ADSL pricing conundrum

The recent Broadband Quality Study conducted by the University of Oxford and the University of Oviedo’s Department of Applied Economics showed that South Africa’s broadband services are below the current ‘applications threshold’, evidence that local Internet users are not well equipped to take advantage of the most common web applications available on the Internet.

This study placed South Africa 61st out of the 66 countries surveyed, and this study did not even take South Africa’s low usage limits and relatively high prices into account.

SEACOM’s arrival was widely punted as the intervention needed to drastically change the local broadband environment, but the reality that is starting to set in is that affordable international bandwidth is merely one component of any broadband offering.  SEACOM will therefore not have a direct effect on access, equipment or local bandwidth prices.

ADSL pricing breakdown

Internationally fixed line access accounts for over 95% of all broadband connections.  This is not particularly surprising as fibre, cable modem and ADSL services are typically faster, more stable and more affordable than wireless services.

In South Africa ADSL access however remains expensive and out of reach of most of the population.  While the monthly cost for ADSL is often advertised as being as low as R 135.00 per month, the total cost of ownership is significantly higher than that.

The following table provides a basic overview of the total cost of ownership for an ADSL service over a twelve month period:

DSL 384 Total Yearly Cost
Service Part Montly Cost Yearly Cost Percentage of Yearly Cost
Line Installation (Once Off) 425.50 425.20 7%
ADSL Installation (Once Off) 598.31 598.31 10%
ADSL Modem (Mega 105) 899.00 899.00 14%
Analogue Line Rental 131.00 1572.00 25%
ADSL Access 152.00 1824.00 29%
ADSL Data (1 GB) 79.00 948.00 15%
Total Cost 522.21 6266.51 100%

The monthly cost can be reduced by doing a self-install (removing the ADSL installation charge) or purchasing a one-price service where ADSL access and data are bundled at a reduced cost.  A 24 month contract may also include an ADSL modem which can further reduce the total cost of ownership, while selecting the right ISP can significantly reduce a user’s data pricing.

But even with these options the total cost of ownership will still exceed R 300 per month, out of reach of most South Africans.  The high cost of the various components of an ADSL service like forced analogue line rental, ADSL Access charges and installation fees mean that most wireless services in South Africa provide a better value proposition than Telkom’s ADSL for monthly usage limits of below 3 GB per month.

So where does SEACOM and lower international bandwidth rates fit in? 

Only one component of an ADSL service is influenced by the cost of international bandwidth:  ADSL data.  When using the example of a DSL 384 service with a 1 GB usage limit, the cheapest service available from Telkom, this component only accounts for 15% of the total cost of ownership.  Even if lower international bandwidth costs result in a 50% price reduction in data prices, the total cost of ownership will decrease by less than 10%.

This however changes for higher monthly usage limits, and it is here where SEACOM and lower data prices will have the biggest effect.  The impact of SEACOM has already seen Telkom and MWEB increase data usage allowances without an increase in price, and various other Internet Service Providers (ISPs) have cut the price of ADSL data.

The way forward

Numerous industry players said that the real effect of lower international bandwidth prices will only be felt when other international submarine fibre systems like WACS and EASSy become operational. 

These systems will not only provide more international bandwidth at lower rates, but also provide much needed redundancy to SEACOM which means that the SAT3-SAFE system can be replaced by operators if they don’t reduce prices. 

But lower international bandwidth rates do not solve the problem of having only one ADSL provider in South Africa.  To break Telkom’s stranglehold on the existing copper infrastructure – which is simply too expensive for a new market entrant to duplicate – local loop unbundling (LLU) is needed.

LLU unbundling will give other operators access to Telkom’s copper infrastructure and will create a competitive environment in the ADSL access space.  This process is currently in ICASA’s hands, and is set to be completed by November 2011.  The Department of Communications has also prioritized the ‘acceleration of local loop unbundling’ process which it wants to be completed by March 2011.

But LLU is a very complex and costly process which will take years to implement successfully.  This is why many operators have called for true bitstream access from Telkom in the interim to replace its current IPConnect service which places some restrictions on wholesale ADSL providers.

Increased local peering – which is made easier by the Internet Service Providers’ Johannesburg (JINX) and Cape Town (CINX) Internet Exchanges – is another intervention which can result in far more affordable local bandwidth and hence lower ADSL data prices.

These interventions will take time to materialize, but if implemented correctly it will create a truly competitive ADSL market which should result in lower ADSL prices and higher service levels.

ADSL pricing discussion

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ADSL pricing conundrum