Limited broadband uptake

Due to high capital expenditure and operational costs operators and ISPs are starting to segment their existing customers in their effort to maximise broadband uptake.

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By  Richard Agnew Published  December 30, 2004

|~||~||~|The number of broadband DSL subscribers in the Middle East has leapt by a massive 262% in the past two years. However, the region still lags behind in internet usage.

Broadband services are available in most countries in the region, but subscriber numbers remain low in most. While it is particularly low for the relatively rich countries of Kuwait and Qatar, nearly all countries are below average for their GDP per capita.

Rural areas are particularly undeveloped due to low incomes, poor education and poor infrastructure. Only the UAE is exception in the Arab World. DSL remains the dominant means of broadband delivery in the Middle East, but much of that infrastructure is still in the hands of monopolies. As a result, the Middle East contributes less than 1% of the world’s 100 million-plus broadband subscribers, and the benefits a high-speed information society such connectivity would bring to the region remains a distant dream.

This is particularly worrying for enterprises in the region that are currently investing in their online presence and looking to build e-commerce channels. “When the Arab World reaches a situation where a broadband bill is just another utility bill, that’s when it will really have major uptake of services,” says Jawad Abbassi, president of Arab Advisors.

“You’re combining higher than global average rates for ADSL with lower than global average income levels in most of the Arab markets. As long as broadband costs more than users’ water, electricity and gas bills combined, people won’t be crazy about paying the money.”

Options are opening up to allow DSL service providers to alleviate these difficulties. One is to provide services over another technology, provided that licences are available. This would also allow them to avoid any regulatory risks that are thrown up by interconnecting their DSL infrastructure with that of the incumbent operator.

“Competitive ISPs have a major share in providing internet access over DSL connections but don’t actually own them — they either resell broadband or the client buys a broadband connection from the telco and buys internet access on it from the ISPs,” explains Mohsen Malaki, programme & consulting manager for communications at IDC CEMA. “But, alternatively, the ISPs could go for technologies such as wireless and metro Ethernet to provide services direct to the customer, in markets where alternative operators are licensed.”

While the ISP arms of telcos like Telecom Egypt and Yemen Telecom use wireless technology to provide broadband, they are yet to use metro Ethernet. In the absence of deregulation in many fixed line markets, another option increasingly being explored is the development of creative pricing programmes designed to increase demand and move broadband services beyond the one-size-fits-all approach largely adopted by operators so far.

Jordan Telecom, for example, has launched new tariffs for ’DSL-lite’ connections offering speeds of 128 Kbits/s downstream.“Capital expenditure is one thing, but if one looks at the cost element and why broadband has been so torturous for incumbents and ISPs, the reason is that operational cost is pretty high. That is why prices are not dropping significantly and operators are looking at alternative options, such as introducing new tariff plans with lower bandwidth connections, and pay-as-you-go type services using prepaid cards,” says Malaki.

Operators and ISPs are also starting to segment their existing customers in an effort to maximise broadband uptake. Experience from Europe shows dial-up users are willing to pay up to 40% more for broadband connections. Alcatel, for example, is also working with operators such as Etisalat, STC and Jordan Telecom to divide their narrowband user bases according to their level of usage and construct services to suit them.

“Businesses have to build the right portfolio of services, depending on the market’s dynamics and the operator’s business case, because it has to bring operating profit,“ says Naveed Kashif, director, consultative marketing at Alcatel. “What companies have to do is look at different segments... Heavy users will perhaps be willing to pay US$50 per month, but medium users would be looking for US$20 to US$30. This kind of segmentation is not a [prevalent] trend in the region, so we are bringing that knowledge from Europe to allow operators to launch the right service packages,” he adds.

Attempts are also being made by operators to restructure their broadband business models to offset high charges for international bandwidth. Currently, Middle Eastern ISPs are subject to a shortage of international capacity; a situation exacerbated by a lack of competition in international gateways.

“The region is one of the lowest in terms of capacity per internet account,” says Ahmed El Oteify, founder of the Arab Broadband Internet Forum (ABIF). “In some countries, capacity is as low as 1Kbits/s per subscriber, so the quality of service is very poor in terms of both broadband and narrowband. Egypt is one of the most developed countries in the Middle East in terms of capacity and we are dimensioning the network for 40Kbits/s per broadband subscriber, but this is still very low,” he adds.

Nevertheless, some telcos are looking to circumvent the problem by aggregating web content locally and restructuring tariffs to take the high charges into account. “There have been high international bandwidth charges in the region, so to optimise margins as a service provider, one has to look at its whole portfolio,” says Kashif. “The group within an operator that purchases the bandwidth often has its own profit and loss, so it is adding margins internally which result in even more expensive bandwidth and packages,” he adds.

However, most of the restructuring that has taken place in the region has been generated by industry-wide initiatives, rather than by individual operators or ISPs. In Egypt’s case, cuts in bandwidth prices were made after the announcement of the government’s intention to intervene in the broadband market in mid-2004.

On the supply side, the government and Telecom Egypt, the incumbent fixed operator, increased the availability of bandwidth to over 1,000M/bits at the end of 2003. The government is also negotiating with Flag Telecom, as well as other international carriers, to lease STM-1s on a 15-year basis under rights of use agreements.

“This long-term leasing model will mean that the provision of internet links will become substantially cheaper, with the cost saving passed on to ISPs,” says Lucy Norton, senior telecoms analyst at the World Markets Research Centre.

These measures have taken place in parallel with obligations placed on ISPs to cut retail tariffs, following analysis that revealed a large number of narrowband subscribers spending substantial amounts on access. “Knowing that, for these customers, an ADSL connection does not mean a quantum leap in spending on the internet, ISPs can be more confident that the always-on and free phone line benefits of ADSL access will be enough to compel these users to upgrade,” says Norton.

Similar measures have also been taken recently in Jordan. Faced with the introduction of competition with the liberalisation of the fixed line market coming up this year, Jordan Telecom reduced bandwidth charges by 85% in 2004, prompting cuts by up to 50% in retail charges by ISPs.

Although Jordan’s government chose a more interventionist strategy, Sami Smeirat, CEO of Wanadoo Jordan, argues it could not have happened without government involvement.
“There has to be a national strategy, backed up by the government, regulator, telco and ISPs,” he says. “The price cuts weren’t dictated by force but Jordan Telecom gave us incentives to drop our rates.”

More room for regional operators to re-focus their business models for broadband will become available when competition comes into individual markets — as Jordan’s service providers are expected to experience in 2005.

“Today in Jordan all of us go through one pipe. But once it is liberalised, there will be much more competition in international capacity. No matter how efficient a monopoly is, nothing beats competition,” says Marwan Juma, CEO, Batelco. ||**||

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