FACULTY OF ARTS, COMPUTING, ENGINEERING AND SCIENCES

 

BROADBAND INTERNET ACCESS IN DEVELOPING WORLD ECONOMIES:

AN INVESTIGATION OF THE FACTORS AFFECTING VIABILITY

     
 Chapter 7: Discussion and conclusions    
     
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Viability of the Case Study Business

 

As discussed in earlier sections, people with different perspectives may have different criteria for sustainability and viability.  In chapter 3, the reasons were discussed for setting the bar high in terms of criteria for viability.  Supernet’s management themselves set different standards: so long as they can repay the original loan with 1% interest and trade in surplus after tax, they consider the business to be viable.  They are satisfying their own criteria.  With access to capital at advantageous interest rates, and with no specific requirement for return on capital, this view may be appropriate for them.  However, it is concerning that they are not specifically budgeting for (and building up a reserve fund to finance) the replacement  and upgrading of equipment.  This may threaten their competitiveness in the medium to long term and thus, the viability of the business.  Also of concern is the level of service reliability that was measured.  Although it would appear that reliability data was collected during a particularly troublesome period, customers indicated that reliability is very important to them.  It is also important to the business as it directly impacts utilization levels and thus profitability.

 

Measured against the more aggressive viability criteria and assumptions laid out at the end of chapter four, Supernet is not viable in its current form.  This means that whilst it is content with its results, it would not be able to survive long term without its advantageous financing arrangements.  The research indicates that it would have to operate the Internet café on a slightly larger scale and average at least 50% utilization to satisfy these criteria. Looking at the share of utilization of bandwidth for the Internet café and the re-sold bandwidth (figure 23), there may be scope to change the balance between them.  It would seem that there is more capacity for re-sold bandwidth.  It seems likely that a 60:40 or even 70:30 split might be a better model than 50:50.

 

The market

 

The demand for increased access speed seems to be a perennial trend. In the USA, broadband adoption has accelerated. The number of Americans with broadband connections at home was 84 million in March 2006 – a growth of 40% over the previous year (Horrigan, 2006)  In the mid 1990‘s, a common dial-up access speed was 9600kbps.  Now, a standard broadband offering is 8Mbps in the UK, with 24Mbps available as one of the fastest offerings here. (Be Un Limited, 2006).  Faster access speed has led to an apparent increase in the use of high bandwidth consumption applications.  Web sites are graphically rich and often feature video.  (For example, www.apple.com recently featured Quicktime video of their television advertisements that loaded and ran by default.)  Evidence cannot be found in the literature, but subjectively, it appears that web content developed in the developing world is following the same trends.  Internet users in the developing world (especially those who speak English and European languages and want to access bandwidth-hungry resources available in those languages) are not likely to be content with slow connections.  This research confirmed that connection speed is the most important factor cited by users in deciding where they access the Internet.  The author visited five other Internet cafés in the same city as Supernet and measured the connection speed informally using the speed tests at testmy.net.  The owner at one location acknowledged that his connection was slow, but emphasized that his price per hour is very low (about $0.30 an hour).  He said, “Why pay more if all you want to do is chat?”  There is some anecdotal evidence that users chose their Internet access location depending on what applications they want to use.  If they are content to use only low bandwidth applications, they may choose a cheaper location with a slower connection.  However, users at  Supernet identified their wish for speedy connections.  The high utilization level recorded when everything was working well (nearly 60%) indicates that there is currently a large enough market to sustain this business in their city.  It is clear though that some of these customers would go elsewhere if there were a faster connection.  Supernet should retain this critical competitive advantage.

 

The demographic profile of users was interesting.  It was assumed that the educational level of users would be relatively high, and that they would also be relatively affluent.  The actual profile showed that indeed, users were generally well educated, but nearly two thirds considered their family incomes to be average.  The evidence that moderate income users found Supernet to be affordable again helped to widen the potential pool of customers within the area.  

 

The data on the occupation of users suggested that most of the users are not involved in business, or any form of revenue generation.  Having analyzed their surfing habits, it is also clear that most of their Internet usage falls firmly into the category of leisure or recreational activity.  From an International Development perspective, this is disappointing as it is widely thought that Internet access is a key to economic development. (This was discussed in the Literature review.)  One could also describe the usage of the Internet at Supernet as parasitic rather than symbiotic as users tend to feed off content which is already published, but do not appear to be involved in collating and publishing data themselves.  For example, it appears that nobody has published even a simple business guide to the city.  There are no bus timetables online.  The local government site consists of four static pages in English! This indicates that the whole Internet ecosystem is as yet under-developed in Aceh.  Simply providing better access will not automatically create a better economy.  For example, if the basic trust does not exist to make online payments, if the banks are not set up to process card transactions and an infrastructure of delivery services does not exist to fulfill orders placed through the Internet, then ecommerce cannot develop.

While local staff at Supernet doubted that users would pay more than at other Internet cafés, it was proven that they would pay 20% more that the general rate for its faster service.  The survey also showed that price was not as important as a number of other factors.  This leads one to speculate that it may be possible to further increase the price premium without having too much impact on utilization.

 

The market for re-selling bandwidth was not specifically studied in this research.  However, since the business model hinges on being able to achieve a balance between re-sold connections and Internet cafés, it would be important to establish that this market also exists if the lessons of this study were to be applied elsewhere.

 

Cost Structure

 

The connectivity choices that Supernet made brought with them a level of costs. These were accurately forecasted in the business model.  The spreadsheet analysis shows that the costs of the business rise much more slowly than revenue as the scale of operation was increased.  It can easily be seen that the cost structure for similar businesses in different cities could be considerably different.  The costs of suitable Internet connectivity and electrical power generation / stabilization would be major variables.  The cost of importing and licensing equipment also varies widely from country to country.  These factors will have a large impact on the scale and utilization levels needed to achieve viability in another situation.

 

Revenue optimization

 

The two main variables that the research investigated were scale and utilization of capacity.  The effect of service pricing was not explored.  Scale and utilization are closely interrelated.  The primary objective is to optimize the revenue achieved from the available assets and connectivity.  This involves finding different revenue generating uses for the bandwidth that create income wherever possible throughout the twenty four hours of each day.  It was found that businesses that buy an Internet link to provide connectivity to their offices utilize the bandwidth mostly during normal office hours.  In the case study, most of these businesses were Aid agencies, and peak demand was in the morning and late afternoon. During the rest of the day, their staff were often out of the office working on projects.  This complemented the peak usage of the Internet cafés very well.  Their peak bandwidth consumption was late evening and into the early hours of the morning.  At one point, Supernet re-sold a connection to an Internet café owned by a competitor.  Given the above thinking, this was an illogical step!

 

The Internet cafés were able to achieve close to 60% utilization of their computers over a 24 hour period when everything was running well.  Supernet management reported revenue of $215 per computer during the month prior to this research, suggesting an average utilization of about 49% based on the average charge of Rp6000 per hour.  During the monitored period, there were a number of problems that reduced the average utilization to less than 36%.  Occasional service interruption on the re-sold bandwidth does not reduce income: it is tolerated up to a point.  However, service interruption in the Internet café hits revenue immediately.  Customers have identified reliability as a key requirement for Internet café service.  One can imagine that customers who regularly travel for 30 minutes or more to use a facility might quickly become less loyal if, on arrival, it is frequently found to be out of order.  The management of reliability is therefore key to continued high levels of utilization.

 

There are also other issues related to capacity, speed and utilization.  Whilst the high speed of the connection draws additional users, it also encourages more use of higher bandwidth consuming applications such as video

downloads.  In turn, this means that fewer users can be accommodated within a specific bandwidth.  As usage patterns evolve, Supernet management would be wise to continue to monitor usage and its effect on utilization levels.  It may be worth examining the possibility of charging different usage prices for different access speeds. There are still periods of the day when the bandwidth is under-utilized.  It would be worthwhile to try and develop revenue specifically during those periods.

 

Other aspects of viability at Supernet

 

Although there was no formal measurement of the skills level of the Supernet management staff, it was clear that there were different levels.  An Australian manager with both a strong technical and business background was available during the set-up of the Supernet business.  After a while, management was handed over to Indonesians.  Whilst they had reasonable technical ability, they had very little management experience.  As a result, the level of management of the business declined.  There was no regular formal measurement of any significant performance indicators except monthly Profit and Loss.  This lack of management has serious implications for the viability of the business.  For example, the inability to manage the reliability issues could seriously impact revenues.

 

The level of management skill and experience is not an uncommon issue in the developing world.  The author recently spoke with Mark Davies, founder and CEO of Busy Internet, from Accra, Ghana (thought to be Africa‘s biggest and most successful Internet business. )  Mr. Davies remarked that he now looks for experience in western businesses when recruiting managers.  This often results in him recruiting expatriates as so few Ghanaians have appropriate experience.

 

Following the lessons of The Balanced Scorecard (Kaplan and Norton, 1996) Supernet should consider the Learning and Growth perspective and invest intentionally in building its skills and management competences.

 

In more junior positions, there are perceived problems with the work ethic in Aceh.  As mentioned earlier, Indonesians from other parts of the country think that many Achenese are lazy and unindustrious.  Some evidence of these traits were observed among Supernet staff.  It will be hard in this culture to develop a strong customer service ethos.  In the longer run, such an approach would be beneficial. (The Customer perspective from the Balanced Scorecard. ) 

 

The reliability issues which were observed require further study.  It would seem that increasing the scale of operations also increases the complexity.   As management skills are not widely available, it may be highly desirable to

investigate ways to reduce complexity.


References:

BE UN LIMITED (2006) Be Unlimited[online] Last accessed on 8/2/2006 at URL: https://www.bethere.co.uk/homebroadband.do 

 

HORRIGAN, J.B. (2006) Home Broadband adoption, 2006 [online] Last accessed on 7/21/2006 at URL: http://www.pewinternet.org/pdfs/PIP_Broadband_trends2006.pdf

KAPLAN, R.S. and NORTON, D.P. (1996) Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review,74 (1)



Edited by the author for the web.

© Copyright, 2006  Rob Longhurst (rlonghurst@drasticom.org)