Cheaper international transit: the effect

Prices for wholesale Internet protocol (IP) transit services have continued to decline around the world, telecommunications research and analytics company TeleGeography reported earlier this month (August 2012).

The median monthly lease price for a full GigE port in London and New York has decreased tremendously; but while prices have declined globally, significant geographic disparities exist, TeleGeography reported.

What about South Africa?

South African network operators say they’ve noticed the sharp decline of international transit, but local Internet Service Providers (ISPs) explained that these costs make up a small proportion of their total network cost.

This minimises the overall impact the lower international IP transit costs have on pricing.

Median GigE IP Transit Prices in Major Cities, Q2 2007 - Q2 2012
Median GigE IP Transit Prices in Major Cities, Q2 2007 – Q2 2012

Mweb ISP CEO, Derek Hershaw, said that they have seen a decrease of about 10% for international transit costs over the past 2 years, while Web Africa’s chief operating officer Rupert Bryant said that the cost has come down around 10 fold in the last 4 years.

Sean Nourse, executive for connectivity at Internet Solutions, said that they have seen similar decreases as those reported by TeleGeography, and that there has definitely been an acceleration in the decreases between Q1 and Q2 in 2012.

Sean Nourse
Sean Nourse

Nourse said that these savings are passed on to the consumer, but added that international IP transit cost is the lowest cost component in delivering an IP service to an end user. This is because of the maturity of the international market, which brings healthy competition, Nourse said.

“What has made a far larger impact on the cost of IP services has been the undersea cables landing on the continent – specifically in the DSL game,” Nourse said.

A Seacom spokesperson explained that local IP transit is priced to include the transmission costs required to bring the international IP Transit connectivity to the local African points of presence, and is therefore much more expensive than IP Transit charges in Europe or Asia.

“These costs will continue to decline however, as more and more capacity is lit to connect Africa to these IP transit hubs, and Africa develops its own internet community,” Seacom said.

Web Africa and Mweb also indicated that local transit is far more expensive than international. However, Web Africa said that much of its local connectivity comes through peering, while Mweb said that it doesn’t pay for any local transit.

From a wholesale perspective, a Telkom Wholesale spokesperson said that they have also seen a decreasing trend in IP transit costs.

As a wholesaler, Telkom said that international IP transit still contributes a higher per Meg cost to the industry.

This is because Telkom Wholesale buys international connectivity and interconnection from foreign peering operators outside the country, while Telkom is able to do its own build in South Africa.

International cost components are also typically measured in foreign currency and outgoing payments therefore continue to contribute to a higher cost.

How are the savings passed on?

Rupert Bryant portrait
Rupert Bryant

Telkom said that it is difficult to determine if its wholesale customers, which buy either international IP transit or raw Layer 1 international private leased circuits, have passed on the savings in IP transit costs to their customers.

“At the retail end a decision to rather add more value to existing offers for the same spend is a possible scenario,” Telkom said.

Mweb’s Derek Hershaw explained that the savings they have seen were used in exactly this way, to purchase more transit, and to invest in redundant transit capacity.

Seacom said that the savings in IP transit are getting passed on to South African consumers, and that these costs are fairly transparent with most operators knowing exactly what IP transit costs in Europe and key centres in Asia.

However, IP transit services are a very small component of the cost of creating an Internet service, Seacom said.

Derek Hershaw
Derek Hershaw

According to Seacom, the major costs in building an internet service are in the international transmission capacity costs (and local domestic connectivity costs) to reach the major IP Transit hubs.

Reductions in transmission costs that new cable systems bring to Africa, combined with improved up-time and resiliency, are bringing the most benefits to internet users in Africa, Seacom said.

Web Africa’s Rupert Bryant said that broadband products have improved vastly over the last few years, and today’s broadband products are only feasible due to the international savings they’ve seen.

“Further meaningful price improvements however will only come via reduction in the ‘Last Mile costs’, namely [IPConnect – Telkom’s wholesale ADSL product], ADSL Line and Telephone line rental costs,” Bryant said.

These typically make up about 90% of the costs to a broadband consumer in SA, Bryant said.

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Cheaper international transit: the effect