[kictanet] Small Internet firms struggle not to fall to the big players... and what about KDN????

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Small Internet firms struggle not to fall to the big players
Written by Kui Kinyanjui

October 03 2007: Broke A$$?" asked an aging billboard along Nairobi's
Argwings-Kodhek Road. Get connected to the cheapest ISP." Apart from
its corny use of language, the billboard was fairly nondescript. It's
symbolism as a monument to the evolving Internet industry was more
apparent.

The ancient billboard belonged to Bidii.com, an up-start of an
Internet Service Provider (ISP) that challenged the both the norms of
advertising and the ISP business.

In its short-lived existence in 2001, the ISP managed to gain a
notable share of the lower-end Internet market. It was later
swallowed up by Africa Online, a much larger ISP, in a tale that is
familiar to many of the service providers who existed during the heady
years when acquisitions and mergers were the catch-words of the Kenyan
ISP market.

Gateway Online, ISP Kenya, Nairobinet and Net2000 were a few of the
casualties of the consolidation movement taking place in the market,
with most of them either running out of steam in the rapidly
competitive market or being bought by larger Kenyan operations.

And then, late last year, the buying started again. This time, the
bigger boys who managed to survive the rout of the earlier buying
spree were the target, and the buyers were not Kenyan. In 2006, a
South African firm acquired a controlling stake in Interconnect, a
local Internet service provider.

As part of the deal, IS injected Sh300 million in fresh capital in to
the ISP. "There was no way we could have continued on our own.

For many Kenyan grown ISPs, getting access to cheap bandwith and
financing makes it harder to survive in the market," said Mr Tejpal
Bedi, Managing Director of IS Kenya.

Much of the investment, Sh100 million, was set aside to upgrade systems.

The company planned to roll-out new technologies and services, hoping
to maintain its share of the corporate market by offering cost
effective virtual private networks to organisations.

"The only way we could maintain our market was by partnering with the
South Africans and diversifying our product line, which costs money,"
said Mr Bedi.

The acquisition was touted as part of the South African company's
growth strategy to gain a footprint in the local and the greater
Eastern and Central African market.

"We will ensure the product mix is right for the Kenyan market, by
deploying our proven services in Kenya," said IS business development
director Ermano Quartero, at a function to announce the deal.

The company that bought Bedi's company is one of the leading
converged communications service providers in South Africa, boasting a
client base at the time of the Interconnect aquisition that included
80 per cent of South Africa's top 250 listed companies.

A few months later, the industry was abuzz with the biggest
acquisition yet. The target was Africa Online, one of the largest
ISPs in sub-Saharan Africa – and the South Africans were after it
again. Telkom South Africa eventually won what was an acrimonious
battle for the Kenyan-born company.

"With the decline of the voice market we are extending and defending
our core profitable services. This acquisition fits that objective,"
said Africa Online's new Chief Executive Officer John Joseph.

Telkom SA has plans to invest Sh300 billion over the next five years
in projects aimed at gaining the company a foothold in key African
markets.

Formerly the giant of the Kenyan ISP industry, the South Africans took
on a company that was cash-strapped and had struggled with periods of
losses over the last few years under it ownership by London firm
African Lakes.

The situation may get worse for the few small ISPs still fighting for
market share.

Smaller ISPs have traditionally been dial-up providers, an industry
currently being affected by a shift in consumer preference.

Although over 50 per cent of users still use dial-up access, use of
the service is estimated to be decreasing by 30 per cent while mobile
and wireless Internet access is increasing by 40 per cent annually.

Up from just under 4,000 users in 1996, Kenya's Internet market grew
by its largest margins last year, and now includes 200,000 users. The
cost of international bandwidth, still expensive and accounting for
most of ISPs' operating costs, has largely limited more rapid growth.

Still, Kenya's Internet industry is set to grow more rapidly than ever
in the next five years according to new research from Frost and Sullivan.

In order to tap into that growth, Frost predicts small companies will
fall to larger Internet firms.

"Consolidation is likely to increase on the market between the
smaller market players in order to gain market competitiveness as the
Internet markets are currently dominated by a few major players," says
the report.

A large number of African ISPs are now controlled by large
international organisations, with a few "for Africa, by Africa" ISPs.
This is attributed to the high operating costs associated with ISPs
in the market.

"It is true that many of the ISPs are foreign owned however other
major firms are still Kenyan owned. By market share it is probably
50/50," said Mr David Somen, of Access Kenya.

His firm broke with tradition and sought local investment funds
through a listing on the Nairobi Stock Exchange earlier this year –
raising Sh800 million to fund its growth.

Access has since bought two Kenyan IT firms and is said to be on a
major spending spree.

"We believe that with the correct incentives there is no reason why
large ISPs should not remain Kenyan. There are great opportunities in
the ISP industry and Kenyans continue to invest in this business,"
said Mr Somen.

ISPs in Kenya still face three major challenges. They have limited
access to investment and venture capital; there is still a shortage of
skilled ICT personnel especially at management level; and Kenyans
themselves need to see more local content on the net to for demand for
Internet services to go up.

But allowing more foreign investment is often the only recourse many
ISPs have to keep their businesses running.

As a result, the industry regulator, the Communications Commssion of
Kenya (CCK) is said to be revising its rules to allow for Kenyan ISPs
to have more foreign ownership. Also looming on most providers' radar
screens is the increasingly urgent need to own their infrastructure.

"My prediction is that East Africa will become a global top ten ICT
hub within 10 years – we're betting the farm on the fact that this
will be the case," said Richard Bell, whose largely locally owned
venture capital firm, East Africa Capital Partners, took on Telkom SA
in the recent Africa Online buyout saga.
"The ISP industry is a "non industry".

Any ISPs that aren't dead already will die – it's just a matter of
time. The only business model with any legs on it is that of being an
Infrastructure provider," said Mr Bell, who firm has already made
three Kenyan acquisitions and one Tanzanian in that line.

Infrastructure ownership issues have also driven the latest purchase
by a South African firm of a Kenyan business.

Technology company Altech is said to be willing to pay nearly Sh5
billion for a 51 per cent stake in the Sameer Group's ICT division.

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