East Coast cable pricing war begins

By Paul Vecchiatto, ITWeb Cape Town correspondent

Cape Town, 23 Mar 2009

If you think international connectivity prices are about to tumble in June, then just wait a year, says Chris Wood, CEO of the West Indian Ocean Cable Company (WIOCC).

In less than 18 months' time, there will be not one, but two, undersea cables operating all the way down the African East Coast - a region that has been starved of cheap connectivity and has had to rely on either expensive satellite services or politically risky land routes for its telecommunications links to the rest of the world.

Privately funded Seacom has already set the pace, as it will offer connectivity at 10 times less than the going Telkom rate.

Now, Wood says, just wait until the East African Submarine Cable System (Eassy) is in service in June 2010, and this could be lowered by another 75%.

Diametrically opposed

The two East Coast cable systems operate on diametrically opposed business strategies. Seacom is privately funded and is, strictly speaking, not a telecommunications operator. It relies on the good will and connectivity from the telecommunications operators in their respective landing points for carriage of its traffic.

On the other hand, Eassy, of which WIOCC is shareholder, as it is a special purpose vehicle representing 12 of the smaller African telcos, has direct telecoms carrier shareholding. The African telcos, therefore, are naturally more inclined to divert traffic its way.

“For telcos, the investment in a cable system comes out of their operating budgets and it is spent and written off. For a private equity funded cable, the owners have to pay their shareholders and debt providers who are looking for specific rates of return. The problem for the latter model is that they have a threshold below which their prices cannot go, otherwise their business model is in question,” Wood says.

Seacom is already laying its cable and it is scheduled to be operational by June. Eassy is still manufacturing its cable and completing its marine survey. The Eassy cable is scheduled to begin laying in September through February, and to be operational by June 2010.

“Events around 2010 are not a big deal for us,” Wood says. “The needs of the Soccer World Cup will be well met by upgrades to the SAT-3 and SAFE undersea cable systems, and to the satellite services. What we are looking at is pricing further down the line.”

He points out that Seacom was taking advantage of the speculation that the Eassy cable would not happen, or at least take a far longer time to, but this will not be the case.

“Eassy is happening and you couldn't stop it even if you tried.”

Wood, who has more than 20 years' experience in the undersea cable pricing business, says while he is aware of Eassy's chequered past, that is all water under the bridge, and he is far more concerned about what is going to happen in the future.

“Building and operating a successful cable system is a marathon rather than a sprint - it's about who can stay the course and be around in 10 years' time,” he says.

WIOCC is a consortium of smaller African telecos, who, if they invested in Eassy individually, would have insignificant stakes. This would make it easier for the big shareholders such as Telkom, Vodacom, MTN and others to push them around.

“Now we are the largest shareholder, with 29%, and we have backing from the developmental finance institutions such as the International Finance Corporation, European Development Bank and others, and we have a far greater say in running Eassy,” Wood says.

Embracing principles

Another factor that makes Eassy not just another cosy telco consortium is that it embraces the open access principles, meaning the carriers are able to compete with each other if necessary. “WIOCC has developmental objectives. For instance if a carrier decides that it wants to keep its prices high, then there is no reason as to why we (WIOCC) can't sell services to SA cheaper,” Wood says.

A West African cable is needed to complement the East Coast developments, but when these will mature is still up in the air.

“We have seen some infighting between the two SA government sponsored systems Uhurunet and Broadband Infraco, with the latter getting the government's endorsement, and then it ran out of funding. What will happen to the projects to replace SAT-3 is still very uncertain,” Wood says.

WIOCC shareholders are Botoswana Telecom Corp, Somalia's Dalkom, Djibouti Telecom, Seychelles Government, Lesotho Telecoms Authority, Onatel from Burundi, Telecomunicacoes de Mocambique, Telkom Kenya, U-Com from Brundi, Zanzibar Telecom from Tanzania.

Editorial note: The structure can be found at this address: http://www.wiocc.net/images/ownership_structure.jpg