There has been a lot in the news recently with VMO2 now becoming an open network heralding an era in the UK of more intense deep down infrastructure competition. Along with an announcement from INCA who are trying to establish a collective to provide their own wholesale platform and with Openreach and CityFibre already in place and deploying gigabit networks at pace the UK market is heading for a four way fight with full gigabit networks available almost everywhere.
The immediate impact should be that more consumers get more choice. More ISPs at more price points with more tariff offerings across much of the UK.
As the market approaches 70% coverage of FTTP networks and even more for gigabit offerings when you include the cable network (also upgrading to FTTP) from VM02 it should mean the households have a wider range ISPs to choose from. Choice is generally regarded as a good thing at least as far as consumers and in the short term regulators are concerned.
The builds are relatively rapid and it will not be long before Openreach, with a raft of resellers, extend their network to more than 90% of UK households.
Differentiation – fifty shades of grey?
As an ISP you can opt for various packages from wholesalers. White box, standard sets of tariffs are often the most popular and cheapest options for ISPs. The costs are somewhat predictable, there are a range of options and to some extent the complexity of running a network is reduced for the retail ISP.
The flipside is a relative lack of control and flexibility and a general flattening of the distribution of options available to the retail consumer. Of course it is possible to work with the wholesaler to allow more control and access for the ISP but it usually comes with increased costs.
What happens when ISPs face off against each other in a more homogenous environment? How do you win and retain customers in a market with less colour and fewer flavours?
The basic set of tools used to win and keep subscribers fall into four broad categories:
Speed differentiation. A go to marketing tool for years is becoming less and less effective and is generally harder for resellers. In gigabit networks, particularly when bandwidth consumption is plateaued for fixed at least, it is harder to use (downstream) speed as a key selling point. Most ISPs still lead with it and the tariff tiers are generally branded by the bandwidth they offer. However many users don’t know what speeds, or technology, they have and many don’t care as long as it’s good enough. Labels like ‘mega’, ‘giga’ and even ‘hyper’, usually followed by ‘fast’, cease to have much meaning in the consumers minds and don’t offer differentiation. If you try and spell out the speed then it can be even worse, we all know how hard it is to count the number of consecutive zeros in a sequence. Should they buy 1000000, 10000000, 100000000, 1000000000 or 1000000000? How many times did you have to count the ‘0’s? Upstream bandwidth is a smaller market even today with more video going in both directions but symmetry or at least a more even split can make a difference but not to significant proportions of the market yet.
Service differentiation – technical and customer. Everyone wants good uptime. With FTTP it is more assured than when copper is in the mix but when it does go wrong it can be a chance to win or lose with a consumer. ISPs are in something of a bind. Internet access is so ingrained and vital to so much of our lives today that when it (rarely) disappears we as consumers can get very anxious and even angry very quickly. Even when it isn’t the ISP’s fault (or in their control) they will get the blame or at least be tasked with sorting it out. This is a key differentiator. Can a consumer access help? Are there long phone queues (eternal ‘unexpected levels of demand’)? Does the voice recognition actually work when you describe your issue (so we can redirect you to the appropriate department)? Will your chatbot actually cost you more than it’s worth when it makes up offers or mis-reports refund policies? Do you actually talk to a person? People, with good knowledge and training, are expensive though and a wonderful way to cut costs if you’re feeling the pinch and that pinch can last for years if your pensions aren’t well managed.
Content, bundles, add-ons. Many ISPs already recognise these as a key set of differentiators and some of the larger players have been competing for an example of this, event TV, for some time. Football matches, large sporting events anything that needs a real time experience already command significant fees. Add in premium movie and TV channels and deals with the OTT providers like Netflix, Apple, HBO and others form part of the marketing and delivery that a number of ISPs offer today. You can go quad play and offer a range of services, demonstrated to be retention tools, and with the backend convergence of fixed and mobile that is ‘easier’ than before. Tailored tweaks can also help. Fixed IP addresses for some, cloud storage for others and wifi extenders for all. Again there are risks and costs associated. Premier league matches cost millions per game, movies can be hit and miss and audiences can be volatile and churn quickly.
Price. Potentially the most dangerous point of competition. Consumers don’t have as much disposable income as they did before and the UK is a prime example of this. So price becomes a key selling point and we can see from our surveys over the last couple of years that the selection of a tariff and what bundles are added is keenly watched by the customer as a primary motivation to buy or to switch. The UK market for telecoms products has suffered, at least the ISPs and operators have, from a race to the bottom for a number of years. In this scenario the ones with the deepest pockets will drive the smaller players out of business by sheer spending power. In the longer term this is not a great solution for (most of) the ISPs and operators, for the retail consumers or for the regulators. If there are no profits to be made the operators can’t or won’t upgrade their networks, the choice for the consumer drops as ISPs consolidate and the regulator is either subject to capture (the US is a prime example) or has a tough job to try and artificially engender competition.
Today in the UK ISPs and operators are facing increasing costs and often suffering losses with a smaller pool of new customers to convert, post sufficiency bandwidth supply and a more homogenous supply environment. A tough place to try and succeed. We are seeing this play out already in the UK with missed targets for market share and therefore revenue with consolidation as one consequence.
It was never going to be the case that the market could support dozens or even hundreds of operators and ISPs (see Sweden for a counter example). With so many ambitious players appearing the resulting overbuild was not a credible outcome.
Scale is very important, particularly in infrastructure where margins are low and deployment costs are high and the ability to gain customers outside your own footprint opens up new possibilities. But just as important and perhaps more-so is differentiation.
There is no easy answer. There are some local optimums for resellers of price/service/content/speed where getting the mix just right puts you in the goldilocks zone. There will be those that make a success of reselling and some that already do. Good marketing, understanding the needs of their consumers, being able to service them well and provide access to unique content and add-ons at a competitive price are all achievable.
The other path though is to retain the control yourself. Your own, closed, network with smaller and more reactive teams and personal interaction with customers can also be a winning formula. Perhaps you won’t bestride the nation and be a household name from end to end but you can make a real business from a niche and without doubt there will be successes here too.
If you already have an asset in the ground you should think long and hard before you dilute it by opening up. Why play the game that others choose and are practiced at winning?
I would be remiss if I didn’t mention we can help you navigate these waters. See our products and free analysis for a taste of the data and insight we can provide and feel free to contact us (or me) for more answers (as well as questions, we wouldn’t be analysts otherwise).