|Latin America I 2003
|Digital Inclusion for Small Business – How Can We Do It?
|Renato Flavio Fantoni
|Director of Public and Regulatory Affairs
|Ericsson Telecomunicações S.A
Renato Flavio Fantoni is currently the Director of Public and Regulatory Affairs at Ericsson Telecomunicações, in Brazil. He joined Ericsson’s local Design Department 1971. Rising within the company, he was later appointed Director for the Cellular Systems local Product Management Units, Datacom Networks and Multiservices Networks. Mr. Fantoni holds an electrical engineering degree from Faculdade de Engenharia Industrial, Brasil, a MSc. in Computer Studies from University of Essex (UK) and studied Business Management at the Escola Superior de Propaganda e Marketing in Brazil.
Most businesses in Brazil are small, with 1 or 2 or, perhaps, a few hundred workers. They are, potentially a large market for broadband. Most SME still use dial-up telephone connections, but as prices drop more SMEs will use broadband. The telecom sector – operators, manufacturers, software and content providers – will have to work together to provide the low-cost, scalable, really useable applications and user friendly equipment SMEs need, but do not have ability or funding to implement.
It is a recognized fact that the global economy has, during the last few years, experienced a very strong slowdown that had a great impact on almost all segments. This came after a long period of extraordinary growth fuelled by the globalisation and supported by the expansion of Internet. The abundance of capital and the “irrational exuberance” of stock markets created the objective conditions for the proliferation of business initiatives, many with very little business rationality, until…the “dot com” bubble blew. The telecom industry, that for many years lived in a “golden age” when capital was cheap and abundant, expanded enormously riding the waves of deregulation and privatisation that many governments implemented as a way of increasing penetration of telecom services, promoting the competition in the benefit of the end user. “Telecom operators are much more focused in their core businesses than before” Additionally, the promises of the third generation (3G) of mobile systems enticed operators, particularly in Europe and the Far East, and, additionally, an astonishingly high volume of money was buried in the purchase of 3G licenses, financed by cheap capital. The bursting of the “dot com” bubble caused a sudden shortage of capital, which moved to less sensitive segments, leaving telecom operators with very limited investment capability. The reality is that the market has changed dramatically since then. Telecom operators are much more focused in their core businesses than before and specific market segments that might have been neglected in the past are now being addressed. This is the case of the Small and Medium Enterprises (SME) market segment. It is a well known fact that, in any structured economy, most enterprises are micro, small and medium in size, raging from 1 or 2 to up to few hundreds employees. In Brazil, the distribution of enterprises per size is shown in table below, illustrating the potential of the SME segment: The SME Market for Broadband Until the last decade of the 20th century, Small and Medium Enterprises in Latin America only used narrowband communications systems for the voice and limited low speed data services provided by state owned public telecom operators. However during the last years of that decade, several important facts drastically changed this scenario. First, the increasing use of Personal Computers (PC) by SMEs, associated with the introduction of Local Area Networks (LAN) to interconnect those PC’s, consolidated the use of the Ethernet technology as the de facto standard for the internal networks in most enterprises. In the same time frame, most of Latin America’s public telecom operators were privatised, opening the communication market for competition. The most important driver of innovation, though, was perhaps the massive popularisation of Internet access using the World Wide Web. In less than 6 years, Internet access evolved from an early-adopter’s novelty into an important tool for SME communications. Until recently, most SME used dial-up telephone connections and independent ISPs (Internet Service Providers). In Latin America, in contrast with USA and Europe, ISDN (Integrated Services Digital Network) as an access technology didn’t take off and broadband service was confined to expensive leased lines that only large multinational corporations could afford. Price has limited the growth of broadband access in Brazil. According to research by IDC, broadband had 700.000 users by the end of 2002, an increase of 112% compared to 2001, but usage by SMEs accounted for only 10% of the total. Building SMEs Using Broadband Access Telecom operators should be studying how to provide, low-cost, scalable, useable service packages. By way of high-speed access to the Internet advanced features – such as integrated voice and data, IP Telephony, IP Virtual Private Networks (VPN), video and multi-media services and user mobility – can be offered. SMEs should be encouraged to migrate from simple telephony and Internet access to a data-centric environment. Broadband access will allow Website adoption, e-commerce with online-sales, product and services information, customer support and other business transactions. To optimise these Web activities, new ways of doing business such as outsourcing of e-mail, hosting, data-storage and content delivery will become increasingly important. Easy access to quick start-up service packages, design/consulting and service assistance will be needed, since most SMEs do not have the know-how to begin alone. “SMEs should be encouraged to migrate from simple telephony and Internet access to a data-centric environment.” Self-select services from advanced software house and easy to digest turnkey service packages would contribute to SME productivity. Building a new SME broadband access network As stated earlier, price is one of the most important factors limiting the use of broadband services by SMEs. Although the price of a service has an intangible component based upon the perceived benefit of the service and competitive considerations, a good part of the price is based upon its real cost. Finding or developing cheaper technology, and cutting operational costs can cut prices to levels that more SMEs can afford. There are a number of broadband access technologies, each with advantages or disadvantages in a given situation. In the case of physical access, using the fixed telephony networks, xDSL (Digital Subscriber Line) can deliver bit rates up to few hundred kbps. XDSL makes use of existing copper access networks. An equivalent solution for cable networks uses cable modems. Another promising technology is Public Ethernet. Public Ethernet addresses one of the key issues facing fixed network operators today – how to capitalize on the emerging broadband access opportunity. Public Ethernet enables universal broadband access services. It combines the benefits of the Ethernet technology with the characteristics of reliable public networks. An innovative broadband access solution will include Ethernet DSL (Digital Subscriber Line) Access, Fibber Ethernet Access and Metro Ethernet Access. Soon, all-IP/Ethernet-based networks will deliver services. The key to this development, however, is the removal of the bandwidth bottleneck in the final connection to the user. With this bottleneck removed, it will be possible to deliver to customers 1,000 times more bandwidth than today using optical metro networks and all-Ethernet-access networks. “Cellular systems using several different standards (CDMA 1xRTT/EVDO and GSM GPRS/EDGE) promise to deliver bit rates specified by the ITU” In addition to DSL solutions, Fibre Ethernet Access solutions also provide symmetrical high-speed broadband (10, 100 or 1000 Mbps) access from a network based upon switched Ethernet and fibre optic transmission. “The need for cellular radio access will, to a large extent, depend on the application, for instance automation of sales force.”. Its high-speed access makes it ideal for bandwidth-hungry services such as video-conferencing, personal TV, interactive commerce and other multimedia services. Metro solutions eliminate the bandwidth bottleneck for heavy data traffic in the metro network and offer a range of interfaces and high capacity links using cost-effective and simple Ethernet technology. The operators have the possibility to choose freely between native Ethernet and Ethernet over TDM (Time Division Multiplex), SDH (Synchronous Digital Hierarchy), or WDM (Wavelength Division Multiplex) depending on their current network infrastructure. Another important issue is the network termination at the SME premises, operators can deploy new innovative Multi-Service Edge Devices or IAD (Integrated Access Devices), which can drastically reduce capital and maintenance costs of connection to a broadband network, allow-ing remote activation of new services on installed multi-service edge device. In the case of radio access, a number of possibilities exist, depending on the supporting network. Cellular systems using several different standards (CDMA 1xRTT/EVDO and GSM GPRS/EDGE) promise to deliver bit rates specified by the ITU (International Telecommunication Union) for Third Generation cellular systems, and above. Other radio technologies, for point-multipoint applications, operating in higher frequency bands can be used for fixed wireless access providing tens of Mbps that can be shared by several users. The need for cellular radio access will, to a large extent, depend on the application, for instance automation of sales force. Nevertheless, new and more user friendly equipment may be required for the SME segment, again considering the application, but taking into account the following aspects: Basic functionality – just what is needed – with easy-to-use simple interfaces; Low cost hardware – minimum maintenance or even disposable devices Display – with basic multimedia capabilities (image/sound), coloured (or not), in order to cope with new types of interactive services Voice-Activation – to allow better interaction with the new services Broadband Services for the SME Market The SME market, presented above, will require new and creative business models. One possible model relies on the partnership among telecom operators, equipment suppliers, distribution channels and content providers. To better describe the business model, a model of the market space is proposed: Primary Market In this context, the large telecom operators that build telecom infrastructure and provide telecom services to the market space (the universe of all potential users of telecom services) form the Primary Market. These services are, in general, licensed by the regulatory entity. “Integrators provide solutions by integrating different components and services; their business model is based on value aggregation.” Most suppliers target the Primary Market directly, offering complete solutions, equipment and services, adding value to the telecom operator. Secondary Market The Secondary Market consists of all the other players with a need for a specific communication solution. They might need a piece of equipment, a company wide solution or a non-licensed/limited service. In the Secondary Market, micro, small, medium and large enterprises and retail customers, interested in products and /or solutions that can be supplied quickly at low cost, are the buyers. The sales channels are the direct sellers, distributors, their resellers / VARs, and integrators. Integrators provide solutions by integrating different components and services; their business model is based on value aggregation. Capillarity, speed in meeting market demands and competitive prices are essential characteristics of the Secondary Market. The Business Model The proposed business model, for the Secondary Market in general and the SME segment in particular, relies on the partnership and close cooperation among the telecom operator, the equipment supplier, the distribution channel and the content/application supplier, each focusing in its core business, optimising the use of capital and core competences: Telecom operator: To develop, market and sell service solutions and to focus on the customer relation. Equipment supplier: To supply equipment and solutions, to support the telecom operator in the development of services, to support the distribution channel in the development of solutions, to support the content/application supplier in the development of applications. Distribution channel: To carry CPE stocks, to implement the physical solution at the customer’s premises, to provide technical support. Content/Application Supplier: To supply specific content and applications, as required. The critical factors in tapping the SME market for broadband services with an appropriate marketing & sales approach are: Market and Demand Analysis (with support from market surveys) – an evaluation of customers profile, needs and preferences and the most relevant drivers for broadband services consumption. Services & Applications Selection – based on the potential penetration and expected revenues of broadband services and applications among SMEs, with inputs from market surveys and analysis. The applications with greatest potential will be chosen. Competitors Positioning Analysis – evaluation of competitors’ offerings and the extent to which customers’ needs are being met (by using customer satisfaction and dissatisfaction factors captured in market surveys). Services & Packages Definition – definition of broadband services and service packages offerings Pricing and Promotions Definition – Pricing/ tariffs definition for the broadband services and packages defined previously, including the evaluation of the demand price sensitivity (price elasticity of demand estimation), through market survey results. Sales Argumentation – sales argumentation creation aligned with customer needs and competitors’ market positioning. We have already implemented this approach in Brazil together with one of the largest distributor/integrators in the market. Business opportunities for broadband access for the SME and low-end segments, mainly using xDSL technology, have been addressed in partnership with telecom operators with very encouraging results. In this way it was possible to offer broadband access, including equipment, logistics, deployment and support, and broadband services in a very effective way, taking advantage of the core competencies and capabilities of each partner. This proved to be an effective approach for the Brazilian market.