Smaller ISPs struggling to compete with bigger rivals

Having started out as rumours among customers and the press, Fuel's parent company - New Call Telecom (NCT) - confirmed the closure today, announcing that they're "exiting the UK broadband market" and that their "customers will be moving to Post Office Telecoms and will experience no disruption in service".

Yet as unfortunate as the news may be their customers, Fuel aren't the only broadband provider to wind down operations this year, with the Scottish-based TenTel and the Lincolnshire-based AB Internet also shutting down in recent weeks.

And given that these additional closures have occurred so close together, it raises the question as to whether smaller ISPs can really compete with their bigger rivals, who can arguably afford the tighter profit margins imposed by a saturated broadband market.

The demise of Fuel

While Fuel Broadband's customers are still currently being provided an internet service via Fuel, it has now been confirmed that they'll be moving to the Post Office in July.

This is what they were all told in the letters sent to them by Fuel, whose CEO Chris Adams wrote, "Post Office Telecoms will match your current package as closely as possible. While there may be some small changes, there will be no disruption to your service and you will keep your current telephone number".

That their customers are being transferred to the Post Office makes sense, seeing as how both are supplied by TalkTalk Wholesale, and how they therefore sell on the same underlying service.

However, it also makes sense insofar as both market (or rather marketed) themselves more as cheaper alternatives to the biggest providers, with Fuel once offering free broadband for six months, and even being given a "Best Budget Provider" award last year by Broadband Genie.

Margins

Of course, the fact that they're moving to a similar ISP may not be much comfort to any customer disappointed by Fuel's demise, which inevitably raises the question of just how an award-winning and seemingly successful brand came to fail.

Well, a look at the accounts of parent company NCT reveals they made a loss last year of £18 million, and that they had accumulated losses of £50 million.

Source: Companies House/New Call Telecoms, Annual Report 2016

According to their annual report for 2016, NCT had been attempted to recover from such a worrying negative balance by "converting the acquired consumer base into a sustainable profitable business through improving margin".

It therefore seems they were unable to improve their profit margin and perform such a "conversion", something which apparently seems to have been the case with the recent closure of another smaller ISP, TenTel.

TenTel were based out of Edinburgh and, among other things, were known for offering more flexible broadband contracts lasting between one and six months.

Having launched in 2013, they'd aimed to gain 20,000 customers within the first year of operations and 100,000 by 2018.

Unfortunately, they'd struggled to gain 10,000 subscribers by November 2016, a customer base that was unsustainable in view of the very narrow profit margins they were inevitably running.

Even with the introduction of significant discounts in March they still failed to increase this base to any appreciable degree, and as a result of the wafer-thin profits it brought them they had little choice but to wrap things up.

Their customers were sent over to TalkTalk, who assured all 10,000 or so of them, "Our biggest priority is making sure that this has no impact on your existing services".

No room?

Continuity of service is one thing, yet in addition to the failure of AB Internet last month, as well as the related collapses of 186k and Firenet in December, TenTel's passing away suggests the worrying hypothesis that there's little or no room for small, independent providers in today's broadband market.

Bigger providers such as BT, Sky and Virgin Media are effectively keeping them out of this market by aggressively pushing introductory discounts they can afford to maintain given their massive customer bases, but that the likes of TenTel can't sustainably match with only thousands or tens of thousands of subscribers.

It's this fierce competition over special offers that largely explains why so many alternative providers have to run on very narrow profit margins, yet the failure to make such margins more viable has also been frustrated by the seeming scarcity of new customers in the broadband market.

It's been suggested by certain industry analysts that even the big ISPs are having difficulties enlisting new subscribers at the moment, and given that these providers are the ones able to continually market discounts, there's perhaps little wonder that Fuel, TenTel and others have been unable to grow.

Which is perhaps bad news for the UK's broadband customers, since it ultimately reduces the choice they have at their disposal, and makes them ever more reliant on a small handful of giants.