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Telkom fails to make the cut

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 28 May 2015
Internet service providers are not fooled by Telkom's 63% wholesale price cuts.
Internet service providers are not fooled by Telkom's 63% wholesale price cuts.

Telkom's generous wholesale price cuts of as much as 63% - meant to stimulate competition - only applies if certain conditions are met, and amount to no more than a publicity stunt.

This is according to industry observers, who note the telco's sweeping wholesale discounts have not made their way down to end-user level and will not have a massive effect on competition in the Internet service provider (ISP) space.

To benefit from Telkom's discounted plans, ISPs have to spend more, which means the wholesale cost has not actually been trimmed by 63%.

A month ago, Telkom announced "wholesale unit price reductions of up to 63% across its product range". At the time, CTO Alphonzo Samuels noted: "A connected South Africa is where positive change starts to happen." The company added the latest pricing announcement followed a "series of price reductions of Telkom's IP Connect product".

As of the start of this month, Telkom said its wholesale customers could expect:

* Rate reductions of up to 10% on the wholesale fibre broadband access product range.
* Price adjustments of between 6% and 25% across the SAIX product range.
* Tariff reductions of between 1.4% and 63% across the IP Connect (IPC) product range.
* Tariff reductions of between 35% and 40% across the metro Ethernet product range.

On the back of the announcement, MD of wholesale services Prenesh Padayachee said: "Telkom has chosen a clear path to democratise data access to all South Africans. We believe these major price adjustments and our renewed focus on value will go far in serving our customers, the industry and ultimately, the socio-economic development of South Africa."

A new model

However, MWeb CEO Derek Hershaw notes Telkom's announcements effectively introduced a new model for IPC pricing. "In these new bands the discounting is skewed in favour of the ISPs that buy less IPC capacity." He adds, based on MWeb's current consumption, it is basically paying the same as it was before - it has to move into a new (higher) capacity band in order to see a reduction in its rate.

Hershaw adds Telkom also offered a once-off opportunity to double IPC capacity for an additional 15% charge on the current rate. "This offer comes to an end in August and we haven't decided yet whether to take it or not. It's all very well getting a lot more capacity but if you cannot use it and monetise it then all you are doing is adding an extra 15% to your existing cost base."

As a result, notes Hershaw, "there are definitely discounts to be had but it depends on where you are in your current usage model and then also whether or not you take the double-up offer. But it's definitely not a case of IPC is now 63% cheaper."

One ISP, who asked not to be named, likens Telkom's "spin" to Telkom deciding its "munch-size Lunch Bars aren't really wanted and so they want to sell off the super-large Lunch Bar". The ISP says there is more chocolate in each rand, but it is still more expensive, and all providers would have to up-size their 'chocolate bars'.

Confusing move

Crystal Web director Paul Hjul adds, although Telkom's move is welcomed, the company is concerned Telkom has framed the move as a simple "price cut", especially when there is a legacy of price mismatching from Telkom on essential building block products such as IPC.

"We hope the announced revision of pricing in the IPConnect product will be followed up by Telkom affording ISPs the opportunity to increase the number of DSL subscribers. Telkom needs to recognise that DSL broadband access is no longer simply a value-add on top of a telephone service but rather represents the most efficient use of Telkom's sizable copper assets."

Meanwhile, Shane Chorley, executive head of carrier and connectivity at Vox Telecom, notes there was, unfortunately, a complex reduction in pricing across the board. He notes Vox is still working with Telkom to understand exact price cuts, following which it will adjust product costings accordingly.

Chorley notes some price adjustments kicked in this month, although Telkom has yet to produce the exact rate per service, while other adjustments require Vox to spend more in order to reduce its unit cost, but are not an exact saving.

Securing the future

BMI-TechKnowledge director Brian Neilson adds, for an ISP to benefit, it would have to "shell out more money on a monthly basis to Telkom, rather than less, which means they would also need to extract more revenue from their retail customers each month".

He adds Telkom is effectively securing the future of its copper-based DSL network, with accompanying MSAN rollout to enable higher performance and consumption.

ICT commentator Adrian Schofield notes Telkom's price cuts are more complex than they appear, and until there is clarity on what it means, price cuts will not be passed onto end-users. Noting the cuts are effectively window-dressing, he says: "This is marketing."

Schofield adds the net effect is not a 63% price cut, unless ISPs are able to move into a new price band, and even then they will not get the full 63% discount. "There is no beaming light at the end of the tunnel."

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