Secret plan behind Telkom ADSL prices cuts: ISPs

Telkom has been accused of using its free ADSL speed upgrades and uncapped ADSL price cuts as a margin squeeze tactic, “clearly calculated to erode competition”. Telkom dismissed this, saying it is committed to fair and efficient competition.

Telkom Wholesale will start its free ADSL speed upgrades on 11 November 2013 – doubling the speeds of 1Mbps and 2Mbps lines, and bumping up 4Mbps lines to 10Mbps.

Telkom Internet followed with an announcement that it will double the speed of its 1Mbps and 2Mbps uncapped ADSL accounts free of charge. It also slashed the price of its 4Mbps and 10Mbps uncapped accounts.

This placed pressure on other ISPs to follow suit, but there is a problem: wholesale ADSL bandwidth (IPC) rates only decreased by 12.4%.

To double uncapped speeds for free and maintain the same service levels, ISPs indicated that they need a 50% IPC price reduction.

ISPs argue that Telkom’s big retail price cuts, in the absence of equitable wholesale price cuts, equate to margin squeeze. This, in turn, will erode competition in the market.

Telkom dismissed this accusation, saying that its wholesale division drove the speed upgrades purely as an initiative to provide ISPs and their customers with a better value proposition – higher ADSL speeds at the same wholesale tariff rate.

“The upgrade decision and process was never intended to disadvantage any industry player. Telkom Wholesale is confident that this enhanced value will go a long way in meeting the broadband demands of today,” said Telkom.

Telkom added that Telkom Internet is treated in exactly the same manner as any other wholesale customer.

“The perception of ‘margin squeeze’ is unfounded as Telkom Wholesale Services is not involved in how Telkom Internet positions or repositions its retail offerings to their customers,” Telkom said.

ADSL IPC price challenge

On 1 October 2013 Telkom provided 5% additional IP Connect capacity to all existing IP Connect wholesale customers at no additional cost.

On 17 October Telkom Wholesale reduced the effective tariff prices of IP Connect by 8%.

ISPs feel that this is not enough for them to remain competitive, especially with the announcement of higher ADSL speeds.

The 5% free IPC capacity is also not added automatically. “You have to pay for the extra capacity in advance, and you are then credited for this ‘extra payment’ the following month,” said one ISP owner.

Telkom said that the method of passing credits was put in place to ensure that there would be no financial burden on the ISPs with regard to the additional 5% bandwidth.

Allegations of anti-competitive behaviour from Telkom

Telkom Internet’s announcement that it is doubling the speed of some uncapped packages for free, and cutting the price of others, is seen as anti-competitive by some ISPs.

Telkom Wholesale said that the perception of margin squeeze is unfounded as it is not involved in how Telkom Internet positions or repositions its retail offerings to their customers.

Telkom Internet added that it operates as a standalone business and independent from Telkom Wholesale.

“Just as any other player in the market, this ISP must ensure that it remains profitable,” Telkom Internet said.

This argument, said Cybersmart’s Laurie Fialkov, is flawed. “It is just a journal entry from one cost center to another,” he said.

“It is of no consequence to Telkom if Telkom Internet is forever running at a loss, if it means that Telkom Wholesale’s revenue through increased IPC sales make up for this loss,” said Fialkov.

“This is anti-competitive in the extreme. If they are going to double the speed of ADSL, ISPs should get double the capacity at wholesale level as well – or at the very least a 30% price cut like previously.”

MWEB ISP CEO Derek Hershaw concurs with Fialkov. “How silly of us to think that anything had changed at Telkom,” he said.

“A new face at the top of the organogram – but this is exactly the same behaviour that landed Telkom in hot water with the competition authorities in the past,” he said.

“They were given 6 months to get their house in order, not 6 months to have one last shot at destroying any form of competition in the market.”

Hershaw said that at face value this is excellent news for ADSL consumers – a big step towards closing the gap in pricing and performance between SA and the rest of the world.

“But to match Telkom’s retail offering ISPs are going to be forced to buy a lot more IPC capacity from Telkom Wholesale. A classic case of margin squeeze clearly calculated to erode competition in the market place. And in the long term that cannot be good for consumers,” he said.

Afrihost director Greg Payne agreed, saying that it seems Telkom Retail’s uncapped ADSL announcement looks like a well-planned strategy.

“We have absolutely no problem with this as we have always been an advocate of low consumer prices. The worrying thing is that Telkom is not halving wholesale rates at the same time,” said Payne.

Instead of true IPC price cuts, Payne said, Telkom is just giving a nominal discount because of a ruling against their past anti-competitive behaviour.

“It is effectively squeezing all the other ISP’s margins which could put us out of business and lead to less competition,” said Payne.

“Unfortunately, it will ultimately be the consumer that is paying higher prices in the future, due to a lack of competition.”

Telkom Internet explains pricing

Telkom Internet said that the ADSL speed increases by Telkom Wholesale forced it to review costing and profitability on these products.

Telkom Internet is increasing the Internet uncapped speeds for the mentioned services, but not at the same bundle price points.

“The price, in fact, has gone up with R35 (R329 – R364) on the 1Mbps Uncapped service and R89 (R459 – R548) on the 2Mbps Uncapped service. This is an increase of 10.6% and 19.3% respectively,” Telkom Internet said.

The price increases in these instances, Telkom Internet said, are unavoidable as Telkom Internet too – like any other ISP – needs to fund the increased capacity (IPC, local and International) needed to continue the same quality of services to customers on the higher speeds.

Telkom Internet said that it is also making changes to the way uncapped accounts are managed, which allows it to remain profitable without sacrificing the customer experience.

No complaints sent to Telkom

Telkom said that the complaints and allegations of anti-competitive behaviour have not been made directly by the ISPs to Telkom. “It is unfortunate that the first port of call on these matters is media,” Telkom said.

“Telkom is open to customers and partners for compliments and complaints, and we are committed to addressing all issues raised with seriousness no matter how large or small,” Telkom said.

“Telkom can indeed confirm that it is treating its retail business at arm’s length and the same as any other wholesale customer.”

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Secret plan behind Telkom ADSL prices cuts: ISPs