November 1999

WIRELESS INTERNET: TO ISP OR NOT TO ISP?

BY MARK C. SPRAGG

Faced with a multitude of competitors and price convergence, wireless Internet access is fast becoming the next battleground for mobile carriers looking for ways to differentiate themselves and boost profitability. Offering wireless Internet access promises carriers several key benefits:

• Stimulated conversion from analog to digital service.
• Additional revenue from add-on subscription services.
• Increased usage and lower churn as consumers rely more and more upon their mobile phones for everything from viewing stock quotes to purchasing movie tickets.

While almost every major wireless carrier has announced some new type of wireless Internet service during the past three months, none have yet gone so far as to transform themselves into an Internet Service Provider (ISP). This isn't due to regulatory or technological constraints. It is due, rather, to the constantly shifting business model of the ISP and the fear of stepping into an unfamiliar and risky business. Internet access is currently being marketed in many different ways, including being bundled as "free" with the purchase of a PC or long-distance service. Market values for many ISPs have risen to astronomical levels, yet for many profitability continues to be years off.

It's possible for wireless carriers to take an active role in facilitating wireless Internet access even if they don't become the ISP. Under this approach, the carrier forms alliances or joint ventures with a major ISP and Internet content providers to provide wireless-friendly portals and e-commerce services. This gives the carrier a certain degree of control over the quality and range of the Internet services available to its customers. Exclusivity arrangements with marquee ISPs may also provide the carrier with a competitive advantage over its counterparts.

Becoming the ISP, however, can offer even greater advantages to the carrier. First, the carrier can develop and offer branded services and content that are geared specifically to certain segments of its customer base. Second, the carrier can provide wireless Internet access as a bundled service through its existing billing and customer care systems, providing economies of scale and a single bill for its customers. Third, and perhaps most important, the carrier can maintain its position as the single provider of wireless services to its customers. A carrier that forces its customers to use a third party as their wireless ISP runs the risk that, over time, brand identification and loyalty will shift from the wireless carrier to the ISP.

While the wireless data market is still relatively young, we will soon come to the point in time when wireless carriers will have to make a decision on which strategy to implement. Each carrier has to consider many factors in determining if and when to become an ISP:

• The level of demand for Internet access over mobile phones.
• The make-up of its customer base.
• The expected benefits of providing customized Internet content.
• The cost and time required to develop attractive ISP wireless services.

Carriers faced with strong demand for wireless Internet access and limited resources to become ISPs may be wise to consider a phased approach: form alliances in the short term while developing ISP capabilities for the long term.

Mark C. Spragg, CPA/MBA, is a director in the PricewaterhouseCoopers Telecommunications Financial Advisory Services Practice. Based in Los Angeles, Mark specializes in strategy, litigation support, and corporate restructuring consulting for the telecom industry. For more information, contact Mark at mark.sprigg@us.pwcglobal.com.