To ISPs: Expand in business segment or die in consumer space

To ISPs: Expand in business segment or die in consumer space

“The worst possible position is being stuck in fixed consumer without any differentiator,” according to Ovum research director, David Kennedy.

ISPs need to target the business and mobile segment as the fixed-line consumer category becomes increasingly less profitable, according to Ovum research director and telco analyst, David Kennedy.

As broadband penetration reaches saturation point, the consumer fixed-line space is rapidly being commoditised and becoming less profitable. Margins are thinning and price wars between ISPs are not sustainable.

This trend is being accelerated by the National Broadband Network (NBN).

Thinning margins and profitability means less cashflow for ISPs to invest back into infrastructure. ISPs need to differentiate themselves and that means putting more effort into business and mobile segments.

“The worst possible position is being stuck in fixed consumer without any differentiator,” Kennedy told ARN. “That’s to be trapped in a low margin market where you don’t have free cashflow for investment and you can’t get out.

“That’s the Kill Box, which in military terms is a place subject to heavy fire – it’s where you go to die and that is what fixed broadband access will be like in five years time.”

Telstra and Optus have both made significant investments into technology such as machine-to-machine (M2M) communications as well as Cloud computing which targets business customers.

iiNet recently made a big push with its Business unit, reigniting its channel commitment to help gain marketshare in the business segment. The third largest ISP in Australia, TPG, has a strong presence in consumer but not so much in business and mobile.

Don't dwell

While Australia is dominated by small businesses, Kennedy advises against ISPs dwelling in this space.

“That segment has a lot of consumer characteristics,” he said. “What ISPs are going to need to get into are services that can support medium and large enterprises, possibly forming alliances with, for example, IT integrators.

“They may also want to build up Cloud infrastructure that can be used as resources for integrators to support SMB clients.”

In the future, ISPs will not just be competing against each other. Technology companies like Google, Apple, and Samsung may be eyeing out to opportunities to offer broadband offerings in Australia as well.

“NBN’s forced migration will mean high-speed broadband penetration rates will grow rapidly compared to other countries,” Kennedy said. “This will attract the likes of Google and Apple as this market will look like Nirvana to them – They will have very cheap entry on the fixed-line service side because they don’t have to build infrastructure.

“They can come in with device offerings in bundles and enter the retail market in a serious way.”

Australia could become a hotbed for dramatic disruptive change over the next few years, he said. Even big players may not be able to completely fend off new competitors from outside the traditional telco realm.

Too late for new ISP entrants

Last month, Internode managing director, Simon Hackett, spoke at the Communications Day Summit in Sydney and suggested it was too late for any new national ISPs to join the party thanks to the NBN.

Consolidation in the market has hit a wall and it will be near impossible for any new entrants to build enough scale to compete with the big four ISPs: Telstra, Optus, TPG, and iiNet.

Kennedy agreed with this view.

“What’s driving returns right now is scale – that is what counts for profitability,” he said. “We’ve reached a limit in terms of consolidation. What’s left is, perhaps, for iiNet and TPG to merge.”

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