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More competition. Maybe.

Read time 11min 40sec

High bandwidth costs and lack of competition in the South African telecommunications market continue to restrain business growth in a number of ways.

South Africans have gotten used to relatively low bandwidth speeds combined with unacceptable service in some areas.

It's unclear whether local loop unbundling - to be implemented in November and expected to bring increased competition and lower bandwidth costs - will actually bring the relief businesses hope for and ISPs can only dream of.

Meanwhile, businesses of all sizes manage somehow.

Small business does not mean unsophisticated, low-bandwidth needs, says Steve Briggs, CEO at Arc Telecoms.

“Even really small businesses in a hi-tech industry, with no more than 10 people, can gobble up more data than you can throw at them.”

And SME budgets could use all the help they can get, given the great expectations of the sector.

“At a national policy level, the government and the policymakers are relying very heavily on the middle market, where SMEs are, to create jobs,” continues Briggs. “One of the things that immediately makes the cost of business lower and makes it easier to reach your market, is better connectivity.”

But in telecommunications, Telkom still has a monopoly in some parts of the market, including the crucial local loop - literally, the copper wire that connects consumers and businesses to their local exchange.

“Bandwidth is an essential service and should be treated the same as water and electricity,” adds Prenesh Padayachee, CTO at Internet Solutions. “If we want to grow as a country, being connected at high speed is going to be key. But we've had a monopoly for so long, I don't fundamentally believe it is a cost-plus model. I think it's always been a model of 'let's see how much we can get out of this'.”

Bandwidth-strapped

For large businesses, telecommunication costs hurt in the contact centre, says Karl Reed, sales director at Elingo. In a contact centre, the single biggest operating cost is staff, at between 60% and 70%. The next biggest cost is inbound and outbound calls.

But when Reed's customers make design decisions about their contact centres, they don't approach decisions about bandwidth and the number of phone lines according to requirements. Instead, they attempt to limit cost. Reed says his customers always try to skimp on bandwidth. They also go for the bare minimum on the number of enterprise-standard phone lines to their PABX, also known as ISDN PRIs (primary rate interfaces).

“An ISDN PRI is the most common way of connecting a business to the outside world,” explains Reed. “Simply put, it is a piece of wire from the outside world to the PABX or contact centre that allows 30 concurrent phone calls. Operators such as Telkom, Neotel, MTN and Vodacom currently provide PRIs.

“We are killing ourselves in the international market. A lot of local customers that would love to launch outbound sales environments just sit back and say, 'Adding another 10 PRIs that would allow me to make 300 calls at one time will set me back R30 000 to R50 000 a month, before I've made one phone call'.”

I think people will be surprised when this local loop is unbundled and they see the price they have to pay.

Reshaad Sha, Cisco

High telecoms costs may even prevent companies from using bandwidth-dependent flexibility and cost-saving measures. As an example, software-as-a-service (SaaS), where a business can rent hosted applications on a pay-per-use basis over the Internet, becomes irrelevant if the cost of connecting to the provider is too high.

“The whole cloud market, really, the whole virtual environment market is strapped by bandwidth,” says Edwin Thompson, GM of technology and infrastructure at MTN Business. “If all you have to the corporate office is a couple of megabits of capacity, it's pointless to try to run your applications or voice telephony across that.”

Price versus quality

With more operators in the market, transmission costs are coming down in certain sectors, but not in the way some may have expected.

“When you buy an SIP service or a PRI service, the costs of those services should be very different, but they're not, because the incumbent carrier still has a lot of old infrastructure on which it needs to get a return,” explains Kevin Hardy, GM Converged Communications EMEA at Dimension Data.

“So services offered now are not necessarily priced according to the cost of delivering them, but rather on what the market will bear and protection of revenues for the carriers.”

I don't believe anybody can do it better than Telkom right now. It's too big a project.

Wayne de Nobrega, Altech Technology Concepts

Big operators face pressure from another front, exactly because more operators create more choices for customers.

Hardy continues: “Most carriers can no longer survive on just having bandwidth; they have to start offering value-added services over that line. Bandwidth is becoming a real commodity.”

Prodded into making a bandwidth cost forecast for the end of 2012, Hardy says: “A 15% to 30% reduction will be reasonable, given that a lot of these carriers have to recoup what they've spent on infrastructure.” He is concerned about the quality of lower-priced services, though.

Apart from factors influencing the supply of lower-cost, high-speed bandwidth, there is also the question of not enough demand to drive unit costs down, at least in the ADSL space.

The game-changing bandwidth cost decrease for small businesses, many of which are started in homes, would still be with ADSL, says Wayne de Nobrega, CEO at Altech Technology Concepts. If enough customers were connected to the network, he adds, lower costs with good quality would be possible.

Service providers, especially big ISPs that oversold on uncapped ADSL services, are to blame for bad ADSL performance, he argues. “As service providers, we have failed the industry and community. We should not be trying to drive the price point down. We need to provide quality products and let people have a great, predictable experience, even if it costs them 10% more.”

Don't write off ADSL because of bad customer support in some areas, insists De Nobrega.

“You can't say, because we have a service provider that is not providing the correct SLA, that fixed lines are not what we should be using. We should fix it.”

Unbundling possibilities

An effective SLA on ADSL requires better management of the physical connection from the office or home back to the ADSL network.

Currently, only Telkom has access to the local loop, and it charges other players to offer services over this infrastructure.

“We have an expensive cable that all of us have to pay for, connecting our networks into the ADSL network,” comments De Nobrega. “It is the most expensive cable in our network, because you can only buy it from Telkom. There is no competition, and no reason to drop the price, unless the regulator forces that. The ADSL network itself and the link from the ADSL network to your house or business is owned and controlled by Telkom.”

However, once local loop unbundling is implemented, ISPs could also have access.

“With local loop unbundling,” explains Winston Smith, MD Southern Africa and Nigeria at Alvarion, “ISPs like Internet Solutions or MWeb would have their own local loop. In other words, the 021 or 011 number would be provided directly from them. They would have access to the exchange and access to pull the copper into your home for ADSL, ISDN or plain old telephone service. They would be able to be the complete end-to-end provider.”

Ideally, local loop unbundling will result in more reliable end-to-end services and less finger-pointing to third parties when lines go down, says Chris Ross, managing executive Commercial at Vodacom Business.

“What we are looking for is real control of the last mile, where we can provide more cost-effective solutions, and assure that the service is available.

“At the moment I can go to Telkom, ask them to put an ADSL line into a building, and then we run our systems over it. When the ADSL line is down, we phone Telkom and they fix the line. You may have a similar situation, having to phone a third party when the service is down, if the local loop is unbundled to a third-

party company.”

Most carriers can no longer survive on just having bandwidth; they have to start offering value-added services.

Kevin Hardy, Dimension Data

But what if many parties end up maintaining the same ADSL infrastructure? Wouldn't that create even more problems in ensuring good service?

Yes, says Ross. And there is another reason to not have too many parties tinkering with maintenance. “The more middlemen you have in the link, the more prices have to go up. Each person in the link has to get a margin for providing service.”

At rival MTN Business, Thompson doubts it will be a full unbundling. “Local loop unbundling will definitely give you a little bit more choice in how the infrastructure is used. Currently, the link from your home to the copper on the ADSL network is restricted by whatever the incumbent operator decides to do with it. If the operator decides the best you can get is a 4MB ADSL service, that is the best you are going to get.”

Explains Thompson: “Full local loop unbundling would open up the network to the point that you could use whatever technology you like on the end of the copper. Then, if someone is prepared to invest in technology that will get 100Mb off that copper wire, they can do that. But, unfortunately, it depends on how the cookie crumbles from a regulatory perspective.”

What that crumbling should look like is very clear to Altech Technology Concepts' De Nobrega.

“We have no control over what we get charged for the physical infrastructure linking people back into our networks,” says De Nobrega. “Some of the services on the infrastructure have an SLA, some don't. ADSL doesn't have an SLA, but a leased line does have the option of one.”

To avoid getting the unbundling horribly wrong, agreeing on business requirements is more important than first deciding on the technical way forward, he maintains.

“I don't care who owns the cable between the exchange and a house, as long as it meets the business requirements. I don't believe that anybody can do it better than Telkom right now. It's too big a project. We need to define the SLA and the business requirements, and say to Telkom, 'Please, this is what you need to meet'.”

But the maintenance model De Nobrega advocates will probably not gel with Ross' hope of no third parties between customers and operators.

“You don't want 20 different service providers looking after the cable between your house and the exchange. You need an infrastructure company that looks after this for all the service providers. Then we need capacity to be handed over to us, and we need to choose where that handover point is.”

Local loop surprises

Local loop unbundling may result in better quality and service on ADSL, but is unlikely to result in significantly lower bandwidth costs. Given how unbundling was implemented in other countries, Reshaad Sha, strategy director at Cisco Internet Business Solutions Group, expects small price reductions.

“Often, smaller service providers in other markets never really understood the pricing and costing of the unbundled local loop until they were faced with prices for using it. I think people will be surprised when this local loop is unbundled and they see the price they have to pay,” says Sha.

“It's not because specific telcos want to make money from it, or that they want to make it difficult for other entrants. The price really is that high.”

Bandwith is an essential service and should be treated the same as water and electricity.

Prenesh Padayachee, Internet Solutions

Sha bases his opinion on unbundling elsewhere. After local loop unbundling in a few other countries, only one or two service providers took the rate card presented to them by the incumbent operator, rolled out service to smaller providers and tried to make some money in the process.

“I think the savings will be single-digit percentages.”

In the South African telecommunications story, local loop unbundling has another significance. It is one of two options that could allow large ISPs to offer end-to-end services to businesses and consumers, says Smith.

“Unless there is local loop unbundling, the other way ISPs are going to enter that space is if they have access to licensed spectrum. Then they can provide a wireless broadband service on Wimax or LTE or another network,” he continues, “and deliver services to the home, the mobile user, or to the fixed line network.” Such spectrum has not yet been auctioned, though.

A full local loop unbundling would open the network up to the point that you could pick whatever technology you like on the end of the copper.

Edwin Thompson, MTN Business
And what the results of unbundling will be is unclear to some.

Observes De Nobrega: “The regulator is talking about local loop unbundling by November. But we have no clue what that means, because there are a lot of ways the unbundling can be done.”

Opening up South African telecommunications to increased competition, choice and potential price reductions still depends as much as ever on local loop unbundling. How this will be implemented and what the implications will be remains to be seen.

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