Can full LLU hurt ADSL in SA?

Local Loop Unbundling (LLU) is punted as a regulatory intervention which will improve service levels and drive down ADSL prices by increasing competition.

It is virtually impossible for any single operator to build an extensive last mile fixed line access network to compete with Telkom’s copper infrastructure, which is why their competitors are watching the unfolding LLU proceedings with great interest.

Their hope is that LLU will not only open the exchanges but also the fixed line market and allow them to compete head-on against Telkom.

Will LLU work in SA?

There are many international examples where LLU resulted in increased competition in the ADSL market, which in turn drove down prices and increased speeds.  Telkom however argues that the same will not happen in South Africa.

Telkom’s head of regulatory affairs, Andrew Barendse, said that he will be very surprised if any of the drivers of LLU in the European Union will advise LLU for South Africa as it will be counter-productive because of the cost and complexities associated with the process. “LLU is not designed for developing nations like BRICS countries,” said Barendse.

But then it is no surprise that Telkom, as the incumbent operator, is fighting full LLU as it poses a significant risk to their business.

Depending on the type of local loop unbundling which will be implemented, rough estimates show that Telkom stands to lose anywhere between a few hundred million Rand to over R3 billion per annum because of LLU.

Telkom’s strong stance against LLU is clearly expected, but do they maybe have a point that full LLU will do little to boost ADSL in the country?

LLU may break Telkom business model

It is no secret that Telkom said that only around a quarter of their exchanges are profitable, and that more than half of their revenue is generated by a tenth of their exchanges.

This means that the high revenue exchanges, which typically serve enterprise customers, will be targeted by their competitors.

Neotel’s recent application to gain access to Telkom’s exchanges, for example, focused on two exchanges:   Benmore Gardens in Sandton and Rosebank, Johannesburg.

If full LLU is implemented Telkom stands to lose significant revenue at their high-revenue, high-profit ‘enterprise’ exchanges – money which is currently used to cross-subsidize non-profitable exchanges.

This means that Telkom will have less money to invest in the low revenue exchanges typically situated in residential areas offering basic telephony and ADSL services.

Telkom is already reluctant to upgrade loss making exchanges to support higher ADSL speeds, and if they are placed under more financial pressure because of LLU even less money may be invested in these exchanges.

This can create the curious situation where full LLU may actually hurt the residential ADSL market rather than boosting competition and improving ADSL provisioning at all Telkom’s exchanges.

LLU options

Telkom may have a strong argument to suggest that other forms of LLU (like Bitstream access) should be implemented first, and full LLU should only be considered if further remedies are needed.

To avoid cherry picking – which will not help to drive government’s plan to boost broadband penetration rates and drive down costs – Telkom may argue that exchanges in under-serviced areas should be unbundled first to assess the true impact of LLU in SA.

But whatever is finally decided upon it is clear that there is no easy or simple solution.

The Regulator, ICASA, is currently busy with a consultation process, and final LLU regulations are expected before the end of November 2011.


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Can full LLU hurt ADSL in SA?