Sea change for telecoms

With the 2010 Fifa World Cup on the horizon and Telkom's divestment of Vodacom, the telecoms landscape in SA is as changeable as ever. From new cables and new players, to carrier pre-select, local loop unbundling and co-location, it seems as if the only predictable thing in this sector is that it won't be plain sailing.

The Seacom undersea cable is set to increase SA's international bandwidth 40-fold, and will kick off the beginning of an enormous shift in the local Internet landscape. Out of all the cables, Seacom is featuring most prominently in the news, having launched in July. This $650 million project, running for 13 700km with a capacity of 1.28Tbps, represents the first of a series of new undersea cables that will open up bandwidth availability, and competition in providing that bandwidth to customers.

So why all the fuss?

Arthur Goldstuck, MD of World Wide Worx, says that, initially, the major service providers will be the biggest beneficiaries of Seacom's bounty because they are able to take advantage of the lower cost of access on the cables to increase their margins.

“Once they start passing on the price benefits, their wholesale and corporate customers will benefit from lower costs and higher data allowances for the same price,” he says, pointing out that this has already happened with MTN Business adding 50% more data allowance for the same price to business customers, and some of those business customers cutting the cost of data by more than a third.

“Because this is a trickle-down effect, however, we don't hear much noise about it, but it is real. Telkom and MWeb have both announced substantial increases in data caps but again, because it's not a direct price reduction, it doesn't attract headlines,” he adds.

Goldstuck anticipates that over the next 18 months to three years, data caps will increase significantly enough that they will be experienced as a real price reduction, “even if the providers don't call it that. The cost of ad hoc data should also come down substantially, and that is when the price wars that benefit everyone will begin.”

Dave Gale, business development executive at Umoya Networks, raises the point that the percentage of costs that an ISP incurs in offering broadband services that result directly from international connectivity, although not insignificant, are not such that buying from Seacom will allow them to slash their prices.

“Many of them are operating on margins of 10% or less and are more likely to accept such savings as a lifeline. This is a time when Seacom will try to secure as many long-term contracts as possible and avoid dropping their prices as low as they can, while other cables struggle towards the South African shoreline,” he says.

As far as Steve Song, telecommunications fellow at the Shuttleworth Foundation, is concerned, Seacom will have only a modest impact on connectivity costs. Song points out that Seacom is hamstrung in SA because it has neither its own nor unfettered access to other terrestrial fibre infrastructure.

“Telkom has just announced that its upgrade of SAT3 from 120GBps to 340GBps is complete, while the Eassy cable appears to be on target to be lit up in June 2010. Both of these will make a difference to the cost of access, but it may take until there is real competition in terrestrial backhaul options to bring about a serious, ie, order of magnitude, drop in costs,” he says. For retail customers, the wait for a dramatic drop in price may be even longer.

Gale believes that while it is significant for South Africans, this is more because it is the vanguard of choice in undersea fibre cables linking us to the rest of the world, than for driving down costs.

“When you are as far from the Northern Hemisphere action as we are, every millisecond counts and plentiful, cost-effective bandwidth is important in reducing the barriers that we as a country have in offering services that rely on the 'interwebs',” he says.

With the arrival of Eassy and WACS likely to place more pressure on international connectivity costs, Gale says he would rather see service providers hold back on committing to long-term contracts before the competition really 'hots up'.

Hamilton Ratshefola, MD of Cornastone Consulting, believes Seacom will be most beneficial to the less regulated countries. “In SA, we are still hamstrung by regulations and as a result we haven't seen any improvements in service or any cost reductions to date. We have three mobile network operators, one fixed-line operator and one more emerging fixed-line operator, so there is little pressure on Telkom to deliver better services at better rates.”

International connectivity aside, the fact remains that the pressing need now is for national and last mile access that really breaks the Telkom monopoly.

Dale explains: “Dark Fibre Africa will be extending fibre from Johannesburg to Mtunzini down to Durban, but only in 2011 or 2012 will they be looking at the Cape Town - Johannesburg link. What about all the other commercial centres? I think Infraco has the only real alternatives to Telkom fibre on those links, and its fibre has been baking in the sun for many years, under-utilised and probably due for replacement by now.”

Gale is not holding his breath for game-changing action from that quarter, though. “Some municipalities have taken up the challenge to roll out fibre, but whether they can manage it competently remains to be seen. I'd hate to see a major cable break that requires a tender process in order to have it fixed!”

Ratshefola sees two ways in which local companies will realise the opportunities presented by Seacom. “Firstly, telecoms infrastructure and service providers such as Altech will provide equipment and services to other African countries. Secondly, we will see the traditional network businesses fighting for new markets against the incumbent.”

According to Ratshefola, the local voice communications market is saturated - there are, after all, only so many people who can use a landline or a cellphone.

“MTN will grow from its presence in markets outside of SA, but the same is not true of Vodacom. Vodacom's growth will come from bringing data services to the corporate market where Telkom has traditionally reigned. We may well see a situation where Telkom and Vodacom go head-to-head on this new battleground,” he says.

Another question on many people's lips is how corporates can benefit from the increased number of international, national and regional players in the market.

While large corporations are in the best position to negotiate significantly improved deals for higher capacity in terms of speed, data allowance and quality of service, Goldstuck believes the biggest benefit will come from the new services offered by the major networks as they engage in far more active competition to win business for value-added services that take advantage of greater connectivity.

Song says that once there are enough independent international circuits coming into SA and enough independent backbones in the country, connectivity will go from a seller's to a buyer's market and corporates will be able to negotiate access costs that are more in line with rates elsewhere in the world.

“This will happen on its own, but there are steps the government should be taking to lower barriers to broadband infrastructure growth. These include insisting on open access terms for any public-private infrastructure initiative, dropping taxes and fees on infrastructure-related equipment and licences, and reducing administrative hurdles to gaining right-of-way permission for fibre deployment,” he explains.

Another interesting shake-up is likely to be experienced by IT data services companies like IBM, EDS and Business Connexion, according to Ratshefola. “Suddenly the telecoms companies will be competing with companies that were their customers. That has happened with BT in the UK and I expect to see the same here. The cable is going to give customers options, but it will shake up the data services industry too,” he says.

...because it's not a direct price reduction, it doesn't attract headlines.

Arthur Goldstuck, MD, World Wide Worx

Then there is the matter of choice, which puts pressure on price as operators work to be more efficient and offer better value.

“Steady yet gradual as opposed to sudden change is better for the market from the point of view of avoiding the destabilising impact of operators and service providers that are unable to move fast failing. But we've had such long periods of inactivity and delays in getting the regulatory environment changed, that the market may well prefer some chaos with the change to more delays and slower progress,” says Gale.

The prospect of IECNS licence holders rolling out their own networks, and the impact that this is likely to have on costs and bandwidth availability, has many observers licking their lips. However, efficient use of spectrum resources continues to be a bugbear.

The biggest opportunity for licence-holders will be to gain access to additional spectrum, both licensed and unlicensed. Song points out that it is likely that less than 10% of SA's available communication spectrum is in use at any one place and time.

“At the same time, wireless technology performance is doubling roughly every 30 months. With some forward-thinking decisions by the regulator, wireless communication spectrum represents a massive opportunity for service providers to deliver affordable voice and broadband services throughout South Africa.”

Seacom is hamstrung in SA by the fact that it has neither its own nor unfettered access to other terrestrial fibre infrastructure.

Steve Song, telecommunications fellow, Shuttleworth Foundation

Extending fibre infrastructure is also strategically important, notes Song, but will necessarily progress at a slower pace. “I believe that IECNS licences will only really have an impact on price when there are more opportunities for holders to deliver services either through an unbundled local copper loop or through access to communications spectrum.”

Gale concurs. “I'd say that less than 5% of IECNS licensees are going to be able afford to roll out regional and national networks, and maybe 10% will attempt metropolitan networks of some sort. Wireless will play a large role in last mile solutions. Only once the other bottlenecks of cost and capacity have been addressed in national, metro and last mile will we see a significant impact on broadband pricing.”

Goldstuck too believes the IECNS licences in themselves won't make a big difference to costs in the short-term, “but as the likes of MTN and Vodacom amortise the costs of their new fibre-optic networks and pass on their lower operating costs, they will simultaneously add numerous value-added services on top of the data stream. Over time, too, these networks will be made available to resellers of bandwidth, and we will probably see a reinvention of the ISP business as it comes to terms with a new connectivity landscape.”