What Telkom’s price cut means for you

Consumers should expect cheaper internet and data within a matter of months

By - April 14, 2012
Telkom money

Consumers should soon expect price cuts and improved quality of broadband and data services following a landmark regulatory price-cutting decision.

On March 30 the Independent Communications Authority of South Africa (Icasa) announced that it would slash the costs of Telkom’s IPConnect product by 30%, effective April 1.

Icasa’s move to reduce internet costs represents the first time that the authority has directly intervened in data pricing.

IPConnect is used by all of SA’s existing internet service providers (ISPs) to access Telkom’s fixed-line data network in order to provide internet services.

The ISP charge is the most significant cost faced by ISPs in providing ADSL services.

“It’s a large component of our existing costs and that means that, because it’s a competitive space, you will see price drops to the consumer,” says Murray Steyn, the chief commercial office of Vox Telecom.

Murray Steyn

Murray Steyn

With the IPConnect charge forming anywhere between 20-50% of the total costs faced by the end consumer when purchasing internet services, it is difficult to estimate just how much of a price benefit consumers may expect to see as a result of the decision.

But at the extreme consumers may expect a 15-20% reduction in their broadband costs, according to Steyn.

By widening the margins achieved by ISPs, Icasa’s decision will have other “significant” ramifications on the market, according to Derek Hershaw, CEO of MWEB’s ISP.

“What’s going to happen now, that’s the million dollar question,” asks Hershaw.

“The one possibility is that ISPs will pass the saving through to the end consumer, the other is that they may decide to leave the pricing the same to look after their revenue but give consumers a bigger broadband cap on existing offerings,” he says.

Derek Hershaw

Derek Hershaw - MWEB ISP MD

Finally ISPs may decide simply to cream the savings made from the reduced costs or to re-invest into improved infrastructure to provide a better quality of service to clients.

“Effectively what is happening is that Icasa is giving them [ISPs] extra flexibility in their pricing,” says Irnest Kaplan, MD of Kaplan Equity Analysts, “initially the ISPs will drop their prices a bit and then keep a bit of benefit for themselves”.

However, Kaplan reckons that perhaps within a period of a few months, due to competition, much of the cost savings achieved by the ISPs will be passed on to the end consumers as players in the space jostle for market share.

Icasa’s decision holds significance beyond the immediate and short-term cost savings that consumers may expect as it marks the first step towards the so-called “local loop unbundling” process in SA.

In effect that process is intended to improve the competitiveness of SA’s fixed-line data market by reducing the stranglehold that Telkom has on the market  through its ownership of the copper cables that allow ISPs to connect consumers to the net.

A reduction in the IPConnect charge will improve the competitive manoeuvrability of  SA’s ISPs.

“It’s been on the cards for so long that we need to reduce this IP connect bottleneck,” says Kaplan … “for a long time people have been complaining and now suddenly they have decided to reduce the charge”.

“On a lot of fronts Telkom has always stood firm that they are not changing their pricing and I think they got really out of touch with what the real pricing in the real world was …Telkom has been a nightmare to deal with and this is quite a significant thing whether this was forced on them or they agreed to it,” says Kaplan.

By November 2012 Icasa hopes to have achieved the next phase of the unbundling process through Bitstream which allows ISPs greater control over the quality of the service they provide to consumers.

Telkom refused to provide any comment on the matter stating that it is in a closed period.

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