Low Cost vs High Cost providers – why pay more?

  • Comparing the real value of your ISP
  • What can impact your service on a cheaper connection
  • Why TPG is different than Dodo, even though they cost the same

The margin for competition in the broadband game is surprisingly slim. At the bottom of the scale, low-cost providers are offering ADSL connections (with line rental included) for around $60. The higher-cost providers are offering similar packages for $80-$100. Somewhere in this $40 differential, there are dozens of companies vying for a piece of Australia’s $50 billion internet services industry.

So what differentiates these companies, and what contributes to their gap in pricing. We look at the major contributors, and how they affect the customer.

Low Cost Providers

Examples: Dodo, Exetel, SpinTel

An internet service provider has to deliver in three areas: price, customer service and service delivery. It’s a delicate balancing act. The floor for the price of an ADSL connection is dependent on what Telstra Wholesale (the company that maintains and leases out the copper telephone network) are charging per line. Each company works out its own deal, but generally the line costs an ISP about $350-$400 a year. Broken down per month, this equates to $30 or more per line. For a low cost provider offering unlimited downloads for $50-$60, this means that there’s $20-$30 available to pay for call centre employees, technical employees, management, equipment maintenance and advertising.

Customer service will almost always be the first of those variables to get the chop. This will mean outsourcing. According to a report from TMC.net, a leading call centre analysis group, a typical Australian based contact centre worker earns $40k - $50k per annum, undergoes a month of training (which can cost $15k per worker, when factoring in the cost of a trainer and the development of a training program) and lasts 12 months in the role. Compare this to a contact centre worker in the Philippines, who earns $4000 a year, costs $5000 to train, and stays in the role for 2 years or more.

The issue of outsourced customer service is a very sensitive one. On one hand, customers enjoy far lower prices than would be available if the entire work force was in Australia. On the other hand, communication is crucial when dealing with technology. Accents aside, there is an idiom in which Australians speak that cannot be easily taught. An internet connection is a complicated thing, further complicated by the web of conditions, billing requirements, plan details, exclusions, inclusions, value added services and other components that make up a service. Trying to fix an issue with someone who does not speak the same way can lead to some very real emotional breakdowns. For the person on the other end of the line, the interaction can be equally stressful.

Some lower cost providers are doing their best to squeeze in the cost of basing their contact centre in Australia, while still maintaining low prices. For some companies, this calculus changes when they go public – a private, unlisted company can lose money for a while, building up a sufficient customer base, or can make razor thin profits while providing the absolute best service at all levels. But once a company becomes listed on the stock exchange, that company has a duty to shareholders to maximize profits where possible, and this means cutting corners.

The other area where a company can cut corners is in services. Low-cost providers can sometimes take a “bare-bones” approach, where all you buy is access. This means no friendly online presence, no unmetered access to certain sites, and restricted options in how you pay (this usually means direct debit only).  This can also means no special contract terms where free equipment is subsidized by a long contract. The company provides access, pure and simple. This can be a preferable way to keep costs down – sometimes this approach has the added benefit of simplifying the process in a mature market. Many people have already had or already have a modem and the technical know-how to manage their own account.

And finally, there's contention. This refers to how many people are sharing a connection at any one time. Cheaper providers are often known to oversell their network, reaching contention ratios (ie. the number of people battling over one data connection) as high as 50:1. This varies from provider to provider and from exchange to exchange. The situation gets better over time (companies do upgrade and expand their networks) but the lower the price, the likelier the company is divvying up their bandwidth to a greater number of people.

Summary – with a low cost provider, you’re likely going to be dealing with off-shore customer service and support, restricted payment options and very few additional services or generous contract terms. However, prices are lower and contract lengths are generally shorter.

 

Mid-Range providers

Example: TPG, Vodafone, Club Telco

Some providers aim to strike a balance between the quick and dirty approach and the white-glove treatment. This means that they will charge low, offshore their service and support, and offer very few additional services. On the other hand, they will enforce better standards, invest in their own state of the art equipment at the exchange (rather than renting off a bigger provider) and generally offer a few more bells and whistles. This might include local call packages, free equipment with longer contracts, or “Off-Net” services. This means that even in areas where they don’t have their own network, they will rent a connection off another provider, and act as your service provider in between. They won’t be able to reduce the price or offer you special bundle deals, but they can often offer reduced contract lengths to entice you as a customer.

Summary – mid range providers differ very little from low-cost providers on the surface, but they usually invest more in staff training and infrastructure, delivering an overall better service.

Carrier Grade providers

Example: Telstra, Optus, iiNet, Internode

Higher cost providers are usually referred to as Carrier-grade. This means they invest heavily in their own network of equipment and services, and usually maintain a significant proportion of their customer-facing workforce in Australia. They are full-service providers, offering all or most means of connection, a host of online services (including gaming servers, discussion forums, newsgroups and more), comprehensive support and extensive bundle options which fold in other telecom services like mobiles, home phones and pay television.

This extra razzle-dazzle comes at a price. Most attractive offers from these providers are heavily dependent on bundling all of your other services in with long-term contracts. Lower contracts or standalone services are charged at nearly double the rate of the more competitive end of the market. Moreover, these carriers usually restrict their download limits to a much greater extent. This is done to maintain peak network performance, as too much activity can destabilize a network and lead to problems. Carrier-grade networks err on the side of caution and count on that fact that most people will find it difficult to go through even 100GB of data, let alone the terabytes or unlimited options offered by other companies as incentives.

Carrier-grade companies sometimes count their competition amongst their biggest customers. Low-cost providers often rent access off the carrier-grade provider, and re-sell as a non-frills service. This means that the carrier-grade provider is restricted in meeting their competitors/clients retail prices.

A carrier-grade provider also invites higher standards of customer service satisfaction, thanks to slicker advertising and marketing promises. This attracts a higher level of scrutiny from consumer watchdogs like the ACCC, and this means higher legal costs for the carrier. All of these additional costs eventually get passed on to the customer in the form of higher monthly fees.

Summary – Carrier grade providers often cost more and offer poorer value per gigabyte. But the provider will usually offer much better support and service, an extensive network, numerous add-on services and better consumer protection.

Most consumers still shop with price considerations first and foremost. This isn’t necessarily a bad thing- it forces the entire market to bring prices down to what customers are willing to pay. But it does come with some trade-offs. Make sure you’re taking this into consideration before signing up to a long contract.

Here are some recommended providers in each category:

Low-cost providers

Exetel – Exetel has their own network at 400 or so exchanges, limiting their scope considerably (there are over 5000 exchanges in Australia). In those areas that they cover, they offer attractive low-cost plans with calls and line rental included; The OF20 plan includes 40GB of data (20GB peak, 20GB off-peak), line rental and 9000 minutes of free local, national and Optus network mobile calls, all for $49.50/month. Call 1300 106 571 to sign up today.

Mid-range providers

Club Telco – Club Telco (CT) takes a slightly different approach. Instead of setup fees and contracts, CT charges an annual $50 membership fee, and seeks to retain customers with Australia-based service and support. CT seeks to change the current atmosphere of punitive contracts and complex plans, by offering an Unlimited Plan for $50/month, with no contract. Line rental is not included, so customers looking to take advantage of this offer will need to either have an existing telephone connection, or pay a minimum $30/month to Club Telco to provide a line. Club Telco will service almost any exchange, as they re-sell from other providers and bank on their customer service and simple pricing models to retain customers. Call 1300 138 155 for more info.

Carrier-Grade providers

Internode was, until recently, Australia’s largest private ISP. The company was founded and guided by Australian IT legend Simon Hackett, who positioned his company as a true competitor to Telstra. Internode recently sold to iiNet, a similar service provider. Internode will continue to run independently for some time however.

Internode offer numerous services, including an extensive network of their own equipment, and a very extensive Reach network (where Internode act as your ISP while renting services off Telstra or Optus). Internode offer dedicated gaming servers, business services, FetchTV (internet based pay television), and much more. Their customer service and technical support is based entirely in Australia, and enjoys a reputation for the best phone support in Australia.

Internode currently offer a 200GB EasyBroadband line rental and internet plan for $79.90/month, with no peak or off-peak conditions. Setup fees are priced at $129 (no contract) or $79 (24 month contract). Call 1300 106 571 for more info.