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And now, the real ISP industry

By Arthur Goldstuck

If you ever wanted evidence that the mass media simply do not understand the technicalities of niche industry sectors, look no further than the Internet Service Provider (ISP) environment. In almost any coverage of this industry, the focus is on the dial-up ISPs – either on their financial ills or their battle for domination of the subscriber market. So, when the media report on the largest ISPs, they report on M-Web and World Online (now part of M-Web in 2005). Yet, for all their huge numbers of subscribers, the dial-up market is hardly the core of the ISP industry.

I’ll go a step further: the dial-up market is the froth on the surface of the ISP industry. The companies that specialise in dial-up in South Africa typically run at a loss, or are flirting so closely with the edge of break-even, a relatively small business setback can push them back into the red.

The reality here is that the margins are razor-thin, and customer expectations are absurdly high. I do not wish a dial-up business on my worst enemy. Well, okay, I would wish a dial-up business on Osama Bin-Laden or the Australian cricket team, but only when I’m in a bad mood.

In the corporate market, on the other hand, margins are often high, services are vastly differentiated, customers are still willing to be given strategic guidance, and new opportunities for expansion keep emerging.

In other words, the business customer is the real business of the ISP industry.

Today in South Africa we have four first-tier ISPs – those that purchase part or all their bandwidth from international suppliers – all of whom offer compelling value to their customers. Unlike the dial-up market, churn among these ISPs cannot be readily or glibly predicted, and the relationships between these ISPs and their customers are often more akin to partnerships than the seller-buyer model.

Here, for a moment, is where we are forced to sound like we are conducting a public relations exercise:

*In this sector, Internet Solution (IS) is not only a success story, but also a testament to the rewards of a focus on professionalism. It is a particularly compelling story, given the manner in which young idealists founded it, yet is run in a manner that puts many aged corporations to shame. Its virtual ISP programme has made possible a new boom in small, independent ISPs. Most of the new players offering dial-up access at anywhere between R39 and R79 are able to do so only by piggybacking on this kind of service. And, despite becoming part of the Dimension Data group, IS has retained its unique culture, and remains one of the favourite companies to work for among IT people in South Africa.
* UUNET, the corporate ISP that emerged from the never-ending process of consolidation that took in half of the ISPs that first appeared in 1993 and 1994, is now owned by its international parent, yet remains inextricably connected to the needs of South African business. Moreover, its push into Africa makes it a symbol of the manner in which this country can make both physical and metaphorical connections to the rest of the continent.
* If Internet Solution is the jewel in the crown of Dimension Data, then CITEC is the hidden jewel in the Johnnic stable of online services. But its quality is slowly being revealed. Its service level agreements (SLAs) are probably the best in the industry, and among the only ones that offer actual refunds (yes, refunds) if it does not meet quality commitments to clients. Its close links to MTN also provide it with access to equipment of a standard that is out of all proportion to its relatively low profile.
* It is never easy to be kind to Telkom in the context of an ISP discussion – after all, their regulatory intransigence is a key factor in the slowdown of growth in the industry, and in the block on the roll-out of connectivity services that are taken for granted in most other countries with mature Internet industries. Nevertheless, the industry has to acknowledge the role played by Telkom’s Internet networking reseller, SAIX, in pioneering the Virtual ISP model in this country. At one stage, a third of all ISPs would not have existed without access to what was then called the virtual PoP (point of presence) infrastructure.

At the next level, that of ISPs who purchase their bandwidth from the first tier ISPs and then resell to corporates, there are four that stand out:

*DataPro, which has made an art out of the science of repackaging bandwidth into unique value propositions for their clients;
* NetActive (now part of M-Web in 2005), which first identified the SME market as the ISP growth market of the future;
* Storm, which rescued the remnants of Club Internet and found regulatory loopholes to add a unique set of telephony-related services for businesses;
* AT&T Global, which emerged from its parent company’s buy-out of the IBM network as an influential player in the South African market.

Others, like MediaPost and Adept, have promising businesses, and other ISPs will also come into focus in due course as current research is completed.

Why be so kind to each of the competitors in a cut-throat industry that we curse as often as praise? It is simply this: 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 very 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. The same, it seems, cannot yet be said of the dial-up market.

It should also be noted that not all of these businesses are profitable, but all are highly attractive businesses, and have the potential for 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 above would not be around today.

Arthur Goldstuck is editor of The Big Change and author of more than a dozen books on the Internet and urban legends. He runs the independent research and strategy consultancy, World Wide Worx. he was responsible for the groundbreaking research that established and tracked the size of the ISP market from 1995 onward.

Purchase the Goldstuck Report: Internet Access in South Africa

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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