Making a play for customers

hamba

Inactive User
Joined
May 24, 2005
Messages
8,704
Reaction score
1,345
Location
Down Here
Making a play for customers

You may think that premium-rate calls to support lines are paying for your internet provider's tempting offers to new customers - it's not so simple

Free laptops with a new broadband subscription, fees as low as £10 a month - does anyone go into the business of being an internet service provider (ISP) with even the faintest hope of making any money?

Existing subscribers might have an idea where some of the money is coming from: 090 premium-rate numbers for support. A survey by YouGov for the price comparison site uSwitch.com estimated this month that we make 19m calls, equivalent to 2,000 every hour, calling broadband technical helplines at up to 50p a minute - these cost us a total of £34m annually, on top of the £2.8bn we pay for broadband service. Yet it's not the rip off it seems: even those premium-rate charges don't cover ISPs' support costs.

Yet even while some existing Orange customers were fuming (uSwitch found that they and TalkTalk customers were the least satisfied with their provider's technical support), Orange and Dixons Store Group (DSG) launched a joint promotion offering new broadband users a free laptop worth £300 - or £300 towards a better-specified laptop bought from one of the group's stores, which include Dixons and PC World. How could that make money for Orange?

"It was definitely commercially viable," says Hamish Thompson of DSG. And other providers followed suit, with Carphone Warehouse offering a Dell laptop to new subscribers and Redten Internet offering an LG-branded desktop as part of a sweetening deal for new subscribers.

So are ISPs so desperate for new customers they feel the need to entice us with promises of shiny kit?

The fact is, ISPs always need new customers. But they also operate on slim margins: BT charges broadband ISPs for their connection to an exchange, and the ISP must then cover the costs of administration, support and revenue collection - and, ideally, make a profit - in a market where everyone has access to the same BT exchanges. Virgin Media is now the only nationwide cable provider, and so can set its own prices, but these are often very similar to the phone-led ones.

Broadband takeup has rocketed: in 2005, the Office of National Statistics said about 50% of home internet connections were broadband rather than dialup. Just two years later it puts the figure at 90%. The problem for ISPs seeking to expand is that the remaining 10% aren't likely to upgrade soon. The only option is to steal them from other ISPs - what analysts call "churn". But how to tempt them?

Economy of scale

"You have to spend to acquire," says Scott Morrison of analysts Gartner. But there's still a problem: "Customer acquisition costs are high, especially if you are subscale." By subscale, he means small. ISPs are most efficient when they are large, he says, because they achieve economy of scale on their fixed costs, such as customer service and physical infrastructure.

And it is by having economy of scale that ISPs can afford to offer their deals - which is where they can begin to make profit. Thus you are offered "double play" (voice and internet), "triple play" (voice, internet and TV) or even "quad play" (voice, internet, TV and mobile) services, all in the hope of extracting more money from you.

Point Topic, a broadband analysis company, notes that in western Europe the standard DSL double play - broadband and voice - is marketed for an average of £28.7 per month (only £3 more than the average standalone broadband service).

But is this good news for consumers? The answer is yes, if you are looking for a package of services and think you won't need too much in the way of support, and if you don't mind being locked into the long contracts that the providers want you to sign: up to two years in the case of Orange's laptop package.

The advantage to the provider is clear, says Danny McPherson of US-based analysts Arbor: "There is opportunity for providers to offer many more services in new markets with only incremental capital and infrastructure investment. Now, rather than ARPU [average revenue per user] being, say, $25 (£12) a month, they can obtain ARPU of $100 a month or more."

This is why we have in the past year or so seen a change in the way ISPs market themselves to consumers. It is no longer about speed - even an entry-level 2Mbps service is perfectly adequate for most purposes - but about value-added deals. Sky, the satellite TV broadcaster, has one of the best-known campaigns with its "see, speak, surf" tagline, which stresses its triple play.

Carphone Warehouse, best known as a provider of mobile phones and packages, offers both a landline and broadband connection, while Virgin Media has a series of quad play packages that provide mobile phone, television, a landline and internet access. Its battle with Sky - which pulled its package of TV programmes such as Lost from the Virgin TV feed in a row over costs - should be seen in the context of two companies desperate to sign customers up to multiple services. Both companies want you to choose them, but Sky's TV package clearly tipped the balance: 40,000 left Virgin for Sky in the three months to the end of June, as the dispute bit hard.

Pamela Varley, an analyst at Point Topic, agrees. "Customers are being offered good value with these bundles, but operators are having to cut their margins to the bone to provide them."

Those wafer-thin margins begin to show through when you need support - as many people do. uSwitch calculates that 39% of users had called technical support in the past 12 months. And it's not the moneymaker it seems. YouGov data suggests it takes 2.62 calls of average length 16.8 minutes to resolve a problem. Yet even with Orange's 50p-a-minute call charge, for which the user pays £22, the ISP won't recoup the £30 it costs to answer the phone (£10 per call), but will probably only get about half the call revenue.

Scott Morrison of Gartner reckons scale is the answer: "It makes sense to have one multi-lingual call centre serving multiple geographies."

Incredible bulk

"You need bulk," says Morrison, bluntly. He points out that "bulking up" has a further implication: that broadband providers have to swallow up smaller players in order to remain profitable. And this is already happening: Carphone Warehouse last year paid £370m to acquire AOL UK, which was the UK's third largest ISP. Last month (July) Tiscali bought Pipex for £210m, lifting its customer base in the UK to 1.9 million subscribers.

So where is the market going? Morrison reckons that in five years there will be no more than four big players in the UK market, although some will also offer smaller, differentiated brands. It's a tough market to be in, and one that doesn't exactly encourage new entrants. Says Michel Robert, managing director of Claranet: "I think you'd have to be brave to want to get into the consumer market."








Kate Bevan
The Guardian Thursday August 30 2007
Guardian Unlimited
© Guardian News and Media Limited 2007
 
Back
Top