The true cost of ADSL bandwidth
The high cost of ADSL bandwidth has long been a thorn in the side of broadband users. Uncapped ADSL accounts are typically very expensive while the high per-GB cost of ADSL bandwidth means that many high end users have to restrict their Internet usage due to financial concerns.
Internet Service Providers (ISPs) are often blamed for the high bandwidth tariffs, but an objective look at the wholesale pricing – which dictates the retail cost of bandwidth – reveals that ADSL bandwidth provisioning is not cheap.
Most small ISPs merely resell ADSL bandwidth provided to them on a wholesale basis by Telkom/SAIX, Internet Solutions or MTN Business. The retail ISP market is very competitive and margins are not particularly high. Many ISPs rely mainly on breakage – where a user does not use his full monthly allowance – to ensure profit at the end of the month.
Some of the larger service providers like Internet Solutions make use of Telkom’s IP Connect service to provision their own ADSL bandwidth. This option is also available to smaller ISPs, but the costs are prohibitive.
SEACOM’s lower international bandwidth fees have been touted as something that will have a big impact on the cost of ADSL bandwidth, but international bandwidth is not as significant a contributor to the total cost of a broadband service as some people may think.
Internet Solutions CEO Angus MacRobert recently said that international bandwidth accounts for only 20% to 25% of the total cost of provisioning a broadband service. This means that even a significant reduction in the cost of this component will only have a fairly small effect on the total cost of an ADSL offering.
Cybersmart MD Laurie Fialkov confirms MacRobert’s views, pointing out that while SEACOM does have a positive effect on broadband pricing, it is not particularly significant.
Real world costs
An ISP provisioning their own bandwidth using Telkom’s IP Connect (IPC) service – the only way in which it can currently be done in South Africa – is faced with various costs which will have to passed on to consumers. The three main costs associated with the service are the cost of IPC itself, local IP transit and international bandwidth.
According to one industry expert the IPC cost ranges, according to the capacity purchased, from R 22 000 for a 2 Mbps link to around R 370 000 for a 126 Mbps connection. This translates into a per Mbps per month cost of between R 11 000 and R 3 000.
The next aspect of the service is international bandwidth, which typically includes international transit costs and carrying bandwidth from the international cable’s point-of-presence (POP) to the service provider’s POP. This cost is in the range of R 8 000 to R 10 000 per Mbps per month. Local IP transit incurs a further cost of around R 5 000 per Mbps per month.
It should be noted that this breakdown covers only the basic costs associated with an IPC based offering, and does not include associated expenses like hardware, software, billing systems, staff salaries and other operating expenses. It also does not include a profit margin yet – something which is typically worked in on the pricing at a retail level.
The wholesale cost for a full IPC solution which includes IPC costs, local & international bandwidth costs and general service overheads can be as high as R 30 000 per Mbps per month for a low bandwidth solution. For a high end solution using a 126 Mbps IPC service the cost comes down significantly – in the range of R 16 000 per Mbps per month.
Per GB cost
It is theoretically possible to download 332 GB on a 1 Mbps connection over any 30 day period. Using a business model where the full capacity is used for 16 hours per day, it means that an average of 221 GB will be used per Mbps per month.
At a low end cost of R 16 000 per Mbps per month this translates into R 72 per GB, significantly higher than current per-GB wholesale pricing from SAIX and Internet Solutions. Even at full bandwidth utilization the cost per GB is R 48, in line with SAIX and IS’s wholesale bandwidth offerings.
Considering the complexities and costs involved in provisioning ADSL bandwidth using Telkom’s IPC product, it is not surprising that most ISPs opt for a simple bandwidth reseller model.
There are ways of reducing the per-GB retail cost which may include local peering, content caching and sourcing cheaper international bandwidth through a provider like SEACOM, but the reduction in cost is often not enough to justify a shift from an easy-to-use wholesale bandwidth model to a complex IPC service.
Wholesale ADSL bandwidth pricing discussion
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