[By Alan Knott-Craig] I know that this article is going shock you, but not in the way you expect, so buckle up. I have oversimplified the piece, but its essence is as true as you could wish for.

The other day, I found a Telkom — in those days Posts & Telecommunications — internal “newspaper” called Postel, dated December 1982. The front page article — coincidentally written by myself at the time — described a 40% cut in international data communication tariffs based on X.75 packet-switching. Before the 40% cut, it cost, in today’s money, more than R10 000 to send 1MB of data. After the 40% cut, it cost only R6 000/MB — a bargain, with demand exceeding supply.

Hooray, the public shouted!

In 1982 a 9 600bps (bps is bits per second, with eight bits forming a byte) leased line for data from SA to London cost R18 000/month. That’s about R500 000/month in today’s money. Today, a 64 000bps line to London will cost you about R4 000/month. Strangely, no one seems deliriously happy. But this decrease does reflect the impact of the decreasing cost of technology on the price of services (a topic for another day).

In 2004, the cellular operators introduced 3G at a rate of between 60c/MB and R10/MB. Wonderful, some competition at last, the masses chortled. Today, the lowest rate offered on SA’s mobile networks is 19c/MB. Boo, the public chants!

I calculated today’s money by figuring out what it cost to go to university in 1982 compared to today, and I also compared what I bought my house for in 1980 and what I sold it for in 2007. I know that’s a crude technique, but at least indicative. So, very roughly, money was worth 30 times more in SA in 1982, and that’s a conservative estimate. That means that in 1982 actual money, it cost more than R200 to send 1MB of data after the 40% cut in rates.

Petrol, by the way, went the other way. As a student I could buy a litre for little more than 10c. Now you need a mortgage loan just to fill your tank.

So I asked my son, Alan Jr, what the heck is going on? He did some excellent research, which I shall refer to shortly. Alan is a numbers kid; I still do back of cigarette box calculations.

So I started with first principles. Demand and supply. If you have more than people want, the price goes down, if you have less than they want the price goes up. In the world of data, people don’t just want to send more data, they want to send it faster and faster. In 1976, when I started working, most folk were happy with 1200bps. Today anything less than 1m bps sucks. So not only do millions more people want to send data, but they want to do so a thousand times faster, and 10 times cheaper (hence the outcry for lower tariffs).

And that’s the fundamental problem in SA. There just is not enough bandwidth to satisfy everyone, so the price is not going to go much lower in the next year. Yes, I can hear you yelling, then why can the US and Europe offer prices so much lower. I will get there, don’t swamp me. And India, you add? I will get there too.

First why does SA have too little bandwidth. Well, mainly we have to thank the government, which I do notice does quite a lot of the yelling for lower prices, for the shortage. Why? Because in the interests of making our country look attractive and dignified — a noble goal — government decided in the mid-1990s to sell 30% of Telkom to international investors. For those of you — and I am sure there are none — who don’t quite appreciate what “international investor” means, it means someone from another country who wants to take as much of our money back to their country as soon as possible. That’s not unique to SA, it’s just the way it is, unless you invest in China, where they keep everything, including you.

The SA government sold 30% of Telkom in 1997 to Thintana (a consortium comprising SBC Communications and Telekom Malaysia) for R5,45bn. The consortium presumably paid for this stake, at least in part, using profits gained from selling its 15,5% share in MTN at the time. SBC, the alpha Thintana partner, cleared a profit of US$250m when it sold its stake in MTN.

At the time there were 5m fixed-line telephones in SA, and Telkom employed some of the best engineers in the world. Telkom was also a commercial disaster, which has only slightly improved in the intervening years. SBC (the dominant partner) and Telekom Malaysia (the ugly, but friendlier, sister) bought the stake for this paltry sum of money, promising to install an extra 2,8m fixed lines by March 2002, and replace 1,25m analogue lines with digital fixed lines. SBC estimated that this would cost between R40bn and R50bn. Today Telkom only has 4m fixed lines. In layman’s terms I call that going backwards.

In a fascinating paper written by Robert W Horwitz and Willie Currie in 2007, the two researchers reach the following devastating conclusion: SBC effectively drafted the 1996 Telecommunications Act after transferring its entire San Antonio corporate office legislative team to SA for that purpose. For six years, until May 2003, Thintana (read SBC) gained control of Telkom, and were not compelled to follow any SA legislation which might violate its shareholders’ agreement (their “rights”). They seconded some 75 executives and employees to Telkom, each of whom earned an average of about $1m/year. In 2001 alone, it is estimated that Thintana’s profit was in the order of R1,12bn! That’s take-home-pay!

The most senior SBC technical executive sent to SA as part of the deal was a gentleman who had a high school mathematics teaching diploma — so I am told, anyway, and in my dealings with him, this appeared to be the case.

Thintana sold its stake in 2004 for a total of R12,7bn, plus billions of rands in management and other fees, as well as profits.

The monopoly period, granted to Telkom and its foreign partners, screwed up this country as regards the supply of bandwidth, and hence price. When Telkom’s foreign investors were done, we were poorer and had irrevocably fallen behind the rest of the world in terms of cheap, high-speed bandwidth. And the regulator, first the SA Telecommunications Regulatory Authority and then Independent Communications Authority of SA, were powerless to do anything about a government-engineered deal. To give them credit, they tried once or twice to flex their muscles, only to be knocked back into submission.

Europe’s GDP per square kilometer is 11 times higher than ours, hence their low tariffs (since they spend more, they can charge less per unit of data, and rake in more cash). Europe is small, highly populated and rich, unlike SA. There, it’s difficult to lay a cable without bumping into someone. In SA, most of the time you are simply going to bump into a windmill. More importantly, in 2002/2003 Deutsche Telekom and France Telecom (the big Telkoms of Europe) reported a combined loss of some R440bn! Much of that went into providing huge amounts of bandwidth that was priced too low. It gives you some idea of how much taxpayers’ money you need to provide cheap bandwidth. Not a way to go in my view.

In the US, some R2,4 trillion in today’s rand was spent by Global Crossing and Worldcom alone in laying tens of thousands of miles of fibre-optic cable. This was subsequently written off when they went bang in 2001 thanks to their misguided investment plans, allowing this vast capacity to be sold today at a price which has no resemblance to the actual cost of laying that cable. AT&T was laying more than 2 000 miles of cable an hour at one point. Needless to say AT&T too went “plop” and SBC bought the company in 2005 for a song (probably with some of our money).

Only Africa and Australia did not benefit from what my son calls “sub-prime bandwidth” in the US and Europe. So unless Telkom goes into liquidation, super cheap data tariffs are not likely in the near future.

And India? A megabyte there costs roughly between 3c and 14c (according to my friend, Dr Hasmukh Gajjar). That’s why all the call centres in the world are located there. That’s partly why most of the 1bn people in India live in poverty. Costs are low in a country thriving on economies of scale.

Today everyone with 10c to spare is building bandwidth in SA. And in time it will make a real difference, but not overnight. And if we force tariffs down now, these companies will simply stop building infrastructure, and we might have low tariffs, but we won’t have any new infrastructure. So unless the government decides to build cheap bandwidth with taxpayers’ money — instead of paying policemen and teachers a better wage — don’t hold your breath for super cheap data rates in the near future. Let private investors build oodles of bandwidth with demand driving the build, until we tip to over-supply. Then the tariffs will come down. A little patience is needed, and a lot of understanding.

I’ll take my chances with 19c/MB for now, a bit of the Bushveld, and a beautiful African sunset. When I started penning this column, I thought 19c/MB was probably too high. Not anymore. At least not for now.