[By Duncan McLeod] SA consumers got their first taste of a broadband price war last week when a small Internet service provider, Afrihost, slashed the price of bandwidth to below cost. It’s a promising start, but matters little until Telkom is forced to open its network to rivals.

It was a ballsy move. Last week, Afrihost cut the cost of fixed-line bandwidth on broadband digital subscriber lines to just R29/GB. To put that in perspective, the average selling price for this type of bandwidth has, until now, been R50-R70/GB.

Afrihost, a so-called “second-tier” service provider, resells bandwidth it buys wholesale from Dimension Data division Internet Solutions (IS). CEO Gian Visser admits the company is selling it at a loss.

But he says Afrihost’s move makes commercial sense. The company took the money it had planned to spend on advertising its digital subscriber line products, and instead used it to discount the price of bandwidth. The PR spin-offs and the new clients it has won far outweigh any advantages Afrihost would have gained from an advertising campaign, Visser says.

Though Afrihost’s discounts probably won’t last past this week, the company has promised that its existing subscribers will continue to enjoy the discounted R29/GB rate indefinitely.

Other industry executives don’t think the price of retail bandwidth will fall below R50/GB sustainably for some time. Seacom, the new undersea cable along Africa’s east coast, has not yet had much of an impact in the market. And some industry players don’t think prices will start to come down significantly until two new submarine cable projects — one along Africa’s west coast and another in the east — come on stream in 2011.

There are a number of other factors that are keeping broadband prices high. One is the cost of national backhaul — the price of carrying data between, say, Johannesburg and Cape Town. National bandwidth prices should start to fall in the next couple of years as new fibre systems are laid that will provide alternatives to Telkom.

But perhaps the biggest impediment to lower broadband prices is the fixed-line local loop, the so-called “last mile” of copper cables into homes and businesses. Telkom controls the local loop. Until other service providers have access to the fixed-line operator’s telephone exchanges to provide services directly to consumers over that copper infrastructure, broadband prices will remain higher than they should be.

Unfortunately, little seems to be happening in unbundling the local loop. Former communications minister Ivy Matsepe-Casaburri set a deadline of November 2011 for a full unbundling. But, other than a report published in 2007, little seems to have happened.

The largest and growing costs associated with fixed-line broadband are the line rentals charged by Telkom. Local-loop unbundling should go a long way to help drive down prices, provided the process is handled correctly by the regulator, the Independent Communications Authority of SA (Icasa).

Unbundling is critical to fostering competition. But it must be done properly to ensure that Telkom isn’t able to abuse its position. Like incumbent operators elsewhere in the world that were forced to open up the local loop, Telkom is likely to do everything it can to frustrate rivals from providing services over its last-mile infrastructure.

What’s needed is a strong regulator that is able to manage the process effectively and tackle Telkom head-on over anticompetitive abuses. Fortunately for Telkom — and unfortunately for the rest of us — Icasa is a fundamentally weak regulator and expecting it to do its job may be expecting too much.