Double-edged ADSL price sword

Smaller ISPs without scale or niche offerings will be gobbled up by larger companies in the next consolidation wave, or risk going out of business altogether.
Smaller ISPs without scale or niche offerings will be gobbled up by larger companies in the next consolidation wave, or risk going out of business altogether.

Fixed broadband costs will continue to decline next year, benefiting end-users, but the lower price points will lead to consolidation in the industry - and the collapse of smaller Internet service providers (ISPs) that cannot keep up with declining costs.

SA's broadband price war started near the end of last year, when local businesses like Afrihost and Axxess took on the market with far cheaper per-gig rates. Then, in March, MWeb led a charge that resulted in a slew of uncapped broadband offers over ADSL.

MWeb's uncapped gauntlet was accepted by several industry players, including Vox subsidiary @lantic and Afrihost, which dropped prices and offered a range of uncapped offerings.

Industry expects price cuts to continue falling, but lower price points could see smaller players without a large backbone - or a value-add service - bought out, or wiped out. However, no one can put a number, or name, to the number of expected causalities of the broadband pricing war.

At risk

MWeb Business GM Andre Joubert expects a round of consolidation within the industry in the next year-and-a-half. He says the consolidation will affect smaller players that will not be able to meet lower price points due to a lack of scale, leading to unsustainable thin margins.

Joubert explains MWeb is moving towards becoming a bigger player with more capacity and a larger backbone, which gives it more economies of scale. He adds that the price cuts seen in 2010 will gather speed and prices are expected to continue dropping next year as more fibre goes into the ground.

However, Joubert says there will still be plenty of competition in the ISP space, as there are many larger players from which to choose. “It's not like we are drifting towards a monopoly.” In addition, he adds, those that are left will be more sustainable, which will be good news for end-users who will not suddenly be stuck without access.

[EMBEDDED]John Holdsworth, CEO of ECN Telecommunication, adds there is no doubt that increasing competition will inevitably lead to consolidation, as operators seek to grow market share and reduce costs in an increasingly competitive market.

Holdsworth says the only way to cut costs and gain market share is through takeovers, mergers and co-operation.

“Dominant incumbent operators with a strong financial base will be able to acquire additional market share and technology, while smaller broadband operators without the necessary critical mass or product diversity will be the likely casualties; either disappearing or being acquired,” he says.

No one is safe

Andrew Simpson, MD of Axxess DSL, couldn't agree more. The company has already been seeing consolidation for the past few months, which has aided the company's growth, says Simpson.

“The smaller companies without scale or the ability to cross-subsidise the cost of Internet access cannot maintain a sustainable business, and hence are forced out of business,” says Simpson. However, he adds that it is not only the small business that is under threat.

“In my opinion, this consolidation 'threat' will also affect some of the bigger providers with their own infrastructure, if they have not geared themselves correctly,” says Simpson.

Time to innovate

Internet Solutions MD Derek Wilcocks says companies need “huge economies of scale” to buy their own capacity. “Small to medium players will struggle to maintain themselves.”

IS has about a quarter of the local market, 90% of which is business gained through its resellers, says Wilcocks. This relationship allows the resellers to benefit from scale, as IS passes on the benefit it sees from having access to international capacity.

However, smaller ISPs that do not have access to scale and cannot offer niche services, or extra value, will see “life becoming harder”, says Wilcocks. He expects more price cuts before year-end, as the West Africa Cable System is due to land in SA soon.

“At base infrastructure level, companies are in more need of scale than ever. There will be medium-sized players that find it hard going and will consolidate,” says Wilcocks.

Vodacom Business managing executive Ermano Quartero adds that more incoming international capacity will result in pricing cuts. He explains smaller companies that cannot add value to the core product of ADSL will be under pressure financially.

Quartero says companies with access to the capacity, and a large network, will benefit as they will be able to add more value to their current offerings. “The broadband experience we have been waiting for will happen.”

Vox Telecom MD Douglas Reed adds there will always be smaller ISPs. “They are leaner, more flexible, more agile and more often than not use their ISP offerings as a value add.” However, these players will find it difficult to scale through at these levels if they want to grow their ISP business.

“The pricing of Internet bandwidth has come down dramatically because of competition; however, to make a dramatic difference, we need to look at other components of the cost structure to come down, like the Telkom line fees and ADSL connection fees,” says Reed.

Related story:
MWeb frees the Web

Read time 4min 40sec
Nicola Mawson

Nicola Mawson is a contributor who hates corruption of any sort. She does not drive a million-rand Beemer and would rather walk.

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