Telkom must cut where it hurts

Last week, Telkom’s Internet service provider slashed prices for its consumer and business products. But it’s really in broadband line rental where the real cuts are needed. By Craig Wilson.

There’s no denying that cutting the cost to communicate is good for South Africa. Cheaper and more ubiquitous communications have a direct and measurable economic impact. This is one of the reasons government wants to have every South African online by the end of the decade.

Part of government’s strategy calls for more people to sign up for fixed digital subscriber lines rather than relying on mobile alternatives. Fixed broadband is more consistent and, when used for large amounts of data, is more cost effective.

Fixed lines are also the most sensible solution for services like streaming video, a space in which Telkom has said it plans to play. The challenge it faces is getting people to take up fixed lines rather than turning to mobile alone for their connectivity needs.

The price cuts for uncapped data, announced last week by Telkom Internet — the fixed-line operator’s Internet service provider — are welcome insofar as they reduce the cost of one (increasingly small) aspect of having fixed broadband. But the cost of the lines themselves — especially the broadband line-rental charge, but also the voice line rental — remains prohibitive for too many consumers.

Not surprisingly, it’s these rental fees where Telkom doesn’t have to contend with direct competition. Where its prices are tumbling is where it faces intense rivalry; where it’s not showing a willingness to reduce prices is in the area that continues to fall under its exclusive domain.

According to Telkom, the cost of maintaining its fixed-line infrastructure means it loses money on the average fixed-line in service when only basic line rental is taken into account. Telkom calls this the “access-line deficit”. This deficit is the reason the operator cites for forcing consumers who want an ADSL connection to also have to pay for a telephone line, whether or not they intend using it for making telephone calls.

Forcing customers to take a phone line with a data connection may offset costs, but it also puts off many prospective fixed-line customers. Telkom’s entry-level 1Mbit/s asymmetric digital subscriber line (ADSL) connection costs R165/month and basic line rental is an additional R148,37/month. That’s more than R300/month before any data has flowed across the line.

Given the growing number of competitively priced data offerings from the mobile operators, and the fact that mobile data prices continue to fall, it’s hard to make a compelling case for a fixed line for all but the heaviest of data users for whom an uncapped service — or a sizeable chunk of bandwidth — is a necessity. The rest can make do with mobile, provided they’re in a coverage area.

It’s not only retail end users footing the bill for Telkom’s access network. Internet service providers also have to pay the operator IPConnect charges to access its last-mile network into homes and businesses.

In light of this, it’s easy to get cynical about Telkom Internet’s price cuts. Nevertheless, the move is still good for consumers. Competing service providers will have to either bring their pricing in line with Telkom’s, or offer greater value to their clients.

Service providers will also continue pushing for more cuts in IPConnect fees. Facing pressure from the Independent Communications Authority of South Africa, Telkom cut the fees by 30% last year, prompting almost immediate price reductions from across the market.

However, at a cost of R1 000 per 1Mbit/s of bandwidth per month to volume buyers of IPConnect, Greg Payne, commercial director at Internet service provider Afrihost, says the fees are still three times the cost of bandwidth on undersea cables. He thinks IPConnect is priced four times higher than it should be.

Telkom, of course, faces huge challenges in getting prices down to more reasonable levels. For a start, it’s burdened with too many employees – and the enormous salary bill that brings with it – but is unable to retrench to the extent it needs to, in large part because of the fact that the government is its largest single shareholder.

If it wants to remain relevant, Telkom has to keep growing its broadband base, where growth in recent years has been faltering. Whoever takes the reins this year from outgoing group CEO Nombulelo Moholi must make growth of the company’s ADSL base a strategic priority. And that means doing something that the company has so far been reluctant to do: it needs to cut prices across the board.  — (c) 2013 NewsCentral Media

• Craig Wilson is deputy editor at TechCentral