Demand for Internet connectivity in South Africa surged in 2020, with more people working, learning, and accessing entertainment online from home.
There are relatively few companies that actually own and operate the broadband infrastructure which supports this connectivity in South Africa.
Broadly speaking, there are two primary categories of providers, Mobile Network Operators such as Vodacom, MTN, and Telkom, and Fibre Network Operators like Openserve, Vumatel, and Frogfoot.
However, South Africa currently has numerous Internet Service Providers (ISPs) – both large and small – who resell the bandwidth and data provided by these operators to end-users.
MyBroadband spoke to the Internet Services Providers’ Association (ISPA) South Africa and two major ISPs – Cool Ideas and Cybersmart – to learn more about how to start one of these companies.
Cybersmart’s Laurie Fialkov said that out of the gate, aspiring ISPs would need the following:
- Access to funding.
- A unique product.
- A niche relationship with an important party – such as a particular property development or neighbourhood.
ISPA advised that start-ups should start small and work themselves into fully-fledged licenced operators as the business grew in scale.
“It’s probably a better idea to start with what customers need and focus on providing that: spend a few years as a reseller of an existing large ISP, where you can focus on building your own brand, market presence, billing and customer service capability,” ISPA said,
“Start with your neighbours and friends and help them solve their Internet woes, particularly with excellent service,” it added.
This would help you to better understand the industry and make the necessary contacts.
“Then once you’ve an established customer base you can start to build your own network, and that’s the point at which you’d approach FNO directly,” ISPA said.
Cool Ideas co-founder Paul Butschi cautioned that becoming a successful ISP was not a quick process.
“Going in you should be prepared for the long haul if you expect to become anything of substance in the industry,” Butschi said.
“We started as an ISP technically nearly 10 years ago and are still learning and improving as we go,” he added.
Sorting out licences
Becoming an ISP in South Africa requires the necessary regulatory approval.
ISPA explained that the first point of contact for an aspirant ISP should therefore be the Independent Communications Authority of South Africa (ICASA), which regulates the telecommunications industry in South Africa.
“No matter how you look at it, there is some sort of engagement with the regulator,” ISPA said.
Those simply looking to resell the Internet access services of existing licenced operators will need a reseller exemption from ICASA.
If you are planning to build your own network or provide your Internet then you will need to apply with ICASA for licences.
For building your own network, an Electronic Communications Network Service (ECNS) licence is needed, whereas providing your own Internet will require an Electronic Communications Service (ECS) licence.
These are categorised as follows:
- Class – Limited within a municipality.
- Individual – For national rollout.
Fialkov stated that class licences are fairly easy to get from ICASA and are “relatively cheap” – around the R40,000 mark.
If you want to operate nationally with an individual licence, matters become far most pricey.
These licenses – of which around 600 are currently registered – are near impossible to come by due to ICASA’s process, Fialkov claimed.
Purchasing one of the 100 dormant licences would cost between R500,000 and R700,000, plus around another R200,000 in ICASA and legal fees to transfer it to the new company.
In addition, you may have to factor in an autonomous system (AS) number and resource allocations such as IP addresses from the Region Internet Registry, in this case, AfriNIC.
When it comes to staff members, ISPA recommended that fledgeling ISP entrepreneurs rather begin small with just their own phone, computer, and a modest workspace.
“Unless you have serious start-up capital, it’s probably better to only hire employees when you have income,” ISPA said.
Butschi agreed with this, explaining that Cool Ideas started with two employees but realistically one employee would be possible.
Fialkov elaborated on a more aggressive approach for those who had access to capital.
According to him, a new ISP would require at least five staff members – including the founder – to get off the ground.
Of the four other employees, one should drive sales, two must be responsible for taking phone calls and handling customer queries, and one programmer can be appointed to automate systems.
Fialkov estimated this would amount to around R3 million in starting costs – with R1 million a year for salaries, another R1 million for licencing, and a further R1 million for routers and switches.
Alternatively, Fialkov said it may be cheaper to buy an existing ISP than to start from scratch.
“You can probably find someone struggling who you can pick up for less with all of the above,” Fialkov stated.
Setting yourself apart and becoming profitable
Important to your success will be the ability to set yourself apart from rivals in order to gain and retain customers.
ISPA and Fialkov warned, however, that an ISP would not be able to compete on price alone.
“In many respects, there is anecdotal evidence of insufficient margin to compete on price,” ISPA said.
“This is an industry where margins are very small, and it is hard for a small player to compete against the economies of scale in technical operations.”
“Start-up ISPs will do well to distinguish themselves on other aspects such as service, technical competency and additional value-added offerings layered across the utility of Internet access.”
With ISPA’s approach of starting small, you should assume it will take more than 10 years to become profitable, although investing more resources in the firm could help you reach the breakeven point much sooner.
Butschi said that how quickly an ISP would be able to become profitable would be determined by the type of customer you are selling to.
“If you are selling services to businesses then one can be profitable very quickly,” Butschi stated.
“If your target base is consumer you need scale, the typical return-on-investment (ROI) on a consumer is around 24 months or more,” he said.