Seeing Daylight

While the region's internet access market is expected to grow considerable over the next few years, ISPs' margins are still being squeezed by excessive costs

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By  Richard Agnew Published  September 29, 2003

|~||~||~|New pricing models and increased availability of broadband services are expected to drive annual revenue growth rates of up to 20% or more in the region's internet markets over the next few years. The ability of internet service providers (ISPs) to share in this growth, however, is still being impaired by the high costs they incur.
Across the Levant and North Africa, for example, licensed ISPs collected less than US$89million of the total internet access market last year. According to research group IDC, over half of the revenues generated during 2002 went to incumbent telcos, illegal service providers or suppliers of data connectivity.
Depending on the regulatory environment in each country, ISPs are also experiencing considerable pressure at the operating cost level from dial-in portal rental fees, the costs of connectivity to the national IP backbone, collocation charges for ADSL equipment, and wholesale fees for leased lines.
"ISPs are just not getting the revenue that they should be," says Mohsen Malaki, senior analyst, telecoms group, IDC's CEMA division. "The market is generating money, roughly US$180 million in the last year. But of that total less than 50% is accrued by the ISPs. The rest keeps going to the telcos in the form of public switched telephony network (PSTN) call charges or leased line fees, [as well as] DSL lines and connection fees," he adds.
In many areas where the internet service provision market has been liberalised, competition is driving prices down. However, monopoly operators still have a tight grip on the market and ISPs' costs remain constant. For example, in Saudi Arabia, only 33% of end user spending becomes revenue for the ISPs, and 66% is collected by STC. A similar trend is existent in countries in the Levant and North Africa, with ISPs only receiving a 33% share in Tunisia, a 42% take in Jordan, and 43% in Lebanon, according to IDC.
Additionally, a comparable situation is expected to arise when countries such as the Gulf states usher in competition. "The ISPs depend on services provided by the telecoms operators, for infrastructure, for PSTN, for leased lines, for the backbone, and for international bandwidth," says Malaki. "The underlying infrastructure is a monopoly but the service on top is a very competitive environment. [This] reduces revenue, but the cost base isn't flexible enough," he adds.
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Considering these factors, the opening of Bahrain's internet provision market in August, is expected to receive considerable attention. As new ISPs are awarded licences, the process is also expected to be scrutinised to see whether a regulatory environment can be created allowing the new entrants to flourish. If successful, Bahrain could also become a test case for other countries in the GCC wishing to open up their own markets.
The results remain to be seen of a 56 day consultation opened by Bahrain's Telecommunications Regulatory Authority (TRA) at the same time as the licences were made available. This will be used to determine pricing, tariffs and revenue sharing models between the ISPs that qualify and Bahrain's monopoly telecoms operator, Batelco.
However, impending competition has already seen Batelco looking to lower its prices and expanding coverage of both narrowband and broadband across the whole country.
"We have made sure that internet services are available in Bahrain and we have improved prices and offerings," says Adel Daylami, senior manager, informatics services, datacomms, internet, messaging and e-commerce, Batelco. "Recently, we reduced our 'Speednet' ADSL product by 25% and provided a variety of packages for businesses and consumers," he adds.
Efforts have also been made to reduce new entrants' reliance on Batelco in the area of broadband provision and international bandwidth. For example, local exchanges will be opened up to ISPs next year, as well as wholesale provision of DSL.
The local loop unbundling (LLU) process, it is hoped, will allow Bahrain's new ISPs to gain more interaction with customers and generate increased spending.
While LLU is yet to spread across the region, it has already been tried in Egypt with some success. Through it, the ISPs request monopoly operator, Telecom Egypt, to connect their customer's DSL lines and become the billing front for end-users, giving them greater interaction with its customers and an opportunity to target them with new offers and services.
"Whoever the new entrants are [in Bahrain,] they will stand a good chance of having [significant] revenue streams. In Egypt, the customer doesn't interact with Telecom Egypt for DSL lines, so the ISP has full control of the customer and [this] gives them more leverage in terms of increasing user spending," says Malaki.
If successful in Bahrain, LLU could be extended to other countries in the Gulf once they liberalise their own markets.
Additionally, international bandwidth costs - an ongoing bugbear for the internet industry across the Middle East - are being tackled in Bahrain. According to IDC, between 30% and 60% of the operating costs ISPs face for broadband ADSL is generated by the price of international bandwidth consumed by each user's connection.
Daylami says that international connections are particularly expensive in Bahrain because of its geographical position. He adds that Batelco has had to increase its own supply to provision for disasters along the lines of this summer's earthquake in Algeria, which knocked out global links. "We had a plan [before the earthquake] to discontinue providing internet bandwidth through satellite, but we now need to upgrade that to provide for disasters," he says.
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But savings are expected to be made when international facilities licences are brought out in Bahrain in 2004, bringing greater competition into the bandwidth market. The new ISPs will also be able to aggregate their demand for bandwidth through an internet exchange, which is currently being set up and will be run by a non-profit organisation.
"Price is the main barrier to [internet uptake] and bringing the internet to the country is expensive in terms of international bandwidth," says Daylami. "If the internet exchange can provide the international capacity, fine, if it cannot, ISPs will come to us and we will provide it on a wholesale basis," he adds.
In addition, further savings are expected to be generated as Bahrain is among the Gulf states aiming to minimise traffic traversing on global connections through peering arrangements with neighbouring countries. "We recently peered with the UAE and have one link with Qatar, and we are in the process of [connecting] to Kuwait, Oman and Saudi Arabia. That will reduce pressure on the international uplink and prices," says Daylami.
On a wider scope, various pricing models have also been adopted over the last few years help offset ISPs costs in providing services, particularly in North Africa and the Levant. These include the internet pre-paid model in various countries, and the subscription free premium rate model used in Egypt, Syria and Algeria.
Models such as these are expected to be a major driver of dial-up connections. In North Africa and Levant particularly, they will also play a key role in overall internet access growth over the next few years. IDC predicts that the overall internet access market in that region will show a compound annual growth rate (CAGR) of 24% in terms of connections through to 2007, with narrowband services forming the bulk of the increase.
When introduced, the subscription free model in Egypt - perhaps the most notable of the new models - also saw ISPs being guaranteed a share of 70% of call revenues generated from dial-up connections. "At the beginning there seemed to be some scepticism from the ISPs but today we have over 100 providers," says Ahmed Nazif, Egypt's Minister of Communications and IT. "It's been growing very quickly. At least 800,000 Egyptian homes use the service and we put the number of users at about 2 million," he adds.
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Other countries such as Saudi Arabia have been rumoured to be ready to adopt the model. Although the Communications and IT commission (CITC) in the Kingdom recenty began soliciting opinions about the service, no decision has yet been made.
"This is a simple concept in principle but it has far reaching effects on all stakeholders and should be carefully studied," says Dr. Abdullah Al-Musa, head of SaudiNet, STC's ISP arm.
However, from the ISPs' perspective, the results could be initially mixed. In Egypt, while users took time to increase spending, subscribers to more expensive packages transferred across.
"The quality of service of the subscription free dial-in ports was very high, because the bit capacity was high and there were higher speeds," says Malaki. "So, users had very good quality at a cheaper price than premium rate services such as ISDN. You saw a lot of people leaving the premium rate services to [go with] subscription free," he adds. In the longer term, however, ISPs revenues slowly recovered. "Spending suffered a bit and that hurt the ISPs, but now we're seeing some growth," says Malaki.
But eventually, ISPs will need to turn to broadband for eventual future growth in terms of end-user spending, and position themselves to gain a larger share of broadband revenues to secure future profits.
In Saudi Arabia, for example, STC has a monopoly on the DSL lines and charges 220 riyals per month to the end user to connect the line, and as a result is getting a lot of the end user spending through the initial charge for the DSL line. "That's a hefty fee. The ISPs will start competing on the tariffs for DSL subscription on top so that will squeeze their profit margins, whereas STC has no competition on the DSL line so its going to keep the same price," says Malaki.
With a considerable amount of revenues expected to be generated from broadband in Saudi Arabia, ISPs will need to lobby for a larger proportion of end user spending. "They need to start speaking to the regulator so that there will be some kind of equitable distribution of the revenue between them and the telcos," says Malaki.
This effort will also eventually need to be extended across the region. "In the future, the broadband market is where the money lies for ISPs," says Malaki. "Providers can't just sit on the sidelines and wait for things to happen. If they want to position themselves to get a bigger share of end user spending then they need to make sure there is unbundling or wholesale access, where the incumbent gives them DSL lines on a wholesale basis and at a reasonable price. This is not currently the case," he adds.
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