Why we don’t sell to residential users

A couple of times in our history, DTS has toyed with the idea of diverging from our business/government only focus and entering the residential market. Nowadays though, it is a simple decision, there is no way we will enter that space.

Why? Well, firstly, because it would be really hard to do, and if we failed I would look bad, so there is that. But to give more detail on why it would be difficult, here are some key points:

  • Easier to add value to business services. We can deploy redundant carrier diverse tails, supply high-end CPE, design and implement VPLS/MPLS high availability networks, offer Voice over IP, etc. Residential users don’t need most of these things, and if they do, they won’t pay much for them. It is much more difficult to add value to a residential user in a manner that will significantly add to our bottom line.
  • Streaming video on demand (SVOD). I recently saw a presentation by iiNet in Sydney where they stated that network traffic had grown by 25% in the 4 months since Netflix officially opened for business in Australia. However, due to the unlimited data plans iiNet (and the rest of the Australian market) offers, revenue has held steady. In short, SVOD has introduced significantly higher operating costs without any obvious way to offset them.
  • Residential users will use the bandwidth available to them, and backhaul is still expensive. This is particularly true in Australia where NBN is introducing faster access speeds but NBN Co. have not setup an affordable backhaul pricing model from their 132 points of interconnect.
  • Regulatory hurdles and overheads. There are a number of compliance obligations ISPs need to adhere to when they reach a certain scale, and most of these apply to the residential market. In Australia, for example, an ISP must tailor their sales contracts and terms and conditions in a certain way to be compliant, and an annual reporting program is compulsory. In New Zealand there is the Telco Levy, which requires ISPs earning over $10 million to contribute, and if this revenue is coming from residential users, the margin will be minimal and those payments will severely affect an ISP’s bottom line. From an administrative point of view, ISPs have to follow a certain process in regards to copyright infringement claims. These infringement claims are far more prevalent for residential users than business, which again means a greater administrative overhead for the lowest margin customer base. These are just a couple of examples, but illustrate the general point that legal and compliance costs increase when operating in the residential market.
  • Increased costs added by support overhead. Business clients tend to have either an in house IT manager or a trusted IT contact/contractor who is fairly clued up on how the services we provide work, which means support issues are resolved with greater ease than would be the case with an average home user.
  • UFB install issues. Until Chorus are far more efficient at getting fibre into homes, we would be stuck with additional overheads as we try to placate clients and spend time chasing Chorus (or Enable, UFF or Northpower).
  • Supply of low end CPE. To compete on price, cheaper hardware would have to be used. Cheaper gear breaks more often and that means higher costs for us from support and replacement efforts.
  • Scale isn’t a great thing.. Spark and Vodafone are not making a good display of finding profit through residential broadband, but Callplus was and I am going to assume Snap was as well. Although on the negative side again, Orcon was making a loss when it got snapped up (for the 3rd time). This seems to suggest that there is a sweet spot and it isn’t at the top of the pile. We don’t want to get involved in a market segment where scale doesn’t represent additional profitability.
  • Dilutes value to business clients. Business clients, our whole reason for being, will face longer support queues and services will be less focused to their needs.

Brand recognition is the only real positive I see in residential broadband.

We are however offering clients the ability to purchase discounted DTS services at home so that they can be on-net with their office network if that adds value to their interaction with us, but we see that as an extension of the business service/relationship already in place.

So, good luck to those in the residential fray, but it’s not for us.

Brendan Ritchie

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