Abraham van der Merwe, co-founder and MD of Frogfoot Networks, writes about how creating competition in the buoyant Internet service provider (ISP) space plays a crucial role in driving customer choice.
Consumers can go anywhere to get their home or business connected, but the costs are still very much dependent on whether their service provider uses an open or closed access business model.
Competition is the main defence for open access: by not competing, you become the de facto service provider for the area. This approach lowers the cost of the infrastructure build to such an extent that it does not make financial sense for another business to build over an existing network.
In Sweden, the City of Stockholm municipality has built the entire infrastructure for the city, which is leased by the service providers. The network is over 14 years old – it was one of the first open access networks ever built – and because it is the only network available in the city, competition is fierce. So much so that the average revenue a service provider receives per customer is a mere $1. The ecosystem has become so intensely competitive that it has driven the cost down.
An open access business model works particularly well for infrastructure. It dictates that an infrastructure provider can build a fibre network accessible to all wholesale service providers. A key aspect to this model, however, is to specialise in one area – network infrastructure – without being drawn into providing bolt-on services. The more services you provide, the more you compete with other businesses and the less inclusive you become.
A good analogy is a property developer who builds an office complex and leases out the office space to individual businesses. What he typically doesn’t do is become a one-stop-shop for office supplies and equipment. Instead, he provides only the space, because if he were to offer furniture – as an example – it would limit the businesses that choose to rent office space from him: a competing furniture supplier would not want to be co-located with a competitor.
When building a fibre network in a suburb, it does not matter if there is one or a thousand customers: the build cost remains the same. However, it is in the business’s best interest to increase penetration: the higher the penetration, the lower the subscription rate.
Another element to the open access business model is to provide products and services on an equitable basis. A fair price book – applicable to all customers – will increase customer retention and lead to greater market penetration. It also attracts wholesalers who are now no longer regarded as the competition, but have instead been given the foundation to deliver their services to customers.
A closed access business model is the opposite side of the spectrum: the service provider leases access to its infrastructure to the customer, who is then also required to purchase any bolt-on products and services directly from service providers.
One of the biggest pitfalls of this model is that the moment the customer is told that they have to deal with a particular provider – without choice – problems start to occur. This in turn becomes more of a hazard when the customer becomes dissatisfied with the level of service.
A business is also operating under a closed access model when the customer is given the option to deal with a host of businesses, including the service provider. This means that the service provider is now competing with its customers for their business, which will ultimately lead to lower penetration and a price hike is passed on to the customer.
For us it’s clear to see why the closed access model doesn’t work and you have to question why anyone would follow this route. However, in the telecoms industry of the past – as with most service providers today too – they never actually defined a business model. The “model” was very much about trying to connect customers who wanted connectivity and making the assumption of the overall penetration. This plays a huge role in the costing model, which is why the incumbent – is regarded as the inefficient giant of the telco market: spend billions before fully understanding the customer reach.
A more efficient way to do business – in support of open access – would be to first determine what the underlying costs will be to build a network with 100 per cent penetration. Thereafter, use a downward scale to calculate the costs should only a percentage of customers sign up: increasing penetration to lower the price point.
Now that is where we want to end up: choice and lower costs for the end user is what we need in South Africa.
