Dial up as an Internet service provider (ISP) mainstay is dying, and while there are still major impediments to fast Internet and its attendant services, applications and content, it remains the key to survival.

The narrowing margin for basic services and the growing demands of businesses are forcing ISPs to provide a much greater level of technical expertise and diversity of services. As they rise to the challenge however, they're facing stiff competition from the telcos who's business they piggybacked on when they first entered the market, as well as computer companies, systems integrators and specialist firms who're picking off their best customers. 

The major carriers are shifting all their services into Internet territory with end-to-end IP (Internet protocol) networks , and along with niche companies specialising in web hosting, development, outsourcing and secure networking, are clawing back the added value Internet providers have provided.

There's already a strong trend of ISP mergers and acquisitions as second tier operators beneath the dominant three scramble to appeal to a more lucrative customer base. The market squeeze is further underlined as financial conditions tighten. In short ISPs are facing something of an identity crisis.

Access Price Rising

Ironically despite years of price wars, which helped to take Internet mainstream, access fees are now creeping up again. Meanwhile Telecom's Jetstream digital subscriber line (DSL) service, while increasing in penetration and take-up, is still considered too expensive for the average small business or home user. It remains unchallenged, particularly as the rollout of the TelstraSaturn high speed domestic network has been stalled as the new company, now merged with Clear, refocusses on the business market.

Xtra, Clear/TelstraSaturn and ihug own about 90 per cent of the Internet market, which now comprises about 1.6 million users or 60 per cent of New Zealanders. According to IDC, that number is expected to grow to 2.35 million by 2005.

Depending on who you talk to there's somewhere between 90 and 140 Internet service providers around the country. In the top 10 are those with 10-30,000 subscribers, including Voyager, now owned by Ozemail / Worldcom MCI, Iprolink, Asia Online formerly Iconz now owned by Desden Equities, Orcon Internet and Maxnet.  The latter two are among several players currently growing by acquisition.

The balance of providers mostly have less than 5000 users, typically in the specialised or home and hobbyist arena. Those without a solid business model, a budget to continually upgrade and a loyal customer base spending over $300 each per year are headed for trouble.

While the top players will continue to dominate the market they're increasingly shifting their focus away from the home office and consumers to high value business. They won't abandon their massive domestic hold however because they ultimately want to leverage them up to fast Internet as it becomes more attractive.

ISP Business Commoditised

Michael Cranna, analyst with research company IDC New Zealand, says smaller ISPs are seeing their offerings commodotised and need to offer more advanced services such as Internet data centres, services and application hosting and business process support. "If you're just offering a big pipe into the Internet backbone you're going to be struggling - people want more than email and Jetstream resold."

He says it's a bit like the hardware market with Compaq and HP coming together. "There's no need to differentiate between their boxes anymore you just want a box that runs your applications or business solutions."

At the high end of the market customers are looking to specialist application and service providers. "Xtra and Clear are both owned by companies who are involved in e-commerce - Telecom for example sees Xtra not just as a consumer service but as part of a whole. Higher-end customers will be serviced by Telecom's Advanced Solutions and joint venture company esolutions. I don't see ISPs well positioned to get into e-commerce services in the long run," says Mr Cranna.

"The waters are going to get muddied as more non- telecommunications services are provided on the back of ISPs who'll be seen as the bottom layer infrastructure provider of the model. On top of that is the application provider, then 'development environment service providers', content service providers then IBM, Telecom and the big guys providing 'business process support'. "The ISP is the basic layer of the XSP provider pyramid," says Mr Cranna.

And while the number of ISPs is shrinking the value of the market-space is increasing and no-one can be quite sure what's up ahead. Overall the telecommunications market is growing massively. According to Australian-based consultant Paul Budde, who's just published his latest tome examining the local telecommunications sector, it'll rocket from around $NZ6 billion this year to $15 billion by the end of the decade. That growth will largely be driven by broadband including video on demand, tele-education, tele-health, community and regional services, games on-line and network delivered applications.

"That's going to turn this into an information technology market rather than a telecommunications market with the focus being on software and applications."

Penetration Stagnation Point

Meanwhile broadband won't be a common or affordable service for most New Zealanders unless the price comes down - until then nothing will grow," warns Mr Budde.

He says the second tier ISP market now faces an enormous growth barrier. "We're reaching the 50-60 per cent penetration level and there's no more new subscriber growth beyond that. No matter whether you give them a free PC and Internet connection there's part of the population that just wouldn't use it. PC penetration (est 52 per cent) also hampers the growth of Internet."

Very few if any are making money and there'll be more restructuring and job losses next year, he says. "The majority of ISPs might generate $40-$60,000, that's sufficient for an income but there's no money for new equipment. It might work as a hobby but that's all."

Mr Budde says changes in the market are going to wipe out the third tier of Internet providers altogether. "If you only have a few hundred customers there's basically no future for you. Even in the business market you could provide web hosting, electronic trading, secure networks, gateways into payments systems and virtual private network development but if you
also have 20,000 marginal dial up customers with a churn rate of about 5 per cent a month you'll go broke. If your customers don't generate more than $250 per annum get out of that business - they're better off with Xtra or Clear.Net.," says Mr Budde.

Another longstanding impediment to growth for all parties in the revamped world of the ISP remains access to the local loop. And while Telecom will be forced by the Telecommunications Act to provide wholesale services across its backbone and for the last mile there are unlikely to be overnight changes to its market dominance. Many in the industry including the Telecommunications Users Association (TUANZ) would like to see the local loop unbundled so rival carriers have greater incentive to provide services beyond the CBD and compete more fairly with Telecom in the carrier space.

Local Loop Link Missing

Prior to the merger of Clear with TelstraSaturn it was made obvious that without unbundling the competitor would find it extremely difficult to provide broad ranging local loop services. As feared the combined company has now refocussed and is backing off its promise for high speed domestic services unless there's obvious profit to be made.

A large percentage of second tier ISPs cannot for various reasons provide fast Internet access, largely because the industry is still dominated by a single player - Telecom.

Even the provision of the existing digital subscriber line (DSL) service is not suitable for most businesses as it has a fast download capability (2-4Mbit/sec) but a slow upload speed. Businesses want two-way fast access to the Internet available on their local area and wide area network (WANs and LANs). Leased lines enabling office-to-office connection still remain extremely expensive and a major moaning point among IT directors looking to grow their enterprises into always on entities.

Another impediment to using DSL - and its promised successors which may provide up to 40Mbit/sec speeds - is the data cap which means companies pay per megabyte over a set threshold and can never be certain what their monthly bill will be.

Keith Davidson is general manager of the Wairarapa Times Age newspaper, which runs a small ISP called WISE Net and also happens to be president of the Internet Society of New Zealand.

"The wild west days of the Internet are truly over, and the industry needs to provide a level and reliability of service to maintain confidence for e-growth."

He lists issues facing providers at the moment which include the daily hassles of adding users, spam, viruses, hacking and cracking, denial of service attacks and the like, as well as having to face up to issues such as infringements of the Copyright Act, Defamation, Privacy versus Censorship, Domain Name and Trademark disputes, inappropriate content (including pornography and safety for minors).

Selection More Sophisticated

Originally consumers were driven primarily by price, with the somewhat naive mindset that 'one Internet is as good as another', or 'never mind the quality, feel the width'.  As users have become more sophisticated, and while price is always of significant concern, other factors have become important in the ISP selection process.

WISE Net for example makes house calls for people with computer or connectivity problems while larger nationwide providers have difficulty providing expert or fast service or simply providing an efficient helpdesk.

Mr Davidson would personally like to see ISPs make some collective decisions on self-regulation to pre-empt any plans by government to consider heavy-handed laws that might make life more difficult. "There has been a clear message from central government that they would prefer industry self regulation. If we ignore this advice, we shouldn't be surprised if we get unusual laws. The Australian experience of heavy legislation has done little to assist the industry in that country, and has some bizarre connotations"

In fact Mr Davidson believes a robust and widely subscribed Code of Practice or Best Practices document, well promoted and adhered to by the industry is a logical and practical way forward.

By Keith Newman. December, 2001.    

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