Seacom walks on water

'Seacom to POP up in Joburg'. 'Seacom readies its cable'. 'Seacom geared to go'. 'Seacom ships out'. 'Seacom starts Red Sea leg'. 'Seacom finds parting Red Sea unnecessary, because Seacom walks on water.'

The only hint that the last one is made up is that it's too long for a headline.

The remarkable progress of the Seacom undersea cable, which will connect the unserved east coast of Africa to the rest of the world, should stand as a lesson to the big-government busybodies that think only the state can provide important infrastructure services to its citizens.

Granted, Uhurunet, a rival project sponsored by several governments, did have its first official inter-governmental assembly meeting last year, and while it would be churlish to sneer at such great leaps forward, Seacom laid its first cable in November and is both on schedule and below budget for going live in June. Uhurunet will, may, or could deliver all its great social, economic, education and healthcare benefits, in 2010, maybe.

I don't mean to pick on Uhurunet. Infraco, the South African government's preferred project, because it is a South African government project, is in the same boat. Like Uhurunet, it will cost two or three times as much as Seacom. The only reason it hasn't run over budget yet is because it hasn't started yet.

Of course, this cost will be paid by the taxpayer. So will any losses the companies incur, because Seacom has the first-mover advantage.

It is on pricing that the key test will come. If Seacom is laying this cable despite anticipating competition from tax-payer-funded alternatives, this means its investors foresee at least some pricing power.

Why might they expect this? After all, if the capital costs are funded by tax revenue, the rival state-owned cables will find it much easier to run at a loss. This amounts to a price subsidy, against which private companies traditionally find it very hard, or impossible, to compete.

If the operators of the public cables are themselves private, you get the worst of all worlds, in which the price they pick is as high as they can get away with.

Ivo Vegter, ITWeb contributor

But consider how the public sector works. Usually, such projects are operated at arm's length from government, with only a pricing mandate or tariff and service-level commitment to meet. These pricing mandates are usually of the cost-plus form, rather than the freedom private companies have to price at what the market will bear.

As a result, public companies pick a price, and scale their cost expectations accordingly. If the operators of the public cables are themselves private, you get the worst of all worlds, in which the price they pick is as high as they can get away with, because it is the only way to maximise profit, which is typically a fixed percentage of revenue.

By contrast, private companies have another tool: cost-containment. If a public company, with a cost-plus pricing structure, reduces cost, it also reduces profit. Worse, if it needs to reduce prices, it often has a hard time reducing its previously generous cost base.

Not so a private company. While it is no less profit-seeking, a private company has more tools available to it to maximise its profit. The result, in a competitive market, is that prices will decline over time.

Nobody in their right mind expects Seacom to make good on its promise of cutting prices by 80% below current levels. (Although, since current levels are about 125 times the global norm, even an 80% cut would make its African traffic the most profitable, per unit, of any cable in the world.)

However, one does expect it to undercut incumbents, and to aggressively reduce costs when price competition becomes a pressure on profitability.

Seacom has already shown how a private company can outperform multiple public-sector competitors in deploying a large infrastructure project. In fact, it has given some of its private competitors a valuable case study in how to do it, so far.

Once the cable goes live, in June, keep an eye on it. Especially if you're still a believer in the social benefits of the patronage state. My bet is that FIFA will find its bandwidth both cheaper and more reliable than all the grand political projects that will be vying for World Cup 2010 business. For a start, it may actually have some bandwidth to sell.