I recently was working with some electric cooperatives that collaborate to perform many of the routine functions for operating their companies. This is a fairly common business model for small electric companies, and many cooperatives and municipal electric companies collaborate together.
I’ve always wondered why smaller telcos and ISPs don’t work together more with their neighbors. I know of a few telco cooperatives that work together. There are also small holding companies around that own multiple small telcos that effectively force this structure on their companies. There is some small degree of collaboration for companies that belong to statewide fiber network groups, but this is usually fairly limited in scope.
What do I mean by collaboration? It means sharing the cost of performing the routine functions of operating an ISP to achieve efficiencies and savings. When I look at the companies that collaborate I see some of the following functions being done together:
- Accounting. Collaboration means hiring fewer accountants and also saving money on accounting software.
- Benefits Administration. Assuming that benefits can be aligned it’s far more efficient to share the cost of acquiring, monitoring and administering benefits.
- ISP Functions. For companies that do ISP functions in house there are significant savings from sharing email platforms, security monitoring, spam filters, etc.
- Legal. Some of the routine legal costs such as negotiating interconnection agreements, pole agreements, vendor contracts, etc. can be less costly when done for several companies at the same time.
- Software Sharing. There can be significant savings on software licensing fees for companies acting as one entity.
There are also possible economy of scale savings from collaboration, where looking like a larger company can save money. Almost everything larger ISPs do is cheaper per customer than for smaller ISPs, so collaboration can let a group of companies look like one larger entity. Possible collaborative functions include:
- Billing. Larger ISPs are able to perform billing functions in house at a lower cost than outsourced services.
- Engineering. Smaller companies working together can probably hire an engineer or two for a lower cost than each of them outsourcing the function.
- NOC Monitoring. Companies working together might be able to afford 24/7 NOC coverage for less than what they are paying today for partial coverage.
- Help Desk. Collaborating on a shared help desk can also mean better coverage hours for a lower cost per customer.
- Purchasing. Collaborating can mean using a full-time buyer, which is more efficient that using mainline employees to do the purchasing function. There are also economy of scale savings from buying some network components and other supplies together.
- Dispatch / Fleet Management. Again, looking like a larger company should equate to savings on vehicle maintenance and insurance. There is also the opportunity to afford a better fleet management tool to reduce windshield time for technicians.
- Customer Service. I don’t know many telcos that share the customer service function, but I see electric companies with significant savings from operating one group for multiple companies.
Finally, there are significant savings of the collaborating companies that have physically interconnected networks:
- Voice Switch. The savings per customer are significant for sharing one voice switch for multiple companies. There is also a significant potential savings for switch functions like SS7, database management, interconnection trunks, wholesale long distance, etc.
- Cable TV Headend. There is also significant savings from sharing one cable headend.
- Major Network Routers. The major core electronics used to power FTTP or other kinds of networks can be used to support multiple companies if all are on the same network using the same technology.
- Internet Backbone. Companies acting as one can buy a larger broadband data pipe for a lower cost per gigabyte and well as more easily establishing redundant routes to the Internet.
Neighboring ISPs can gain some of these savings by simply working together. But many of the savings (such as the economy of scale savings) probably require a more formal corporate structure. A common structure in the electric world is to create a service corporation that is owned by, and works for all of the owner / partners. With margins tightening across the small ISP industry this is something that any small ISP ought to think about. Even if you don’t jump in and share everything, starting with a few functions can make a significant difference to bottom line.