No free broadband for businesses

David Meyer
ZDNet UK
August 01, 2006, 09:20 BST

Analysis: Consumers can now choose from a number of 'free' broadband services, but businesses won't be offered similar schemes any time soon, or even see a significant price drop

The last two months have seen the emergence of a number of supposedly "free broadband" offers aimed at UK home users. Carphone Warehouse started the trend in May, closely followed by Orange. Sky threw its hat into the ring last week, while ntl:Telewest will join the fun in September.

But trying to work out what effect, if any, this commoditisation will have on e-business and more specifically, business broadband prices, is not straightforward. The first important point to note is (and this really should go without saying): there is no such thing really as "free" broadband. In the case of Sky, the broadband comes tacked on to digital TV; with Orange, it's a mobile contract. There is always a catch.

After Carphone Warehouse got rapped on the knuckles by the advertising regulator for calling its broadband "free", chief executive Charles Dunstone blogged: "We do remain however the only mass market supplier of Free Broadband available without also subscribing to pay TV or a mobile phone subscription."

Of course, getting Carphone Warehouse's "free broadband" relies on having a fixed line and voice package with the company. As Disruptive Analysis's Dean Bubley puts it: "I'm looking forward to Kelloggs bringing out a free broadband offer saying it's the only one where you don't have to get a mobile phone contract, you just have to buy 98,000 boxes of cornflakes."

"It's marketing," points out Ovum analyst John Delaney. "You can only call it free because you allocate the price of it to another part of the bundle — back in the days of the incumbents we used to call that cross-subsidy."

There is a cautionary tale in this, which can be found in Denmark. There, the mobile operator Telmore (known in this country as easyMobile) had great success in offering extremely cheap call and SMS rates after the national regulator mandated cost-level wholesale rates.

Telmore's pricing was so successful that, according to Delaney, it "brought the perceived value of mobile so far down in Denmark that it hasn't recovered".

Delaney thinks the UK could see a similar outcome: "I think the danger is in the long term, if a lot of players are in the game of making things seem free. People are not stupid — the price of the bundle will start to be eroded, and it's very difficult to bring it back up. This risks eroding the value of the components of the bundle."

Ian Fogg, an analyst with Jupiter Research, agrees: "If you market something as free and the market is price sensitive, you're feeding the fire. At some point the industry is going to want to get more revenue from customers — if they sign up on the basis of being cheap, it becomes very hard to upsell them later."

So, the "race to the bottom" is a risky business. That said, the analysts agree it will probably have the effect of increasing broadband uptake in the UK. This carries several advantages — not least for e-commerce.

"Over the last couple of years, falling broadband prices have already made a big contribution to broadband penetration in the UK, and the further they fall, the greater that effect will be," says Delaney. "And clearly, the more people who have broadband, the more viable both e-business and e-government will become."

This is because broadband provides a "better Internet experience", according to Fogg, who adds that broadband users tend to spend more time online and tend to be more active Internet users.

Adam Legresley, head of operations at the IT Forum Foundation (which works with British e-business and the Department for Trade and Industry), agrees that increased broadband uptake will "make people more at ease and make them more Web literate", especially due to the higher speeds and smoother experience offered.

He suggests this shift will not only bring more customers to UK e-commerce sites, but will encourage more small businesses to go online. "It will give them greater confidence in using the Web as a teaching resource for themselves," Legresley says. "From the point of view of e-commerce, if you're getting more confident using it then you might be more inclined to set up your own Web site, even if you're a micro-business."

Free broadband, therefore, will probably provide an online boost for businesses, but what kind of effect might it have on the pricing of business broadband itself?

Sadly, the answer is "not a lot". The consensus is that there's a reason businesses pay more for their broadband, and it's not going to change because of the way services are marketed to the domestic user.

"There will undoubtedly be a number of small businesses for whom the free offer will be very tempting, and a lot will probably take it up," Matt Cantwell of business broadband provider Demon Internet tells ZDNet UK. "But we've actually won business from free broadband providers already, and free broadband's only been out for the last couple of months."

The biggest reason for this is quality of service. Internet service providers (ISPs) who offer free broadband are likely to try to put as many customers as possible onto the same network, to keep costs down.

This makes for variable speeds — something the home user might put up with, but hardly suitable for a business trying to send or receive large amounts of time-sensitive data. The usage limits imposed by most domestic ISPs are equally unwelcome in the world of business, but one of the strongest cases for business customers paying a premium is based on customer service.

"If you're running a very pared-down free service, if it's very successful, you may not have the customer service representatives available to be able to support your customers," Cantwell suggests, adding: "We're not going to charge you premium-rate numbers for calling technical support."

Business broadband providers also tend to offer things like multiple IP addresses, which are rather useful for running firewalls, VPNs, and other assorted network elements that a domestic user might find irrelevant, but most business users actively need.

Even Orange, which plans to roll out business broadband products next year, won't be taking their domestic approach into that market. "We still see there's an inherent value in business broadband just as we see with mobility," says a representative of the company's Business Services department. "We'll fight to retain that value in terms of what we charge our customers, but we certainly won't be going in with a free broadband tariff for businesses."

Orange does, however, have a halfway measure in the form of its "broadband for home workers" service. This allows large corporations using Orange for mobile services to combine their employees' work phone and home broadband bills, thus removing the need for workers to pay for home broadband themselves and claim it back from the company.

In other words, it's free home broadband again, only subsidised by a work phone rather than own phone contract. It is an "important first step in convergence", as Orange's representative points out, but it's also about as far as the "free broadband" concept is likely to go in the business environment.