SEACOM is perceived to be one of the most significant events in history in the local and African telecoms market. It has taken on a heavy burden by promising to revolutionize the way East African connects to the world. Up to now many East African countries had to rely on expensive satellite bandwidth to connect to the world – something which SEACOM will definitely change.
Over the last decade Telkom had a monopoly on international bandwidth with its stranglehold on the SAT-3/SAFE cable system and its control over carrying this bandwidth nationally. This changed when Neotel gained access to the SAT-3/SAFE landing stations, and the company is now providing international connectivity without touching Telkom’s network.
When SEACOM launched operations recently it signaled the end of the SAT-3/SAFE monopoly on international fibre connectivity, promising to significantly reduce bandwidth costs and improve local broadband services.
While there have been a few price cuts in the market, the true effect of SEACOM is yet to be felt. Consumers have been getting restless waiting for big players like Telkom, Vodacom, MTN and Neotel to make their big announcements of cheaper broadband services or improved monthly usage limits, but not much has happened yet. Some industry players even argue that massive price cuts may only happen in 2010/2011 when two new undersea cable systems, EASSy and WACS, become operational.
Some industry players, including SEACOM itself, point out that price cuts have already occurred, and that South Africans can expect more cuts in future as SEACOM anchor tenants start to launch new services.
When will pricing come down?
Suveer Ramdhani, commercial manager at SEACOM, says that significant price cuts occurred in the South African telecoms market long before SEACOM even landed – purely due to the looming threat of competition.
Ramdhani explains that the cost of an STM-1 circuit from Johannesburg to London on SAT-3 – providing 155 Mbps of international bandwidth – costs R 1.8million in November 2007. The current price is R 800 000, says Rhamdani, a reduction of over 50% purely due to SEACOM’s imminent arrival in the country.
While it is well known that Telkom reduced its international bandwidth fees after SEACOM became a threat, some service providers report that they have not seen a significant reduction in quoted international bandwidth prices from SEACOM when compared to SAT-3.
One ISP, which asked to remain anonymous, said that they were quoted between R 8 000 and R 9 000 per Mbps per month for SEACOM bandwidth, a far cry from the published wholesale rate on SEACOM of between R 300 and R 800 per Mbps per month.
Ramdhani explains that SEACOM has little control over the price that channel resellers charge for international bandwidth on the cable, which may well in some cases be quite high. He however added that companies will be well advised to contact companies who purchased significant capacity directly from SEACOM. These companies include Neotel, Internet Solutions, Gateway Communications (Vodacom Business) and IBS.
SEACOM is completely transparent regarding prices, and has previously published all of its rates for Johannesburg to London circuits. The company offers bandwidth to clients on both an IRU (indefeasible right of use) pricing model or 1 to 5 year leased model.
The once-off fee for an STM-64 circuit (10 Gbps) from Johannesburg to London on the IRU model is $ 99-million (R 774 000 000 at R 7.82/US$). This translates roughly into R 12 097 406 for an STM-1 circuit (155 Mbps) and R 325 per Mbps per month over the 20 year lifespan of the cable.
The once-off fee for an STM-1 circuit on SEACOM on the IRU model is $ 3 400 000 (R 26 648 714 at R 7.82/US$). This translates into roughly R 716 per Mbps per month if the pricing is broken down over the full 20 year life span of the cable.
The SEACOM rates are payable in US$ which means that the ZAR/USD exchange rate has a direct influence on the cost of bandwidth on SEACOM. This varying rate may influence pricing models from operators who are concerned about a weakening of the rand over the next twenty years – an event one could hardly call unlikely.
On a leased model the prices are significantly higher. The monthly cost for an STM-1 on a one-year lease is $ 94 444 (R 737,446), translating into R 4 658 per Mbps per month. This cost further excludes the once-off setup fee of $ 20 000 (R 159 950).
If one increases the lease period and capacity the cost does come down. The monthly cost for an STM-64 on a five-year lease is $ 2 555 712 (R 19,943,361), translating into R 2 010 per Mbps per month. This cost however excludes the once-off setup fee of $ 42 000 (R 327 975).
The once-off costs quoted are also not the total cost. All SEACOM tenants must pay a cross connect fee of R 12 000 per month for every STM-1 link, and R 9 000 per month per rack should they want to collocate in the Neotel data centre in Midrand.
Providers purchasing bandwidth from SEACOM will also have to pay for their access link to carry traffic from the Neotel/SEACOM data centre to their own point-of-presence (PoP), and cater for local IP transit (which can cost in the region of R 5 000 per Mbps per month) if they want to provision broadband services.
On the IRU model there are yearly cable maintenance fees ranging between R 798 499 per annum for an STM-1 and R 23 247 750 for an STM-64 circuit.
Internet Service Providers will also have to pay a once-off cross-connect fee of 1 450 GBP (R 18,904 at 1 GBP = 13.0373 ZAR) in London and an IP transit fee of $ 2 000 (R 15 662) per month per STM-1.
These costs all add up to increase the effective per-Mbps price which wholesale service providers have to pay for SEACOM bandwidth, and these costs must unfortunately be passed on through the value chain and eventually to the consumers paying for broadband bandwidth.
Real world pricing
While the wholesale SEACOM price of R 325 per Mbps per month or even R 716 per Mbps per month looks great, it is very far removed from the effective market price. This price excludes various components of providing a full internet service. It also fails to take into account the substantial upfront payment and costs for initial equipment, other capital expenditure and general operational costs.
The biggest factor making this low per-Mbps price unrealistic is that it is calculated over the full lifespan of the cable, assuming a full utilization or resell of capacity during this period without any profit margin. A company which invests around R 770-million in international bandwidth capacity is taking a significant risk, and adequate profits are likely to be built into their pricing to ensure a return on investment.
The price of a few hundred Rand per Mbps per month for SEACOM bandwidth should therefore be seen as an academic exercise of establishing the lowest possible price for raw bandwidth on SEACOM rather than a realistic reflection of what ISPs can expect to pay to use SEACOM bandwidth in providing Internet services to their clients.
While the true cost of using SEACOM as a SAT-3 alternative for international bandwidth may not be as low as a few hundred Rand per Mbps per month, it is still significantly cheaper than current pricing on SAT-3/SAFE.
This lower pricing will filter down to consumers in the form of higher usage limits and lower bandwidth tariffs, but it will take time for all SEACOM’s anchor tenants to start rolling out SEACOM based services and for this pricing to filter down the broadband value chain.
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