Are you killing your ADSL ISP?

Many uncapped ADSL subscribers are consuming hundreds of gigabytes per month, which means that Internet Service Providers (ISPs) make a massive loss on these accounts.

MyBroadband recently established that the minimum basic cost to provide ADSL data is around R6 per GB. However, this cost excludes support, staff costs, and related ISP expenses.

Even at R6 per GB, ISPs make a significant loss on any user that consumes hundreds or even tens of gigabytes – depending on their account type.

Afrihost’s top data users serve as an excellent example. Their uncapped 10Mbps consumer accounts are priced at R797 per month.

Afrihost’s top uncapped 10Mbps subscriber consumed 1,265GB over the last month. At R6 per GB this equates to R7,590, which means that Afrihost is losing R6,793 per month on this user.

The following table provides an overview of the losses suffered by Afrihost from its high-end users. It should be noted that these are the minimum losses (only taking bandwidth costs into account) – the real figure is potentially much higher.

Top user GBs used Estimated cost to ISP for data (at R6 per GB) Price paid by subscriber Loss to ISP
10Mbps uncapped subscriber 1,265 R7,590 R797 -R6,793
4Mbps uncapped subscriber 881 R5,286 R397 -R4,889
2Mbps uncapped subscriber 607 R3,642 R297 -R3,345
1Mbps uncapped subscriber 295 R1,770 R197 -R1,573

Uncapped broadband business model

Any uncapped broadband business model is based on low-end subscribers subsidizing high-end subscribers who consume lots of data.

This model works well in an environment with many low-end users, where the profits from these users compensate for the losses incurred by a few high-end users.

When there are too many high-end users pushing the average usage beyond the cost of providing an uncapped service, the business model breaks.

Uncapped business model
Uncapped business model

Uncapped ADSL business model taking strain

With the increase in popularity of bandwidth intensive services, such as YouTube and media streaming, the uncapped business model in South Africa is taking strain.

MWEB ISP CEO Derek Hershaw said that the average monthly data usage on some line speeds increased by as much as 35% per year.

Feedback from ISPs suggest that their average usage across all their uncapped ADSL accounts typically range between 35GB and 45GB per month.

One some accounts, the average can be much higher. Openweb CEO Keoma Wright said that the average usage on some of their uncapped accounts is 180GB per month.

Web Africa CEO Tim Wyatt-Gunning said that the average usage for their Home Uncapped product ranges from 31GB at the entry level 1Mbps package, right up to 614GB for 20Mbps VDSL.

“It’s a simple average so the figures are inflated by the minority who push as much data through the network as possible,” said Wyatt-Gunning.

He added that their customers typically consume around 3 times more data than when Web Africa launched uncapped services 18 months ago.

Something’s Gotta Give

Despite the growth in data usage among uncapped ADSL subscribers, the retail price of uncapped ADSL accounts over the last year remained unchanged, or even decreased with certain ISPs.

However, the input costs for providing these accounts did not change much. The biggest cost of providing an ADSL service to consumers, Telkom’s wholesale IPConnect (IPC) service, will only reduce by 8% this year.

This is creating an unsustainable situation: much higher data usage resulting in higher costs to ISPs, but no significant wholesale price reductions to accommodate the higher usage.

This will result in a few possible scenarios – higher prices; worse service levels (less bandwidth for more users); or ISPs cracking down on subscribers who consume large amounts of data.

Some ISPs have already started to crack down on high-end data users, and throttling and shaping have become commonplace.

Unless Telkom slashes its wholesale ADSL costs, consumers may see more of the same from their service providers in future.

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Are you killing your ADSL ISP?