The Internet Service Provider (ISP) industry remains one of the most difficult in which to make a profit, with those ISPs intent on offering flat-rate services finding their balance sheets perilously awash in red ink.
So says Craig Levy, Managing Director of Ensquared, the technology solutions provider for the networking and ISP markets.
According to Levy all dial-up ISPs in South Africa are running at a loss, including M-web and Worldonline, based on the fact that the market has driven the dial-up price per user down to less than R100 per month. One or two service-related calls from a client and the ISP is already deep into the losses. In addition, he said Telkom introduced its 'R7 call'.
"These two factors alone are having a debilitating affect on the ISP marketplace. Couple this with the continuous devaluation of the Rand and the increase in international call charges and you will quickly come to the conclusion that ISPs who purchase International bandwidth will find that running at a loss is becoming more and more of a reality."
Levy says the leased Line market - which has 'fat' built into it - is now becoming less and less of an area to make money as more and more ISPs have cottoned onto this and are competing for a slice of the cake. This has consequently driven prices down and taken a chunk of the profits away.
He also believes that the offering of flat-rate Internet services may help ISPs grow their client bases meteorically in the short term, but will almost certainly bring disaster further down the road. The costs of sustaining this model will 'require companies with extremely long pockets, or particularly dumb shareholders'.
"One must also remember," said Levy, "that there is a lot of churn in this industry. Customers have very little loyalty at the moment - and I do not see this changing for some time. If they come across what they think is a better deal elsewhere, they will immediately jump ship. It is a recipe for disaster. An ISP who has built up a massive client base through offering flat rate service charges will find it hard to deviate from this course in the future. If they do, they stand to lose a chunk of their clients. They are wedge between a rock and a hard place."
Turning his attention to overseas markets, he said "A wave of failures in Europe's fledgling flat-rate ISP market is just the beginning.
"Analysts expect a flood of mergers and bankruptcies in coming months, as a dramatic shakeout hits the European market for unmetered dial-up Internet access." This is 'no surprise,' according to Lars Godell, European Telecommunications Analyst at Forrester Research in Amsterdam. "We are talking about a business model that, already in '99, was pointing heavily in the red in terms of huge losses." He predicted that the flat-rate ISP business model will be dead in Europe within two years.
Meanwhile, several German companies are apparently throwing in the towel in the fiercely-contested, and seemingly suicidal, flat-rate market. Dusseldorf-based DUSnet, for instance, recently announced the termination of its 'FLATcity' tariff, which was introduced on 18 August. In a statement, the company said the pricing plan, with a startup fee of 69 marks (US$31,68), and a monthly flat fee of 69 marks, is proving economically unfeasible. Also in August, Bitburg-based Surf1 announced the opening of bankruptcy proceedings. In a statement, the company said its flat-rate model had resulted in 'immense losses,' as 80% of customers were surfing more than the calculated break-even point.
But the tales of woe do not end there. Versatel Internet Group, in Dortmund, has stopped taking new subscribers for its unlimited Sonne service, which costs 79 marks a month. The company bemoaned its fate in an open letter to customers, saying that the average user previously surfed an hour a day, and that figure has shot up by threefold or fourfold since introduction of the new flat-rate tariff.
"We have determined that 80% of our network capacity was being used by 'power users' - people who stay on-line for 24 hours a day," said spokeswoman Susanne Heeke. "That is not normal." She also said that existing subscribers are being monitored for their usage patterns, and those who are on-line nonstop for 30 days or more will find their contracts terminated.
Similar problems have been encountered with the much-hyped roll-out of unmetered Internet service in other European countries. In the UK market, AltaVista indefinitely postponed the introduction of its flat-rate service plan on 21 August.
"The current state of the UK telecom market has not enabled the company to deliver an unmetered service within the time scales originally planned," the company said in a statement. This announcement came hot on the heels of other ISPs in the country, including Springboard Internet Services's LineOne, LibertySurf Group and Breathe.net, all of whom ran into problems with excessive demand for unmetered services.
Ensquared's Levy said that the cardinal difference between this business approach in the United States and in Europe is that dial-up, narrowband users in Europe/Africa have to pay the local call charges when accessing the Internet. This basically means that the telcos do not share the revenues for calls dialled into the ISPs network with the ISP - there is no kind of kick-back model.
"As long as a provider is charged for (on-line) time, he can't resell it unmetered; it just doesn't work," said DUSnet Manager Udo Dluzinski. "It's not like in the US, where phone service is sold for a lump sum. That's a problem that the regulatory authorities need to aggressively go after.
"The economics are extremely bad for this model, especially if you couple it with the subscription-free service as well," he said, "So the only revenues the ISPs could get are advertising and e-commerce revenues, and so far it's basically only been Yahoo and AOL (America Online) that have been successful in attracting these."
Analysts, meanwhile, predict that out of more than 500 ISPs currently operating in the UK, there will probably be fewer than 10 by 2005.
"Making money with dial-up users alone is highly unlikely, unless a company has extreme critical mass. Even then it will be difficult to stay profitable. There has to be a bigger ball plan, like growing a large client base through the lure of cheap dial-up services - but then making use of knowledge- based systems to cross-sell other products and services, including from third parties, to this large audience," said Levy
For further information contact Ensquared, (011) 788 8445.
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