[kictanet] Cheaper international fibre prices in 2009 will put the squeeze on national backbone prices

[alice]

  (From Balancing Act)



  Cheaper international fibre prices in 2009 will put the squeeze on
  national backbone prices

Africa’s operators say they cost their national backbone prices based on 
distance. The basis is that the further you want your traffic carried, 
the more it costs. However, this logic will soon be challenged by new, 
cheaper international bandwidth costs. If it costs more to send traffic 
from Johannesburg to Cape Town or from Lagos to Abuja than it does from 
any of these places to Europe, then national arbitrage will have well 
and truly arrived. Russell Southwood looks at what is likely to happen.

Currently SAT3 prices vary from US$1,300-8,200 per mbps per month. 
Volume prices in South Africa fit into the bottom end of this range. 
Prices have recently come down in Angola to the lower end of this range, 
leaving Cameroon and Gabon as the high price pirates on the route.

SEACOM and TEAMS are both saying that their cables will start operating 
in Kenya by Q2, 2009 and are offering prices that will probably 
translate into US$500-1,000 if operators pass along the savings made. On 
the west coast, Main One looks like being the first competitor cable to 
land in Q2, 2010 and will offer prices that will probably translate into 
prices for customers in the same range as on the east coast.

And this where the problem begins for operators. About half of Africa’s 
operators are offering the same bandwidth (usually up to 500 kms) for 
US$2,000 or more. Only a very few are below US$1,000 and some are as 
high as US$4,000. These prices do not take into account a series of 
add-ons like access charges that actually take the global prices higher. 
The intelligent customers might at this point be asking themselves: why 
are operators able to go half way round the globe for the same price 
they’re charging me for going from the capital city to another city?

One telco in the southern African region with a monopoly gateway gets 
65% of its revenues from international traffic. The impact of lower 
rates will rob even competitive incumbents of significant parts of their 
revenue. No wonder the Zambian Communications Minister (see Telecoms 
News below) is trying to retain Zamtel’s monopoly gateway status because 
the company is already loss-making with that financial advantage. But 
the bad news cannot be held at bay…

For the operators, pressure from customers on national backbone will 
become irresistible because on the basis of distance charging things 
will not make sense. So what can the forward-looking incumbent do?

* They need to invest in IP networks where according to Huawei and Nokia 
Siemens Network speakers at last week’s CRASA event (Migration Towards 
All-IP) IP core networks are 30-50% cheaper in CAPEX terms and 30% in 
OPEX terms. As vendors, they would say that, wouldn’t they? But these 
figures seem to accord with those of operators we’ve spoken to who have 
made all or part of this transition. Companies with all IP networks 
(like South Africa’s Neotel) or who have made a real beginning with this 
transition possess a potent advantage over those who will have to 
replace their core network over the next five years.

* Most incumbents are very over-staffed and the political pressure to 
avoid redundancies has been too great for them to avoid this core issue. 
Not only do they have too many staff but they have too few with the IP 
skills required in the future. None have any strategy for addressing 
this “elephant in the room”. For many IP and analogue reside in separate 
departments and the former is small and not influential in corporate 
strategy.

One possible solution? Outsource the core network functions in the way 
that a small number of mobile carriers (for example Kasapa in Ghana) 
already have. You can insert focused management and higher levels of 
skills and control your cost levels. But for Government-owned incumbents 
this will require decisiveness and a clear understanding that your asset 
will slip through your hands if you don’t. Bankrupt companies don’t 
employ people for long.

For customers the prospects are more cheery. Infrastructure competition 
will in the medium term begin to deliver real savings if they are savvy 
and more demanding. There are two reasons:

* Vertically integrated mobile operators want to get into the business 
of providing core network. All of those we have spoken to – both those 
planning and those already doing it – agree that there are savings to be 
made in the 30-50% range. Countries as diverse as South Africa, Nigeria, 
Kenya and Ghana already have several core network (or infrastructure) 
providers. Some claim even higher savings as much depends on how 
protected the monopoly provider is. The challenge for customers is to 
point out the national arbitrage and demand better value.

• The second factor that favours customers is the arrival of alternative 
infrastructure providers. Power utilities already posses fibre over 
transmission pylons and adding more is considerably cheaper than 
trenching the same capacity. Over half a dozen power utilities have been 
either licensed directly to sell the capacity or given permission to 
tender to licence-holders. One of the more recent ones was Escom in 
Malawi which will in the not too distant future have fibre links to 
Mozambique. Where this has not happened, incumbents are trying to argue 
that this alternative capacity should be in their hands but they are 
probably fighting a losing battle.

In order to speed up competition in the core network at the national 
level, operators’s customers will have to ask two questions: what is 
your new international fibre costing you and how much of that saving are 
you passing on to me? And why is it cheaper to get my traffic to Europe 
than it is to transfer it around the country I live in? Best to start 
asking now as the excuses are bound to convoluted and lengthy.