Telkom’s forced ADSL price cuts: ISPs respond

The Competition Commission and Telkom have reached a settlement agreement to resolve a series of complaints lodged against Telkom from 2005 to 2007 by various companies, including the Internet Service Providers’ Association (ISPA), Internet Solutions, Multichoice, and Verizon.

The settlement package includes an admission of guilt by Telkom, a R200-million penalty, a functional separation between Telkom’s retail and wholesale divisions, a transparent transfer pricing programme, and wholesale and retail pricing commitments for the next five years estimated to yield R875m savings to customers.

ISPA welcomed the settlement, saying that the settlement addresses the reality that Telkom is both an active competitor and the provider of the basic infrastructure and services that the whole industry relies upon.

“This is far more constructive than simply giving Telkom a fine, and consumers are set to benefit, not just the complainants,” said Dominic Cull, ISPA’s regulatory advisor.

Cull warned, however, that the effectiveness of the settlement will only be able to be judged through its implementation.

“ISPA will be watching to ensure that it is enforced adequately and that the monitoring of Telkom’s subsequent conduct is effective,” said Cull.

Forced price reductions

As part of the Competition Commission settlement, Telkom will reduce the prices of wholesale services implicated in the complaint and used by ISPs to deliver their IP VPN and Internet access services over the 2014, 2015 and 2016 financial years.

The price reductions will apply to undersea cable international lines, national high bandwidth transmission lines, access to ADSL lines via the IP Connect service and Diginet leased line access.

It will also apply to retail products, including Telkom’s VPN Supreme and Internet Access.

“The price reductions are weighted more heavily in favour of wholesale services (at least 70% wholesale) to bring about a more competitive market and will amount to an estimated R875m savings to the market,” the Competition Commission said.

“Telkom will also ensure that any price reductions are not reversed in the 2017 and 2018 financial years.”

MWEB ISP CEO Derek Hershaw

Derek Hershaw Mweb
Derek Hershaw

MWEB ISP CEO Derek Hershaw said that while you can’t expect Telkom to come “absolutely clean”, there must be enough transparency for the rest of the industry to feel comfortable that the playing fields have been levelled.

“That covers a wide range of issues including pricing, internal accounting and access to customer information,” said Hershaw.

When it comes to where Telkom should cut prices, Hershaw said that there is enough competition already as far as international bandwidth is concerned, and national bandwidth is not far off.

“In a year or two there will be enough competition in the national bandwidth market to force Telkom to reduce pricing without requiring any external intervention,” said Hershaw.

“The focus has to be on reducing the cost of IPC [IP Connect], and the cost of last mile access to the consumer – so either a reduction in ADSL line rental charges or the introduction of a naked ADSL, or both.”

Afrihost CEO Gian Visser

Gian Visser Afrihost
Gian Visser Afrihost

Afrihost CEO Gian Visser said that for them the key cost in providing ADSL to consumers is the wholesale price of IPC.

“This is, by far, the biggest input cost we pay to bring ADSL to our clients. It is still significantly more expensive than international, undersea cable connectivity costs and this should change,” said Visser.

“If Telkom were to cut these costs by 70% I guarantee you that the ADSL landscape in this country would be radically altered.”

Visser said that if he was the CEO of Telkom and could do only one thing to re-invigorate ADSL, he would simply cut the wholesale IPC costs to the bone.

“The second thing I would love to see is a significant drop in the monthly ADSL line rental that clients pay – including the ability for a client to choose Naked ADSL,” said Visser.

“This would also decrease the input costs for consumers and encourage people to adopt ADSL as their preferred broadband connection.”

Visser also called for a proper separation of wholesale and retail within Telkom. “That means Telkom Wholesale should invoice Telkom Retail for individual lines and bandwidth, just like they do to the ISPs and large enterprises,” said Visser.

Visser also asked for a proper audit of Telkom Retail’s books to see that they are in fact being charged wholesale rates and selling at a profit.

Cybersmart CEO Laurie Fialkov

Laurie Fialkov
Laurie Fialkov

Cybersmart CEO Laurie Fialkov said that the functional separation settlement requirement is puzzling.

“There has supposedly been a functional separation between wholesale and retail in Telkom for years, so I am really not sure if this changes much,” said Fialkov.

“A functional separation is of little consequence if, as wholesalers, we are unable to match Telkom’s retail pricing,” said Fialkov. “Telkom should also not be allowed to bundle services with retail where there is no wholesale offering.”

Fialkov said that Telkom’s 3G and ADSL bundled products, where there is no Telkom Mobile wholesale product available, is one such example.

When it comes to lower prices, Fialkov said that IPC is still the biggest input cost in providing an ADSL service, followed by the cost of local bandwidth. “Any reduction in IPC costs would be most welcome,” said Fialkov.

Fialkov explained that it currently costs them more to get to another data centre 180m away, than what it costs them to connect to London via undersea cables. “A reduction in local bandwidth costs would therefore be second on the list,” said Fialkov.

Internet Solutions legal manager, Marc Furman

Marc Furman
Marc Furman

Internet Solutions (IS) legal manager, Marc Furman said that the settlement appears to contain elements of an outcome which is favourable to IS and the other complainants.

“The settlement appears to put in place the necessary elements of functional separation between the wholesale and retail divisions of Telkom,” said Furman.

“The elements of this agreement which give effect to functional separation are the requirement for Telkom to create and apply a Code Of Conduct to Telkom Wholesale with respect to its relationship with Telkom Retail and its wholesale customers.”

Furman said that there is also the requirement that Telkom put in place a transfer price policy which governs how Telkom Wholesale prices services internally to Telkom Retail.

“The requirement that Telkom Retail keep separate accounts which reflect such internal pricing as well as complete transparency in this regard is also an important aspect of the functional separation.”

Furman said that the above terms are critical components of a successful settlement but equally important are the mechanisms which will be used to enforce the above rules.

“The settlement agreement appears to make provision for this by way of thorough external and internal Telkom audits over the next five years,” said Furman.

“The success of this agreement will be determined by the enforcement of these rules and the Commission’s commitment to ensuring Telkom’s adherence to them over the years ahead.”

“As far as what IS would look to achieve with respect to price reductions from Telkom, the all-important requirement is that products and services in the wholesale space are reduced as soon as possible to bring about complete parity between Telkom Retail and Telkom’s other wholesale customers. A reduction in retail pricing would also be welcomed by IS,” said Furman.

Vox Telecom Chief Commercial Officer Murray Steyn

Murray Steyn
Murray Steyn

Vox Telecom Chief Commercial Officer Murray Steyn said that they would like to see is true separation between Telkom wholesale and Telkom retail, not merely paying lip service to it as they have in the past.

“Telkom have always claimed to have separated wholesale from retail, but in admitting to anticompetitive practices they have confirmed what the rest of the industry has been saying for a long time, that the so-called segregation between the two has been a sham,” said Steyn.

“Not only that, but it has hampered the development of the industry, at the expense of Telkom’s competitors and ultimately, the consumer.”

Speaking about the promised price cuts, Steyn said that previous drops in these wholesale prices have resulted in significant and immediate drops in the price that consumers pay for those services.

“This is because the Licensees that pay to access the Telkom network operate in a competitive environment with each other, whereas Telkom has a monopoly over its network, and there is no transparency of the prices that it provides to its retail operation,” said Steyn.

“It is not clear exactly how this functional separation of wholesale from retail is going to happen, but if done properly and transparently, one thing is certain; if wholesale prices drop, retail prices to end users will drop as well.”

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Telkom’s forced ADSL price cuts: ISPs respond