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Is Broadband Access a loss leader. 12.09.2006 With the recent news of Smart Telecom’s share pricing dropping by almost 50% last Friday amid mixed news at their AGM. Oisin Fanning has stepped down and Smart Telecom fast need an infusion of cash due to achieving lower Broadband subscriptions than forecast and targeted. This is an issue that affects the whole Irish marketplace, with slowing growth rates in Broadband adoption across both small business and the home. In Ireland we are stuck in a ‘land grab’ situation, where providers are ignoring business fundamentals in chasing new clients, irrespective of costs and profits. I was lucky to share the stage 3 years ago with Denis O’Brien formally of ESAT (acquired by BT) fame and currently of Digicel fame, where he spoke of the need for any new business to be cash flow positive within 18 months. For someone that had made many millions and had access to VC money if required, this was a great reminder, that irrespective of the business opportunity, ‘cash flow remains king’. Within the Irish Telecom marketplace, some basics are being ignored, positive cash flow is one, and creating customer demand is another. Irish broadband adoption will not increase significantly without providers focused on providing the value added services on top of broadband access. Broadband costs per MB are falling all the time and will be further accelerated with eircom’s recent announcement of reduced retail and wholesale costs. However, irrespective of high speed connections, if people only want to do email, then there is still no compelling event to move from dial-up to Broadband. Value added services will also generate higher cash flows and in turn profits, while a ‘land grab’ costs money. In the Irish land grab environment, churn is very high, as low prices are not rewarded by customer loyalty. Look at Vonage in the US, where there shares traded at 45% of IPO price last Friday a fall from $17.25 to $7.86 in a handful on months. Vonage (see blog of June last VoIP make nothing from nothing ) state that they may never make a profit, so it’s no surprise no-one wants to trade their shares. Irish Telecom companies are no different, if you do not generate positive cashflow to cover costs (at a minimum) then the outlook is not ideal. Spending vast fortunes on LLU and mobile 3G licenses does not make commercial sense in the Irish marketplace today. Setting up an NVMO and building upon existing infrastructure makes financial sense. When the profits are flowing then such investments like LLU and building 3G networks are more appropriate. There is a catch 22 for the Irish marketplace, LLU has high costs, few Vendors have the required deep pockets to invest, competition is slowed, but competition is not our problem (ie supply), the problem still remains demand, so maybe broadband needs to be seen – not as the business - but the loss leader, and profits will flow from Content and IP applications such as Video, Voice over IP and On Demand offerings……… |
