The Bloor Perspective: Blow to Broadband Britain, Orange's sales slide and CIOs' new optimism

The first signs of instability in the broadband market appeared this week with the collapse of the little known ISP, ET Global Solutions. The firm has been pushing cut-price, subsidised broadband solutions which, as many had expected, have proved unsustainable in the current climate. The hope now is that this isn't a sign of things to come.

The company had set out its stall offering broadband packages priced around the £18 mark. This was considerably cheaper than the general market wares, which are closer to £20-£25, and there was good reason for that: ET Global Solutions had slashed its profit margin to the bare bone in the hope of grabbing market share from the heavyweight soon-to-be market incumbents like BT and Freeserve.

Obviously this is a strategy that has failed quite miserably and its customers are now having to turn to fellow cut-price broadband vendor GIO Internet which has come in to pick up the pieces of ET Global Solutions' customer base. This might prove something of a fillip for customers who may be reassured by GIO's slightly greater trading history. ET Global Solutions was something of a start-up, coming to market young, with fresh ideas and a fresh approach.

Britain has already been through a debacle of this nature once or twice over the past couple of years. Most notable was the collapse of ISPs that were offering flat rate and unmetered access packages on dial-up. In this case they too were touting cut price, subsidised packages in the hope of building up a user base that, next year, it could charge the full price.

Unfortunately those scales were never balanced and the fall out had a devastating effect on Internet take-up and added to the misery of the general dot com collapse.

Obviously, the industry as a whole has learned some harsh lessons since then and we can only hope that few make the same mistakes as ET Global Solutions. But this might be the start of some minor fallout as is always the case when new technologies emerge. Let's just hope it isn't as bad this time round

Orange posts good Q3, warns of sales slip

Orange began to show some cracks in its finely polished marketing facade this week when it announced a sales warning in preparation for its final year results. It said that they would fall as much as 15 per cent behind expectations. But it shouldn't affect the company profits, we're told.

Speaking at the company's third quarter results jamboree, the firm's COO said that whilst handset sales were down on expectations, the big network spenders were spending more and the profit margin for the year should be unaffected. It's the monthly phone bills that are doing it. The average Orange UK customer is now spending an average of £258 - that's a rise of 3.2 per cent and enough to offset the balance in profits and sales.

Voice calls in particular have done well for Orange through the third quarter of 2002. This segment alone has seen the average revenue per user climb by 1.4 per cent to £222. Non voice traffic across the Orange network is continuing to build too. During the third quarter revenues from this segment rose to E1.203m - that's 10.5 per cent of its revenues.

Similarly with the overall value of the contracts Orange is pushing. The third quarter saw increases here of two per cent to £560 and for prepay customers an average rise of 2.5 per cent to £124.

The customers are still climbing aboard in their droves however. Orange Worldwide added 2.5 million new customers to its books through the first nine months of the year giving it a customer base 12.5 per cent larger than this time last year. The UK accounted for 673,000 of them, which includes 258,000 that joined in the third quarter of this year. That gives Orange a total UK customer base of 13.1 million.

And moreover they are gradually switching over to the more profitable contracts. This year contract holders accounted for 31.7 per cent of Orange's customer base compared with 29.6 per cent at the same time last year. Contracts seem to be wooing the punters with ease. 56.9 per cent of Orange's growth was on contract tariffs, compared to just 22.5 per cent for the same nine months in 2001.

CIOs point to upturn in mid 2003

Merrill Lynch's regular survey of CIOs has found some signs of optimism for the tech sector. Many of them see spending increasing in the second quarter of 2003. Better still, they're all utterly convinced about the need for technology in their firm.

Generally the feeling is that mid-2003 could be the real burner for the industry. CIOs quoted in the survey said that the backlog of user requests and the need for new projects would drive the spending.

But there was of course a caveat. The CIOs almost universally agreed that tech spending would be intimately tied to the effect of the economy on the profitability of their business. That's the same old story and one that's obviously never going to change. Comparing the realities of the geopolitical goings-on in the world with the CIOs' optimism doesn't make for pleasant reading of course. But, you never know.

That doesn't necessarily means that it's going to get any easier for the vendors however. It isn't. The CIOs polled by Merrill Lynch were asked for their opinions on various tech spending related statements. The one that the majority agreed with was that, "We are trying to negotiate down software maintenance fees."

When it does pick up it's a bit hazy what the CIOs are going to be spending their money on. When presented with the statement, "When spending improves we will buy hardware before software," they were pretty much split down the middle. Those that will plumb for software purchases next year are making some interesting moves.

There has been an intellectual debate for years over whether or not best of breed products are a better choice than, say, a full suite of integrated applications from SAP, Oracle, PeopleSoft etc. In the past the majority have voted with their wallets firmly in favour of best of breed. The Merrill Lynch survey suggests that this trend may be reversing, with more and more coming out in favour of the integrated application suite. In these times, when return on investment has taken priority, a well integrated suite of apps could seem very appealing.

Bloor Research is a leading independent analyst organisation in Europe. You can find out more at http://www.bloor-research.com or by emailing mail@bloor-research.com