|Issue:||Europe II 2007|
|Topic:||The ISPís changing universe|
|Title:||Founder and Chief Executive|
|Organisation:||Liberty Europe Network|
Barry Shrier is the Founder and Chief Executive of The Liberty Europe Network, a group of businesses focusing on wireless Internet expansion throughout the EU. Previously, Mr Shrier worked with Deutsche Bank to launch Paybox, the worldís first international mobile payment system. Prior to Deutsche Bank, Mr Shrier worked for several strategic marketing consultancies managing a variety of international projects for Unilever, Guinness, Procter & Gamble, Mars and NestlÈ. He is a member of the Institute of Directors, I.O.D, and a Board Member of the WiFi Group, Europeís leading business organisation promoting future wireless technologies. Barry Shrier has an MSc in Philosophy from the London School of Economics, and a BA in Politics from Middlebury College, Vermont, USA.
Until recently, you got an Internet connection from an Internet service provider, ISP. New technology, new networks and new business models, combined in many parts of the world with more permissive regulations, have changed all that. Today, just about every network operator is getting into the market. Many networks have much excess capacity that anyone, handset retailers, for example, can buy and resell becoming operators of their own virtual networks. The rapidly increasing competition is threatening traditional ISP business models.
Robert F. Kennedy said, “Like it or not, we live in interesting times…” This is indeed true in our times as the Internet continues to redefine our lives. In the 40 years since its inception, and the 15 years since the advent of the World Wide Web, the Internet has become the greatest communication channel in human history. However, with technological advances, traditional Internet service providers, ISPs, increasingly face a variety of pressures from the industry that threaten their very survival. The role of the ISP Historically, Internet service provider, the ISP has provided a fairly narrow service – one that was easy to define, price and provide. The ISP delivered a connection to the Internet. However, there has been enormous change in focus during the past decade, from the supply side with its transport technology and the relationship with the telephone operator, to the demand side where market fragmentation and the introduction of new market players from outside the telecoms industry have dominated. With America Online, AOL, came the realisation that providing connectivity was not enough. The Internet was, at the time, so limited in its content and capability that only a small segment of the population was attracted to it. How could this be developed into a proposition that would be of interest to a mass-market audience? The answer was to simplify it and to add more to the Internet, to create special content. The case of America Online illustrates a fundamental strategic issue for ISPs. What are they? Are they just data transmission pipes, or are they providers of value-added services? Historically, this issue was not so important. The leading telephone operators delivered voice connectivity and, in most of the world, were usually government-controlled agencies with guaranteed monopolies. These PTTs, postal, telegraph, and telephone providers, with their guaranteed markets, merely offered acceptable prices for the connectivity and the limited additional services they provided and had little incentive to innovate. With ISPs, however, the picture was more complicated. Most are not network operators, i.e. they do not own or operate the physical infrastructure over which they provide their connectivity services. The ISP, therefore, relies upon the network – the copper, fibre, exchanges, switching services, etc – as this dictates their wholesale costs. Disrupting ISPs Letís say you make cars, great cars, say top-of-the-range BMWs. I then come along with the ability, based on new technologies, to create a similar or even better car at a considerably lower cost. I would immediately have a major price advantage and be in a powerful position to attack your market. This is, of course, what has recently been happening in the connectivity industry. The transition in transport technologies has been profound, from analogue dial-up to broadband. We now all have IP wireless networks, which entirely eliminate the need for a physical network infrastructure reaching all the way out to the ëlast mileí. The implications of this are profound, both for the incumbent ISPs and consumers of connectivity. For the ISP, we are seeing a decline in hardware costs, combined with an ever-increasing ability to deliver better services. This results in higher bandwidth delivery and lower contention (line-sharing) ratios, all at a lower cost to the end-consumer. This commoditisation of the service is creating challenges for the ISP – manifested in lower margins – but has resulted in a more attractive proposition for end-consumers. As retails prices plummet, a larger segment of the population accept the service. The social consequences of this are very exciting. As more and more people have broadband access to the Internet, the more valuable this communication and commercial channel becomes. Itís a classic example of both the network effect and Reedís Law: ìthe value of the network grows exponentially as the number of users increasesî. The results of these trends are noteworthy. ï In the UK, for example, 70,000 homes are now signing up for broadband every week, making it one of the fastest-growing consumer products of all times. ï Broadband access has also been a major driver for e-commerce, which continues to achieve double and sometimes triple digit annual growth rates. The ISP If you accept a broad definition of an ISP as a provider of an Internet connectivity service, then ISPs include a wide range of businesses, from straightforward providers (Earthlink), to telecom operators (Telefonica), to virtual providers such as Virgin, to cellular telephone operators or mobile network operators, MNOís, such as Vodafone, and all the way down to retail Internet cafÈs (Easy CafÈ). These examples highlight both how diverse the marketplace is, but also emphasise the difficulty for the more traditional providers. For example, as the MNOs reach out to saturated markets, the need to continue delivering revenue growth requires them to branch out to new markets. For a traditional ISP that previously only provided Internet connectivity, the arrival of very large, international MNOs which have substantial customer acquisition budgets is clearly a powerful threat. Ten years ago we had only a small handful of ISPs offering Internet connections via telephone dial-up modems; we now have a wide variety of service providers including telephone operators, Cable TV operators, ISPs, virtual ISPs, and mobile telephone operators. ISPs and new business models If youíre a philosopher, the marketing discipline provides a great source of profound material. For example, the question: ëwhen is Free not equal to Freeí? Answer: when it is an Internet-access offer from the marketing department of the UKís leading mobile phone retailer; Carphone Warehouse. This famous example of a new bundled consumer connectivity proposition is well known and worth evaluating. Last year, Carphone Warehouse launched a major marketing initiative, promoting free broadband. The catch of course was that you had to purchase a 12-month telephone contract from them. This resulted in consumer sign-ups well above Carphoneís initial forecasts, which caused large-scale customer service and delivery problems. This clearly showed that bundled services based on a fixed contract payment scheme, but heavily promoted with a FREE add-on, are, still, amazingly potent propositions driving substantial customer acquisition. Carphone also showed just how much pressure traditional ISP Internet connectivity providers are getting from newcomers from outside the sector with innovative business models. Remember, Carphone Warehouse was previously only a mobile phone handset and contract retailer. Now, Orange, Talk Talk and Sky are among the firms offering ëfreeí high-speed Internet to their subscribers. As reported by the BBC recently, ìVery soon customers are going to be able to turn around to their provider and say: ëWhy should I carry on paying for my Internet connection?íî Whatís next for ISPs? There is a well-known phrase from the dawn of the Internet revolution: ìHere is your lunch, if you donít eat it someone else will.î This is what ISPs are facing. They are confronting major challenges from new technology – including extremely rapid changes in transport technologies – and meeting threats from businesses that previously had little or no involvement in the connectivity sector. What will happen to the ISP sector? Will the telephone operators, cable providers and MNOs dominate the marketing with their bundled offers of fixed line and wireless voice, data, TV and more? Can niche ISPs succeed with a proposition based on quality and customer care? History can provide us with little guidance, except that todayís largest and most successful providers may not be tomorrow’s.