Sky Internet: The internet service provision businesses of the Lopez Group

• Main Author: Avante, Erwin O.
• Format: text
• Language: English
• Published: Animo Repository 2000
• Subjects: Internet service providers > Philippines; Business Administration, Management, and Operations
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/2713
• Institution: De La Salle University

The Internet Service Provider (ISP) industry is part of a bigger industry called the inernet industry. Basically, there are sub-sectors under it: (a) the Internet Network (b) the InternetProviders, which include the ISP (c) the local Loop Carriers and (d) the Users. The major players in the industry include the government thorugh the Natioanl Telecommunication Commission, the backbone providers which is dominated by PLDT, the top 4 ISPs which include Sky Internet and the internet organization called Philippine Internet Service Organization (PISO). The SIP industry is a unregulated business, growing at a compounded annual growth rate of about 53%. although tantamount in growth, internet penetration in the Philippines is below 15% since it largely depends on the country's teledensity and PC penetration, which are way below compared to other countries. There are about 173 ISpsw in the country today serving mostly Metro Manila. Non-corporate subscribers account for nearly 90% of the total subscriber mix, but contribute only around 75% of the total revenues earned by ISPs. E-mail is the most popular reason why people use the internet. Majority of the users are male and are aged 18 years old and above. Dial-ups still represent the bulk form of internet access. However, broadband, particularly cable internet access, is expected to gain popularity in the future most especially among corporate sibscribers due to its cost-benefit advantage compared to dial-ups. To connect to the internet, an ISP needs an upstream internet provider which are composed of 2 levels- international -end and Philippine-end. This is because current country regulations do not allow ISPs to connect to internationa-end International Private Leased Circuits (IPLC) providers directly. There are alot of international-end IPLC providers. Howeve, with respect to Philippine end- IPLC proveiders, these are dominated by the telecommunications companies. The local Public Switch Telephone Network where subscribers connect to the ISPs are also controlled and dominated by the same companies providing the Philippine-end IPLC. There are a lot of threats facing the ISP industry today. These include (a) phone metering, (b) threats from existing players, (c) popularity of cable and wireless access protocol (WAP), (d) free internet access, and (e) fraud and hacking. Equally, there are a lot of opportunities facing the ISP industry as well. These include (a) e-commerce, portals and online advertising (b) cinvergence, (c) consolidation of ISPs, (d) new revenue models, (e) expansion of the Philippine internet exchange, and (f) initial public offerings. The ISP industry is moderately unattractive. if it will be rated from 1 to 10, with 10 being the ideal industry set-up, the ISP industry will be rated as 4. This is because (a) competition within the industry is moderate to strong but yet, from global experience, few ISPs have generated profit, (b) entry barrier is very low, (c) substitutes are better and soon will outperform the traditional ISP business model, (d) the ISP industry is very much dependent to backbone providers, (e) threat of phone metering which will reshape the ISP industry, and (f) threat from free internet access once it flies later on like what is happening in other countries. However, on a positive note, it remains attractive in the sense that (a) bright opportunities on e-commerce, portals and online advertising exist, (b) opportunities exist from convergence, and (c) opportunities to increase shareholders value by public listing is present. Sky Internet, United Network Access and ZPDee Cable internet are the three vehicles used by the Lopez group for its internet services. For the purpose of this paper, Sky Internet is termed to include the 3 corpporate vehicles mentioned above. Sky Internet offers a wide array of services, which include dial-ups, dedicated access, leased lines, prepaid services and cable internet access. Outsiders do most of the primary activities in the value chain. This is because Sky Internet, like other ISPs, is solely dependent on the IPLC and local backbone providers for the conduct of theie business. Therefore, a good relationship with a telecommunications company is a competitive edge in the ISP industry. Sky Internet has a lot of strengths and competencies. These include (a) access to narrowband and broadband infrastructure, (b) strong brand recognition, (c) large reseller network, (d) affiliation with Bayantel and Sky Cab e, and (e) good relationship with PHNet. Equally, Sky Internet has a lot of weaknesses as well. These include (a) billing and collection problems, (b) foreign exchange exposure, (c) relatively low subscriber base, (d) mismatch in revenues and expenses, and (e) non-affiliation with PISO and others. Sky Internet's financial position and conditon has continued to deteriorate throughout the years. This is evidenced by the fact that the Sky Internet has not generated any net income which bloated its capital deficiency eversince it started commercial operations in 1996. Sky Internet's operation cannot support its cash requirement and has continued to rely on the advances made by its affiliates either in the form of cash or delayed settlement of IPLC fees. Also, Sky Internet is bleeding with respect to the sizable amount of bad debts as evidenced by its 82% allowance as of December 31, 1999. Compared to the other top 2 ISPs, Pacific Internet and Inforcom, Sky Internet has a negative position except for the following: (1) assets turnover, and (2) revenues per subscriber. In general, its liquidity position is worst compared to the other top 2. Likewise, it is very unstable compared to the other 2 with a very sizable amount of capital deficiency and debt ratio. It has not managed its expenses well, which is the highest among the 3 ISPs. Also, Pacific Internet and Infocom, stand ready for future competition with Sky Internet. Their strategies are quite different from one another- one banking on its regional presence in Asia, while the other on a convergence strategy. Sky Internet's strategy is similar to that of Infocom, which is mainly brought by its affiliation with telecommunications and braodcast companies. The only difference is that Sky Internet is also affilaited with a content provider, which could bolster its bid to generate more revenues on e-commerce. Thus, Sky Internet stands a chance in gaining more market share as long as it takes advantage of its special relationship and manage its IPLC well. The generic strategies applicable to Sky Internet are low cost strategy, differentiation strategy amd focus strategy. The 3 are applicable especially if the convergence strategy, which is one of the existing strategies of Sky Internet will be implemented. Apart from convergence, Sky Internet's main present strategy is relying heavily on the infrastructure and the brand name of Bayantel and Sky Vision. The proposed strategies of this paper were stated in the light of significant strategic issues facing Sky Internet. Using a business horizon perspective and a priority activity perspective, the top 4 strategies are: (a) promotion of prepaid services and migration to an improved billing and collection system (b) execution of a convergence strategy that aims to drive down costs and increase revenues from additional synergies within the integrated broadband services (IBS) group (c) acquisition of smaller ISPs to increase subscriber base and spread the fixed IPLC cost (d) improvement of capacity and (e) strategic alliance with an international expert to form a joint venture that will offer e-commerce solutions to other companies. The superordinate goals, which are embedded in the core values of the company, will guide the implementation of the different proposed strategies. Also, the different proposed strategies will have to be implemented based on s certain structures, skill requiements, staffing, style and system. Using the 7S Framework, the different elements were dicussed on the different relevant strategies. Ih the end, certain policies will have to be changed and/or changed in order to implement the different strategies proposed. Based on the financial model built to determine the impact of the different quantifiable strategies proposed, it was found out that the promotion of prepaid services an the migration to an improved billing and collection system will provide with the most value since this will help solve the bad debts problem crippling Sky Internet all these years. Convergence was found to create the next best value since through the integration of certain back and front office functions, revenues were enhanced and expenses minimized. Acquisition of smaller ISPs also adds value as subscriber base increases and IPLC fees spread through this wider subscriber base. Also, improvement of capacit adds value as well since it increases the market share of Sky Internet. In the end, the mix of these four quantified strategies is expected to provide an added benefit as well. Base case discounted cash flow valuation for Sky Internet shows P403 million compared to an all upsides case value of P2.5 billion. This shows an enhanced value of around P2.1 billion and an unrealized creation of about P2.8 billion compared to Sky Internet's existing book value."