Following Telkom's June announcement that it will drop its ADSL pricing by 18% and 31% depending on the ADSL product, smaller Internet service providers (ISPs) say they will also bring ADSL prices down.

The latest to do so is Adept Internet, which has announced ADSL price cutbacks with immediate effect, offering capped 3GB for R179 and 30GB for R358. Other ISPs like Imaginet have also said they will drop their prices.

"The prices can be dropped because the South African Internet eXchange (SAIX) has dropped its prices for ISPs," says Jacques Pieterse, MD of Adept Internet.

SAIX is a Telkom subsidiary that is the wholesale provider of raw connectivity to the Internet for southern African ISPs.

However, even with the price reductions, Imaginet CEO Darren Miller says Telkom is still controlling the floor prices so ISPs can "only go so low with prices and still remain profitable".

An ADSL connection consists of three components: a monthly line rental, a price for ADSL access service and an ISP charge for Internet access via the ADSL service.

"The first two are controlled by Telkom and nobody else can legally provide an alternative," says telecoms analyst Ant Brooks.

Therefore Telkom dictates these portions of the ADSL cost, while ISPs have some control over the third cost component - an ISP charge for Internet access via the ADSL service - says Brooks.

While ISPs have some control over the third cost component, they must either pay Telkom for the ability to connect their networks to Telkom's ADSL infrastructure or buy access accounts from SAIX on a wholesale basis and resell them to their customers, he adds.

"So Telkom controls the underlying costs to the ISPs and at present Telkom's pricing for both scenarios is very high and ISPs are essentially forced to keep their profit margins on ADSL services close to negligible in order to be able to compete with Telkom's own ADSL offering."

At present there are no checks and balances in place to ensure the ADSL retail offerings from Telkom Internet have the same input costs as other ISPs, he says.

So while ISPs using IPConnect to connect to Telkom's ADSL infrastructure must pay tens of thousands of rands per month, Telkom does not connect to the ADSL infrastructure via IPConnect, instead using largely the same infrastructure as Telkom uses for the underlying networks, says Brooks.

"So essentially Telkom Internet can reduce the ISP charge portion of its ADSL offerings below the cost of providing that part of the service, since Telkom still profits from the first two components."

Given this, there is really no way for ISPs to fairly compete with Telkom Internet for the provision of ADSL services, Brooks adds.

The ISPs are still not satisfied that Telkom's price reductions are enough.

"Yes, they have lowered the prices but not by as much as we would have liked, but at least it is a step in the right direction," says Imaginet's Darren Miller.

"And the pricing is still not internationally competitive."

"I do not believe that we will see significant competition as far as quality of service goes until ISPs have direct access to the loop," says Brooks.

It is hard to see how there could be a true 'price war' for ADSL services in SA, given that Telkom ultimately controls all of the costs of providing the service, and the retail arm of Telkom Internet does not have any of the same input costs as its competitors, he adds.

"All that competitors can do in response to a reduction in the Internet access portion of the charge from Telkom Internet is to reduce their margins even closer to zero and hope that the market gets some true competition before Telkom forces them out of the marketplace altogether."

The growth and importance of high-speed access was highlighted in a 2005 small and medium enterprise (SME) survey conducted by MWEB Business. The survey, the results of which were published in June, indicated that SMEs are slowly moving away from dialup connections to high-speed options such as ADSL. The number of companies using ADSL increased from 2% to 25% from 2003 to 2005.

"The growth potential for broadband in SA is enormous as it exposes SMEs to a range of opportunities that were previously unattainable. ADSL will transform the way in which SMEs conduct business, aid their competitiveness and ensure sustained growth," says Andre Joubert, MWEB Business GM.

"We believe that in future, broadband connectivity will be the preferred Internet access method for SMEs. The current high cost of broadband in SA is, however, an inhibitor for broader adoption and effecting change in this regard should be a strong priority for all industry players," Joubert adds.