Why broadband in SA is so expensive - TechCentral

Why broadband in SA is so expensive

Alan Knott-Craig

[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.

  • Knott-Craig is former CEO of Vodacom Group

23 Comments

  1. This from a man that is partly responsible for the interconnection charge between service providers thats probibly the most expensive in the world.

    I would love to hear what your yearly income with bonuses was at Vodacom.

    19c /MB where? Try 50c/MB.

  2. Excellent article! Very well summed up and a vital reality check!

    Would love to take this article and translate the story in it into a multimedia format possibly.

    I believe the importance in making the “why is” explainable, especially to my generation, is crucial in more ways than one.

  3. Beautiful Thinking Alan on

    Price of a PC in 1982 – R2000 (R25,000 in today’s money).
    I can get a PC today for R2,500 (1/10 of the price).

    Therefore R200 to send 1MB in 1982 should cost R2500/MB now.
    1/10th of this is R250/MB. But we get it for R0.19/MB = SCORE???

    KAK argument. Technology has advanced like crazy over the past decade. I dont buy that argument.

    That same PC that I can buy for R2500 today would have cost me R190 in 1982’s money…

    Where is the sense in that?

  4. Wouldn’t it be a good idea to use something like Moore’s law as a basis for price comparison?

    Interesting article, the explanations of bandwidth elsewhere in the world in particular were enlightening (if true!)

  5. I was inclined to disagree AK-C’s point in the beginning and was very close to dismissing him entirely but after reading it again,I have to say he makes excellent, well thought out points. I think we can all appreciate the role that spawn of satan SBC played in getting us to this juncture. Makes one think, though.

  6. This has been my argument for a long time. Thanks to our protectionism, we missed out on the telecoms boom. That the companies involved went bust is immaterial to the consumer. It matters only to the private shareholders who risked their private capital. The fibre they laid is still there, but we’ve got none of it, thanks to the cozy deal between the government — in the form of Pallo, Jay and Ivy — and Thintana. Thanks, gov.

  7. Matthew French on

    The article provides plenty of food for thought, but glosses over the past five years. The story of SBC and Thintana is practically ancient history. The almost criminal neglect shown on more recent years by the Department of Communications is a far better story. The DoC even gave us plenty of room for great conspiracy theories – how else can one explain their determination to make things worse?

    As for cost: who can really say what the real price of bandwidth in South Africa should be? What is pretty clear is that government intervention and inaction, which often happened at the same time, has only helped to increase prices.

    More bandwidth is also not going to help the foggy regulatory environment. Who would want to invest millions in infrastructure only to find out tomorrow that it is illegal? Getting rid of the antiquated legislation won’t fix things, but at least it will make room for someone who has an interest in doing better bandwidth.

    Fortunately the signs from the new DoC are encouraging. But right now we need more than signs – we need vision and clarity.

  8. Don’t buy the argument. Costs are still too high and service still shocking – a pigeon beat Telkom ADSL yesterday. Technology eventually becomes ubiquitous and will not define your strategic advantage. Service and innovation will define the company. The ability to build true converged products and supply products suitable to the informal market will drive sales and profits – more efficiency will decrease costs, increase profits and allow prices to consumers to drop.

  9. Not very logical on

    Comparing the price of a house in the early 80’s to today is hardly the same as comparing technology prices. Technology has advanced in leaps and bounds over the last 30 years, houses have not. A CD player when they first came out were damned expensive (R2000+ if I’m not mistaken) – today you can get one for under R100 – use that in your comparison.

    Another thing: Telkom recently stated that the cost of international bandwidth only makes up 30% of the cost of providing the bandwidth. If this is true, then why is international bandwidth 10x more expensive than local bandwidth? It should only cost 30% more than local bandwidth.

    South Africa is being raped with international bandwidth costs – and yes, we can carry on paying for “infrastructure” (or fat bonuses) but it’s going to leave SA in the dark with regards to online business advancement.

  10. It is a good argument, and very true, with one catch.

    Why is it that mobile operators have kept up with and even exceeded international standards in mobile broadband, but Telkom fixed-line speeds have remained largely static practically since introduction? Cost is not the sole issue here, performance must be looked at as well, and it’s certainly nowhere near national standards. Is it the fiber (or lack of it) that’s the problem here? Really?

    What about all that dark fiber Broadband Infraco suddenly, interestingly, finds itself sitting on for zero investment, the entire unlit large-capacity network which used to belong to Transnet, was promised to Neotel then somehow suddenly got yanked away and dumped into yet another useless, profiteering “new” shell? There was spending on infrastructure, but rather than this being sold off at a cheap rate to private investors when the company collapsed, it got redirected into another Telkom profiteering machine and sidelined until demand was so pent-up that it could come in and charge an insignificant amount less than the hated incumbent and just absorb a huge amount of pent-up demand as sheer, unearned revenue.

    Still nice, thought provoking article well researched and written.

  11. Vodacom is charging R2 per meg and it seems like its still a long way to go because most people use their cellphones as modems and they are billed on their airtimes. But if per meg is R2 who will do that internet browsing. Vodacom is expensive if you do not have a modem you are in serious trouble in SA we are still paying very highly ridiculous amounts forusing internet in this country. These modems are expensive also what we need is competition and competition and competion in this country maybe we will be paying 0.5cents per meg and everyone will will be happy and start instant browsing.

  12. if he did a bit of economic he would know that you cannot compare prices of something in 1982 to today without implementing a nominal interest rate etc…

    plus you prices then was relatively high to prices know (according to his calculations), the thign is it was a NEW technology then, today its fairy matured..

    weak article, and please give me a link to the 19c/megabyte ( its probably only a package that is like 200gigabytes cap or something) . What about the average consumer?

  13. Even if you have a modem, you will pay as much as a phone, the problem is in other countries Internet is unlimited but here they give you data bundle like food, the more you eat the more it going down per month, that rubbish. So even when you are talking 5c/MB or 50c/MB the problem is your data bundle still 500MB or 1GB or whatever and you are going to spend it until you got 0MB. The better we pay for Internet witch we will use as we like the better more people will be able to have Internet connection in their home. For the record, just to load this page it cost me 2.1MB and now I am going to send my comment it will be 4.2MB and if I bought 5MB for R9.25 from vodacom that means this is my last house of Internet and I am going to be offline. South Africa wake up and stop fullish protectionism.

  14. Andy October (WirelessMonkey) on

    Dearest Alan – my hat off to you for what you have achieved. I’ve always said that we need to give you credit for the work done. However, times are changing and people are hungry for connectivity, but sadly your Vodacom, along with the rest, fails to hear them. The passion that once drove you to achieve the progress you made has died. There simply is no passion driving us any longer. The fight to connect Africa has become a figures game that serves only to conceal the hidden costs to the consumer. Honesty is what’s asked for and is what’s not forthcoming. We need to remember the passion that once drove us, because the problem that existed then and crippled Africa, still exists today.

  15. Denis Jeoffreys on

    While Knuckles give a well reasoned history lesson, it is beside the point. What we need is a well reasoned business plan that will deliver the cheaper bandwidth in a much more accelerated manner than simply waiting for organic growth. Education, Healthcare, Economic development all demand this. Without an infrastructure to support the improvement in efficiency demanded in the world today we will remain a third or maybe fourth rate country going backwards with respect to the major economies. What happened to the cheap deployment of fiber, using the sewers instead of trenching in urban areas, the running of fiber on the high tension power lines for long haul etc. There are too many empires being built and not enough thought is being put into the development of the country as a whole. Throwing money at the problem is not the answer alone, proper planning and a drive to improve the lives of all our citizens is what is needed. National pride is only possible when all our people can achieve self pride.

  16. “Follow the money”

    With hindsight, the disastrous privatisation of Telkom, the recent reports in the media of hints of skullduggery involving mobile interconnect rates, the probable future boom-bust nature of building bandwidth, I’d be very scared to invest money in SA telecoms in the medium or long term. (Unless I know who the controlling players are, from the politicians to the corporate financial brokers) However, corruption at this level is not confined to Africa, it happens in the most advanced economies, just it’s very sophisticated.

    So how does one build a cheaper network? Perhaps I’m missing the point here but in an enterprise-class or Telecom-level network It’s not as simplistic as just the cheap deployment of fiber. There’s much, much more complexity involved, to make it reliable and functional. This any telco engineer or executive will tell you.To initiate it is not quite as cheap as you’d think. That’s not to say it can’t be cheaper it can , just to be realistic about the costs and investment required.

  17. Only TRUE competition lowers prices, provided the playing field is level.

    Local Loop Unbundling at fair prices is essential to bring about true competition.

    More competition on submarine cables is also required – moving from monopoly to duopoly to an oligopoly or cartel only creates the perception of competition. The answers lie in what has been done overseas – adopting the good and the learning from the bad.

  18. South african internet is embarrassing. No justification makes up for the fact that you cannot stream netflix and other things that are taken for granted in most of the world.