Rules of the game changing as DSL subs head for 1 million and international fibre prices fall to all-time low

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Almost unnoticed the rules of the game are changing and the South African market shows key developments that will transform how markets operate. DSL subscribers there look set to break through the “critical mass” barrier and there are irresistible pressures building up for low prices and no caps. Alongside this development, SAT3 bandwidth prices are now nearly down to the critical US$1000 a meg for volume buyers. Russell Southwood looks at why this is a moment of change for South Africa and how it will also be something that affects the rest of the continent.

Speaking at this week’s Media and Broadcast Congress in Johannesburg, Rudolph Muller of Mybroadband told conference participants that broadband subscriber levels had reached just over 700,000. He predicted that they would reach 1 million in 12 months and 2 million in 2 years as prices came down, capacities went up and restrictions were removed.

Another small straw in the wind is that there were recently 700,000 downloads on the dsTV site after a recent Big Brother programme. Small, you might say alongside the scale of the continent’s population but massive against what was believed possible 3-5 years ago.

The revenue drivers in this market comes from two sources: subscriber income and advertising. Once the South African Internet heads for the millions, it becomes another media through which to address people. Growth will be significant as it starts from such a low point. For as South African media owner Prakash Desai, CEO, Johnnic pointed out:”99.9% of revenues are offline. The Internet doesn’t feature.” Outside of South Africa, the same will occur when the medium attracts 100,000 plus subscribers. For how many African newspapers have that kind of circulation?

The second development of considerable significance is that for large volume purchasers in South Africa, international fibre bandwidth prices have come down to all-time lows and are very close to the US$1000 mark. As predicted from experience in Kenya after VoIP legalisation, the arbitrage in the system moves from the international to national pricing. The international prices referred to above are for Sessimbra to Johannesburg and these are now slightly cheaper than equivalent prices for Johannesburg to Cape Town. This is no longer sustainable in anything that resembles a competitive market.

This must put pressure on Telkom to lower national trunking rates as it enters into intense competition with the new influx of infrastructure providers. Its strategy appears to be to make larger reductions in national rather than local prices, thus reducing the margins available to the new entrants. Between 2001-2006, it has reduced national rates between 20-40% (depending on volume) against only 10% for local rates.

Obviously this rate is not available to smaller users and SAT3 bandwidth will become limited as the impact of these prices kick-in. However, the news that this has occurred will put pressure on all the monopoly telco providers in Africa along the SAT3 cable. For South Africa has now come down to the kinds of levels offered by Senegal’s Sonatal and Cote d’Ivoire Telecom. Others must surely follow even if it takes another 12 months for them to migrate prices down wards.

The fog is beginning lift on the confusing array of fibre projects. The South African Government has two international fibre projects, both claiming they will build fibres both up the west and the east coast. The DTI has set up Infraco and has just appointed consultants to bring the project about. Meanwhile there is the DoC’s project with NEPAD: contrary to past spin, this has little to do with the few signatories of the NEPAD protocol. Seventy per cent of the funding is now going to come from Bihari, which looks likely to agree to put up 70% of the funding.

As one industry insider put it, “the DoC are backtracking on the original announcement and are all over the place.” 70% foreign ownership does not quite seem to fit the Minister’s original requirement for South African ownership. Meanwhile it looks likely that when Seacom is financed it will have majority African funding. Those who should know say that the DoC/NEPAD project will be quietly folded into the DTI project and that only the west coast route will be built.

Operators also seem confident that Government will deal with the SAT3 monopoly issue and allow them to co-locate at the landing station. Telkom itself is apparently already putting aside a building there where this will happen.

Ironically, the third development that will create “market changing” pressures is the launch of Telkom Media. Having assiduously talked IP-TV and interactivity as its differentiator, its parent company now has to deliver the means through which it can be delivered. Telkom, the telephone company has been struggling to keep up with the pace of DSL growth. Whilst it is currently offering 4 mbps, Mybroadband tests show that average achieved speeds are 343 kbps. This will only allow a limited number of IP-TV offerings.

Telkom Media will need much higher speeds to make IP-TV work in the way it has been promoting it: at least, 1-2 gbps will be needed and it will need to stop ratioing bandwidth through capping use. In case, the future is behind schedile, it has taken a side-bet by also having a satellite offer ready if ADSL 2 not available within its time scale. However, Telkom is busy rolling out ADSL2 as quickly as its workforce and contractors will manage it. Telkom Media will also brand itself differently to get away from the stigma attaching to its parent company with consumers.

The fourth development of real significance is the arrival of competition at the national infrastructure level that will help drive down national transmission costs. Although Telkom has looked like a financially impregnable company, there is nothing but bad road ahead. It is bleeding key staff to MTN and Vodacom who are gearing up to become infrastructure players. The roll-out of DSL is not going fast enough and it is now relying on managed service contractors in key areas.

Furthermore Telkom will soon be turned upside down. Vodafone will buy out Telkom’s shareolding in Vodacom for a large sum. And as this constitutes large part of its income (50%) and capital value, it will then be a considerably smaller company facing major competition in its remaining retail and wholesale markets.

Despite serious competition issues, there is high-level political backing for the MTN deal which would see MTN acquire its wholesale and data services as Government wants MTN to become the “African champion”. The perception in Government is that Telkom doesn’t have the management or skills to play this role. The previous CEO was got rid of because it was seen that he had failed to get to grips with the fact that he was running a telco. His frankness about this when he started was refreshing but wore thin as time went by. Also Telkom’s failure to acquire African assets at any speed must also have played a part in this disillusionment with its former favourite son.

So everybody is now rushing into infrastructure and the vertical integrators (of which Vodacom will become one) will offer triple and quad play. Telkom will probably now face nine competitors. The traditional contenders will be: MTN, Vodacom, Neotel, and Sentech (that has already decided to get out of the retail space). Possible insurgents contenders will include: MWeb, IS, Verizon and Datapro. Rumour has it that after the recent issue of Wi-MAX spectrum that there is enough remaining spectrum for 4 players Neotel’s retail launch will take place in March/April of next year and it is working on a triple/quad play product.

MTN’s fibre infrastructure tender closed this week and prior to this, it had already started rolling out in the wealthier metro areas. Its strategy is clear: either it will provision more cheaply or its entrance into the market will cause Telkom to lower its prices. Either way prices will be reduced and it can stop investing in fibre once it has established a basic network, leaving Telkom to supply more marginal areas.

Obviously Vodacom is heading in the same direction and wants to become a vertically integrated provider. It has already done a deal with DSTV. At the moment it is simply a reseller, but in the future? It is hard to believe that it will make sufficient margins on its TV offer if it remains a reseller. With Vodafone purchase of Vodacom almost certain to go through, the parent company will find itself in the unusual position of watching its South African operation to see what lessons it can learn for the rest of the group about the roll-out of converged services.

Whilst transmission costs are only 10% of most operators’ voice operations, they are 50% of data costs so they have to get this right. The market is unlikely to sustain nine infrastructure players but this flurry of competition will open up the VoIP market, lower national prices and grow the user base for a wider range of services. And what’s not to like about that?