Will the traditional ISP David Slay the Mobile broadband Goliath?
With the advent of mobile broadband, traditional ways of connecting to the internet such as WiMax and DSL are facing an everyday battle for relevance. Indeed, mobile broadband presented a disruptive technology that the traditional ISP was not prepared for.
In Professor Clayton Christensens’ book “The Innovators Dilemma” he defines disruptive technologies thus:
“Disruptive technologies bring to market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in the “mainstream” markets. But they have other features that a few fringe (and generally new) customers value.
In short, products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently more convenient to use (think of your 3G USB modem). He also goes on to say that the conclusion by established companies that investing aggressively in disruptive technologies is not a rational decision for them to make, has three bases.
- Disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits.
- Disruptive technologies are first commercialized typically in emerging or insignificant and often ignored market segments.
- Leading firms’ most profitable customers generally don’t want, and indeed initially can’t use; products based on disruptive technologies. By and large, a disruptive technology is embraced by the least profitable customers in a market. Hence, most companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late.
Looking at the Kenyan ISP’s that dismissed mobile broadband as a non-starter and went on to say that it posed no threat to their valuable client base, the situation today is very different as tables turned against them. traditional ISP’s have failed to fuel broadband penetration and have remained stagnant with diminishing prospects of every regaining that foothold. Statistics from CCK show that mobile operators control a whooping 98% market-share of internet penetration in the country with the remaining 2% spread among the various ISP’s.
The question that comes to mind is what avenues did ISP’s have at their disposal to capture or even compete with mobile operators in the fight for market share and profits? It’s true that ISPs do not have the deep pockets mobile operators have that have enabled them build extensive networks. From the surface it looks like it was to be an all downhill roll for the traditional ISP as mobile operators ate their lunch.
What ISP’s should have done:
I believe the biggest mistake ISP’s did was to underestimate mobile operators. They did this by relying on the assumption of a good internet user being the ‘corporate’ user Their definition of a corporate user is a registered business or NGO with a steady income or donor funds. At no time did ISPs think that the mass market was a viable revenue generator. The ISP therefore did not invest in mass market products and those who attempted failed miserably because they ran mass market businesses as though they were “smaller versions” of the corporate segment they were already experienced in. The mass market needed a paradigm shift in how it’s operated. A good example of the mistake that the ISPs did was in billing, many ISPs that attempted to serve the home mass market still used the “come to our office to pay” approach of billing as opposed to investing in convenient bill payment platforms such as scratch cards, tokens and mobile payment platforms, I do not know of any ISP in the country which allows its users to pay online by credit card. You cannot expect the mass market to walk to your office or banking hall to pay for services. Only monopolies such as Kenya power Ltd can afford to make customers queue and even them are changing to more convenient payment methods. Mobile operators came with more convenient payment methods for the mass market and flourished. That is just one example, others include distribution channel and marketing approaches employed and many more.
The traditional ISP also failed to reinvent itself. It dwelled on the age-old “service provider” model in which the ISP played a facilitator role. It facilitated connection to the internet (That’s why they sale you the modem, leased line, router and heavy set-up fees). On the other hand, mobile operators came in and were more of experience enablers to their users. Connecting to the internet was no longer a technical/business affair but a social affair. an internet connection was no longer a status symbol, it was a necessity for a “normal” life. Traditional ISP brochures dwelt on connectivity attributes of speed, throughput, VPN’s, up-time (99.99% anyone?) and QoS while mobile broadband providers dwelt on the social aspects of instant gratification and convenience such as “update your status now”, “tweet on the go”, purchase of connectivity bundles on a daily, weekly basis on the fly, pay-per-use and less and less of jargon like ‘throughput’ and ‘dedicated’ or ‘QoS’…. show me one internet service brochure from Safaricom or Orange talking about 99.99% uptime or something similar.
The ISP also failed to be innovative; connectivity was no longer a commodity, experience was the new commodity. Sadly the ISP’s got the definition of experience all wrong. To them experience was how fast the page loaded (so they invested in many cache servers and web accelerators), how long the connection was sustained or how clear the VoIP call was. On the other hand, experience to the mobile broadband user was that notification of someone liking his photo album on Facebook, that text notifying you that you are about to run out of your data bundle, that free access to twitter, that self-service portal/IVR. At the end of the day, an ISP customer was left disillusioned as the ISP was out of touch with him. As a write this, majority of the ISP’s communicate to the customer in two occasions, when there is an outage/scheduled maintenance or when demanding payment and only respond to the customer when not responding poses as a revenue threat.
The three largest ISPs in the US (Comcast, Time Warner and AT&T) have continued to record strong growth in the traditional end of the business in addition to the rapid growth in mobile wireless. They do this by being innovative in their product offering, bundling of services (triple play), extensive distribution channels, and above all, separating their ‘corporate’ business from their mass market business and running them as separate businesses. This last action of separating the businesses arises from the need to allow them to focus on their core competencies. The term Core competencies was coined by Professors Gary Hamel and C.K. Prahalad in their 1990 article ‘The Core Competence of The Corporation”. The core competency of a high volume low margin business is to ensure repeat business and lower operating costs while that of a low volume high margin business is to maintain relationships for sustained business (This explains why a mobile broadband customer doesn’t have a dedicated ‘client relationship manager’ while a $100k per month customer at an ISP has one). From the surface the mass market business might seem to be in the same business as the ‘corporate clientele’ business (that of providing connectivity) but their core competencies are totally different. Sadly our local ISPs have failed to see this even as they attempt to give mobile broadband operators a run for their money.
In my opinion, the following needs to happen for the ISPs to remain relevant:
- They need to redefine who their customer is.
- Become more market driven than product driven <–this is a cliché sentence, however, the ISP needs to do a soul search and see if their potential customers are really interested in words like “redundant fiber connectivity to our London teleport” or “resilient metro-ring around the city” or “We understand IT”.
- Redefine the commodity they are offering the market, is it connectivity? i don’t think so.
- Convert their fixed operating costs to variable through outsourcing and leasing of services such as dark fibre, hosting facilities and even vehicles. Local ISPs are out doing each other in laying fiber and building WiMax base stations (effectively increasing their fixed costs portfolios). These fixed costs have a bigger impact on cash flow, revenues and profits.