Next year will bring significant consolidation among SA’s Internet service providers as they battle a difficult, deflationary environment.

That’s the view of Altech Technology Concepts CEO Wayne de Nobrega, who says the industry is in a “race to the bottom” as bandwidth prices plummet and service providers try to outdo one another with uncapped products that don’t make financial or business sense.

“If you are really objective about it, a lot of what happened in 2011 shouldn’t have happened,” De Nobrega says. “There was a seed and everyone jumped onto that seed without thinking through pure business principles.”

De Nobrega is a sharp critic of uncapped fixed-line products, saying they don’t make sense in the SA environment where Telkom charges Internet service providers high fees for connecting to its digital subscriber line (DSL) network.

He says the plummeting cost of bandwidth is putting severe pressure on the revenues and profit margins of service providers and this, he believes, will inevitably lead to broad consolidation from next year as companies try to build economies of scale to offset the challenges.

He sees Technology Concepts playing a role as a consolidator and won’t rule out the company making acquisitions and forming partnerships with other service providers. “We need to grow the utilisation of our network, getting customers onto our network quicker than under our original plans.”

De Nobrega is unhappy that service providers are fighting among themselves rather than attempting to grow the fixed-line broadband market.

Rather than finding ways to grow the number of DSL lines in service, he says the industry is fighting over the same limited pool of users. At the end of September, Telkom had 795 000 DSL lines in service, representing growth of only 13,7% over a year ago. There are about 4m fixed lines in service in SA, meaning fewer than 20% are enabled for broadband.

“What we should be doing is working together to get that number to 2m,” De Nobrega says. “Instead, we are all stealing customers from each other.”

He suggests the industry needs to work together to achieve a common goal and to find ways of helping Telkom increase the number of lines in service rather than treating it simply as the enemy. He says fixed-line alternatives to Telkom’s “last mile” access network are unlikely to materialise because the risks of building infrastructure in a market that is as geographically widespread as SA’s and where prices and profit margins are continually falling are high.

“I wish there was room for a new infrastructure player, but I don’t think anyone has the balls to take that risk,” he says. “So, the question must be how we work with [Telkom]. How do we work with the incumbent to achieve our objectives?”

Rather than treating Telkom as the nemesis, the industry ought to engage with the operator to find ways of growing the broader industry in a way that benefits everyone, he says. However, he concedes that Telkom needs to separate its wholesale and retail businesses more clearly and that down the line full structural separation of the company may be necessary.

Telkom’s IP Connect charges, the fees it levies on service providers to access its DSL network, remain too high and must come down, De Nobrega says. He welcomes the recent move by the Independent Communications Authority of SA to intervene to try to bring these costs down, but says the timelines the authority has set out are too long. The high IP Connect fees, he adds, make uncapped Internet unviable in the SA context, at least for now. Also, although bandwidth prices on undersea cables have fallen dramatically in recent times, they remain expensive.

“MWeb will say uncapped is viable but how can it be?” he asks. “The company is cross-subsidising its uncapped service with something else. Perhaps MWeb just wants more subscribers on its network because it wants to sell them content as well.”

MWeb, which led the move to uncapped DSL, is owned by MultiChoice, a pay-TV operator, which is in the process of launching online video-on-demand services. — Duncan McLeod, TechCentral