Internet service providers (ISPs) could get “hurt” as the decline in bandwidth prices in SA gathers steam.
The fall in prices, already evident in the market for fixed-line broadband, will result in lower revenue for ISPs and put pressure on their profit margins.
That’s the view of Keith Matthews (pictured), GM for sub-Saharan Africa at BT Global Services.
Bandwidth prices have already fallen sharply in recent months as a direct result of the landing of the Seacom undersea cable, which connects SA with Europe and Asia via Africa’s east coast.
Smaller ISPs have slashed the price of bandwidth on digital subscriber lines to as little as R14/GB. A year ago, the average price of fixed-line broadband was around R70/GB.
Some providers have even begun selling bandwidth below cost to attract subscribers as the price war has intensified.
However, it’s not all bad news for ISPs, says Matthews. The pressure on margins will force them to innovate and develop new products, which in turn will be good for consumers, he says.
Derek Wilcocks, MD of Dimension Data’s Internet Solutions, has a different view, however. He says that although revenue growth from connectivity and bandwidth is slowing, pent-up demand will stop sales from turning negative.
“In our own business, and in our larger resellers, the price elasticity of demand is significantly higher than one,” Wilcocks says. “In other words, as the bandwidth prices come down, clients tend to just buy more. They don’t necessarily want to reduce their spend.”
Where there is significant pressure, he says, is in the retail consumer and small business segments. ISPs that serve those markets could feel margin squeeze.
But medium and large companies and government departments are not cutting their spending. Rather, they’re buying more services at the same price.
And services like video on demand and video conferencing will continue to drive demand for bandwidth. “The pent-up demand for bandwidth is still very significant,” Wilcocks says.
However, he agrees with Matthews’ assertion that service providers will pursue new business areas as sales growth in pure bandwidth slows. “Shareholders tend to invest for a certain rate of growth.”
For Internet Solutions, that means investing in its data centre and developing a strategy for offering online applications in the “cloud”, among other things. — Duncan McLeod, TechCentral
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