Telkom may face CompCom investigation over uncapped ADSL

Mweb, Internet Solutions, and other Internet service providers (ISPs) have called on the Competition Commission to scrutinise Telkom’s recent moves in the uncapped ADSL market.

This is according to Derek Hershaw, CEO of Mweb ISP, and follows a statement Mweb issued towards the end of November 2013 in which it threatened to take Telkom to the Competition Commission for what it says were margin squeeze tactics.

In essence, ISPs have expressed anger at Telkom Internet for reducing the cost of its uncapped ADSL accounts shortly after the announcement that Telkom would be upgrading the line speeds of ADSL subscribers for free.

To explain why they are upset by developments which seem to be good for consumers, Hershaw reiterated the sequence of events that lead to their threat.

“Telkom Wholesale announced in September [2013] that they would be doubling the access speeds on all 1Mbps and 2Mbps lines and increasing the 4Mbps line speeds to 10Mbps, at no additional charge to the consumer,” Hershaw said. “Great news!”

Then in October, Telkom Internet announced that they would be doubling the speeds of their uncapped data product to match those lines speed increases. “This would also be, by and large, at no extra cost to their customers,” Hershaw said.

However, for other ISPs to match the Telkom Internet offer and remain competitive in the market, they would all have to buy a lot more capacity on Telkom’s wholesale ADSL product, IP Connect (IPC).

“So overall, Telkom benefited from that additional IPC revenue, but the ISP’s were all facing severe margin squeeze on the back of much higher network costs,” Hershaw said.

He was not alone in this conclusion, with Afrihost, Cybersmart, and Openweb calling into question whether Telkom was sacrificing profits in its Telkom Internet retail division to boost Telkom Wholesale for an overall gain for the group, while squeezing competitors out of the market.

The ISPs also expressed concern that they would not be able to maintain the current quality levels of their uncapped ADSL offerings.

Derek Hershaw Mweb
Derek Hershaw

Appeal to Telkom, Competition Commission

Hershaw said that to address their concerns, together with Internet Solutions, they formally engaged Telkom and requested a 50% reduction in IPC costs.

“Although not directly part of this engagement, I spoke to a number of other ISPs who shared our concerns on this and fully supported our request for a price reduction,” Hershaw said.

Telkom rejected their request, Hershaw said, citing a number of reasons why they believe that this is not margin squeeze.

Eventually the ISPs decided to meet with the Competition Commission, and on 17 January 2014 Hershaw said they outlined their concerns to the body and asked how best to resolve the matter.

Telkom has since offered all wholesale customers a further 10% reduction in IPC charges, Hershaw said, which they have decided to accept conditionally.

“That condition being that the Competition Commission will still investigate the matter, determine whether or not a case exists for margin squeeze, and if so, whether this latest 10% reduction is sufficient to address it,” Hershaw said.

He said that they have asked the Commission to investigate the matter within the context of the principles and framework set out in the settlement agreement reached between the Commission and Telkom in 2013.

Among the terms of the agreement was that Telkom had to reduce prices (particularly its wholesale rates), and functionally separate its retail and wholesale divisions.

Telkom has six months from July 2013 to implement the principles in the settlement agreement with the Competition Commission, after which an independent audit will be conducted.

“I’m optimistic that they will find that [the price cut] is not enough,” Hershaw said.

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Telkom may face CompCom investigation over uncapped ADSL