|Issue:||Asia-Pacific I 2002|
|Topic:||Returning to Profitability in the Internet Business in Asia-Pacific|
|Author:||Tan Tong Hai|
|Title:||President And CEO|
|Organisation:||Pacific Internet Limited|
Asia Pacific Internet service providers were hard hit by the dot.com bust. Companies that managed to recover and turn a profit learned much. The main lesson was to take care of the business fundamentals first: focus on your core business; manage margins aggressively; understanding the trade-offs between service, service level and cost; discover which strategies and services can be replicated and those to be adapted for each country; use a common technology platform everywhere; practice “smart marketing;” and hire local talent.
The Internet business in the Asia Pacific has never been more challenging then in the last few years when we witnessed the rise and fall of many companies following the bust of the dot-com bubble. During the dot-com boom, companies were quick to jump at opportunities in the capital market and funding was relatively easy to come by. Convincing company directors to support business ventures that were still in the red was possible. In the aftermath of the dot-com euphoria, company directors are now extremely focused on return on investment (ROI), discounted cash flow and profitability. CEOs are forced to focus on business fundamentals rather than building value in the capital market. Many companies made their share of mistakes and had to weather the ups and downs of the Internet economy. The journey back to profitability was challenging and many important lessons were learnt. Lesson 1: Staying focused on the core business The basic tenet for running any profitable business is to remain focused. Many companies, have been tempted to look at alternative business models for new sources of revenue streams. This has resulted in a loss of business focus for most ISPs who diversified into non-core businesses like the advertising and e-commerce based service models etc. These ISPs ended up losing their ground in the core access business and also incurred hefty losses in the non-core businesses they ventured into. The ISP business is fundamentally a service-oriented business. Customers will not buy value-added services from you if you do not service them well at the basic level. A quality network and good customer service must be delivered before anything else. Lesson 2. Managing margins The second tenet for running a profitable business is to always keep your eye on delivering healthy margins. This may sound easy and basic but margins are easily eroded in the heat of competition. In the early years, the Internet in Asia was primarily a consumer business and margins were good as there were few competitors. However, the dot-com boom and the entrance of many new ISPs contributed to the rapid erosion of margins from consumer access services. Additionally, in certain markets such as the Philippines and Thailand, there was a demand shift from post-paid consumer dial-up services to pre-paid services, resulting in thinner margins and greater challenges in customer retention. The falling margins from the consumer segment prompted ISPs to shift its focus from the consumer to include the corporate market. This is not an easy move, but it is essential, as the better margins from the corporate market are needed to improve the bottom line. Margins will change along with changes in market dynamics. ISPs must be prepared to quickly change business strategies to maintain, improve or in some cases to slowdown any rapid erosion in margins. Although managing change is challenging, it is imperative to sustain strong financial momentum to return the company to profitability and keep it there. Lesson 3. Understanding the relationship between service, service level and cost. Profitability isn’t just about revenue and margins but also about monitoring and managing operating expenses. Customer service is fast becoming an essential but high cost item in any service driven business. It is recognized that customers in different countries have varying levels of service expectations and needs. Therefore, a good understanding of the service level expectation will allow the company to maintain customer satisfaction while effectively managing cost and staffing needs. We have learnt that service standards are not the same in all countries. A study of the customer needs in each country, allows a different customer support staffing structure to be adopted for each country. Call centre personnel, for example, need to be trained according to the standards and requirements of each country to ensure that appropriate, local, service levels are maintained. Providing good customer service is essential for any successful business but “over-providing” customer service can be unnecessarily costly and a burden on the bottom-line. Lesson 4. Not all strategies can be duplicated regionally without localization Companies that operate in several countries in the Asia Pacific region quickly learn that one size does not necessarily fit all, particularly in the consumer market. A proven business model in one country may not work as well in another market with a different culture and heritage. It is now clear that consumer behaviour in each country differs. For example, in Singapore, Hong Kong and Australia post-paid Internet services are the norm while markets like the Philippines, India and Thailand are skewed to pre-paid services. An in-depth understanding of the different local needs and usage patterns, allows one to tailor marketing and product strategies for each market according to local needs. Blindly transplanting a strategy into another market one can easily incur high marketing expenses without achieving the desired results. Localization does not necessarily mean a complete reinvention, but starts by understanding local market needs to find the best and most cost effective means to meet them. Lesson 5. Knowing which strategies can be duplicated regionally While consumer behavioural patterns differ in each country, corporate customers’ needs are generally more homogeneous. Unlike consumer services, corporate services are generally similar in different countries. Therefore, the basic offerings for the corporate market can often be replicated across the region. This has cost and efficiency implications for the business. While some countries in the region are more developed than others, their corporate needs do not differ significantly. For example, the needs of a Thai corporate customer looking for regional connectivity services will not be very different from a Hong Kong based customer. Corporations have certain homogenous traits and requirements for services such as Virtual Private Network (VPN), email outsourcing roaming services, among others. While it is important to know when to localize, it is equally important to know when you can replicate. Both have a significant impact on cost and profitability. Lesson 6. Build a common technology platform and infrastructure across the region. Regional ISPs would benefit from a common technology platform and infrastructure by cross sharing bandwidth between countries and transferring of equipment and network assets. For instance, the company can build a very reliable network architecture that offers full redundant links through peering arrangements with major carriers and satellite vendors. Through this highly resilient network, each operating entity will then be able to offer customers uninterrupted Internet services. Network assets can also be transferred to subsidiaries in developing markets so that the company is able to maximize investment costs by not letting idle assets go to waste. The company can save on capital expenditures by re-utilizing equipment transferred from other offices that have upgraded their configurations. A regional ISP can also negotiate better pricing for bandwidth and equipment by consolidating the purchases at the Group level. Lower procurement costs can provide significant savings for the entire group. Lesson 7. Smart Marketing In the Internet business, particularly in the consumer arena, marketing cost is a large component of a company’s operating expense. When profitability becomes a key issue, most companies either drastically trim its marketing budget or they spend more money to generate demand. One route is “smart marketing.” To continue generating demand and reduce operating costs new avenues can be found to communicate the corporate message. One of the most cost effective vehicles is public relations. A company can establish greater credibility through objective media coverage, endorsements from third parties such as analysts or customes. In addition, leveraging on industry speaking events provides additional opportunities for the company to communicate with partners, customers and industry authorities. Accolades and awards won can also be strong “pull” factors for customers to put their faith and trust in a company who is seen to be an industry leader with strong public endorsement. Today, brand recognition comes about from a combination of many different marketing activities. All these communication channels play a major role in helping to establish and build the image of the company as well as to increase top-of-mind recall amongst a variety of audiences such as investors, industry counterparts and most importantly customers. It is a fine balance of deploying a cost effective marketing plan that will not compromise the achievement of the business objectives. Lesson 8. Hire Local Talents to Reduce Costs and Improve Service Level Most regional businesses are usually run by foreign talents put in place by headquarters management. Experience has taught that to grow a regional business well a strong local management team must be in place. The local touch is needed not only to service customers in the country, but to also be able to read and adapt to market needs. There are advantages to local talents running the business, it not only helps reduce operational costs but also improves responsiveness since local talent has a better understanding and appreciation of the country’s cultural norms, customer behavior and other local market dynamics. Speed of execution and customer satisfaction are also benefits that can be derived. For the local management to function effectively, a certain level of autonomy and flexibility must be given. This leads to a greater sense of ownership and responsibility for the running of the business and its bottom line results. Conclusion The lessons shared are based on my own experience. The strategies may or may not be transferable to another company, but the fundamentals do apply and are valuable. The fundamentals are: focus, margins, cost management, efficiency, good market knowledge and organization building. In a dog eat dog world, it is easy to forget the fundamentals but the journey back to profitability is best started with the fundamentals. Good luck!