Consolidation And Change Seem To Be The Only Certainties For Asian ISPs

The ISP market in Asia has become a boiling cauldron of activity. From consolidation, to government deregulation and initiatives, to challenges brought on by the fall of regional currencies, the Asian ISP market promises to be turbulent and evolving in the years to come.

"Asia is all over the map right now," says Jason Ma, Managing Director for IPass Asia Pacific, a global roaming and remote access services company with a strong presence in the region. "The Asian ISP market is so heterogeneous that there is no way to make blanket assertions about where it is going."

The overall terrain on the Asian ISP scene is certainly diverse. Japan, for example, is the largest ISP market in Asia with over 3000 ISPs comprising a tremendous range in size and quality; Malaysia, on the other hand, has only two ISPs and a few small service providers throughout the country.

With this type of variation, it is a challenge to nail down the machinations of the Asian market. But despite the diversity of the Asian ISP market, there appear to be a few trends that most of the region has in common.

Growth, Change, Government Initiatives:

The Asian Internet services market appears to be growing as ISPs jockey for position in a rapidly changing marketplace. According to IDC Asia-Pacific, an Internet research firm, the Asian market is expected to grow, with several regions expected to see the total number of Internet users jump to twice their current levels. Strong performing markets include China, expected to jump from .3 to .8 million users within the year. Hong Kong and Malaysia are expected to double from .2 to .4 million users, and Singapore, India, and Thailand soon expected to jump to .2 million users, up from .1 million at the beginning of 1998.

Asian companies are also expected to spend more on Internet-intranet despite their economic difficulties. The Xinhua News Agency quoted IDC Managing Director Dennis Philbin as saying that while Asian companies are cutting spending on information technology (IT), they are increasing the portion spent on Internet-intranet projects from 6.2 percent in 1997 to 20 percent of IT spending by the year 2000. In 1997, the Asia-Pacific region excluding Japan spent 50.2 billion U.S. dollars on IT, up ten percent from the previous year.

IDC predicts that the Asian market will grow to 88.2 billion U.S. dollars by 2002, with China witnessing the highest growth. More Internet surfers are expected to found in China by 2001 than in any other Asian country outside Japan. IDC has also predicted that China will surpass Australia as Asia’s top Internet used and will have an estimated 9.4 million users by 2002.

Thailand: A Case Study

The largest problem facing Asian ISPs has been the devaluation of regional currencies. The leased lines that service providers use to connect to the North American Internet backbone are priced in US dollars so the price, in local currency, has risen substantially over the past two years.

Thailand, a country hit hard by the Asian economic crisis, has seen its growth in the number of Internet users slow recently due largely to the crisis. In addition to high costs of doing business, Thai ISPs have had to deal with the policies of the Communications Authority of Thailand who has created a challenging environment for Thai ISPs.

"Before its fall in the economic crash of 1997, Thailand was growing rapidly and expected at least 1 million subscribers by the end of that year. The post-crash reality has proven quite different," said Pradit Pinyopasakul, Business Development Manager of local ISP leader KSC Group, who has 30,000 individual and 200 corporate subscribers, "The Thai market has only 550,000 subscribers right now with over 50 percent of Internet use generated by education and institutions."

Government initiatives have not helped. First, as a highly regulated environment, Thai ISPs are required to submit 35 percent of their stock and 35 percent of revenues to the Communications Authority of Thailand (CAT). Also, CAT implemented a new pricing structure in 1997 that abolished the floor-pricing requirements ISPs could charge subscribers. To offset the reduction, CAT promised to reduce the cost of international links 15 percent for ISPs. The CAT claimed the new price structure was necessary to boost Internet use, which has yet to pan out.

Thai ISPs are battling to keep their heads above water; in addition to losing revenue as a result of wide spread price reductions, Thai ISPs have seen their investment costs rise 20 fold as result of the new rate. In addition, international links accounting for 40 percent of ISP costs have risen massively. "Before the crisis there were 20 ISPs--since then the number has shrunk to about seven Thai ISPs’" said Pinyopasakul, "There is severe competition in the Internet market. Because all ISPs have to compete to attract customers reducing prices is one of their strategies. Unfortunately price reductions have gotten so low that it has been difficult to stay in business."

Consolidation

Over the past two years, there appears to have formed two distinct segments for ISPs in the Asian market. The first is for connecting consumers to the Internet, which has created a race among ISPs to bolster market share; the second is for corporate business, where ISPs are scrambling to adapt to an explosive demand.

The number of smaller ISPs in many parts of Asia is has been dwindling since the fall of regional currencies as the costs of providing the necessary Internet links to the U.S. is high. Telecom links are usually priced in U.S. dollars, whereas local ISP revenues are priced in local, and recently devalued, curries. In a market that was already challenged, the fall of Asian currencies due to the economic crisis hit regional ISPs very hard and created an environment ripe for buyouts.

Large ISPs, who are more immune to the currency devaluations of recent years, are buying up regional service providers in attempt to both gain market share and to plug into an existing network that can be used as a springboard for growth. This probably explains why in just over three months, US-based PSINet has come from virtually nowhere in Asia to command a prominent position in the regionís changing market for Internet services.

"We love the small ISP sector, which is where the heart and should of the Internet resides," says Jeffrey Shaprov, Director of Strategic Development for PSINet. "Smaller ISPs are entrepreneurial, they respond quickly to change and the needs of customers, and partnering with them has great working potential in a rapidly changing marketplace." Shaprov believes that the winners in the topsy-turvy Asian market will be well capitalized, large ISPs and smaller companies who can maneuver in light of the shifting marketplace medium sized, undercapitalized ISPs are in a position to be hit the hardest.

PSINet’s recent purchases include three ISPs in Japan: market leader Tokyo Internet Corp., RimNet and Twics KK. In Hong Kong, PSINet subsidiary Linkage Online acquired first Hong Kong Internet & Gateway Services, and later AsiaNet, Huge Net and Spider Net. It also picked up Inet, a South Korean provider. All recent purchases have been estimated by PSINet to add $50 million annually to revenues.

PSINet’s recent acquisition of regional ISPs is a sign of consolidation in the business of supplying Internet access and the more newly emerging market for customized services for corporations. "Business users' demand for services beyond pure access to the World Wide Web is increasing," said Pete Hitchen, senior analyst for IDC Asia-Pacific, "Only large players can provide these types of services. So a lot of smaller ISPs in the market are building up their muscle by acquiring companies and forming business partnerships." IDC expects this trend to continue.

Deregulation

Although consolidation is happening as larger ISPs buy up smaller companies, Shaprov believes the Asian market is simultaneously entering a growth period where a lot of small ISPs will hit the scene as a result of recovering economies and government deregulation.

"Most of the markets in the Asian Pacific region have been tightly held entities in a somewhat monopolistic structure," says Shaprov, "Up to now the telecommunications sector has been highly protected by the governments. Often there are very close connections between the relevant telecom regulatory agency and the dominant local carrier, which usually began life as a branch of the government. There are a lot of vested interests that have been protected."

The Asian ISP market has been limited by government regulation as a result of high costs and access to bandwidth. Many believe that deregulated markets in Asia will open the door to a new period of growth and that smaller, focused ISPs are in a very good position to whether the economic storm and emerge as focused, niche players catering the needs of business.

Deregulation can be a slow process, but in light of pressures from the World Trade Organization since the economic crisis, things have been moving along pretty quickly. "With deregulation comes lowered costs for consumers as well as a better playing field for ISPs to prosper and the Internet to emerge in the region. Now that the markets of Asia are beginning to deregulate, things are really going to take off in Asia."

PSINet, as the budding leader of the Asian market, understands and thrives on the change that is taking place throughout the region. "Our favorite environment is a market that has just deregulated, and in total chaos, and the dominant carrier still thinks they are dominant but is rapidly losing market share. It this type of transitional market in the wake of deregulation that holds lots of opportunity," says Shaprov.

The most promising market with entry potential in Asia is Japan, second to Australia. "Right now, the Japanese market is as big as all of Asia taken together," says Shaprov. Key markets to watch are China, India, and Singapore important commercial hubs that are highly protective and remain uncertain with regard to their level and pace of deregulation.

Catering To Business

Large telecoms, which already have the necessary trans- Pacific connections, are often the only companies able to compete in the low-margin consumer market and the high-end corporate sector. In response, smaller, regional ISPs are moving toward supplying the small to medium sized business community with a range of custom Internet services.

"The corporate market appears to be the most promising market for Asian ISPs," says Ma of Ipass, "ISPs that will thrive will go toward the needs of businesses who are looking for more than just access to the Internet. Up to now businesses have been in-housing the entire process and have spent a lot of money on traditional solutions. ISPs that focus on cutting edge solutions from high speed access, to virtual private networking will develop profit centers that go beyond the highly competitive market of consumer users."

High-speed access has been slow in coming to many parts of Asia as a result of cost and infrastructure limitations. Bangkok-based service provider Info news Company, Ltd. Launched a new service that allows customers to access the Internet through ISDN lines in an attempt to lure in more corporate clients wanting to reduce the cost of establishing Internet connects.

"Internet via ISDN is our strong point now that competition in the Internet market is severe." The expansion of the service depends on the Telephone Organization of Thailandís (TOT) strategy to expand the implementation of ISDN infrastructure. TOT also plans to expand its ISDN network to cover other provinces outside Bangkok.

Several companies in Hong Kong plan to implement broadband access and application services by yearís end. Hutchison Telecom, which launched its Internet service last year, plans to spend HK8 billion over the next three to five years build an international gateway and upgrade its fixed-line telephone network for broadband. "The 2Mbps broadband Internet service is under planning and development stage," said Sammy Tse, director of international and multimedia services, "We expect to launch the service in early 2000. Major challenges have involved the cable infrastructure and regulatory restrictions."

Asian ISPs Bonding Together

In addition to consolidation and buyouts, some Asian ISPs have formed strategic partnerships with competitors, creating mutually beneficial relationships to survive and thrive in the market. Last March, AboveNet Communications Inc., the architect of a global one-hop network that brings together high bandwidth content sites and ISPs in centralized co-location facility, announced an alliance with Singapore Telecom (SingTel). The arrangement will provide SingTel who has direct connections to more than 20 countries with U.S. presence and a direct connection into the U.S. for its ISP and high bandwidth content site customers.

To deal with the rising challenges of the Thai ISP market, local ISPs banded together, forming the Internet Service Providers Club, a cooperative organization aimed at surviving the economic crisis and competition from international ISPs expected to target Thailand in three years when the telecommunications industry is liberalized. The club aims to promote Internet use and share resources among members, such as information on Internet movements and international linking bandwidths.

"Cooperation among ISPs is possible in many ways, even the sharing of nodes." Although the Thai economy appears to be stabilizing, and ISPs have implemented survival tactics, most ISPs are braced for a rapidly changing marketplace and the challenges it will present.