Developments in the smaller ISP market

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece Piers Daniell, Managing Director of Fluidata looks at the activities of smaller internet service providers in the UK.

The ISP markets in the UK and US are dominated by a handful of major players. All with huge budgets, most of whom offer a variety of other services to tempt customers in (like mobiles, fixed lines, and TV packages). However, these major ISPs often have little interest in investing in hard to reach or otherwise unprofitable areas of the country.

While larger ISPs may dominate the market, there is a place for smaller internet services providers, especially when it comes to serving communities that are otherwise neglected.​ They need to be given the opportunity and the initial funding to be able to compete.

Google, which has recently entered into the ISP fray, elected to rollout its fibre network to a few American cities. It’s predicted to cost the company $84m to build its fibre network in Kansas City alone (costing around $11bn if it were to attempt to service all of America). With the cost of building networks so high, it’s no wonder that the industry is dominated by a handful of providers.

Without the backing of revenues from the world’s largest search engine setting up as an ISP, the cost of investing in a network or buying access to an existing network can be prohibitive and lead to less competition and ultimately less choice for businesses and consumers.

The ISP market in the UK

The UK government has recently declared that super-fast broadband is a key utility, and its universal service obligation states that all homes must have at least a 10Mbps broadband connection by 2020. For the last five years, the government has given the responsibility for super-fast broadband rollout to BT – it has won all contracts up for tender in the £850m programme. Yet some projects are still to get off the starting blocks.

Morgan Stanley predicts that the UK is heading towards an internet industry dominated by five major providers. Sky, which already uses BTs fibre network to service its customers; Virgin Media (which has a cable network covering 50 per cent of the UK); BT (which has recently acquired mobile operator EE); Vodafone (which has just entered the home broadband market); and, it argues, that the March 2015 merger of Three mobile and O2 UK could create a business eager to enter the broadband arena.

Other major providers, such as TalkTalk and Kingston Comms, use BT’s network to service their broadband customers.

These larger ISPs have access to funds that new and smaller ISPs usually lack. They also benefit from the value of an established household brand name (such as BT), and TV/landline bundle deals (such as Sky and Virgin Media) that encourage people to become customers. As for the mobile operators entering the industry, they have an existing customer base to sell to, and significant brand awareness of their own.

Yet, larger ISPs often have the luxury of picking and choosing where they operate. If it is deemed to be too expensive to rollout broadband in a rural area, they don’t need to worry, because there are still enough suburban and urban areas to expand to. It may make more financial sense to do battle over 800 thousand customers with their biggest rival, than spend a fortune rolling out fibre to a remote area that has less than ten thousand homes and businesses.

However, if Morgan Stanley is correct then there will be little incentive for the large players, driven purely by large revenues, to invest in these underserviced areas in the UK.

What smaller providers can do

Smaller ISPs, or those just entering the market, have a brilliant opportunity here. Millions of people have substandard broadband service in the UK, both those in remote areas that the larger ISPs aren’t servicing, and those who feel they have little choice but to stick with an inadequate service provided by their current ISP.

They can’t afford to be picky, yet they also have to make every penny invested count. Joshua Montgomery, founder of American ISP, Wicked Broadband, argues that new ISPs need to reach 30 per cent “of their local market in the first few years or [they’ll] go out of business.” To do this, they need investors who are willing and able to wait for any return on investment, they need permits, and agreements with contractors to build networks or partnerships with existing networks in place. They need the money for sound legal representation, and the ability to market themselves in an industry dominated by national names.

Smaller ISPs often have the freedom to come up with innovations and creative solutions to issues that their larger counterparts can muster. (Such as ITS Technology using the CCTV network in the London Borough of Hammersmith and Fulham to build a 1gb fibre network, which will save money for businesses in the area.)

Other UK providers, like Gigaclear, are working with local rural communities to supply super-fast broadband to areas where larger ISPs just don’t see the cost benefits. Smaller ISPs have the flexibility to do this, and are able to adapt their services to fit the specific needs of the local community.

Smaller ISPs are also able to specialise, becoming experts in their chosen area. Independent Fibre Networks Limited, specialise in supplying super-fast lines to new build developments (and is currently working on London’s King’s Cross). Other ISPs, like Ask4, specialise in supplying broadband to students. While another wireless ISP, Wifinity, focuses on high-speed broadband in schools and hard to reach rural areas for the armed forces and holiday parks.

All about service 

The important thing to remember is that people just want to connect to the internet. They want a reliable, fast connection. ISPs need to work together to provide this, rather than spending time challenging each other on who has the fastest download speeds and who ‘owns’ which area to provide a service in.

While the mainstream UK ISP market may be consolidating, there will always be a market for niche, specialist ISPs that a small and flexible enough to fill in any service gaps, or tailor their services to specific needs.

Piers Daniell is MD of London-based data communications company, Fluidata. He started his first business at 15, and founded Fluidata in 2004. In 2014, Fluidata was awarded a Queen’s Award for Enterprise in Innovation – the UK’s highest accolade for business success – for its work in delivering high speed broadband to rural areas in the UK.