What's in a business model?

Two recent developments added even more excitement to an already over-active Internet service provider (ISP) arena: the revelation that X-Stream is already beta-testing free Internet access in SA and Vodacom's R50 million acquisition of Global Internet Access' (GIA) consumer market from USKO.

These two newsmakers have nothing in common but their unusual business models. X-Stream does what the Internet is famous for and promises to give South Africans an expensive service away for free, while Yebo!Net associates its brand-name with prepaid access.

As groundbreakers, they come in the wake of a relatively long line of offbeat business practices. Who will ever forget the M-Web and UUNet deal, which had everyone wondering about the consequences of swapping customers? But so far the customers seem happy and both companies are doing well within their focused markets - M-Web with its dial-up users and UUNet with its corporate clients.

This is not dissimilar to the deal between USKO and Vodacom, in which the latter takes control of GIA's consumer market while USKO retains the corporate division.

Back in the good old days ISPs scrambled for any business they could find, be it corporate or home users. These two deals, however, indicate a trend towards stricter, fine-tuned focus. Some players are betting all on the future of dial-up, while others head for the calmer, and some say more profitable, waters of corporate access.

One reason might be the emerging virtual private network (VPN) market. March saw some interesting movement there, with USKOnet soon opening for business and HIX Technologies listing on the strength of its VPN hopes.

USKOnet, which will launch in April, spent more than R10 million on infrastructure to guarantee bandwidth for its customers, while HIX abandoned a profitable history in distribution to concentrate more on its VPN business. The common denominator seems to be a possible telecomm roll in the near future. "Service providers will become the next generation of telecomm carriers," says Steve Mazabow, CEO of HIX. "Just by virtue of being a service provider we'll have telecomms offerings that will expand as the year 2002 nears." Shaun Reed, GM of USKO Internet, is more cautious, but agrees voice over IP (VOIP) could be a major component of his business after deregulation in 2002.

Neill Hart, technology marketing manager for Dimension Data Networking, believes VOIP also has good reason to generate a lot of fuss, especially for ISPs. "Voice is probably the easiest thing consumers identify with. Everybody we work with has used a telephone at one stage or another."

Hart believes the settled world of the telco businesses is being shaken up. "VOIP is definitely going to change the usage and revenue patterns for telco businesses." And he reckons data will start eroding voice in the battle for bandwidth. "The percentage of bandwidth used over telephone lines will start favouring data, while voice will start to decrease."

VPNs, with their private networks and bandwidth guarantees, will be in a perfect position to take advantage of this new market.

These VPN ISPs will have two more things in common - the quality of their infrastructure and their lack of fuzzy consumer-friendly additives like content. Lawrence Brick of NetActive is also wary of predicting the future, but he sees a definite distinction in that respect. "I think we will see ISPs split into two broad categories, those focusing on infrastructure and those who focus on end-users, which will include communities," he says. John Beck, USKO CEO agrees, commenting during the publicity around the GIA deal that Vodacom is geared for customers while USKO is better suited to corporate clients.

Brick says NetActive for one would not abandon customers for corporates, as his company prefers to continue to build communities and care for its customers. "Our approach is personal, we hold your hand and guide you through the Internet," he says.

Antonie Roux, M-Web CEO, says content is the ticket. "We see ourselves as a media company," adding that ISPs worldwide derive 7% of their revenue from content only. Content forms part of a broader strategy M-Web employs, which Roux likens to America Online, in that it provides more than bare-boned Internet access. That is what attracts customers. "Value is the capability to have mail, news services, call centre capabilities and billing infrastructure. If you have that, like we do, you have happy customers."

Yebo!Net seems to agree with both sides, with 24-hour toll-free helpdesk facilities and a content-heavy site. Its future strategy is unclear at this stage, as Joan Joffe, corporate affairs executive for Vodacom would only say "no comment" when asked about the GIA deal.

NetActive's Brick has appreciation for the tactics Yebo!Net used to gather non-subscribers. "It adds excitement to the market," he says. "The type of media-spend that players like M-Web and Yebo!Net go for creates market awareness and growth, from which the industry in general benefits."

That is fine for the mass market and the corporates, but no one is targeting the middle ground, reckons Craig Levy, operations manager for DataPro Business Online. DataPro does just that and focuses exclusively on the small to medium-sized business market.

"Mid-sized companies need special help because they are too big for a dial-up service and too small to set up their own IT department," he says. That is why his company also feels the handholding type of service is so important. "The problem is that ISPs seem intent on throwing technology at medium-sized companies without really assisting them," he says.

So where does that leave X-Stream? In deep trouble according to M-Web, which alternates between saying "it won't work" and "it's not really free". When asked for comment on X-Stream, Roux referred ITWeb to an analysis his company did of another British free ISP. Dixons, he says, has four revenue streams, the interconnect fee paid by the telecomms, e-commerce revenue, advertising revenue and the sale of space on its own page. There is no interconnect fee in SA due to the Telkom monopoly, and e-commerce and advertising, he contends, is not big enough to support free ISPs yet.

M-Web has issued a press release that questions whether "free ISP" really means free. Entitled "Free Internet - at what price?" it refers to ISPs in the UK that charge for support calls, but names none. Dixons charges for support by telephone as one of its revenue streams, but X-Stream in the UK charges a minimal flat rate for such calls, and its call centre is outsourced. "At what cost will 'free Internet' be offered to consumers," asks Roux in the release, "and just how much will consumers be paying for service calls to 'free' ISPs?"

X-Stream would not comment on the press release, partly because its says the company has not officially launched the services and partly because it wishes to avoid a war of words. It would only say that it already has "thousands" of users and that the testing is going well.

Brick of NetActive says he is not loosing any sleep over X-Stream, because its success would be his success. "It would be very exciting, because that would mean the online advertising can support them. Everyone would benefit from that kind of revenue stream," he says.