Providers hesitating about getting involved with Rural Access Network initiatives in the region would do well to consider the experience of providers under the Australian broadband subsidy scheme. Even though the challenges faced in developing countries is likely to be far greater, our expectation is that this first mover advantage will be repeated and with greater returns than in Australia. We therefore encourage providers to engage in these initiatives sooner rather than later, whilst putting in place strategies to mitigate downside risks.
Rural Access Networks Are Not New
Thin route telephony networks connecting isolated villages have been delivered via satellite for some time. Mostly funded by either the local PTT, or via some form of Universal Service funding, their use is based on a pay-phone structure with the provider responsible for all aspects of service delivery.
Today we not only see the model being extended to Internet delivery but also, the risk sharing amongst stakeholders is changing. Unlike the traditional model, service providers and even community members are being encouraged/ required to share in more of the risk. Some models for example, even have a member of the local community using micro-finance to take a stake in his/her service delivery kiosk.
Risk sharing is fine, providing the rewards are adjusted accordingly. In this regard, governments still hold major sway in the shape and ultimately success of these initiatives to bridge the digital divide between their urban and rural constituents. In the case of Australia, this is definitely the case and so we will use the Australian experience to illustrate how changes to the risk/reward balance can have a dramatic impact on service provider fortunes.
Australian Broadband Subsidy
The Australian broadband subsidy model is based on the government providing funding to accredited service providers in the form of a per-connection, incentive payment. When these schemes first began around 5 years ago, the government’s priority was connections. Rural and remote households had long complained about poor internet access via dial-up and satellite was seen as a major part of the solution. The Threshold Service – the benchmark service which all providers must include in the tariff offering – was set at 256Kbps/64Kbps (outbound to the customer/inbound from the customer), with 500MB of data and the incentive payment was A$3,000 (US$2,550). For customers, this has meant that they could now get a "broadband" satellite connection for $0 upfront – just their ongoing subscriptions to pay.
The subsidy scheme also represented a boon for broadband satellite providers. Even with the relatively high hardware costs at the time, the margins attracted a great range of providers. Although many of these new entrants quickly fell by the wayside, a perception appeared within government that the risk/reward pendulum was too much in the providers’ favour. As a result the Threshold service was increased to 512Kbps/128Kbps with 3GB of data and the incentive payment dropped to A$2,500 (US$2,125).
Despite the success of the program connecting over 100,000 households, service providers have been caught in the cross fire of a debate over what constitutes an acceptable satellite broadband service and a perception that they are too focussed on just connecting new customers, as opposed to servicing existing ones.
This has resulted in the Threshold service now being doubled to 1024Kbps/256 Kbps, with 6 GB data (3GB during peak hours). Unfortunately (for providers), the subsidy remains the same at $2,500 and they will now also have to provide a 3 year warranty on hardware.
Does it really matter whether the government is putting more pressure on the service providers? Again it comes down to risk/reward. Some would say the government had greater ability to affect changes when the viability of ABG service delivery was stronger. Given that one of the major criticisms of the ABG has been in relation to service quality, doubling the Threshold speed without any bandwidth cost relief, is likely to increase rather than decrease the motivation for service providers to utilise excessive oversubscription levels.
The end result is that only the larger providers will have the economies of scale to absorb these changes. We would therefore expect considerable consolidation in the ABG provider market in the next 12 months.
Early Mover Advantage
The Australian experience demonstrates that best returns are most likely at the early stages of these initiatives. At the start, a combination of uncertainty regarding service delivery – i.e. establishment activities, degree of difficulty in serving customers, transaction costs, potential demand, etc – and the focus on take-up as the measure of success mean that incentives are likely to be higher at the start. The value of these incentives will likely decline overtime as familiarity grows: either through government’s deciding they are being too generous; or competition amongst providers driving some to offer their services at a discount, which are then applied across the market.
The message for providers looking to Rural Access Networks as part of a market expansion strategy, is don’t wait too long. We are just seeing tentative steps by providers entering this market with local governments, NGOs and other stakeholders. To date there are few projects of any scale, but that doesn’t mean they aren’t coming. Success will come from getting in on the ground floor to not only take advantage of any additional benefits working with the government may deliver (e.g. favoured licensing arrangements, selling to government agencies) but also, to develop the scale to be able to cope as the conditions evolve over time, as it will. Just ask an ABG provider!
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Chris Frith is the principal consultant and founder of AUSPresence, a professional services firm providing thought leadership and tactical support for customers in the satellite industry, looking to lift their performance. AUSPresence provides services to a wide range of service providers, some of whom are engaged in providing ABG services. Chris held senior positions at Optus Satellite Services before establishing AUSPresence in 2005. At AUSPresence, Chris has been successful in assisting its customers analyse their past successes, pick winning markets for future growth and put systems in place to achieve their business objectives. Chris holds a Computer Engineering Degree and a Master of Business Administration from the Australian Graduate School of Management. He can be reached at chris.frith@auspresence.com.au
