A Framework for A Framework for Analyzing Strategies of Analyzing Strategies of

Internet Service Internet Service Providers (ISP)Providers (ISP)

By: Erik Wierstra, Gabriele Kulenkampff, By: Erik Wierstra, Gabriele Kulenkampff, Hans SchaffersHans Schaffers

Presented by: Ron JohnsonPresented by: Ron Johnson

ObjectivesObjectives

To Provide an analysis of developments in markets To Provide an analysis of developments in markets for Internet Servicesfor Internet Services

Identify key factors affecting the competitive position Identify key factors affecting the competitive position of Internet Service Providersof Internet Service Providers

Develop Scenarios describing the further Develop Scenarios describing the further development of the ISP industrydevelopment of the ISP industry

Developments in ISP MarketDevelopments in ISP Market

Internet technology and ServicesInternet technology and Services INTserv (Integrated Services): INTserv (Integrated Services):

Technology focuses on end user to end Technology focuses on end user to end user QoS per data flowuser QoS per data flow

DIFFserv (Differentiated Services): DIFFserv (Differentiated Services): Technology supports capacity division Technology supports capacity division in different pipes each with a different in different pipes each with a different capacitycapacity

Developments in ISP Market Developments in ISP Market

Internet Business Innovation creates Internet Business Innovation creates new technology making way for new new technology making way for new servicesservices

Regulatory and Policy Issues Regulatory and Policy Issues Network Dependency may affect Network Dependency may affect

strategic innovation quality of servicesstrategic innovation quality of services

Developments in ISP MarketDevelopments in ISP Market

Different actors on the ISP-supply Different actors on the ISP-supply sideside

1.1. Global Operators (GlobalOne, Concert, Global Operators (GlobalOne, Concert, MCI Worldcom).MCI Worldcom).

2.2. National Telecom Operators (cf. National Telecom Operators (cf. EUnet, Ebone).EUnet, Ebone).

3.3. New Entrants New Entrants

4.4. National or regional ISPsNational or regional ISPs

Developments in ISP Market Developments in ISP Market (cont’d)(cont’d)

Internet Service Internet Service Provider GrowthProvider Growth

Internet User Internet User IncreasesIncreases

Framework for Analyzing Framework for Analyzing ISP CompetitivenessISP Competitiveness

Elements in Analyzing Competitive Elements in Analyzing Competitive Advantages are derived from Porter Advantages are derived from Porter include;include;

Competitive forces, determining industry Competitive forces, determining industry profitability (attractiveness)profitability (attractiveness)

Value Chain concept aiding source of Value Chain concept aiding source of competitive advantage and development of competitive advantage and development of strategies in cost and differentiationstrategies in cost and differentiation

Framework for Analyzing Framework for Analyzing ISP CompetitivenessISP Competitiveness

Value Chain Activities and its Representation

Value Activity Value Activity (infrastructure (infrastructure

and intermediary and intermediary services)services)

Internet ServicesInternet Services Main Cost Main Cost ComponentsComponents

Infrastructure: Supply Infrastructure: Supply of network accessing of network accessing the Internet Access the Internet Access Provider (IAP)Provider (IAP)

IP-transport, IP-transport, Telephony (dail up)Telephony (dail up)

Lines, Lines, interconnection, interconnection, hardware, software, hardware, software, laborlabor

Supply of access Supply of access network (connecting network (connecting the IAP with an ISP the IAP with an ISP connected with the connected with the Internet backbone)Internet backbone)

IP-transport IP-transport Lines, Lines, Interconnection, Interconnection, hardware, software, hardware, software, laborlabor

Supply of backboneSupply of backbone IP-transportIP-transport Lines, Lines, Interconnection, Interconnection, hardware, software, hardware, software, laborlabor

Framework for Analyzing Framework for Analyzing ISP CompetitivenessISP Competitiveness

Analysis is based on the following 5 dimensions of strategy: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

Framework for Analyzing Framework for Analyzing ISP CompetitivenessISP Competitiveness

Conceptual Framework for analyzing competitive position:

Factors Affecting ISP Factors Affecting ISP competitivenesscompetitiveness

Impact of factor input choicesImpact of factor input choices

Impact of cost provisions of service may Impact of cost provisions of service may create create cost advantagecost advantage

Impact of characteristics of output may Impact of characteristics of output may result in an advantage by result in an advantage by differentiating differentiating the services the services from competitionfrom competition

Factors Affecting ISP Factors Affecting ISP competitivenesscompetitiveness

AdvantagesAdvantages Higher productivityHigher productivity Reduced expenses Reduced expenses

for network for network operationsoperations

Increased reliability Increased reliability of network servicesof network services

DisadvantagesDisadvantages Technology can be Technology can be

quickly outdatedquickly outdated Higher initial Higher initial

investmentinvestment

Using advanced network infrastructure over Using advanced network infrastructure over mature network:mature network:

Different Types of ISPs and Different Types of ISPs and their competitivenesstheir competitiveness

FeaturesFeatures IncumbeIncumbent telcont telco

New New CarrierCarrier

Small, Small, regional regional

ISPISP

InputsInputs

Capital Capital intensive intensive (inter)national (inter)national Mature Mature TechnologyTechnology

Highly capital Highly capital intensive intensive (advanced), (advanced), (international)(international)

Less capital Less capital intensive, less intensive, less advanced, advanced, mature mature technology technology

Functional Functional value chainvalue chain

Vertically Vertically IntegratedIntegrated

Ownership of Ownership of infrastructure infrastructure

Not vertically Not vertically integrated integrated

Product Product PortfolioPortfolio

Basis portfolio Basis portfolio + other + other servicesservices

Usage orientedUsage oriented Flat, fee Flat, fee bundling of bundling of servicesservices

Pricing and Pricing and bundlingbundling

Flat fee, Flat fee, bundling of bundling of access and dial access and dial upup

BusinessBusiness Residential Residential business; business; regionalregional

Market Market segmentationsegmentation

Residential, Residential, (Inter)national(Inter)national

BusinessBusiness Residential, Residential, businessbusiness

Different Types of ISPs and Different Types of ISPs and their competitivenesstheir competitiveness

Examples:Examples:

Incumbent Incumbent TelcoTelco New CarrierNew Carrier Small, Small,

Regional ISPRegional ISP

IVM and IVM and Angel, Angel, Vuurwerk Vuurwerk and A1and A1

Different Types of ISPs and Different Types of ISPs and their competitivenesstheir competitiveness

Incumbent Incumbent TelcoTelco New CarrierNew Carrier Small, Regional Small, Regional

ISPISP High density High density of nation-wide of nation-wide structure structure (location (location advantage)advantage)

Telephony Telephony service service (Expertise in (Expertise in reliable reliable services)services)

High High international international network network infrastructureinfrastructure

International International scope of the scope of the network network infrastructureinfrastructure

Can provide Can provide more more customized customized servicesservices

Different Types of ISPs and Different Types of ISPs and their competitivenesstheir competitiveness

Incumbent TelcoIncumbent Telco Strengths: One stop shop for customers. Strengths: One stop shop for customers.

Higher level of control over network Higher level of control over network allowing higher guarantee for QoSallowing higher guarantee for QoS

Weaknesses: Using older technologyWeaknesses: Using older technology

Opportunity: Updating technologyOpportunity: Updating technology Threats: Increased competitionThreats: Increased competition

Different Types of ISPs and Different Types of ISPs and their competitivenesstheir competitiveness

New CarrierNew Carrier Strengths: High degree of control over Strengths: High degree of control over

network making it easier to provide QoSnetwork making it easier to provide QoS Weaknesses: Not as well known as the Weaknesses: Not as well known as the

incumbent telcoincumbent telco Opportunity: Face the competition for Opportunity: Face the competition for

back bone capacity with the pricing of back bone capacity with the pricing of incumbent telcosincumbent telcos

Threats: External factorsThreats: External factors

Different Types of ISPs and Different Types of ISPs and their competitivenesstheir competitiveness

Small Regional ISPSmall Regional ISP Strengths: High quality of services and Strengths: High quality of services and

extremely flexible extremely flexible Weaknesses: Only can provide service Weaknesses: Only can provide service

in very limited region. Cannot in very limited region. Cannot garauntee QoS due to factors outside of garauntee QoS due to factors outside of company controlcompany control

Opportunity: Find niche market Opportunity: Find niche market Threats: External factorsThreats: External factors

Different Types of ISPs and Different Types of ISPs and their competitivenesstheir competitiveness

Volatile External FactorsVolatile External Factors Technology: Possibility of new technology changing industryTechnology: Possibility of new technology changing industry

Regulation and policy: Changes in interconnection Regulation and policy: Changes in interconnection agreements, competition policies, regulations concerning agreements, competition policies, regulations concerning intellectual propertyintellectual property

Market Structure: New players and essential market Market Structure: New players and essential market characteristics characteristics

Customer Needs: Developments in preferences and trade-Customer Needs: Developments in preferences and trade-offs, pace of adaption of Internet services, penetration of offs, pace of adaption of Internet services, penetration of services and Internet access rates.services and Internet access rates.

Discussion and Discussion and ConclusionConclusion

Goal was to develop an analytical framework Goal was to develop an analytical framework for analyzing business strategies for ISPsfor analyzing business strategies for ISPs

The focal points of this article were the The focal points of this article were the impacts of production characteristics on cost impacts of production characteristics on cost and opportunities for product differentiationand opportunities for product differentiation

Despite certain limitations this analysis gives Despite certain limitations this analysis gives bases for identifying successful ISP bases for identifying successful ISP strategiesstrategies

BibliographyBibliography

A Framework for Analyzing Strategies of Internet ServiceProvidersA Framework for Analyzing Strategies of Internet ServiceProviders

Erik Wierstra, Gabriele Kulenkamff, Hans Schaffers. Netnomics: Erik Wierstra, Gabriele Kulenkamff, Hans Schaffers. Netnomics: Economic Economic

Research and Electronic Networking Amsterdam: June 2001. Vol 3, Research and Electronic Networking Amsterdam: June 2001. Vol 3, Iss 1, p. 35Iss 1, p. 35