Telkom has set in motion a chain of events that may see another price war - this time in fixed-line broadband - erupting within months.
This is according to industry observers and comes after the state-owned company - SA's telecoms backbone with a monopoly in the fixed-line arena - announced it would cut IP connect (IPC) costs for the third time, in two years, next month.
IPC is the wholesale product through which third-party Internet service providers (ISPs) connect to Telkom's network. The latest price reduction of an effective 15% (set to come in from 1 February) follows a 30% cutback in April 2012 and another 8% reduction about a year-and-a-half later.
Historically, ISPs have positioned Telkom's IPC rate as being an inhibitor to growing broadband in SA. The cost of IPC has been positioned by the Independent Communications Authority of SA as "the single largest cost component faced by competing ISPs in providing choice to the end-user for fixed-line ADSL services".
Last year, the Internet Service Providers' Association said IPC could constitute up to 70% of the total costs involved in ISPs delivering Internet services to their customers.
Price war
The latest move to further reduce the wholesale burden, says Telkom, will assist and enable ISPs to grow fixed broadband service offerings in SA.
While Telkom has long been criticised for holding back competition in the sector, analysts are optimistic the latest IPC rate cut is a step in the right direction that will ultimately see consumers benefit.
In Telkom's own words, 2014 will be a year of delivery, a year of setting right soured relationships, and contributing to the ultimate goal of making SA a better place through more affordable communications, in line with government's National Development Plan.
Telkom CEO Sipho Maseko said in a Sunday Times column yesterday that the company was intent on reviving its full potential as an enabler of SA's social and economic advancement.
Add to that a 2013 ruling by the Competition Commission compelling Telkom to reduce wholesale prices - and analysts see a recipe for a fixed-line broadband price war in 2014.
Consumer win
IDC analyst Spiwe Chireka says - although the tangible benefits may only be seen in two to three months' time - a cut in wholesale prices is destined to filter through to the end-user.
"There will definitely be a consumer benefit following the latest IPC reduction. Although it depends on the individual ISPs, I think SA can anticipate price reductions over the next three or four months."
She expects another price war in the said timeframe, with Telkom leading it. "At the end of the day, the consumer stands to win. Usually one of the bigger ISPs like Telkom or MWeb will start with price reductions [or better capacity for the same price] and then the others follow. They don't really have a choice but to follow."
Africa Analysis analyst Dobek Pater agrees consumer price reductions are likely to follow in the wake of the IPC drop in February. "Over the past several months, we have seen ISPs already reducing prices on fixed broadband services and this trend will continue for competitive reasons.
"The latest reduction in the IPC will be an enablement. We have also seen some of the traditional fixed broadband service providers expand their offerings into the mobile sphere (eg, Afrihost partnering with MTN and MWeb with Cell C), whereby they will be able to structure their own mobile data products using the mobile operators' networks."
Ovum analyst Richard Hurst says consumers may not expect immediate, outright price cuts following Telkom's latest wholesale cut - but local trends indicate broadband prices will keep falling. "I think over the past few years we have seen some positive steps in the reduction of broadband pricing for South African consumers. However, I think there have been a number of factors which have influenced this price reduction.
"Perhaps we will not see any massive price cuts for the consumers right away and the cost-cutting could manifest itself in various guises, such as giving more bandwidth at the same price."
Ofentse Mopedi, Africa Analysis analyst, says Telkom's IPC cut has provided ISPs with an opportunity to revise, in particular, their ADSL offering and to introduce even lower priced offerings.
"When looking at the Internet access cost alone, much progress has been made over the past three years, with some of the bigger ISPs (Cybersmart, Telkom and Webfrica) in the country offering residential customers 1G of ADSL data at cost less than R10 at the moment."
Mopedi says, in the near future, SA can expect to see the local broadband market being more in line with international markets in terms of broadband pricing.
Not enough
ISPs and pundits have, however, also been careful not to raise expectations too high following IPC cuts in the past.
In September last year, World Wide Worx MD Arthur Goldstuck said the bottom line when it came to broadband affordability, was local loop unbundling. Goldstuck said Telkom needed to address other layers of costs for the consumer.
"The problem is the layers of costs consumers have to pay for access to ADSL. First, there is the R157 monthly fixed-line rental fee and then, on top of that, you still have the ADSL line rental and then the ISP cost. Sometimes the ISPs' costs are swallowed by the ADSL rental but the fact of the matter is, it's another layer of costs."
Speaking at the time about the then latest 8% reduction in wholesale IPC costs, Goldstuck said it would have only marginal benefits for consumers.
SA's second biggest ISP after Telkom, MWeb, says ISPs' margins are squeezed and they need to see a greater drop in wholesale prices to remain sustainably competitive.
MWeb CEO Derek Hershaw points out that Telkom announced in September it would double access line speeds on all 1Mbps and 2Mbps lines and increase 4Mbps line speeds to 10Mbps, at no additional charge to the consumer. "This was very good news, and we hoped that they would also announce a drop in IPC charges so that we could do something similar with the speeds on our data products. That never happened.
"In October, Telkom Internet announced they would be doubling the speeds of their data product to match those lines' speed increases. This would also be, by and large, at no extra cost to their customers. So, in order to remain competitive in the market, a number of ISPs started making changes to their data products anyway, even though it created severe margin squeeze on the back of much higher network costs."
Hershaw says Telkom's latest reduction is not enough to offset these additional costs. "I think that figure should be at least 25%. But the Competition Commission will look into that as part of the settlement agreement they reached with Telkom last year, and hopefully we will get further relief then."
He says, in the meantime, MWeb will use the price drop to take some of the pressure off the ISP's margins, and to build capacity and improve performance in its network. "We don't plan to adjust our retail prices at this stage."
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