Openserve killing ISP profits with R135,000-per-Gbps IPC charge

Openserve’s IP Connect (IPC) prices are so high that many South African Internet service providers (ISPs) are losing money on these fibre clients.

This is the word from many of South Africa’s largest ISPs, who spoke to MyBroadband about Openserve’s excessive IPC prices.

ISPs are forced to buy IP Connect bandwidth from Openserve, as it is the only way to provide Internet over the company’s ADSL, VDSL, or fibre-to-the-home networks.

The high cost of IP Connect bandwidth is currently preventing ISPs from reducing the price of broadband to their customers, Internet Solutions said.

The problem is so significant that the Competition Commission’s Data Services Market Inquiry report instructed Openserve to substantially reduce the price of its IP Connect product.

As part of its final report, the Competition Commission said Openserve must “substantially reduce in the price of IP Connect to remove excessive pricing concerns within two months”.

R135,000 per Gbps

Internet Solutions said in its submission to the Competition Commission that Openserve charged IP Connect at R175 per Mbps per month.

The comparable Automation Exchange service from Vumatel, which provides the connection to the operator’s last-mile fibre network, costs only R7.30 per Mbps per month.

This submission is, however, from October 2018. Since then Openserve’s IPC pricing was reduced to R135 per Mbps, or R135,000 per Gbps.

Vumatel, in comparison, charges R6.50 per Mbps or R6,500 per Gbps for its comparable Automation Exchange.

This means that Openserve charges 2,000% more for IP Connect bandwidth than what Vumatel charges for similar Automation Exchange bandwidth.

What is even more telling is that Openserve’s IPC pricing is nearly seven-times higher than the price of international bandwidth, which costs around R20,000 per Gbps.

Excessive IPC pricing killing profits

Many prominent ISPs who spoke to MyBroadband said they are currently making a loss on their Openserve fibre products.

They are therefore forced to cross-subsidize Openserve fibre products with profits from connections over other fibre network operators (FNOs).

These ISPs said IPC should be offered by Openserve at cost plus a fair margin, which they estimate to be about R5,000 per Gbps.

One ISP told MyBroadband that a negotiated glide path with decreases of at least 20% every 6 months is advisable.

There is consensus among these ISPs that Openserve should slash IPC prices not only because it is highly inflated, but also because it will help to drive broadband adoption in South Africa.

Openserve is making it easy for other FNOs

Cybersmart founder and CTO, Laurie Fialkov said Openserve’s high IPC prices give other fibre network operators like Cybersmart LightSpeed and Vumatel a competitive advantage.

“If I am competing for a client in a building or precinct that has both Cybersmart LightSpeed and Openserve infrastructure, I want to maintain the cost advantage I have,” he said.

He joked that as a competitor to Openserve, he thinks the current IPC prices are very fair. “If I had to vote it would be to increase IPC prices, not decrease them.”

Fialkov said an ISP’s perspective is very different as they are currently making very little to no money from Openserve’s fibre as they battle for market share.

He also warned against regulatory intervention as it is a very competitive market on both the infrastructure layer and the ISP layer.

“Normal economic forces should be driving the price of IPC. If there is a regulated drop in the IPC prices, how exactly is this going to be funded?” said Fialkov.

Openserve defends IPC prices

Openserve defended its IPC prices, adding that it is incorrect to compare Openserve’s IPC offering with Vumatel’s Automation Exchange.

Openserve’s full response is provided in full below:

Openserve’s network is designed to connect Internet Service Providers (ISPs) to a national copper-based and fibre-based footprint across rural, urban and metropolitan areas. This is vastly different from most other fibre infrastructure providers that only focus their rollout in specific geographical localities – typically only within specific suburbs in metropolitan areas or high-value areas where the customer/business density is regarded as high.

Most other broadband access providers, such as those described above operate mainly in discrete geographic areas and hand-off their services at data centres that accommodate the colocation of multiple operators. The Automation Exchange product is typically provided in data centres to enable the hand-off of access services for internet breakout. Automation Exchange is thus not the same as IPC. IPC is Openserve’s service which aggregates broadband access services across its entire national footprint.

We are not in a position to engage you on a discussion around IPC’s future pricing. It is inappropriate, and in fact potentially unlawful, to discuss costs and pricing methodologies in a public forum. Any pricing changes Openserve may decide on will be communicated to our customers in the appropriate manner and at the relevant time. As you correctly point out, IPC is also the subject of the attention of the Competition Commission in its data service market inquiry. Telkom has been approached by the Commission to engage with it on this score and it will thus be inappropriate to deal with the issue in the media until such time as Telkom and the Commission have finalised their engagements.

We must point out that our ISP partners sell thousands of Openserve’s fixed broadband access services every month. Many of these ISP businesses have been very successful using Openserve’s broadband offerings. Some have even been recognised with the coveted ISP of the Year Award at the popular Annual MyBroadband Conference.

Now read: Telkom must cut wholesale fibre prices

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Openserve killing ISP profits with R135,000-per-Gbps IPC charge