A Framework for Analyzing Strategies of Internet Service Providers (ISP)

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A Framework for Analyzing Strategies of Internet
Service Providers (ISP)

• By Erik Wierstra, Gabriele Kulenkampff, Hans
  Schaffers
• Presented by Ron Johnson

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Objectives

• To Provide an analysis of developments in markets
  for Internet Services
• Identify key factors affecting the competitive
  position of Internet Service Providers
• Develop Scenarios describing the further
  development of the ISP industry

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Developments in ISP Market

• Internet technology and Services
• INTserv (Integrated Services) Technology focuses
  on end user to end user QoS per data flow
• DIFFserv (Differentiated Services) Technology
  supports capacity division in different pipes
  each with a different capacity

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Developments in ISP Market

• Internet Business Innovation creates new
  technology making way for new services
• Regulatory and Policy Issues
• Network Dependency may affect strategic
  innovation quality of services

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Developments in ISP Market

• Different actors on the ISP-supply side
• Global Operators (GlobalOne, Concert, MCI
  Worldcom).
• National Telecom Operators (cf. EUnet, Ebone).
• New Entrants
• National or regional ISPs

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Developments in ISP Market (contd)

• Internet Service Provider Growth

• Internet User Increases

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Framework for Analyzing ISP Competitiveness

• Elements in Analyzing Competitive Advantages are
  derived from Porter include
• Competitive forces, determining industry
  profitability (attractiveness)
• Value Chain concept aiding source of competitive
  advantage and development of strategies in cost
  and differentiation

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Framework for Analyzing ISP Competitiveness

• Value Chain Activities and its Representation

Value Activity (infrastructure and intermediary services) Internet Services Main Cost Components
Infrastructure Supply of network accessing the Internet Access Provider (IAP) IP-transport, Telephony (dail up) Lines, interconnection, hardware, software, labor
Supply of access network (connecting the IAP with an ISP connected with the Internet backbone) IP-transport Lines, Interconnection, hardware, software, labor
Supply of backbone IP-transport Lines, Interconnection, hardware, software, labor
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Framework for Analyzing ISP Competitiveness

• Analysis is based on the following 5 dimensions
  of strategy

1. Factor Inputs This dimensions relates on the
   technological, capital, and labor inputs
2. Value Chain Structure Specific value chain
   structure as well as what influences buying
   choices
3. Product Portfolio Characterized by the services
   offered (IP transport, Web Hosting, email, etc.)
4. Pricing Policy Flat fee compared to usage based
   pricing
5. Market Segmentation Geographical scope and user
   categories

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Framework for Analyzing ISP Competitiveness
Conceptual Framework for analyzing competitive
position
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Factors Affecting ISP competitiveness

• Impact of factor input choices
• Impact of cost provisions of service may create
  cost advantage
• Impact of characteristics of output may result in
  an advantage by differentiating the services from
  competition

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Factors Affecting ISP competitiveness

• Using advanced network infrastructure over mature
  network

• Advantages
• Higher productivity
• Reduced expenses for network operations
• Increased reliability of network services

• Disadvantages
• Technology can be quickly outdated
• Higher initial investment

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Different Types of ISPs and their competitiveness
Features Incumbent telco New Carrier Small, regional ISP
Inputs Capital intensive (inter)national Mature Technology Highly capital intensive (advanced), (international) Less capital intensive, less advanced, mature technology
Functional value chain Vertically Integrated Ownership of infrastructure Not vertically integrated
Product Portfolio Basis portfolio other services Usage oriented Flat, fee bundling of services
Pricing and bundling Flat fee, bundling of access and dial up Business Residential business regional
Market segmentation Residential, (Inter)national Business Residential, business
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Different Types of ISPs and their competitiveness

• Examples

Incumbent Telco New Carrier Small, Regional ISP
IVM and Angel, Vuurwerk and A1
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Different Types of ISPs and their competitiveness
Incumbent Telco New Carrier Small, Regional ISP
High density of nation-wide structure (location advantage) Telephony service (Expertise in reliable services) High international network infrastructure International scope of the network infrastructure Can provide more customized services
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Different Types of ISPs and their competitiveness

• Incumbent Telco
• Strengths One stop shop for customers. Higher
  level of control over network allowing higher
  guarantee for QoS
• Weaknesses Using older technology
• Opportunity Updating technology
• Threats Increased competition

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Different Types of ISPs and their competitiveness

• New Carrier
• Strengths High degree of control over network
  making it easier to provide QoS
• Weaknesses Not as well known as the incumbent
  telco
• Opportunity Face the competition for back bone
  capacity with the pricing of incumbent telcos
• Threats External factors

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Different Types of ISPs and their competitiveness

• Small Regional ISP
• Strengths High quality of services and extremely
  flexible
• Weaknesses Only can provide service in very
  limited region. Cannot garauntee QoS due to
  factors outside of company control
• Opportunity Find niche market
• Threats External factors

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Different Types of ISPs and their competitiveness

• Volatile External Factors
• Technology Possibility of new technology
  changing industry
• Regulation and policy Changes in interconnection
  agreements, competition policies, regulations
  concerning intellectual property
• Market Structure New players and essential
  market characteristics
• Customer Needs Developments in preferences and
  trade-offs, pace of adaption of Internet
  services, penetration of services and Internet
  access rates.

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Discussion and Conclusion

• Goal was to develop an analytical framework for
  analyzing business strategies for ISPs
• The focal points of this article were the impacts
  of production characteristics on cost and
  opportunities for product differentiation
• Despite certain limitations this analysis gives
  bases for identifying successful ISP strategies

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Bibliography

• A Framework for Analyzing Strategies of Internet
  ServiceProviders
• Erik Wierstra, Gabriele Kulenkamff, Hans
  Schaffers. Netnomics Economic
• Research and Electronic Networking Amsterdam
  June 2001. Vol 3, Iss 1, p. 35