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ISPs urge 'drastic' cost cut

Bonnie Tubbs
By Bonnie Tubbs, ITWeb telecoms editor.
Johannesburg, 23 Mar 2015
ISPs are calling for drastic cuts in the cost of IP Connect, so that a more competitive field can exist.
ISPs are calling for drastic cuts in the cost of IP Connect, so that a more competitive field can exist.

SA's Internet service providers (ISP) are calling for far more drastic cuts in Telkom's wholesale IP Connect (IPC) cost, which is the largest cost component in providing consumers with ADSL. The local "last mile" cost is also significantly higher than international bandwidth costs.

This comes after Telkom last week confirmed it was looking at cutting IPC costs, for the fourth time since the Independent Communications Authority of SA (ICASA) stepped in to force price reductions three years ago - a move that has allowed ISPs to bring down ADSL costs to end-users.

ISPs have been appealing for cheaper IPC for years now. In 2005, MWeb regulating director Richard Heath - addressing ICASA at a hearing into complaints around Telkom's ADSL offerings - said the IPC pricing model made it "extremely difficult" for ISPs to compete.

Some years later, in 2012, the regulator decided these wholesale prices were indeed too high, and intervened - a move that saw wholesale IPC plummet by 30%. Since then, Telkom Wholesale has reduced IP costs to a far lesser degree - introducing an 8% cut in October 2013 and another 10% last February.

Pricing proposal

Afrihost director Greg Payne says the ISP wants an immediate drop in IPC pricing from Telkom - 30% minimum per year for four years, to be exact. This kind of saving for ISPs would allow for more competitive pricing and, in turn, cheaper ADSL to end-users.

Payne says IPC local bandwidth is being charged at four times the cost of international bandwidth. "[This is a] ridiculous situation, especially [considering] the last mile copper line rental is being recovered separately from the IPC. Telkom should have to justify to the regulator why these charges are so high."

He says currently, ISPs are paying (approximately, depending on volumes purchases) R800 000 per month per Gbps for IPC, while undersea cable bandwidth only sets them back R200 000 per month per Gbps.

"[ICASA] could change this at the stroke of a pen to the benefit of all South Africans. We saw recent reductions in IPC prices being passed on directly to the benefit of all consumers, so it would be reasonable to expect that future reductions would be passed on too, since there is fierce competition in the ISP space," says Payne.

If Afrihost's proposed reductions were to be instituted by ICASA, ISPs would only see the price dropping below the R200 000 mark in 2018 (R192 000).

A 30% IPC cut per year would take the current wholesale cost of R800 000 per month (pm) per Gbps (approx) down to:

R560 000 pm per Gbps in 2015
R392 000 pm per Gbps in 2016
R274 400 pm per Gbps in 2017
R192 000 pm per Gbps in 2018

Greg Montjoie, executive for connectivity at Internet Solutions (IS), notes there are costs other than IPC involved in the total cost of the delivery of a megabyte to a client - including support costs, international and national bandwidth - but says IPC cuts have allowed IS to reduce overall costs.

ICT expert Adrian Schofield says consumers have little choice about the ADSL connection - unless they go wireless. "So I do see that a small/medium ISP will battle to pay Telkom's wholesale rate and still have enough margin to earn a net income while offering value to their clients. The big ISPs don't have that problem because they do not have to use Telkom to access the network and can have a choice of alternative fibre networks."

Drastic decrease

Crystal Web CEO Shaun Kaplan says, until Telkom confirms wholesale line rental price reductions - "a product which many ISPs already run as loss leaders" - or until Telkom reduces IPC pricing substantially, ADSL costs will not come down satisfactorily for consumers.

"ISPs are forced to margin-squeeze to innovate, which is a terrible manner in which to have to operate. Alternatively, as has been evidenced, ISPs are forced to get creative with their advertising while reducing the value to the end-user."

OpenWeb CEO Keoma Wright agrees a drastic IPC cut is needed for ISPs to make a real difference to consumers. He notes IPC is still the single largest cost component faced by competing ISPs in providing choice to consumers for fixed-line ADSL - an assertion made by ICASA three years ago.

BMI-TechKnowledge director Brian Neilson points out, although ADSL costs are coming down (in terms of the cost per unit), because consumers are growing their use, on average, even faster, they may be spending very much the same on a monthly basis - or in some cases even a bit more than before.

Web Africa's connectivity product owner Greg Wright says Telkom's IPC cuts have made fixed broadband, on the whole, more affordable and the market has seen an increased uptake in ADSL products. "That being said, we still feel IPC pricing is out of whack with global standards and there is plenty of room for movement in terms of further reductions."

Simon Butler, head of product: carrier and connectivity for Vox Telecom, says recent IPC price drops have made a difference in terms of spurring cheaper ADSL, but these are marginal compared to the growth in user usage demand over the same period.

"While we welcome any price drop and initiative that ultimately benefits the end-user, ISPs have had to come up with innovative ways of packaging their products to pass savings onto customers at a much faster rate than intermittent IPC price drops."

Telkom says, going forward, and in the spirit of further reducing the cost to communicate, Telkom Wholesale is striving to find ways of reducing its costs and prices, including the price of IPC. "This will assist in increasing the uptake of fixed broadband connectivity in South Africa. We will communicate such price reductions to the market in due course."

ICASA had not responded by the time of publication.

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