THE BROADBAND ISP MARKET
The broadband ISP market underwent significant changes during 2005 and 2006.
The key development has been the aggressive charge by Telstra into the overall broadband market. This certainly has increased awareness and increased penetration, which, of course, is good for the country. However, at the same time, Telstra’s strategies have also resulted in a sharp drop of ARPU and that is seriously affecting the more vulnerable competitors, who don’t have a $4 billion profit buffer. At the same time wholesale costs over that period have not decreased. Margins in this market have dropped to 20%. This is not enough to cover the costs involved in customer acquisition and a good quality customer service.
Telstra is offering baby broadband (256Kb/s) for $29.95, with a $19.95 monthly charge for the first 12 months, based on a 2-year contract. At the same time the company is able to throw in other services, such as exclusive access to certain content. Within the current market structures it is virtually impossible for competing ISPs to come even close to the content offerings that Telstra can throw in. The ACCC is keeping a close watch on this situation – it has flagged it as being of serious concern.
Under competitive pressure ISPs are also forced to ‘throw in’ free installations and free modems, making economically viable business models even more precarious. While ARPUs are coming down the cost of customer acquisition is going up.
Residential Broadband ARPU and change – 2004-2006
Year ARPU pm Change
2004 $55 -40%
2005 $42 -24%
2006(e) $35 -17%
(Source: Paul Budde Communication)
The price busters at the bottom of the market have ARPUs as low as $25pm.
The only way for the broadband resellers to survive in the residential market is to live off the ‘penalties’ that customers have to pay when they go over their broadband limits – not the best way to create a bond of trust with your customers. The other alternative is, of course, to move into the business market. While the margins are significantly better in this segment, customer expectations are also higher and only ‘the best’ are able to survive.
Still, most ISPs are ‘trapped’ in the customer acquisition cycle. With dwindling ARPUs more customers are needed to sustain the business. In this vicious circle they are focusing totally on access and have little time or money to spend on market segmentation, customer service and value-added services. This has resulted in yet another year where more than 90% of ISP revenues depend on ‘commodity’ access.
On the market side, the only way forward for the industry is to move into triple play models, providing voice, data and video services. To be able to deliver a QoS product of this type requires a minimum of ADSL2+ capacity.
On the industry side, the only way forward in the ISP market is consolidation, and with ARPUs continuing to fall this is not a sustainable way forward. This applies to both 2nd and 3rd tier players in the market. Merger and acquisition announcements are taking place across the market every week.
It is actually amazing that, despite the onslaught that is taking place in this competitive market, since Telstra started the campaign in 2005 it has only been able to increase its retail market share from approximately 40% to 43%.
More statistics and analyses of the Australian telecoms market will be released at our annual ‘State of the Industry’ Roundtable:
‘State of the Industry’ Roundtables with Paul Budde 27th & 28th September
Theme: Australian Telco Market moving into 2007
Presentations and discussions will mainly concentrate on the latest results of our new Australian reports that we will publish at the same time, covering:
- Analyses of the Australian Telecommunications Industry (Revenues, Market shares, Trends and Developments) Analyses of Telstra, Optus, AAPT, Vodafone and Hutchison.
- Key industry and market developments – state of the industry
- Statistics, Trends and developments in fixed voice, data, mobile and broadband
- Forecasting broadband, Triple Play, NGNs, FttH, VoIP and other fixed network developments
- Forecasting mobile data, content and personal wireless developments
I will bring you up to date regarding the latest research data and, perhaps more importantly, analyse the market with you – highlighting the areas where opportunities exist.
For more information and agenda click here.
Other dates for your diary:
26th September – Sydney - Wholesale Industry Meeting
18th October – Sydney – Broadband Power Lines (BPL Workshop)
