet Solutions, UUNet, SAIX and Citec - has been joined by one newcomer, Datapro. Consolidation at the top also continues, with Datapro swallowing up BTG Internet (the former UskoNet), and Telkom pulling its maverick ISP Intekom back into the fold of its anonymous connectivity services.

It should be noted that the corporate connectivity industry grew up very fast at a time when the market for their services still did not understand what they were offering. By the time bandwidth became a commodity with little fat in the profit margin, almost every one of them had come up with a value proposition that not only set it apart from the rest, but also made sense to almost all their customers.

While not all of these businesses are profitable, all are attractive businesses, and have the potential of huge profits in a deregulated future. Of course, deregulation could bring as many problems as opportunities, but these should be seen as challenges rather than problems. If the ISPs didn`t know how to rise above a challenge, most of those listed here would not be around today.

By Jason Norwood-Young

While they didn`t bring stability to the market, followers of the subsidised ISP model have helped increase the number of Internet users in SA - to a point.

When Absa Bank launched its free ISP offering to the public two years ago, it certainly shook up the market, raising the bar for value-added services from the paid-for competitors. While it wasn`t the only free Internet service provider in SA at the time, it was the first with some serious marketing budget to throw behind its offering.

One of our major findings - and it`s not exactly rocket science - is that Internet access is a precondition to Internet banking.

Dave Donkin, group executive: e-business and information management, Absa Bank

Antonie Roux, then head of M-Web, predicted that free Internet access did not represent a sustainable business model. His hunch proved correct, with Absa switching to a paid-for offering for its subscribers. But while its free model proved too much of a cost for the bank to continue the subsidy, it managed to ascertain that one does not have to be an ISP to offer Internet access.

According to a report compiled by the Absa task team on Internet and banking: "The market`s appetite for free Internet access was undoubtedly underestimated. Two-year targets for subscriptions were achieved within the first six months, making it the fastest growing Internet offering in the world while it lasted."

The pace seemed a little too much for Absa`s international partner, Affinity, to bear, with the UK-based service provider exiting from the deal - and SA - entirely. Affinity`s local subsidiary has apparently disappeared into the red sea of liquidation.

Apart from niche players offering free access to employees or close partners, the salad days of free Internet are definitely over. Affinity`s demise and Absa`s change of tack have added even more uncertainty to a choppy market.

ICL`s ISP, Eject, was expected to take up the fall-out from Absa after the bank announced that it would start sharing. Confusion regarding the bank`s position - particularly after the repeated stay of execution for the free model - had ICL expecting no users. However, it has managed to secure a modest 2 000-odd client-base for its new service.

Despite the good uptake, Mike Semple, executive of infrastructure services for ICL, says the company will only be able to ascertain the profitability of the offering in about four months.

Arthur Goldstuck`s finding that "neither size, nor target market is an indicator of success", seems to hold true in this business. Semple blames external factors for the unpredictability in the market.

He believes the subsidised model pioneered by Absa can be successful when deployed to employees or direct customers. "I think if it is going to be partly sponsored, it will be for a company`s own employees or people who have a direct relationship with the company. That`s really where Absa is going now."

Absa`s model was copied by other companies, which were not ISPs at heart, such as First National Bank`s eBucks, Auto & General, ICL and Liberty. Technically, the service access is usually run by a first-tier ISP - in Absa`s case Internet Solutions. But, for all intents and purposes, the "virtual ISP" is responsible for the branding.

The free offering has also proved unpopular with the likes of First National Bank, which preferred customers to use its "eBucks" to pay for access.

Absa`s reasons for its initial free offering seem sound in retrospect, although at the time of the launch there was a fair amount of hype, fed partly by the market`s inflated opinion of itself.

The bank did manage to garner some significant benefits from its project, including a claimed 300 000 user base for its online banking system - a stated goal at the start of the project.

"One of our major findings - and it`s not exactly rocket science - is that Internet access is a precondition to Internet banking," comments Dave Donkin, group executive, e-business and information management, Absa Bank. "That is why, originally, we offered the public free Internet access, and we are now looking for a more sustainable form."

The new models of Internet access have helped bolster Internet user numbers in this country. Absa claims to have introduced 56 000 South Africans to "the new world of the Web".

However, as ICL`s Semple points out, new ISP business models, and even free Internet, do not address what he considers the biggest drawback to potential users in this country - poverty.

"Somehow we have to break down the barrier to entry significantly. If we can`t do so, we won`t see significant uptake of Internet users in SA," says Semple.