ADSL prices in South Africa: Why so high?

Rudolph Muller

Rudolph Muller is the editor at MyBroadband and covers telecoms and broadband news. Rudolph comes from an academic background, but left the University of...

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South Africa’s high ADSL prices continue to frustrate local broadband users, and despite calls from consumers and even Government for lower broadband tariffs not much has changed over the last few years.

Telkom last reduced their ADSL access rates in August 2007, and seems disinclined to cut ADSL prices in the short term.

But what makes ADSL so expensive in South Africa?  Is it merely the consequence of Telkom trying to eke out the last drop of profit from its monopoly in the ADSL market, or are there more legitimate reasons behind the high rates?

DSL384 ‘close to cost’

Telkom SA MD Pinky Moholi recently told MyBroadband that the price of their DSL384 product is very close to cost and that there is simply no margin to play with for their low end ADSL offering.

Many people may immediately question Telkom’s honesty in this regard, but Moholi is not the only executive which pointed to the low margin on their entry-level ADSL service.  Two other executives, including Telkom’s former chief of strategy Naas Fourie, also upheld that their margin is low on this product.

This raises the rather worrisome question:  Why are Telkom’s DSL base costs so high?  How can other countries offer an all-inclusive 4 Mbps service with a high monthly cap at cheaper than Telkom charges for only ADSL access and line rental?

BEE and AA influencing costs?

The question about high ADSL base costs reared its head a few years ago at a telecoms conference, and the Telkom representative said that SA’s unique BEE requirements result in higher equipment and network provisioning costs.

The Telkom representative further alluded to the fact that affirmative action requirements at Telkom means that the best person for the job is not always employed, reducing efficiency within the company.

MyBroadband spoke to three Telkom employees working in different divisions dealing with ADSL and network provisioning, and all three employees felt that BEE and affirmative actions resulted in a less efficient organization and higher costs regarding network rollout and ADSL input costs.

But Telkom vehemently denies these statements, saying that the claims made by the Telkom representative “are not aligned to Telkom’s position on this matter”.

“The BBBEE legislation lays out the principles and parameters for national social transformation through a process of black economic empowerment. Telkom has a procurement policy for managing tenders which is totally aligned to the relevant legislation. Telkom applies this policy evenly and fairly in the process of awarding tenders,” Telkom said.

“BEE requirements are therefore not an onerous challenge for Telkom but a guiding business principle which we adhere to across our operations, and Telkom is proud of the role we are playing in contributing towards transformation through empowerment.”

Telkom also denies that the best candidate cannot always be employed due to AA:  “Telkom implements recruitment policies which are aligned to relevant legislation. While Affirmative Action is one consideration for making appointments, others include knowledge, skill and experience of job applicants,” the company said.

“Appointments are made taking all these considerations into account to ensure that the best candidate is employed. Proof of this is the vast range and depth of skills resident within Telkom, representing people from all South Africa’s communities, which made it possible for us to deliver a successful and flawless 2010 FIFA World Cup recently.”

So why are ADSL prices so high?

So if AA and BEE don’t not play a role in escalating costs, what is behind South Africa’s high ADSL access costs? 

Telkom explains that there are vast variances in the costs of infrastructure development, installation and operations in telecoms from country to country, making a valid and meaningful comparison of prices to customers virtually impossible.

“For all service providers, the cost of the service to the customer has to be established against the cost of providing the service. This ensures the continued viability and profitability of the service provider, and ensures that the customer receives value for their expenditure,” Telkom added.

“Telkom is committed to providing value to our customers by supplying cost-effective, affordable ADSL services,” the company said.  This will however do little to ease the pain of consumers forking out much more than their international counterparts for inferior services.

So again why are ADSL prices REALLY so high?

Whilst Telkom was able to give a little bit insight into the cost of ADSL, they did not adequately account for the variances see between SA’s ADSL costs and many other comparable economies.   

When asked what would help them to reduce the cost of ADSL, the company merely said that “reducing the cost of providing the service will assist Telkom to reduce the price of its services”.

Good of them to state the obvious but one would assume that less copper theft, higher economies of scale, a stronger Rand (the Rand has in fact been quite strong over the last few months) and cheaper international bandwidth would all be relevant factors, but Telkom appears to be side stepping the issue to not have to engage in this discussion.

Or maybe the main reason is not necessarily AA, BEE or even copper theft (although it may contribute to higher costs), but rather high staff costs and too many highly paid managers.

According to a well placed source Telkom’s highest cost to provide services is staff related expenses, and here Telkom became uncompetitive.

It is understood that Telkom would be far more competitive if they paid their staff market related salaries for their skills, but unions pushed the company to increase salaries across the board instead of differentiated performance-based increases.  This means top performers and key-skilled employees get the same increases as average workers – not a recipe for becoming competitive.

An added factor is that the unions have forced Telkom to move all staff earning below a certain percentile of their salary range to a minimum salary scale regardless of performance and skills.

It is further understood that Telkom is tied into many long term outsourcing contracts, costing them millions per month, related to lands and buildings, fleet management and security.  It is possibly more cost effective to handle some of these tasks internally. 

Other challenges

It is clear that Telkom is facing a multitude of challenges to become more effective and overcome obstacles to reduce costs, but it is also true that South Africa has a large geographic network size, adding costs to network provisioning and upkeep.

So while it may be cheap to provide ADSL in Gauteng and Cape Town, costs in rural areas escalate.  Telkom however is not able to differentiate on cost in different areas further pushing up the average price of ADSL in the country.

Telkom also sits with many different technologies deployed in the core and access networks which means that maintenance, upkeep and upgrades all add to the cost base of provisioning services. 

Telkom clearly needs an innovative leader to take the company forward and make it more competitive:  both in terms of efficiency and pricing.  ADSL and broadband plays a key role in the company’s future plans, but without more aggressive pricing Telkom will continue to play second fiddle to Vodacom, MTN and even Cell C in the local broadband market.

ADSL prices in SA << why do you think it is so high?