Just like competitive local exchange carriers (CLECs) in the US are dropping like flies, or battling to stay afloat, ISPs (Internet service providers) in SA are facing the harsh realities of too much competition, not enough clients and not enough cash. Only a select few are making money and managing to maintain and attract customers.
This is the opinion of Douglas Reed, Managing Director of DataPro, a leading ISP and network integrator. DataPro recently finalised a R30m management buy following backing from BOE Equity Partners.
"Research shows that it boils down to a good business strategy. Those CLECs in the US, for instance, who are surviving and attracting new customers, do not provide the entire infrastructure themselves - they often leverage off the infrastructures already established by other third parties. This cuts down significantly on overheads," said Reed. A study completed in June this year by Robert Crandall, a senior fellow at the Brookings Institution - an organisation which studies government policy and economies - found that a CLEC's choice of business strategy is the key factor in determining whether it would succeed in a highly competitive and overcrowded marketplace.
The report identified three CLECs that appear to be doing well. The similarities between these three companies is that all three are only partially facilities-based. They have an extensive amount of third party usage agreements with other vendors, rather than investing in their own infrastructures.
"The ISP business is similar to the CLEC business in the US - it is highly capital-intensive. The same problem is faced by telcos. One of the reasons why we have managed to remain cash-positive," said Reed, "is because we have always leveraged off other third party infrastructures, and yet we still provide our customers with the facilities they require. They do not really care how we get or provide them. They just want speed and reliability."
Reed said Data Pro's strategy is similar to those US CLECs who are surviving by striking technology or usage partnerships. "We, for instance, have not gone to the extreme of setting up our own Points of Presence (POPs) at every city in SA. We have relied on Telkom to go to this expense and, instead, use Telkom's frame relay facilities. Where density of users requires it we will establish our own POP, but otherwise we will rely on third party agreements."
Reed said that following the MBO-backed by BOE management, will be looking at ways to improve customer service levels - and this will include investing in new technology and infrastructure, where required. "But we will make business decisions based on usage and user requirements, rather than trying to be all things to all people in areas where we do not really have a current demand. Going that route - and trying to grow too fast - just creates a severe cash-burn situation."
DataPro
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