ISPs In Western Europe - second edition - part 3

The Business Sector:
The Emergence of the ASP Model

Internet penetration in the business sector is ahead of that in the residential sector in most Western European markets.

Rising demand for a fuller range of services as businesses seek the benefits of transferring more of their systems over to IP networks provides many more diverse opportunities for access providers than does the residential sector, enabling them to combine their basic connectivity offerings with potentially higher-margin services such as Web hosting and design, ecommerce solutions and systems integration.

There is also the potential to engage in finer market segmentation than in the residential sector. For the past few years, ISPs have tended to market their services to the business sector on a largely undifferentiated basis, but increasing competition is leading many of them to refocus their operations on particular horizontal or vertical market segments.

The emergence of the application service provider (ASP) model over the past two years in particular has provided a major new opening for ISPs keen to exploit opportunities in the business market.

There are clear reasons for ISPs to seek to move into the area of application services provision. These include:

 

Diversification of revenue streams	ISPs are facing widespread erosion of profit margins on their core services as growing competition forces down prices. The provision of IP access, wholesale transit and basic hosting services is becoming unprofitable for all but those with large economies of scale.. The ASP model gives ISPs a way of augmenting their revenue streams by offering services with potentially higher margins.
Service differentiation and the reduction of churn	ASP services have the potential to become a key means by which ISPs can achieve service differentiation and increase customer loyalty. Because of the breadth of possible ecommerce services and the technical complexity involved in developing and implementing them, there are opportunities to engage in technical innovation and market segmentation, and to offer solutions tailored to the needs of particular businesses. This should enable smaller ISPs, for example, by servicing local or sector-specific market segments, to forge a position in the telecoms market without having to compete with the larger providers head on. By offering more varied and complex services, ISPs can raise switching barriers for their clients, increasing the inconvenience and expense associated with moving to another service provider. The risk of churn is greatly reduced as the service provided by the ISP becomes more personalised to the customer, and as the service provider takes on the role of business partner and trusted third party, thereby increasing customer dependency.
Increased network utility	ISPs that become involved in the development and provision of ecommerce applications will also indirectly benefit by creating greater demand for their core services of connectivity, hosting and transport. The growth of the ASP market will significantly increase the number of businesses online, the amount of time that they spend online and their demand for higher-bandwidth connectivity. At the same time, in the process of centralising storage and processing power through hosting applications, ISPs will be drawing substantial content and computing power back into the network, making it more 'intelligent', and lessening commoditisation of their traditional business. In order to take advantage of this, ISPs' service portfolios should aim to integrate the network closely with their other service elements in order to leverage it from the top of the value chain.

Developing Competitive Advantage
The key to earnings growth for an ISP looking to become an ASP will lie in its ability to balance the achievement of economies of scale, by building a large base of customers and cross-selling further applications into this installed customer base, with maintaining a considerable degree of service differentiation in order to engage customers at as high a level as possible.

Two basic options in the deployment of services will be to adopt either a horizontal or vertical focus.

Partnerships are already a key part of the drive to build market share. These are being established in response to the need to engage in risk sharing, to seed the market, to secure routes to market for the new services, to build trust with the end user, and, most importantly, to assemble new skill sets. Within the ASP market, offering complete solutions to customers will require skills that are naturally owned by a variety of players, and so a vital element of the race will be the swift assembly of the requisite competencies.

The key to reaping the full benefit of the ASP model will be to retain control of the customer relationship and to avoid being demoted to the status of anonymous third-party wholesale network provider.

At present, ISPs are in a strong position to maintain ownership of the customer and be the dominant members within a partnership: their networks form a critical part of the overall delivery chain, and they have good access to potential customers via their existing customer databases. In the long term, however, these assets alone will not be enough. ISPs will need to ensure that their networks are capable of providing the kind of reliability, availability, redundancy, security and uptimes companies will expect if they are to place their business applications in the hands of a third party.