Pricing logic

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onionpeel

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I have a friend who emigrated to California, USA.
He has been there for almost a year now and I asked him what his internet setup was like.
He is not technically minded but this is what came from my questions to him:
1. ADSL
2. 24x7 connection
3. No local phone call charges (in case it is dialup)
4. 768kbps downstream (he say more like 700-750)
5. US$40 per month (inclusive of email etc.)
6. No cap
Ok, so some of you know this.
Let's take an exchange rate of R8 to US$1, which means that it would cost R320 for the equivalent service. Now we don't have 768 downstream speed so I will estimate that the cost will go from R900 p/m to R1200 for the same here (conservative). There is no import duty on this as far as I know, so a straight exchange rate should do the trick.
The US use cable to get to SA, which is why they get pings of around 400ms. The cables costs are the same no matter which operator is using the pipe, unless one has made a larger capital outlay, but then the recovery costs would be higher anyway.

My conclusion is that everything is even, barring the exchange rate, so why do we pay so much for international bandwidth?
 
i don't think SA is eaqul to US.
i think there are more users and demands in US than SA.
so i think they can give the service to users at reasonable prices.
but still R1000 per month for ADSL with 3GB cap and port prioritisation is nonsense. [:(!]
 
desraid, I think the issue of 'number of users' is covered by the fact that there is a serious shortage of international bandwidth when compared to the needs of the customers.
In SA, we have been starved of products like ADSL at affordable prices. Let me share my vision of the reality of the future:

1. The next national fixed line operator will not bring about a significant drop in pricing as they will piggy back on Telkom's network and have to pay usage charges, thereby keeping a real price war at bay for a number of years to come. Take a look at Cell C.
2. In South Africa, overall, prices don't go down. At best, they don't go up by as much as the inflation rate. So what we now see as R680 pm for an ADSL line will go up by at least 5% every year for quite a few more years to come. No less.
3. I know the USA is far ahead of SA - they have plenty of underutilised fibre optic cable within the USA and so bandwidth is virtually free. My point still holds true that the international connectivity will always carry a cost as it is
(a) far too expensive for one company to buy outright covering many thousands of miles with huge installations costs
(b) will therefore always be an external factor in the costing of bandwidth
(c) repayment periods are +-20 years so the prices are pretty much here to stay
4. The only hope for us is that more (ADSL) packages will be launched, thereby addressing (tailoring) the concerns of those whos specific needs are not being met by the 'general' ADSL offering.
 
onionpeel - with reference to your points above:

I agree with you. We will probaly not see a significant drop in pricing as you suggest due to the reasons that you mention, HOWEVER competition will create a more customer driven attitude within Telkom.

More players mean more product differentiation which gives clients more choice. This in itself will be good for the telco industry. As an example - even though the SNO would "lease" services from Telkom untill it's own infrastructure is in place (which WILL take years as you suggest) they will be focussed on winning marketshare. Therefore they (the SNO) would (I assume) aggresively target the larger ISP's - making less margin but winning the business.

Sooner or later the ISP's themselves will have to drop their pricing as their costs have been reduced, and although the may reap the cost benefit for a while at some point one of them will adjust to pre SNO margins in order to get the upper hand on THEIR competition and the snowball will start.

It may take time for the man in the street to see the direct cost benefit BUT IT WILL COME - in the meanwhile customers will have access to a greater number of products - Telkom will be forced to provide a quality service or loose the client business.

As to the International bandwidth - you are right - it costs a fortune to lay undersea fibre, ROI's are calculated based on 15+ years and it will always make it impossible to compare pricing between say the US and SA - but why is this - DEMAND - the content & services people want to access is THERE.

I would argue that if we had a stimulated Internet economy in SA with more loaclly focussed content and services the demand for International would not be as great is it is now - conversely, a deregulated telco industry would be of benefit to the Internet economy - just about EVERYTHING (except bandwidth as present) is cheaper in SA. One of the big factors driving profitability within a company (other than increased sales & marketshare) is cost reduction - we have already seen the inroads that SA call center businesses have made internationally due to the cost reductions they can offer multinationals.

Bottom line - The telco industry MUST be deregulated - totaly over time - Telkom MUST have competition - sooner rather than later - ICASA MUST become a true regulator with the skills to adjudicate - not the panel of bloody broadcasters we have at present and finally and most importantly WE MUST HAVE A MINISTER OF COMMUNICATIONS WHO IS QUALIFIED TO HOLD THE POST - not the current technophobe who has a history of monumental screwups and who is clearly not fit to hold the keys of her office (sorry Dr Ivy).

My 2c worth...
 
Well said ASF - I can't understand how someone can be involved with something they don't know anything about. But thats politics for you and no matter how much we bitch and moan about it, nothing is going to change.
 
One of the major problems in the supply/demand scenerio is the catch 22 situation prevalent in SA, namely in the USA there is numerous domestic uses for the internet - in fact its considered a great disadvantage to not have a connect, it is the norm to have internet rather than the exception. Now SA is reluctant to introduce internet enabled options due to cost and the fact it is the exception rather than the norm to have internet in the household at the moment, and due to this reluctance to e-commerce there is no compelling reason to get internet in the household, thus no demand.

Basically since there is little e-commerce options available to the household user there is little reason for households to get internet, which causes the domestic e-commerce market to be unappealing which again limits e-commerce and thus limits the reason for household internet access ...ad infinitum ad nauseum...

Since Telkom currently controls commercial and household connectivity costs, it is logical to claim Telkom is stunting local e-commerce. If the costs to setup a e-commerce option was more reasonable and the the household cost were more competitivly priced one would find a quickly growing market in SA e-commerce. In the USA it is possible, if not reccommended, to never leave your house and still get practically everything you need to survive online. You can work from home, order equipment and foodstuffs, be entertained, communicate and study all on the net.
 
Wonder which country has a simillar internet access situation like we do here in SA??
 
And having siad all that so eloquently ASF and AsnogarD, we have the first steps of a white paper for our beloved ministry of communications
 
ASF, there already is a demand for international bandwidth. As you mention, most of the internet community lives in the USA. If the supply and demand economics works, then all we should be seeing is a price hike. At the moment, I would guess that the international pipes out of SA (cable) are being pushed pretty heavily. If Telkom did their costing with this in mind, then it is not going to get any cheaper as the pipe has been used to it's maximum capacity and the subscribers are still being charged high tariffs.

Local traffic is also being squeezed as evidenced (see other forum posts) by ADSL users getting high (200ms+) local pings during working hours. A reliable source told me that local bandwidth requirements in SAIX have been doubling every 3 months since earlier this year. It is a problem.

I got a call yesterday from a family friend, who is also a shrewd businessman. He had been approached by an Australian company wanting to start one of those international callback operations here and he wanted my advice on whether to even consider it (as I work in telecommunications). He told me that this company in Australia pays 0.06 Aus dollars (<=R0.30) per minute for a call to the USA and 0.14 Aus dollars (<=R0.70) per minute for a call to SA. This again tells me that there is a big problem here with the costing model or maybe there is something else that is at play?
 
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