UKPlus::More InformationSubscribe

Welcome to issue 9 of UKBBMM.

Over the next few weeks we expect to start providing the odd glimpse of the Broadband User Survey (consumer sector) results, as the fieldwork is now near completion. We’ve interviewed 2,000 households about a range of issues around the use of broadband and the internet and we expect the results to offer the most telling picture yet, of the way in which the UK population uses (or doesn’t use) broadband.

Whilst the Ofcom statement on the Strategic Telecoms Review appears to hand BT a reprieve, the decision not to investigate under the Enterprise Act comes with legally binding conditions. The good news for LLU is that BT is going to give it a head-start, by not tinkering with IPStream pricing until there are 1.5 million LLU subscribers in the marketplace. Whilst we can expect the current rate of LLU growth to increase substantially, it is still going to take an awful long time to reach this milestone (about 20 years at current rates). This is clearly not such good news for ISPs who are IPStream customers.

Point Topic has continued its programme of visits to ISPs up and down the country and met with one such IPStream S customer, Total Web Solutions which epitomises the difficulty which small ISPs face in a market dominated by scale. The constraints on growth which remain for IPStream S customers and the risks they take in expanding may be quite different for bigger ISPs, but the vagueries of a future predicated on subscriber growth are common to both. Another Manchester ISP we visited, NetServices is broadening its portfolio of services and since its acquisition of Telefonica UK, it has the confidence to do so. The contrasting fortunes of these ISPs are outlined in the Analysis piece below. The continued consolidation in the ISP market, which the latter article hints at, continues to trickle on, as one of the UK’s older internet access brands NDO changed hands for the fifth time, being picked up by domain name specialist Namesco for an undisclosed sum. This suggests that a business model which combines access and hosting is evolving to become conventional wisdom.

The other increasingly unavoidable drift is the provision of multiple services by ISPs, either over broadband or over the twisted pair. Hot on the heels of PlusNet’s soft launch of SIP based telephony and AOL’s entry into the CPS market, came Pipex’s PipexTalk service, which has been trialled by sister ISP Nildram for a few months. It is priced at a fiver a month for unlimited calls to 01 and 02 numbers, so unless you spend a lot of time calling ISPs, all of which seem to have 0845 or 0870 numbers, it seems good value.

The benefits of jumping early on the LLU bandwagon surfaced at Freedom2Surf. Having thrown in its lot with EasyNet as recently as April, F2S is already able to offer an 8Mb footprint, albeit a not terribly large one for the time being. The 8Mb Connect package is available on 12 exchanges at present, though that will be expanded to 200 by end July.

The ISP market share statistics which Point Topic published in issue 7 have been modified in the light of new information about the composition of the BT Retail component. We reported the number for BT Retail, recorded in BT’s end March results, of 1,752,000. We reported two other mid-tier ISPs as separate line items, accounting for about 3% of BT Wholesale’s subscriber base, which should be included in the BT Retail figure. It is not known what relationship these two ISPs have with BT Retail, which can quite legitimately establish reseller agreements with ISPs in the same way that both NetServices and Entanet do. This reduces the effective market share of BT Retail, from 24.47% to 22.82% but does not affect the overall market total. The table has been recast to show revised total for BT Retail and Other ISPs. The two ISPs in question remain separately itemised. See here for the revised spreadsheet.

At an ISPA networking event, held at Manchester Airport on 9^th June, ISPs and guests had the opportunity to quiz an invited panel on any subject they wanted. One of the panellists was Stephen Speed from the DTI, who, though a civil servant and not an apologist for the government, Ofcom or BT, was asked this question from the floor: "what is the government going to do to help smaller ISPs, facing anti-competitive practices from BT, which is both a competitor and a supplier?" The question was politely avoided by Mr Speed, who made the point that the question covered well-trodden ground and that the government could not intervene directly in the workings of a telecoms market which was both competitive and satisfactorily regulated. The question has since to some extent, been answered by the initial statements from Ofcom on the Strategic Telecoms Review, but the questioner, Miesha Vukasinovic of Total Web Solutions (TWS), manages a business which is struggling to grow. "We’re operating in a market which is growing faster than at any other time in its history, but we can’t sell anything and we just can’t expand", he claims. His plight is compounded by the fact that TWS claims to have been without a BT Account Manager for nearly two years and that the terms of credit extended to small ISPs by BT Wholesale are non-existent.

The deeper question is about how TWS can expand the business within the limits of acceptable risk. TWS currently rents 34Mb of central pipe capacity on the old standard charging (IPStream S) tariff, at £21,000 a year, plus the cost per customer per month – currently around £37 for a 1Mb connection. When capacity based charging was introduced last year for the IPStream product, the differential between IPStream S and capacity based IPStream charging was heavily weighted in favour of ISPs with existing large customer bases, who were already IPStream customers. Add to this the fact that there is still no easy migration path between the two products and that smaller ISPs make no margin if they offer free migration or connection, and the smaller specialist ISP is caught in a difficult position. Although TWS has surplus central pipe capacity, attracting new customers and keeping existing ones – TWS has about 700 – is impossible because of the high cost of provisioning users when not using the capacity based charging model on IPStream pipes. Further, in order to grow and to compete with the lower prices and higher bandwidth available to other ISPs, daunting levels of high risk investment are required. Vukasinovic estimates that a shift to capacity based charging would certainly allow them to expand, but due to the size of TWS, BT Wholesale could insist on payment for the first year’s central pipe cost (£81,000 for the equivalent of what they currently have), upfront, and charge a new set-up fee of about £14,000. "Having run our broadband service at a loss for two years and after breaking even for the first time last year, we just don’t have the cash to finance expansion", he explains.

This situation is one which another ISP from the North West, NetServices, understands well and has embraced to its short-term benefit. NetServices is a wholesale ISP, operating through a network of small and medium sized resellers (VISPs), who sign up anything from a single customer every month. "When BT Wholesale dropped the price of DSL tails and introduced capacity based charging [in June 2004], our profits increased by thousands of pounds overnight" explained Mark Vickers, Managing Director and a founding partner. As well as an eye for a bargain and no small amount of luck, ability to create and manage scale – with around 65,000 DSL ‘tails’ before the Telefonica acquisition – has been NetServices’ critical success factor. Although NetServices’ BT central pipe costs increased from £40,000 for a 155Mb central pipe to £330,000 in June 2004 with the introduction of capacity-based charging, it was more than offset by BT’s simultaneous reduction in the monthly tail price per IPStream customer.

Figure 1:NetServices Plc at a glance

So, expansion, as TWS and other small ISPs have known for several months, has become an extremely risky business. It relies either on the sunk and on-going cost of a central pipe from their existing supplier, BT Wholesale, or on a reseller relationship with a wholesale ISP, such as a NetServices or an Entanet, or on shifting allegiance completely to a wholesale LLU provider. A reseller relationship takes the small ISP one step further away from BT and a step further away from any direct benefit of future reductions in the monthly costs from BT Wholesale. A wholesale relationship with an LLU provider brings the cost of migration and it is only effective in exchanges which have been unbundled. Furthermore, any of these solutions takes away the ability of an ISP to differentiate through service quality.

The importance of scale to ISPs was no more clearly illustrated than when NetServices bought Telefonica UK (a wholesale ISP business) for an undisclosed sum in May. The acquisition increased NetServices’ reseller base from 420 to over 650. The Telefonica acquisition will contribute, according to Vickers, an estimated £20 million to turnover between June 2005 and September 2006. NetServices’ turnover, for the purposes of illustrating the importance of the deal, will reach £13 million in this financial year (to end September 2005). Integrating Telefonica’s subscriber base which had, according to Vickers, faced ‘capacity issues over the first 3 months of the year’ will boost NetServices’ valuation for a full listing on the AIM in September this year. Despite all this, Vickers is sanguine about the VISP business and he plans to even the spread of the NetServices’ portfolio. VISPs account for 55%-60% of turnover at present, but Vickers expects the corporate VPN and corporate IP telephony markets to account for a larger share of NetServices’ business than the VISP business in the next year and a half.

And the reason for this shift away from the VISP business? Aggressive pricing trends in the retail ISP space and the shift to capacity based charging make it a business "where it is increasingly hard to make any money and consolidation is inevitable", according to Vickers, who expresses the view that this is a deliberate, but perfectly acceptable strategy for BT to pursue. The number of smaller ISPs, to which NetServices provides broadband access services, is going to dwindle and DSL growth is going to be concentrated amongst a group of large retail ISPs, such as BT Retail, Wanadoo, and Tiscali.

So, whilst scale has protected and momentarily increased the turnover and profit of a mid-sized wholesale ISP, it faces precisely the same pressures as a small retailer like TWS. The difference in response is that NetServices is big enough to be able to swim with the tide and it is adapting its portfolio of businesses to face the future. There is a place for VISPs, if they are good and can offer a good choice of bespoke services to businesses. Revenue growth for the small ISP – and small within the next 2 years will probably mean sub 500,000 subscribers – however, is not going to come from adding thousands of DSL subscribers.

For the time being, as reported in "Statistics", the share of the overall market comprising unnamed ISPs, which is a mixture of bigger resellers (like V21) and smaller retail ISPs, trebled in the first quarter. This growth can only be predicated on a desire to build up a subscriber base and sell out, or on the promise of lower prices round the corner.

16^th June 2005: Pipex Internet announced the imminent launch of a voice service. Available from July, the new service, called Pipex Talk, costs £4.99 per month and includes 3,000 minutes of free UK landline calls (to 01 or 02 numbers) at any time of the day. Pipex Internet’s sibling ISP, Nildram, also offers a service called Home Talk, also priced at £4.99. Assuming that Pipex Talk will be offered on the same basis, it will be a carrier pre-select bundle, rather than an internet telephony service. It comes hot on the heels of PlusNet’s announcement of the launch of its SIP based VoIP service PlusTalk, as ISPs embrace the conventional wisdom that bundling services reduces the propensity to churn. Last month (15^th May) AOL announced a similar package, AOL Talk, for £7.99 a month.

21^st June 2005: Further evidence of the consolidating market for smaller ISPs, was the acquisition of NDO by Namesco. NDO is the better known of the two for broadband access and Namesco is a well established domain name and hosting provider. NDO has had five changes of ownership since it began trading in 1995 and it was most recently owned by its management after its former owner, Energis, went in to receivership in 2002. NDO had doubled its ADSL capacity in 2004 and with the two central pipes it now has, it has theoretical maximum capacity for 30,000 to 35,000 ADSL users.

21^st June 2005: Freedom2Surf announced the launch of its 8Mb Connect Package. Speeds of up to 8Mb will be available to Connect Lite customers for £14.99 with a 2Gb download limit, to Connect Home customers for £19.99 with a 10Gb download limit and Connect Plus for £24.99 (uncapped). The service will initially be available in 14 exchanges in major metropolitan areas, with the number of exchanges increasing to over 200 from end of July 2005 and nationwide by the end of the year. Customers on Freedom2Surf’s existing 2Mb Connect Packages will be able to upgrade to 8Mb by paying a one-off £15 upgrade fee depending on their local exchange capability. F2S is a customer of LLUStream, EasyNet’s wholesale LLU product.