Case study: Poptel
This case study was originally written as teaching material for study by post-graduate students undertaking the University of East London's masters degree course in social enterprise. Important: Please note that Poptel has seen significant strategic management and personnel changes since this case study was written.
Poptel occupies a significant place in the world of workers co-operative businesses. It is one of a relatively small number of workers co-ops established in the 1970s and 1980s which have both continued trading and have developed from small roots into more substantial commercial ventures.
The co-operative that created Poptel, Soft Solution, was founded in 1983, and can deservedly be proud of its achievements over the past eighteen years. It identified very early the potential of on-line services for international and national non-profit organisations, particularly trade union and labour bodies, and helped many such groups take their first steps into cyberspace. As its web site points out, Poptel provided the ANC with its first email address, organised the first on-line version of the Labour Party conference, hosted some of the first trade union web sites, and much more.
Poptel can also congratulate itself simply on its longevity. The very survival of any business for almost two decades in the very fast-moving world of on-line service provision is itself an achievement, but Poptel has not only operated commercially in this highly challenging environment, but at the same time maintained its co-operative principles. Poptel, and many of its individual staff, have played a role in the wider co-operative scene. Furthermore, by identifying the opportunity to bid for the .coop domain, it may have performed a very valuable service for the wider international co-op movement. (This is discussed below).
Nevertheless, past success does not ensure future survival, and Poptel (like other non-cooperative companies offering internet services) will have to be nimble and adroit to spot the commercial opportunities in the months and years ahead. As we shall see, it has a number of opportunities but it also faces some significant challenges.
Poptel in 2001: the basics
Poptel currently employs about 55 members of staff. It operates from bases in both London and Manchester, with the staff split roughly 50:50 between the two centres.
The last two years have seen major changes in Poptels business and in its organisational structure. In effect, the organisation has embarked on an ambitious programme of development and growth, which is changing radically the nature of its core business and indeed almost all aspects of its work.
Staff numbers have risen from about 20 over this period, and internal management structures have been put in place so that, if appropriate, further substantial increases in size up to perhaps 200 employees could be accommodated.
Poptel has received a major injection of capital from two venture capital sources together totalling £4.5m, and has used this money partly to build a new Network Operation Centre (the IT hub for the business), partly to reinforce the security measures in place there, and partly to invest in the technical and organisational changes necessary to exploit its appointment as the international Registry Operator for the new .coop top level domain. This is a potentially major initiative not just for Poptel but indeed for the international co-operative movement; however in the short-term it has caused Poptel cash flow difficulties.
As a result of obtaining venture capital, the legal framework for the business has changed. Poptels employees are members of the original workers co-operative, Soft Solution. Prior to the investment of new capital, Poptel was effectively simply a trading name for Soft Solution, which completely controlled the business. Under the new structure, 49% of Poptel shares are held by investors, with the remaining 51% held collectively on behalf of the employees. Four of the seven Board members, including the Chair, are employee appointees.
As part of the discussions with the investors, a new managing director, Stuart Marsden, was recruited from outside the co-op in 1999, followed by the recent recruitment of a Chief Operating Officer from an industry background. Another appointment, of a Marketing Director, proved unsuccessful and the individual has now left the organisation. Shaun Fensom, one of Poptels two founders in 1983, is Chair of the Board, whilst another very long-standing co-op member Malcolm Corbett is Corporate Affairs Director.
Poptel traded profitably for the last time in 1999. Its substantial losses in 2000 were anticipated, and were primarily the result of the investment undertaken. 2001 will also see the organisation posting losses. What has been particularly problematic this year for the organisations cash flow has been the unexpected and lengthy delay in launching the .coop domain, an event initially anticipated for the end of 2000 but now not likely until early 2002. This delay, outside Poptels control, means that the organisation is waiting much longer than expected to generate income from the investment made.
To respond to this cash flow problem, Poptel has taken a number of steps. Firstly, it negotiated a further equity investment in the business, so that the venture capital increased from £2.5m to £4.5m. Secondly, in the spring of 2001, Poptel staff agreed by secret ballot to voluntarily defer an element of their wages, until the financial situation improved. However this step proved insufficient and therefore in August the Board proposed, and staff accepted, an arrangement leading to six staff redundancies. This was the first time the organisation had made any staff redundant.
Poptel is operating in a very fast-changing area of industry, one that is highly competitive but also one which is still suffering the fall-out from the dot.com crash of early 2000. The overall prognosis for the sector is at present not particularly good, with both major IT and Internet corporates and smaller companies internationally engaged in retrenchment and redundancies. However, technological change still offers the opportunity for new business products and services, for those prepared to take risks.
Poptel has produced a business plan for the years to 2004. However, as Malcolm Corbett, Corporate Affairs Director, makes clear, detailed business planning is effectively only possible for a period of up to six months, given the speed of change in Poptels business sector. Unlike co-ops in sectors such as retailing, which can enjoy steady income streams and predictable trading returns, Poptels task is to ride the IT tiger. This can be exhilarating, but can also mean an almost continual task of redesigning the business and finding new profitable trading areas. Malcolm Corbett is convinced that, had Poptel not been prepared to change and to seek outside capital, it would by now have failed.
Poptel in 2001: the business areas
Poptels directors identify three main sectors or divisions to their business.
The first of these is the traditional ISP (Internet Service Provider) operation, providing internet connectivity and hosting services to a range of clients. Access and connectivity has been central to Poptels business since the very earliest days, with the focus primarily on working with membership organisations rather than directly with individual clients. Current sales income from this area of business is around £33,000 per month.
Two years ago a management decision was made to give less priority to this work and to develop a new strategic business sector. Starting early in 2000, Poptel put major resources into developing its Professional services business, offering design and build services for web sites for organisations and corporates. This business has grown fast, and is now responsible for average monthly sales income of £50,000, or approximately two-thirds of overall turnover. Recent successes include a single contract of £250,000, agreed with a health charity. Poptels business plan looks for sales to increase to £120,000 a month by May 2002.
To develop this sector, Poptel has had to expand its staff relatively quickly. From effectively a standing start, by the summer of 2001 eighteen people were engaged in this work. However, developing this sector is challenging, and larger contracts whilst clearly highly desirable in most respects are not without problems. Winning a new contract may mean that a further rapid increase in staff numbers is needed to undertake the work, for example. Another difficulty is that income from contracts is lumpy, but the outgoing wages bill for staff is not. In other words, there is a need to manage the flow of contracts, and of the workload of staff members, to iron out as much as possible the lumps.
For this reason, Poptel has very recently decided to give more attention once again to the ISP services side, effectively reversing the prioritisation of two years ago. The ISP business has historically proved difficult to operate profitably, not least because of the strong competition. However it has the advantage of being more easily scalable, as trade and customers increase. Poptel predicts that the market for hosting and server co-location will increase dramatically in the next few years.
Poptels third business area, the development of the .coop domain mentioned above, is an embryonic one which is currently taking considerable investment but not yet generating income. Poptel was instrumental in 2000 in persuading ICANN, the Internet Corporation for Assigned Names and Numbers, to approve a new top level domain for co-operatives. This means that co-op businesses and organisations will shortly be able to choose to have web addresses ending .coop, rather than .com, .net, .org or one of the other top level domains. Poptel will be the Registry Operator for co-ops registering as dot co-ops. Poptels business plan aims for 3500 .coop registrations a month, at a price of $160 per two-year registration period, but it also hopes to use its registry work as a springboard into a wider and perhaps more profitable area of business, selling value added services to many of its registry clients.
Developing this potential business has involved major investment of money and management time. The idea came from a senior member of the Poptel management team, in response to the announcement by ICANN in 2000 that it was looking to increase the number of top level domains available on the internet. (Poptel also made an unsuccessful bid at the same time for another top level domain, .union, for trade union organisations). ICANN received proposals from 44 corporations and consortia for over 180 proposed domain names, and in November 2000 announced the seven successful bids. Poptel can therefore rightly consider itself to have done well to put forward a winning proposal.
For the .coop bid, Poptel formed a partnership with the US National Cooperative Business Association (NCBA) and also worked with the International Co-operative Alliance (ICA). Operational responsibility will be taken by a new body, Dot Coop LLC, a subsidiary of NCBA established with Poptel and ICA participation which will have primary responsibility for marketing the .coop concept. Poptel will be engaged at a technical level, holding the .coop registry but also acting as one of the accredited registrars. (There are two sides to the registry business, the registry itself and registrars who compete to provide services for end users).
It is probably not an exaggeration to say that the future of Poptel is now inseparable from the development of the .coop registry work. Poptel itself claims that "the success at winning the Dot Coop TLD (Top Level Domain) has.. positioned us on a global stage in a way that has not existed since our early years when Poptel was one of the few businesses offering on-line services to our market sectors."
Whilst the opportunity to identify co-operative businesses internationally through a single .coop domain is an intriguing one, this does not mean of course that the concept will inevitably be commercially profitable. Poptel commissioned the London Business School to research the market for .coop registrations early in 2001. One finding from this report is that Poptel and its US partner will need a strongly international perspective in the marketing approach. For example, LBS asserts that "although the UK is the home country of Poptel, significant effort should not be expended on selling the Dot Coop TLD [here] because the market size is small". LBS points out that the proposed domain registration cost ($160 for 2 years) is higher than that applicable for organisations registering with a .com ($35 per year) or a .edu ($40 per year) domain. It also makes the point: "The recent downturn in the Internet economy has caused many individuals and businesses to become sceptical of the long-term viability of Internet businesses, which may affect the Dot Coop launch. Marketing efforts could be tailored to address this". Clearly, the development by Poptel and its US partner NCBA of the .coop domain will require good business planning in all areas, especially marketing and financial planning. Malcolm Corbett, the Board member responsible for the .coop initiative, nevertheless estimates that ICANNs .coop decision increases Poptels notional market value significantly, to perhaps £50m.
The search for capital
It is a truism to say that businesses structured as co-operatives face particular challenges in finding the capital they need to develop. Co-operative businesses incorporated as Industrial and Provident Societies or companies limited by guarantee do not have the access to equity capital available to conventional companies, or the option to access venture capital through going to the market via an IPO.
According to Malcolm Corbett, Poptels senior management identified around 1996-7 that the business needed to access capital: "if we didnt raise money, it was slow death". As he points out, companies in the IT and Internet sector are highly dependent on venture capital, in a way which does not apply in other, more traditional, areas of business such as retailing. He adds that the co-op movement generally needs to address this issue if the co-op movement is to be represented at all within the high tech sector.
Its search for capital led Poptel initially to talk to traditional co-operative institutions in Britain, without success. In December 1999 however Poptel successfully negotiated an £1.5m investment from the venture capital fund Sum International. A second £1m investment came from the same source some months later.
In order to obtain this equity funding, a change was required to Poptels co-operative structure. As mentioned above, the Poptel business was originally wholly controlled by the employees common ownership body Soft Solution Ltd, a company limited by guarantee. Membership of Soft Solution is open to all Poptel workers who have worked their six months probationary period.
Under the new structure, a conventional share company Poptel Ltd was established, in which Soft Solution collectively was to own 75% of the shares and Sum International 25%.
Had the market valuation of IT companies continued in the way seen before the dot.com crash of 2000, Poptel could have successfully brought in further venture capital without diluting too much the percentage of shares held by the workers. In fact, this was not possible. After the second investment from Sum International, and a further £2m investment from the Baxi Partnership fund for employee ownership businesses, the proportion of shares held on behalf of the workers reduced to 51%, with the remaining shares held by the two venture capital funds. The 51% holding, which is held collectively, is nevertheless seen by Poptel as the guarantee of its status as a co-operative business.
The legal structure was finessed at the time of the first Sum investment by the creation of a Soft Solution Employee Benefit Trust, primarily to take advantage of current tax rules. Under the terms of the deal with Sum International, the EBT was given a very small (5%) shareholding in Poptel Worldwide Ltd, another new company set up as the vehicle through which Sum would invest in the operating company Poptel Ltd.
The existence of the EBT enabled Poptel to take the Baxi Partnership investment without diluting the employees holding below 51%. Part of the capital advanced was treated as a loan to the Employees Benefit Trust, to enable the EBT to acquire Poptel shares in enough numbers to match those now being held by external investors. This loan is repayable in the future, at a time when hopefully the companys market valuation will be significantly greater. The net result of this is that Soft Solution currently owns 44% of the shares, with the EBT holding a further 7%.
With the workers holding in Poptel Ltd at 51%, there is of course the question of whether this device could be used a second time if further capital is required.
Poptels workers have also considered whether they should have the opportunity of holding some of the companys shares on an individual basis. In such an arrangement, the individual-owned shares would benefit from dividends but would be non-voting, as a way of maintaining the key co-operative principle of one member, one vote.
There are arguments for and against this within the co-op. Some people see such an arrangement as being advantageous, in that it enables individual staff members have a personal financial stake in the success of the business. It would also be closer to the situation in many non-cooperative Internet start-ups, where staff are given sizeable share options, as an element of remuneration.
Others prefer the common ownership model, and point to the John Lewis Partnerships route of paying substantial profit-based bonuses in addition to pay to staff members. Given the more pressing issues facing Poptel during 2001, this debate has taken something of a back seat in recent months.
Co-operative practices and staffing
Poptel has evolved from its origins in the early 1980s as a very small common ownership co-operative business, managed collectively with all staff on equal wages, to the current management and co-operative model. Pay differentials were introduced relatively early, partly to reflect market realities (it is hard to retain sought-after IT staff, if they are being paid much less than they could earn elsewhere) and partly perhaps as a natural part of the organisations maturing process, as some of its founder members grew older and developed family commitments. Nevertheless, the pay differential within Poptel remains much smaller than in conventional companies, with a pay range from about £20,000 to £100,000.
Poptel is structured internally in a relatively conventional manner, with a technical team, a customer services team, a finance and admin team, a personnel team, and so on. Some senior management positions are occupied by individuals who have developed their careers within Poptel, but the organisation has also demonstrated that it is prepared to look outside its own ranks to appoint senior managers where necessary. The introduction of venture capital means that there are now three non-executive directors, appointed by the investors, on the Board. Malcolm Corbetts assessment is that the presence of non-executives has been very valuable in the organisations strategic management. For instance Poptels most recent recruit to the board as a non-executive director is a senior academic from London Business School and a significant figure in the Internet and telecoms industry,
Employees are invited to join the co-operative, Soft Solution, once they have worked for Poptel for six months (this threshold has been brought down from one year). The organisation also recognises the trade union MSF.
Poptel has been split between two sites, in Manchester and London, for more than ten years. Both halves of the operation are of roughly equal weight within the organisation: Manchester has the network operation centre and is the base for the technical department, finance, admin and personnel and customer services whilst London is the base for the sales and marketing team, professional services and the new .coop team. Videoconferencing is used regularly between the two sites.
Major decisions of Poptels Board are taken to, and approved by, meetings of the staff, and minutes of Board meetings are available to all staff to read on the intranet. Poptel also holds regular Retreats, weekend gatherings for all staff, which usually take place twice a year.
Poptels co-operative structures were tested to the full in August 2001, with the Board proposal to make six posts in the company redundant, the first time Poptel had faced a redundancy situation. This was, by all accounts, a painful episode.
The proposal was put to a meeting of all staff (to which those under threat of redundancy were also invited), and was accepted. Nevertheless, the event led to a very public, and very acrimonious, set of emails on the Co-op Net email discussion list, which may have caused some damage to the organisations reputation with some of its clients.
Commentary: some issues for discussion
Co-operatively run businesses, it is sometimes argued, are likely to be more conservative bodies than businesses led by individual entrepreneurs, for the good reason that they need to proceed on the basis of consensus and that that can take time. It could be argued that Poptel missed an opportunity in the 1993-5 period, at a time when the internet was first exploding into a major communications network, by failing to take on the role which new companies like Demon exploited. On the other hand, Poptels focus on membership organisations, non-profits and (to a lesser extent) local authorities may have helped it survive the emergence of mass-market ISP players such as Freeserve and AOL, backed by infinitely greater resources.
Poptels Malcolm Corbett rejects the suggestion that the co-op structure slows down the businesss ability to respond, however. He points out that the decision to proceed with the .coop bid was taken (and an initial expenditure of $50,000 committed) within a few hours. The bid itself was put together in a matter of weeks, in order to meet the tight ICANN deadline.
It could also be argued that Poptel has been held back by being undercapitalised, and without the easy access to venture capital available to other high tech businesses. Clearly, a bank loan, or a loan from a funding body such as ICOF (where the maximum loan available is £50,000) is hardly the answer to the needs of a business like Poptel, which requires substantial injection of non-risk-averse capital. This in practice almost inevitably means some form of equity-based venture capital. These sorts of funding issues are a subject which the broader co-operative movement may want to address.
Poptels considered decision was to dilute its 100% worker co-operative structure in a compromise with investors. "In this industry, you have no choice. If you want to build a co-operative business, you have to compromise with capital," Malcolm Corbett says. There is, however, a longer-term question of where Poptel goes next if it needs a further substantial capital injection, since it has already reached the point where investors own 49% of the trading companys shares. Would it ever become acceptable, for example, to reduce the workers shareholding below the magic 51% mark - say, if this was the only way to maintain the business and keep jobs? What happens if principles directly conflict with commercial survival? What other routes, if any, are there for a firm like Poptel to find further capital?
Poptel has begun an internal discussion, so far unresolved, on the issue of whether individual workers should be able to hold their own shares and benefit from any growth in the companys share value. Is this a way of
strengthening staff members commitment to the venture indeed, is it only fair and right that co-op members should individually reap the rewards of a successful business? (Why should workers in profitable high-tech non-coop businesses have the chance to be rich, but their peers in co-op businesses be content with a salary and perhaps profit bonuses?) Or is a co-op stronger where the employees stake is held collectively?
Because of its size, Poptel is destined to be a niche player; the issue perhaps is knowing how large the niche should be. Poptel implicitly declared its desire to break out of the small time when it first accepted venture capital, and more explicitly when it bid for the .coop and .union domains. However its very success with .coop raises new challenges; is it large enough managerially and financially to cope with the demands of exploiting this new opportunity? It could be argued that some of Poptels problems in 2001 have been caused because the business is still too small, and too undercapitalised, to ride out the period of investment which the .coop concept requires.
The recent redundancies at Poptel also marked a moment of transition, perhaps a loss of innocence, for the co-operative. Some would say that it is only after difficult business decisions have been confronted and resolved when members understand that the interest of the whole co-op on occasions has to override the interests of individuals - that the strength of a co-op business has been properly tested; others would argue that the bond and implied contract between a co-op and its members should ultimately override business and commercial considerations.
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