Revenue allocation and the free ISP model

Russell Southwood

Balancing Act

http://www.balancingact-africa.com

Info@balancingact-africa.com

Balancing Act - The commercial

News Update. Weekly e-letter on African telecoms, internet and computing. 6,500 subscribers across Africa. Want to subscribe...

Projects - ICT and Entrepreneurialism series and CD-ROM. Ghana, Kenya, Botswana, Tanzania and Nigeria. Forthcoming in Mali and Burkina Faso.

Consultancy - Example - Regional IXP

ISPs in Africa - Background Dial-up as yardstick. SA and Egypt are cities.

Kenya and Senegal are large towns and places like Mali are small villages

Stagnation in the growth of dial-up subscriptions

Consolidation of number of ISPs Incumbent often skews the market with own

ISP (Sonatel in Senegal. 80% of market)

African ISPs caught in a price squeeze

Customers want ever cheaper prices but the volume of customers is not increasing. Majority of customers are buying on price, not other factors like quality of service

Upstream bandwidth providers (esp int) have margins under pressure and are looking to pass on costs (Satellite floor price USD2-3000 mbps?)

Business model in an unsustainable phase?

Too many ISPs earning too little income chasing too few customers

Likewise too many cyber-cafes chasing…etc (diff between top and bottom end rate 1:2)

Rush for higher ground of corporate market also makes that space crowded.

Me-too market. No competitive advantage lasts long

Too little revenue in the current model

% amount of revenue paid by customer left to ISP after paying upstream providers:

Nigeria (20%), small ISP - SA (30%), Tunisia (33%), Kenya (45%)

N Africa - Av 43%. Morocco (48%) 51% going to incumbent telco (IDC Study)

Need change in % revenue allocation OR new revenue streams. VOIP calling?

How revenue allocation and free ISP models cross paths Discussions of Q of revenue allocation often

lead in direction of revenue sharing (cf UK experience)

Recurring underlying Q: In a stagnant market, how do we create growth for ISPs?

What’s a “free” ISP model Free at the point of delivery Egypt (revenue sharing, no monthly charge,

only access time) Freenet, Uganda Telecom (no monthly

charge, only access time) Put market in jeopardy without substantial growth in numbers

South African examples

Egypt’s free ISP model - Background 70m population. Larger volume of users (1.2 m)

Economies of scale. Incumbent: Telecom Egypt Policy level: Ministry for ICT set up in late 90s

as dedicated Min. Backing from top. Mubarak at library opening:”I need to see a leased line here”

Technology hub for ME. Easier to get system engineers. Much greater level of ICT awareness

How was it structured

Toll-based model at a premium rate. National number, no password. Collections done through telco every 3 months

All ISPs had agreement with telco so that they could co-locate

Split of traffic income: 70% for ISP, 30% for the telco. Cost: USD0.22 per hr. Launched Jan 2002

Predicted it would increase subscribers 4-fold Accompanied by a computer loan scheme

Impact on the market (1)

Largest ISP (25% of market): 15m minutes up to 30m minutes but then only marginal growth. Slipped back, barely doubled.

19 POPs to start. Within 6 months needed 87 POPs. Hard work and costly. All ISPs hurting but a users’ paradise

Impact on market (2)

Ministry/telco- Privately, OK we got it wrong. Inc’d cost of local calls by 20%. How can we help on the rest?

Cost of E1s and co-location from the ministry. Take 30% off next 3 quarters.

Still not working? Let’s talk bandwidth charges and import duties

Conclusions

After all that, just barely covering the costs of delivering the service. Still not making money. Same number of subs for this ISP but selling more cheaply. Govt can’t afford to back down

Other barriers to growth: Income, education, literacy

What model of revenue allocations can drive long-term growth?

Customer POV ISP investment POV Is there a new revenue split? Is there a

“free” ISP model based on revenue share that could work?

Are we reaching the limits of growth? If no, where does new growth

come from? If yes, what does that mean for

African ISPs