[Kictanet] KENYA BEGINS THE COUNTDOWN TO CHEAP INTERNATIONAL FIBRE

[alice at apc.org]

TOP STORY: KENYA BEGINS THE COUNTDOWN TO CHEAP INTERNATIONAL FIBRE
from Balancing Act

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It’s like waiting for a matatu. You wait for ages and none come along.
But just when you’re about to give up hope, three come along at the same
time, all trying to come to a screaming halt in front of you. Kenya now
has three (or more) potential international fibre projects that could be
complete within 12 months. Each one is loudly proclaiming that it will
deliver cheap international bandwidth. Russell Southwood took the
temperature in the market last week about what the impact of this
bandwidth will be upon the market.

The Kenya Government has signed an MOU to build a fibre link to Fujairah
in the UAE currently costed at Ksh5.7 billion. The construction and
supply contract will be awarded early next year and the project, dubbed
The East African Marine System (Teams), will be ready by November,
according to a joint statement issued by both parties from Dubai. Many
in the sector believe that it will be more like 19 months or more before
completion.

The Kenya Government will have a 40 per cent holding in the project,
Etisalat 20% and the remaining 40% will go to investors in the East
African region. The Government has said it will organise an IPO on the
Kenyan Stock Exchange. Several Kenyan companies have expressed interest
and one said that the Government had told them it would “guarantee their
loan”. The details of the finance package have not yet been settled but
it is unclear where the Kenyan Government will raise its 40% from. Will
the World Bank simply shift a portion of its EASSy funding to the new
project as many think likely?

The Government’s commitment to a 12 month schedule is a bold move but
one that must lay them open to a certain amount of scepticism. The
tender for expressions of interest was only issued 2 weeks ago and
Government timetabling is notoriously slow compared to the private
sector. Apparently the Private Secretary has been telling interested
parties that the Government wants prices comparable to those to be found
in India in 12 months time. This benchmark has been set in order that
Kenya will be able to compete in the international outsourcing market.

Apparently a number of interested parties said that they would put up
all the money to build it if they could have a monopoly and he sent them
away disappointed. But more worryingly one interested party told us that
it could only get involved if it also allowed Telkom Kenya to be a
shareholder.

The next international fibre project is KDN’s and it has now signed its
contract with Flag Telecom. Its link from Mombasa will terminate in an
undersea junction in international waters off of the Yemen. It says the
link will be fully operational in the first quarter of 2008, just 15
months away. The company believes that it will come to market with
capacity at $500 per mbps pm but that the price of bandwidth will go up
to those wanting to invest as time passes. In other words, for those who
commit early prices will be lowest and for those who come in late,
prices will go higher. It also stresses that its landing station at
Mombasa will allow other carriers to co-locate there charging only
electricity and services at cost.

So this leaves the third project EASSy looking as if it will be the
third runner. NEPAD appears to have made little more progress on
persuading more African Governments to sign its political protocol. And
whilst the members of the EASSy consortium (that still includes KDN and
Telkom Kenya) are still moving things forward, there remains a
disconnect between the political and commercial ends of the project. If
both of the above projects go ahead, there is clearly much less need to
build the Mombasa-Djibouti section of the route and it has to be said
that both of the above projects have better international connection points.

As if three were not enough, Ethiopia’s ETC has now had its
international fibre connection working effectively for two months via
Port Sudan and Saudi Arabia. But because it is landlocked and it had
endless fruitless arguments with Djibouti Telecom over control of a
possible fibre link, it wants to find a second international fibre
connection. Therefore it is in serious conversations with both of
Kenya’s fibre network operators about connecting to the Mombasa links
when they are ready. If this goes ahead, both it and Kenya will then
have two international fibre links.

Because the process of getting the international fibre to Kenya has been
both confusing and “on-off”, everyone in the market (including
customers) have understandably not really grasped the impact of its
arrival on their businesses. Until now ISPs and satellite resellers have
largely been in the businesses of living on the margin they make between
buying and selling bandwidth.

These margins have been kept high as they have concentrated on selling
to comparatively few customers. Ironically it has been a high-price, low
volume business where their primary commodity – bandwidth – has always
been in short supply, not least because some of them increased their
margin by contending it as much as possible. This has meant that
bandwidth quality is often variable at best for those not paying “top
dollar” for a premium service.

If you argue that international fibre prices should be low price, high
volume, then the national business model changes: what’s sauce for the
goose is sauce for the gander. Bandwidth becomes cheap and plentiful at
a sub $1000 threshold. The margins that can then be charged make it
difficult for those who are not operating at volume to stay in business.

However it does now open up opportunities for new services, content and
applications that can be sold to customers who should now be paying
European prices for real broadband connections (1-2 meg upwards) rather
than the paltry 64 kbps they are currently receiving. There are at least
500,000 households in Kenya that are at an income level that make them
potential targets for broadband. It would take only half of those
households to sign up for there to be the beginnings of a very different
market.

The real sign that the market has not “got it” is that some key ISPs are
not passing on the information about these soon-to-be cheap prices but
are seeking to protect their high margins by telling customers higher
prices. A heads-up, guys. The sector is a village and news will get
round quickly and we’ll encourage the circulation of this price
information. The market’s about to change, get ready to change with it.

At the national level, there is now a third source of fibre capacity.
Jamii Telecommunications has signed an agreement with the Kenya Light
and Power Company (KPLC) to sell an STM1’s worth of its fibre capacity
in Nairobi and Mombasa, with KPLC saying that it will triple its
capacity shortly. Two other companies – CTN and Cable Vision – have been
granted a licence to sell KPLC’s capacity and it is telling (in terms of
the argument above) that both are in the video download and pay-TV
business. Not so far afield, Tanzanian power utility TANESCO is
currently building out fibre capacity and has invited bids to sell this
capacity. Again KDN is poised to make a fibre connection to Tanzania.

However a recent ping on the Kampala-Nairobi route shows that neither
KDN nor Telkom Kenya has got its fibre route operational. KDN is
promising it will be operational by the end of first quarter 2007 and
that prices will be 20% cheaper.

Elsewhere in the market, the new VoIP operators are finding it difficult
to get interconnection agreements and to get proper service from
interconnect service providers. Telkom Kenya is charging absurdly high
prices but has at least reached interconnect agreements. Nevertheless
the new fixed wireless operators – Flashcom and Popote – are having
difficulties: customers are unable to receive or make calls to certain
countries. Apparently anyone who calls a customer number of these fixed
wireless operators from Germany gets a number unobtainable.

Access Kenya’s Yello VoIP service has been aimed at corporates and has
attracted 250 customers who generate 120,000 minutes a month. But it has
had difficulty getting interconnection agreements with the mobile
operators. It made a complaint to regulator CCK in April and became so
frustrated that it said it would run an advertisement publicising the
position. Safaricom came back to the table but Celtel refuses to enter
discussions, saying that it will do so in its own time.

Kenyan ISPs are under heavy pressure from all the new operators.
Flashcom and Popote are taking more money from data than voice at the
moment as customers are primarily signing up for cheaper Internet
access. Also the introduction of EDGE services by Safaricom is eating
into their high-end customers: one ISP’s CEO admitted privately that he
was losing hundreds of customers a month to these new competitors. The
challenge for everyone in the market will be whether they can take the
soon-to-arrive cheaper international bandwidth and use it to transform
the market.
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