Interesting insight into what X-Stream is doing in South Africa and Europe. I'm sure we'll get comments on the last paragraph.
bday.co.za
18 March 1999
Free internet faces hurdles
In the UK X-Stream has enormous success, but some wonder if it will work in SA
Lesley Stones
LISTEN carefully and you just might hear the chant. "SA is different. It cannot happen here."
Those words have become a mantra for people reluctant to accept that SA will be affected by world trends. The information technology industry is particularly fond of its imagined immunity, having built up a fiercely independent industry in the days when there was no alternative.
Now the mantra is being invoked in response to news that next month consumers will be offered free internet access. The culprit is UK-based X-Stream, which has franchised its name and technology to a group of Cape Town service providers.
For years the SA industry has been adamant this is not a viable option. Too few users plus too little advertising revenue equals bankruptcy, they say.
But what if it works? What if so many customers want free access that they all sign up and every company advertising on the web takes its money to X-Stream? A scary thought for the 100-plus service providers still struggling to make a buck.
Ray Krut, MD of dial-up access company Icon, is honest enough to admit: "If it works we are all up the creek. Everybody is driving their services and adding value to differentiate themselves and keep people with them."
DataPro Business On-Line operations manager Craig Levy said he studied and rejected the free access model. "We did some observations as to whether it could be cost effective, but to break even we would need 500000 customers."
X-Stream launched its free service in Britain on March 8 last year and 200 service providers said it would not work. It did. Now X-Stream is the third-largest in the land, with 232000 customers and a healthy profit.
As well as free website browsing, the service includes free e-mail, chat rooms, news, sports and a travel booking service.
To celebrate its birthday last week, X-Stream went an audacious step further - picking up the phone bill for anyone dialling in that day.
Moreover, the company is assessing whether it can afford to pay the phone bills for customers dialling during weekends, said director Chirinjeev Kathuria. No monthly subscription fee is already attractive, but deduct the phone bills too and the rivals would crumble. "We will double or treble our subscription base and the revenue we get on weekdays will more than compensate for free weekends," he said.
Response to the SA launch has been rapid and welcoming. After Business Day broke the story on Tuesday, users were joining the www.x-stream.co.za website at the rate of two a minute, said SA MD David le Roux, already causing problems for Telkom. Profile Media, which publishes financial data, is interested in allowing X-Stream users to view basic data on listed companies. That would link to more detailed data they would pay to access, said marketing director Ernie Alexander.
Investec is keen to discuss an equity investment. "We have a private equity fund to finance start-up businesses with seed capital. We haven't touched any service providers because we expect them to lose money. But subscribers will join this service and that will attract advertisers," said a spokesman.
Fast food delivery chain Mr Delivery would like its couriers to deliver X-Stream's software to home users when the time is right, said national operations director Geoff Shapiro.
Possibly all this excitement is premature, as two major hurdles lie ahead. Firstly, there is such a pent-up demand from potential users reluctant to pay monthly connection fees of about R80 that it could be swamped with too many users.
Secondly, it could take months to generate sufficient advertising revenue to show a profit.
X-Stream UK was enormously careful not to grow too fast, knowing that bad publicity would result if users were constantly met with busy signals.
Le Roux says the SA operation should handle 300000 users immediately. He anticipates 122000 users in the first year and 500000 by year three.
Le Roux also argues that operating costs will not be high, since X-Stream rents its equipment from Saix, Telkom's internet backbone. No capital will be needed to expand the service, but it makes X-Stream dependent on co-operation from Saix and the quality of its engineers.
The advertising problem is more difficult. X-Stream succeeded in the UK only because in that deregulated market several telephone companies all need to outsmart their rivals. X-Stream struck a deal with the City of London Teleco Company, which sees them share the profit from calls made by X-Stream customers.
Telkom's monopoly makes that impossible in SA. So, instead of establishing its own subsidiary, X-Stream sold its franchise to local players.
Kathuria himself recognises that basing the business on adspend alone is precarious. In the early days 70% of X-Stream's revenue came from the pay-back on phone calls and just 30% from advertising. "Everyone can launch a free… service, but it is not sustainable," he warned.
"There is a time lag before it becomes profitable, so you need to have capital."
Le Roux insists there is enough cash to sustain the local operation. Backers include X-Stream itself and Real Media SA, a subsidiary of US-based Real Media, which sells online advertising.
Even so, the total internet-based adspend in SA may reach just R25m this year, according to online media company Jagly Intermedia.
SA's largest dial-in service provider, M-Web, argues that continuous advertising imposed on the users will mar their enjoyment. M-Web also suspects X-Stream will try to recoup its costs by charging for technical support. The average user makes one six-minute help-desk call each month and some free services in the UK charge about R10 a minute for that help, says CEO Antonie Roux.
Finally, Roux argues that since X-Stream is using the "notoriously slow" Saix backbone, users will suffer slow access and end up paying higher phone bills.
But in the UK the enormous success of X-Stream shows no sign of abating and has profoundly changed the industry.
Half a dozen free service providers are active in the UK now. The largest, Dixon's Freeserve, boasts more than 1-million accounts. Paid-for services are struggling and there is no reason to expect they will survive, says Kathuria.
"I don't see a future for paid-for service providers. By the end of this year we hope to be the largest operator in Europe."
Subsidiaries are planned for Switzerland, the Netherlands, Spain and the Far East. Funding will come by listing X-Stream on the New York or London stock exchanges, expected to raise $50m to $75m. That cash will allow X-Stream to unleash a tidal wave of change across Europe. Faint cries that "SA is different" are likely to be washed away in the deluge.
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