The issue of international bandwidth has dogged South African Internet users since the first dial-up access became available commercially roughly 15 years ago. The intrigue associated with the moves either to deploy submarine cables or block their deployment provides almost endless material for debate.<\/p>\n
The only agreement, it seems, is that submarine cables are essential for the functioning of our modern electronic infrastructure. Without them, communities and countries remain cut off, on the wrong side of the digital divide. From there, however the discord and the politics begin. Politics, it has been said, is competing for resources. <\/p>\n
If these resources are held in the hands of a small number of people, then there clearly exists an opportunity to extract the maximum possible reward from the exploitation of these resources. This kind of situation allows the holders of the resources in question to create a situation of scarcity. This, in turn makes it feasible to extract monopoly rents when monetising those resources.<\/p>\n
The controversy around the EASSY cable system and moves to regulate ownership of cable systems landing in South Africa should come as no surprise. There are so many interested parties vying to have a slice of the submarine cable action – especially as long as high prices still allow good profits. It would also make sense for players to lobby government to keep other players out of the market, in order to reduce competition in the future, and keep prices higher. Unfortunately, EASSY may become a victim of conflicting interests between those parties interested in promoting open access to the cable system, and those driven primarily by profit motives.<\/p>\n
Exactly how profitable might an investment in a submarine cable system be then? Clearly the barriers to entry in order to play in this game are high. The SAT3 cable system on the West coast of Africa initially cost in the region of $300 million to commission. At present, estimates of the cost of new systems from South Africa to Europe are in the region of $500 million, albeit for significantly higher capacities. Apart from the initial capital costs of building a cable system, annual operational costs represent between 4% and 8% of the initial build cost of the system.<\/p>\n
Given the high capital costs of a submarine cable system, it is not surprising that participants in these systems would plead poverty and probably even claim that they are making very slim pickings on their investment. This may well be the case for investors in transatlantic cables between Europe and North America, where extreme competition has driven down prices to levels very close to cost. In less competitive markets, the picture can however be somewhat different, with submarine cables potentially being phenomenally profitable.<\/p>\n
To get an idea of the kind of profitability that has been extracted from submarine cables, we only need to start by considering the fact that not long ago, ISPs were paying as much as R6 million per month for a STM1 circuit in SAT3. This equates to nearly R39 000 per month for 1Mbps of capacity. <\/p>\n
Applying the kinds of utilisation patterns experienced by broadband ISPs, this would equate to a cost of over R180 per GByte of international capacity. If we assumed negligibe costs for an ISP to obtain national bandwidth and bandwidth on Telkom’s IPC service, this would equate to a cost of over R100 per GByte for an ISP attempting to compete with Telkom in offering ADSL Internet access!<\/p>\n
In the future, competition to Telkom may drive the price of international bandwidth to $50 000 (about R400 000) or less per month for a STM1 circuit to Europe, which would equate to a cost of just over $1 per Gbyte per month! Assuming local bandwidth and IPC prices remain about the same, the would bring the cost per GByte for an ISP offering ADSL packages to between R15 and R20 per GByte. Some analyses indicate that Telkom will easily be able to profitably compete with prices of $50 000 per STM1 per month or lower, based on their capital investment SAT3 having already been recovered.<\/p>\n
When we consider that ISPs competing with Telkom are at present struggling to make a profit providing ADSL services, this starts to provide an inkling of the kinds of profits that Telkom is most likely still making out of its investment in SAT3, even after years of price reductions.<\/p>\n
We should not for one moment, however, think that competitors to Telkom are acting in any way altruisticly in building new cable systems to link South Africa to the world. Even after massive price reductions, relative to Telkom’s current offerings, they will still be mining pots of gold at the ends of their submarine rainbows.<\/p>\n