The hype is everywhere. Anyone you speak to – even friends at braais – will tell you with wide-eyed incredulousness that bandwidth prices “will drop by 90%” by the time Seacom lights up in a matter of days.<\/p>\n
But, is this realistic?<\/p>\n
Industry sources and executives suggest not.<\/p>\n
Seacom’s Brian Herlihy, at last month’s site visit, suggested that since Seacom was announced, prices have already come down by about half of the 90% originally predicted.<\/p>\n
This, however, is not for the retail price you and I pay for DSL or 3G bandwidth. People in the industry even question whether this price decrease has been as pronounced (but that’s another story).<\/p>\n
Herlihy further stated that prices have another 40 to 50% further to fall. These are the wholesale prices that operators, service providers and carriers pay for bandwidth.<\/p>\n
Now, in time we will see price reductions and tangible added value to current pricing plans, but we’ll need the arrival of the recently-announced Main-One Cable System, as well as the West Africa Cable System, and EASSy to really make a massive impact. Right now, there is simply too much pent-up demand.<\/p>\n
Seacom<\/a> is targeting a return on investment in five years, and sources suggest that this too is very conservative. Some suggest payback in as little as three years.<\/p>\n The media have been quick to automatically declare that prices will “fall by 90%”. Few want to point out the unpopular (but true) story.<\/p>\n As far back as February, general data manager at MTN<\/a> Brian Seligman said that while “we are going to see changes in pricing [as opposed to real decreases], we are going to see changes in structure, and one of the biggest misnomers out there is that these international cables landing are going to drop the price of data by 90%”.<\/p>\n Head of Commercial at iBurst<\/a>, Steve Briggs has also cautioned that “consumers should not expect to see the sharp falls in broadband pricing that some of the more optimistic commentators have predicted”.<\/p>\n Briggs is able to make hard-line statements like this because iBurst, due to its market share, is not really in a position to dictate price in this market. As an illustration, Neotel charges 8c per MB for out-of-bundle data – but you haven’t seen MTN, Vodacom<\/a> and Telkom<\/a> suddenly rush to bring their prices down to anywhere near that level.<\/p>\n Granted, Briggs is (in some ways) talking his own book: he lists a number of factors which influence pricing, beyond international bandwidth. These include “the costs of the network providers’ infrastructures, the costs of the customer’s modem, as well as marketing, distribution and support”.<\/p>\n Seligman, weighing in nearly six months ago, added that one needs to remember that “although this is going to give us a lot of bandwidth, and most customers are going to see significant improvements in performance, the cost of international bandwidth is only a small percentage of the total cost of delivering a megabyte of data”.<\/p>\n Market talk, in recent weeks, has suddenly pointed to the fact that Seacom will offer “more bandwidth”, “redundancy”, and “an opportunity to bring more bandwidth-heavy hosted applications to South Africa”. Most of these announcements have plainly ignored price.<\/p>\n MTN’s Seligman basically rubbished the idea of massive price cuts in February: “No, I don’t think we are. You are going to see different ways of packaging; you are going to see some incredibly innovative ideas from MTN over the course of this year in terms of making data significantly more affordable, significantly less expensive for customers, and that basic R2\/MB – that’s not going to change significantly in the foreseeable future.”<\/p>\n Think for a second: why would an operator cut its base price immediately?<\/p>\n If your service provider is currently charging you R499 for 2GB of data per month, why would they suddenly start charging you R399 or even R299?<\/p>\n Rather, a service provider will keep charging you R499 in order to defend revenues, and rather bundle “extra” data. The truth is that the vast majority of users on a specific price plan do not use their allocated 2GB (for example) per month, and therefore if an extra 1GB (for example) is bundled with that, its done so at very little real “cost”.<\/p>\n This kind of thinking is backed up by confirmations with high-level industry sources.<\/p>\n Vodacom’s current data promotion where (a small amount of) “free data” is offered with every purchase backs up this strategy.<\/p>\n We may yet see some aggressive moves from Vodacom – rumours indicate they may use this opportunity to move quickly and assertively. MTN’s Seligman has indicated that we’ll see some “incredibly innovative ideas” from the operator.<\/p>\n The operators’ focus will be on making bandwidth more “affordable” – in short, the operators will restructure their bundles and bundled incentives.<\/p>\n You’re likely to get your hardware for free and not have to subsidise the cost of it across a 24-month contract (hardware prices have come down consistently so this, again, is a small loss-leader).<\/p>\n But a 90% reduction in bandwidth prices?<\/p>\n Not a chance.<\/p>\n