How to be Successful as a Broadband Service Provider

Guest article by Mike Roddy,  Managing Director of NuLine Partners, LLC

The deployment of billions of dollars of new broadband networks may result in areas of economic development and business growth, however, it is also likely to result in the unnecessary loss of countless investment dollars.  Venturing into the broadband business in competition with substantially-funded competitors and agile entrepreneurs is a business that requires significant planning, preparation, and proper execution.

Considerable news has been made of the Broadband Stimulus funds over the last 24 months.  Billions of dollars of low cost loans and grants have been distributed with the intention of bringing broadband access facilities to rural and “underserved” markets.  These Stimulus funds, coupled with the already high rate of municipal interest in entering the last mile broadband market has resulted in a new splurge in local broadband investment.

Obviously, results will vary.  Some very successful and some failures resulting in the loss of significant capital investment.  However, the capital-intensive nature of the business makes the stakes much higher and risks further disenfranchising communities when local (taxpayer) funds are involved

Critical to the success of the venture is the need for a sound business plan, knowledge of the market, competitors, product offerings, incumbent price points, anticipated response of competitors and consumers to a new market entrant, etc.  Are other competitors pursuing similar plans such that there may be three or more providers (inclusive of wireless) each anticipating an unattainable 35% or greater market share?  Detailed research and industry benchmarking can shed light on these questions and help adjust business model assumptions and expectations.

KNOW THE MARKET

Communities that are anxious about being underserved are certainly interested in pursuing competitive alternatives to the incumbents that they charge with under-serving them.  However, anyone interested in developing a competitive alternative needs to ask “How are we to recover our investment and achieve success?”  In order to recover the invested capital, the operation must stimulate new demand and / or capture significant market share from incumbent providers.

While constructing the network is fairly straightforward, costs vary significantly based on aerial vs. underground mileage, technology used, and what is deemed “distribution” vs “success-based” capital – that which you deploy for each new customer acquisition.  

The more difficult metrics are those that are not as tangible.  How do you plan to differentiate yourself?  Once in that position, how do you plan to sustain that differentiating factor?  For instance, can you achieve and maintain the position of ‘low cost’ or ‘high technology’ provider against a competitor with far deeper pockets?  Is being the ‘local’ or ‘customer-service oriented’ provider enough to capture and maintain a significant market share once your competition begins to react to your entry?  Does the market want or need the differentiating factors you plan to deliver?  How do you drive the appropriate culture of a competitive service organization?

Who are the competitors?  What resources are at their disposal to respond?  Are they able to deploy new technology and how does that impact the capital requirements and service offerings of your network?  How far can prices drop in this competitive market before the business plan is not viable?  What is the consumer perception of the competitors and how was that measured?  What are the competitive products that you bring to the market and how do you maintain their differentiation?  Price, speed, quality (or reliability) of service?

The answer to each of these questions will drive other business decisions.  Deploying a state-of-the-art network in your community will require significant capital.  Does the competitor have the resources to duplicate your investment?  In other words, can you continue to outpace your competitors in a technology race and what are the capital requirements of that decision?

A ‘high-touch’ customer-focused business plan is expensive.  Very short hold times for customer service, short installation and service windows, and ‘guaranteed’ service offerings require additional manpower, reduce operating margins, and therefore lengthens the time to positive cashflow.  

Identifying your point of differentiation and pursuing it with vigor, however, is critical.  Knowing key metrics of success and measuring them consistently will guide you to your end goal.

KEY METRICS

Knowing what key industry metrics are, and routinely benchmarking your operation against them will improve your chances for success.  In other words, what are the operating metrics of the most successful companies that operate in similar markets?  A few general metrics that will certainly indicate your likelihood of success are as follows:

Investment per home passed identifies the overall investment over the number of potential subscribers.  It is driven by the technology chosen (wireless, wireline, FTTx, etc), the density of residential and business prospects in the community, and the type of construction (aerial vs underground, urban vs rural, etc).  Furthermore, extending your network to the outer reaches of the market will likely reduce subscribers per mile density and increase costs significantly for this metric.  While aerial plant can be installed quickly and generally less-expensively, beware of large make-ready construction costs and ongoing pole attachment rates when building your business plan.

Market Share reflects the percentage of the market you serve over your network.  We only measure revenue-producing customers in this metric.  Last mile facilities typically need at least 25% of the end user market and they need that share within a short period.  The longer it takes to capture market share the less likely you are to achieve a return on your invested capital.  Clearly, the fixed network investment, spread over more customers, reduces the investment per customer and drives the likelihood of a positive return.  Market share is the single most important metric in determining the success of your network investment.  However, customers for customer sake is the wrong path – driving customers and ARPU through your marketing plan and not “we have cheap cable” will yield the best results.

Average Revenue per User (ARPU) reflects how much each customer is willing to pay for the services delivered.  In a typical triple-play model, the $100 metric is often the target.  Many will pay more, many will pay less.  However, as competition heats up, the ability to hold pricing at historical levels becomes difficult.  A capital intensive business in a declining price market with shrinking markets is a difficult place to compete.

Churn reflects at what rate customers leave your service altogether.  “Controllable” churn reflects those customers leaving you for reasons within your control – price is typically at the top of the list, but it also includes situations where the competition offers services that you do not, or perhaps the result of a poor customer experience.  Churn is often ‘masked’ or understated in the early period of network construction.  New customers are being added each month at a rate that suppresses the churn rate.  However, a stable customer base will reveal the real cost and impact of churn as time goes on.  It is a fact, that high-value, bundled customers churn at far lower rates than single-service subscribers that are much more likely to price shop their offering.  Developing strategies for addressing churn without initiating a price war is a challenging but necessary step in the business planning.

Capturing market share early is critical.  Having a marketing plan that can be executed before, during, and after construction is a key to success.  Communication to the community during this period will yield results.  New subscribers can become ‘advocates’ very quickly and good experiences will be shared and result in new customers.    

Controlling churn through the consistent delivery of a high-quality, affordable, product will pay dividends.  However, know that facilities-based competition has been around for a decade or more in some areas and as competition heats up, loyalty goes down.  Customers become very price sensitive and soon realize that the ‘barrier to change’ is not high.  Waiting a week or more and possibly losing a phone number in the portability process is a relatively low risk proposition these days.  Carriers often make cash offers, or offer to buy-out contracts, not unlike the days of long distance competition to capture new customers.  Those can be red flags for a significant new investment in broadband facilities.  Furthermore, creating networks for multiple carriers in Open Access environments may make the situation worse.   (Look for a subsequent article on the implications of Open Access decisions.)

CONCLUSION

In the end, having a sound business plan with measurable goals is a critical first step.  Managing the business to that plan as it is executed is necessary to identify when / if changes are necessary to either the plan or the execution.  Managing the costs to fit the revenue stream rather than hoping the revenues will catch up to the cost structure is much more likely to yield positive results.

Finally, a successful network deployment will be a ‘consumer’ (business or residential) driven model.  It is critical that the business model and plan execution consider the needs of the market, not simply the deployment of new technology.  History shows that the “if you build it they will come” model simply does not work.

CODA
Design & Construction

From concept to design and construction, the network development stage is largely driven by engineers and technical decisions.  What technology to deploy (FTTx, vendors, etc).  It is engineers that enable the deployment of the network whether in the air or underground.
Marketing & Sales:  Prior to the first mile of plant construction, there is a marketing plan to educate business and residential consumers on the products, advantages, and prices for services.  Effective marketing and sales efforts in advance of (and during) the network construction will assist in achieving  successful market share and return on investment.
Early marketing efforts should help focus early construction.  Building those areas where demand is most likely to be highest can stimulate customer interest in trying to “be first” and drive additional penetration.

Ongoing Operation

Following the completion of network construction, ongoing operations require consistent marketing and branding, network maintenance, and the tenacity of a competitor facing a plethora of competitors each trying to put them out of business.
This evolution requires an experienced team of professionals with a breadth of experience in critical disciplines.

Differentiation

Establishing your Company’s unique (and sustainable) position in the market is absolutely critical to minimize the risk of a ‘me too’ battle of carriers each offering a virtually indistinguishable set of services resulting in an unwinnable price war.
There is not an exhaustive list of differentiating characteristics.  
Technology:  May include the inherent network technology (FTTx), the related product offerings (higher speed data) or products your competitor(s) don’t offer (wireless, VOD, or access to programming online or anywhere).  This position is generally considered more capital intensive.  
Service:  Offering a ‘higher’ quality of service can be difficult message to deliver due to the intangibility.  It includes live operators, short appointment windows, and a higher ‘touch’ factor.  It may include the “local” company factor with a greater ability to respond to local needs.  Operationally, these decisions can drive significant operating costs, lowering long-term margins, and lengthening the time to a return on your investment.
Price:  Competing on price is not a preferable position in a capital intensive business.  Given that many incumbent providers are starting from much better competitive positions, competing on price is a negative for all providers, but in the long term probably favors the incumbent.

Commercial  Service Offering

A network aimed at the entire market obviously needs to target the commercial districts of a market.  In fact, during network design, these should be some of the earliest areas constructed.  They will employ the highest fiber counts and generate the most revenue per subscriber.
Long term, the commercial subscribers become complementary and very high-margin subscribers.  These customers share a network with the residential subscribers, but their network demand is generally during the day while the residential demand is in the evening and night time.  
In other words, the revenue stream from the two networks contribute to the common network costs at a much higher rate.