Is it gloom or boom for local ISPs?

The South African Internet service provider (ISP) market has been relatively stable during the latter part of 2000 and the first half of this year, with four players dominating.

Corporate providers UUNet and Internet Solutions are seen as clear leaders in their field and see little threat in specialised competitors, who cater either for niche markets or concentrate on a range of services in which bandwidth provision is almost incidental.

While troubled by continuing rumours of its imminent sale, World Online continues to share the dial-up market with M-Web after both swallowed up a host of competitors in their search for critical mass.

Free Internet access services will help to grow the market size and probably will not cannibalise paid subscriber services.

Synaptic Junction, ., .

The unexpected response to Absa bank`s FreeMail free dial-up offer caused much heated debate about ISP business models and seemed to lead to a measure of soul-searching at M-Web headquarters. But although now the third largest dial-up ISP in the market, Absa seems to have had remarkably little impact on the bigger picture within which it operates, and as the dust settles, free providers are increasingly seen as in a class of their own, fundamentally different from corporate or dial-up ISPs.

It seems the biggest disruption in the industry as a whole will come from government, which through its policy decisions is altering the nature of bandwidth provision forever. Broadband to homes could be less than a year away, despite expectations that new technologies, such as DSL, will not be broadly adopted.

Yet the industry is not immune to a shake-out from within its own ranks. A study by a student group has found a general lack of perceived quality among all providers, potentially leaving room for a handful of new players with a different approach to rapidly gain market share.

A recent study by a group of Wits MBA students found that the ISP industry in SA has seemingly numbed consumers and businesses alike to poor service, despite competition in the leased-line market and free access offers to consumers.

The group, Synaptic Junction, reported some unusual findings on the perceived quality of service among businesses, small and large, as well as dial-up users.

Companies of less than 10 employees reported the largest variation in service levels in areas such as alerting users of possible outages, reporting lines going down and confirming that problems had been resolved. For medium to large companies, the variation was much smaller, with the majority reporting either excellent or appalling service.

But despite bad experiences and a general perception of being neglected, 80% of respondents across the board said they would give their ISP a word-of-mouth referral.

"Although most Internet users felt they were getting fair value, but mediocre service, 80% would recommend their ISP to a friend," says Synaptic Junction. "Comments received ranged from 'It could be worse`, 'Hardly any problems`, 'Staff are always pleasant to deal with`, to `Delivers the same service one would expect elsewhere` and 'Not too many choices in SA`."

A feeling of lack of choice was especially evident among dial-up users, with one respondent citing "better than M-Web" as a reason to recommend his ISP to friends.

Users may well try another free ISP and Absa clients are a prime target market for other free ISPs starting up.

Arthur Goldstuck, independent Internet analyst, .

As would be expected, the group found that speed, cost, service and reliability were the determining factors in the selection of an ISP, but also found that the amount of emphasis put on each factor could be grouped by company size.

Small companies were the least worried about cost, but were concerned about speed and reliability. Medium enterprises were most troubled about reliability but not about service, while slightly larger companies were most concerned with service levels and not much by speed. Large companies, defined as firms with headcounts of more than 150, said reliability is their primary concern with speed not far behind, but that service was not an issue.

Synaptic Junction believes small companies may have had bad experiences with unreliable and very slow but cheap dial-up connections, while large companies are aware of their vulnerability with mission-critical systems depending on bandwidth availability.

Despite the general perception that bandwidth is very expensive in SA, cost did not seem to figure large in the minds of any of the business respondents.

A portion of the Synaptic Junction study focusing on the Absa free Internet service had some encouraging results for other ISPs, with the findings seemingly backing up the more optimistic predictions from their community.

Here too cost took a back seat to other factors.

In a survey of higher income earners in the LSM (Living Standard Measurement) 6 to 8 categories, 64.7% of respondents said they are prepared to pay for dial-up Internet access. Despite some anomalies, no group had less than 40% of its members unwilling to pay for their use, with the upper limit reaching 70% in one professional group.

Maybe even more encouraging to traditional ISPs are the perception levels on the sustainability of a free Internet model. Some 40% of respondents said they did not believe free Internet access would work in SA, with 15% of existing Absa FreeMail users agreeing with the sentiment.

For consumers, cost did not appear to be a major factor in deciding on an ISP, but speed did. Likewise, continuity of service ranked high, but cost was not a major factor. The results among users of free services did not differ significantly from that of the total population.

There will probably not be significant reductions in the cost of leased-lines.

Andreas Bertoldi, business unit manager, BMI-TechKnowledge

Synaptic Junction believes this indicates that most of Absa`s 170 000-odd registered users signed up to test the service and are using it as a secondary provider while paying for their primary access account. Less than 4% of Absa users said they held no other Internet account, while 41% of respondents said they held more than one access account, with the second typically being a free service.

So with the price of a dial-up account not a burden to higher income earners, free services would have to offer better speeds than their paid-for counterparts, or once and for all overcome scepticism as to their future.

"The majority of South African Internet users are not prepared to utilise free access services alone, and will hold multiple accounts to hedge against the disruption caused by the discontinuity of the free services," says Synaptic Junction. "Free Internet access services will help to grow the market size and probably will not cannibalise paid subscriber services."

The findings are similar to what other analysts have found.

Andreas Bertoldi, BMI-TechKnowledge (BMI-T) business unit manager for Internet and e-commerce, says surveys done by the research company show that less than 20% of Absa FreeMail clients are new to the Internet.

And despite the introduction of such a popular free service, subscriber churn seems to have decreased markedly since the days of frenetic competition among a host of equally small ISPs in 1997 and 1998. Today`s market, largely dominated by M-Web and World Online, seems pedestrian in comparison, Bertoldi says.

Independent Internet analyst Arthur Goldstuck agrees that exposure to alternatives will not have a great impact on churn, regardless of the mediocre service levels many customers may experience. Rather, he believes, free services are likely to compete with one another.

"Users may well try another free ISP and Absa clients are a prime target market for other free ISPs starting up."

While the impact of free access may be negligible to positive, government`s recent announcement of its intention to license broadband providers has created quite a stir.

[VIDEO]At the end of July, the Ministry of Communications announced its final policy directions, the document which will, through its influence on legislation and regulation, determine the future shape of telecommunications in the country.

Among the changes between the initial policy and the final document were multiple competitors for Telkom and the promise of broadband licences by year-end.

The policy defines broadband as "a technology solution, wireless and/or cable or both that provides for the transmission of integrated voice, data and video service in a single logical channel between the network transmitter stations/lines and the subscriber".

The Department of Communications has confirmed that such licences will enable the licence-holder to lay his own fibre, use radio or laser links across private property, or outsource the building of infrastructure to any party it chooses.

"People will be licensed to basically say `here is your geographic area where you can provide broadband`," says Department of Communications director-general Andile Ngcaba. He foresees applications such as crime-preventing inner-city cameras and video on demand to be among the first for which the capacity is used.

[Leased-line] prices will come down fairly rapidly. We can`t be sure how much yet and it depends on a number of factors, but you can`t maintain the current pricing models.

Andre Wills, director, BMI-TechKnowledge

Yet ISPs falling over themselves in a rush for such licences are likely to be discouraged by the terms and conditions such a licence would carry.

Licences are to confine providers to very specific geographic areas, many of which will probably be as small as business parks and single city blocks. "It is going to be defined either by metro or by specific geographic area that will be defined in the invitation to apply," says Ngcaba.

As a provider of telecommunications services, broadband licensees would also contribute a portion of their revenue to the Universal Service Fund, and it is expected that licensees will be subject to regulations more stringent than those imposed on other ISPs, exponentially increasing the red tape they will need to deal with.

Nor does any part of the policy released to date make provision for broadband providers to be exempt from the total ban on voice over Internet protocol (VOIP) for all but Telkom and its competitors.

The introduction of a free dial-up business model did little to change the state of the market, and regulation is unlikely to give birth to a new breed of ISP, but according to the experts, telecommunications liberalisation will have a marked impact for large businesses.

Worldwide experience has shown that telecommunications providers can find little profit in the suburban market, where cable needs to be strung from home to home to enable chit-chat between friends and family.

The opening up of the regulatory constraints will definitely enable other telcos and ISPs to compete more aggressively.

Arthur Goldstuck, independent Internet analyst

Businesses, on the other hand, are intensive users of high-margin long-distance and international services. Telkom has long been preparing for the siege it expects from competitors wishing to usurp its corporate business, and no new carrier will ignore the chance to integrate voice services with data and offer a bundled package.

The upside for clients could be improved and innovative service rather than cheaper bandwidth. Or maybe not.

"There will probably not be significant reductions in the cost of leased-lines," says BMI-T`s Bertoldi. "The reality is such that nobody can afford to engage in a radical cost war. They will compete on services rather than price, and you may see a 5% or 10% drop in pricing."

Andre Wills, a director of BMI-T who concentrates on the telecommunications market, sees things differently.

"[Leased-line] prices will come down fairly rapidly. We can`t be sure how much yet and it depends on a number of factors, but you can`t maintain the current pricing models," he says.

From Wills` perspective, it seems there will be an oversupply of bandwidth due to competition among operators. This, combined with a lowering of international connectivity costs due to competition, should see an effective lowering of prices.

The reduction, however, may be masked as ISPs under-charge for bundled services.

Goldstuck believes leased-line costs will only be reduced in the unlikely event that international bandwidth, a major component of current costs, is deregulated.

He predicts that it is more likely that lesser savings will arise from the relaxing of other regulations, such as moves to allow ISPs to buy bandwidth in bulk and resell it among clients. "The opening up of the regulatory constraints will definitely enable other telcos and ISPs to compete more aggressively," he says.

In the short-term, ISPs may find themselves in a cosy position as new operators woo them, and by extension their clients, into new contracts. But they may find themselves in life-and-death competition with those same operators before too long as operators claim increasing portions of the high margin services market.

"I suspect telcos will be moving into the ISP space before too long," says Bertoldi. "Unless you are a pure carrier, it is natural for a telco to move up the value chain." He foresees some of the larger corporate ISPs teaming up with operators eventually, a move which may well put such outside alliances out of business.

For small businesses and consumers, there are likely to be far fewer fundamental changes, as their business is less important to carriers, and there are no immediate leaps in technology.

Goldstuck says this situation is not likely to change, even with new operators laying virgin copper. "DSL will be by its very nature a lot more expensive than normal dial-up in this country. ISDN will still be more cost-effective for your average consumer."

Wills believes DSL may be offered after the local loop is unbundled sometime after 2004, when small ISPs will be able to offer it using the copper put in place by Telkom and company. He says some markets, specifically in Europe, have seen operators convert ISDN subscribers to DSL because of cost-savings, and such a move is not out of the question in SA.

But without general uptake, the technology will remain expensive and out of reach.

I suspect telcos will be moving into the ISP space before too long.

Andreas Bertoldi, business unit manager, BMI-TechKnowledge

Both analysts also agree that mobile technology, such as packet-switching in data-rich 1800MHz spectrum and even third-generation may be more pervasive, but because of their inherent expense and limitations, will supplement rather than compete with fixed-line data offerings.

"If it is expensive and the throughput is not great, why bother switching?" asks Wills.

Both BMI-T and Goldstuck expect a continuing slowdown in the rate of Internet penetration in SA after the boom years of initial exposure.