Speakers at the IIR's xDSL Summit conference in Geneva, Switzerland, share their advice for achieving profitability in the Small- and Medium-sized Enterprise (SME) xDSL market.

by John Bosnell of Point-Topic [August 1, 2001]

Winning the business of small and medium enterprise (SME) customers was a major theme of IIR's xDSL Summit conference in Geneva (10-11 July 2001), supported by Point Topic. Many speakers looked at strategies for achieving profitability in the SME market, and here we summarise their key conclusions.

DSL: the current situation
Since initial deployment in 1999 and 2000, the DSL rollout has continued steadily. For example, there are now over 3.5 million DSL lines in service in North America and 3.3 million in Korea. But the failure of some American DSL CLECs, including NorthPoint in March 2001, has meant that banks have become very cautious towards DSL recently.

Much of the early financing for DSL CLECs was based on ambitious and costly targets for rollout (usually measured by the number of COs with DSLAMs installed). The watchword then was 'win subscribers at any cost'. But the downturn in the financial markets' view of telecoms means that CLECs must switch attention from subscriber numbers, and present their business plans in terms of the profits that DSL can bring by selling useful services.

Many attendees agreed that they can sell profitable services based on DSL to SMEs. Regulators are also moving from a 'physical' model of competing networks to a 'virtual' model of competing services to benefit the consumer.

Why are SMEs seen as profitable?
A simple division of the telecoms market gives three types of customer: residential, SME (under 500 employees), and large corporate (over 500 employees).

Traditional incumbent telcos are used to serving the needs of large corporations, with teams of account managers providing global VPNs and other services. Although profits are high, this market is hard for new entrant DSL operators to crack.

Residential DSL customers are more price sensitive than business customers, and margins are low or non-existent at the moment. The market is moving towards a commoditizaton of DSL access, with 500 Kbps Internet access in the USA currently around the $50 per month mark, which leaves almost no room for profits in the short to medium term.

Approximate figures presented by Justin Fielder of European IP and DSL provider Easynet show the low revenues that can currently be expected from residential DSL.

The annual revenues from 5% DSL penetration in a typical central office (CO) serving 25,000 residential customers, with the operator having a tenth of the market share, offering a £25 per month service, would be

25,000 x 0.05 x 0.1 x 12 x £25 = £37,500

But for the same central office, which also serves 5,000 business (mostly SME) customers, with 15% taking a DSL service at £130 per month, the annual revenues would be

5,000 x 0.15 x 0.1 x 12 x £130 = £117,000

This analysis shows the greater revenue potential of SMEs. Given the high costs of colocation (see footnote 1) or bitstream, this is the difference between a profitable and a loss-making business.

Strategies to profit from SME customer revenue
There are several stages to finding and keeping profitable SME customers.

1. Find the qualified customers
In the current climate in the telecommunications industry, it is not possible to get funding to build a network first, then wait for the customers to come. Initial targeting of prospects can come from incumbent databases that give details of the types of customer connected to each central office. For example, in the UK, the top 500 central offices have between 10,000 and 25,000 customers, but between 500 and 5,000 business customers. Finding the right COs with DSL-qualified customers means that operators can target investment most effectively.

2. Don't sink too much money into network infrastructure initially
Although DSL equipment costs per subscriber have fallen up to six-fold since early 1997 (see footnote 2), the costs of unbundled access are high in Europe. Installing serviced rack space can cost up to 70,000 Euros in the Netherlands.

European IP and DSL operator Easynet is using Bitstream (wholesale) DSL services to connect its SME customers initially. This enables it to identify the most profitable central offices. It can then make an informed choice of the central offices in which it is worth investing in colocation space to offer an unbundled service.

3. Use automatic provisioning
Operators that have successfully deployed DSL in competitive broadband markets, such as Belgacom and Korea Telecom, show the importance of automation. Research from some vendors suggests that there can be between 250 and 500 steps in the provisioning process from start to finish. Automation increases the speed and reduces the cost of rollout, and minimizes error.

For a profitable operation, it is therefore essential to automate the progression through line qualification, connection provisioning, CPE installation, service verification, and integration with back office systems.

Automation should also bring better technical support, which is a service differentiator. And it allows the monitoring which is the basis of service level agreements (SLAs—see item 6 in this list).

4. Add Voice over DSL (VoDSL)—although it's not easy
Voice is the essential service for SMEs, and VoDSL allows CLECs without access to network infrastructure to win voice revenues from the incumbent. VoDSL should enable significant increases in the average revenue per user (ARPU).

However, VoDSL is still relatively untested in the marketplace, although Mpower reports that around 10% of its DSL customers also use VoDSL. Customers will expect the same reliability that they currently enjoy from the public switched telephone network (PSTN)—and regulators may insist on this for emergency services.

Data operators have no experience of selling, operating, and billing voice services, so having the right operational support system is important. The operator also needs to have the necessary interconnect agreements in place. This complex area could provide a new opportunity for VoDSL service providers to offer voice expertise to CLECs entering the voice market for the first time.

5. 'Up sell' more value-added services over time
Most operators and analysts are agreed that the key to profitability, and therefore survival, is to sell bundled services to SMEs that add value and provide margins. This depends on a motivated sales force to add more services to the bundle. For example, an initial contract to provide an SDSL data leased-line replacement could be enlarged to include Web hosting and centrally managed security, firewalls and virus protection. Voice services could than be added, followed by VPN services, possibly to enable teleworking. Finally, video over VDSL for conferencing or training will soon be available.

6. Implement service level agreements with teeth
Service Level Agreements (SLAs) are an important component of selling value added services. After all, business customers view telecoms services as business critical. They are used to SLAs saying that their leased line will be replaced within a fixed time if it fails)—or the telco will compensate them generously.

The up-front guarantee of SLAs gives customers the peace of mind that their new Voice over DSL services are not going to fail every week or every month. Automated operational support systems make it much easier to monitor key metrics about the service continuously. This in turn makes it easier for both operator and customer to have all the information they need about service performance (for example, via a secure Web site).

Of course, guaranteeing high-quality SLAs for business customers is not free. Operators will need to invest in staff and equipment to meet their obligations. Staff-to-customer ratios will have to be higher for business customers than for residential subscribers. Furthermore, there is an isues concerning what happens when the customer's traffic leaves its operator's network, and crosses, for example, to the incumbent's backbone. Currently this is an unresolved issue in DSL provision, and for SLAs to work, operators and regulators will have to collaborate internationally to ensure minimum service standards.

Conclusions
The market potential for DSL is good, especially in Europe where average copper loop lengths are lower than the US. SMEs, currently paying high prices for voice services and leased lines, are profitable prospects for operators. VoDSL software and equipment, new integrated access devices for the customer premise and improved OSS all make it possible for CLECs with DSL infrastructure to give SMEs what they want: bundled services of voice, data (and later video) with guaranteed service and at a competitive price.

Notes

(1) Easynet's outline figures are for colocation space in the UK.

Capital Costs

Colocation space preparation £50,000

DSL equipment £20,000

Backhaul installation £10,000

Annual Costs

Colocation rental £5,000

Equipment maintenance £2,000

E3 backhaul rental £30,000

Total 3 year cost = £191,000.

Assuming a gross margin of 30% (i.e. after marketing and provisioning costs), these costs require 650 residential subscribers per CO at £25 per month, but only 125 business subscribers at £130/month.

(2) DSL supplier Accelerated Networks quotes the following approximate prices per subscriber. It suggests that variations are partly due to historical differences in equipment pricing between North America, Europe and Asia, and partly due to the fact that many US operators signed contracts first, when equipment costs were higher. Cost per subscriber, North America, 1997 = $1000. Cost per subscriber in mid-2001. USA = $300-350, Europe = $200-250, Asia = $130-170.

— End

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