ICTworks

It’s been about 12 months since Africa was the only continent without submarine fiber telecommunication links to the rest of the world on all of its coasts. The east coast did not have any fiber links while the west coast had only one fiber link, the (in)famous SAT3 cable.

Satellite was slow and expensive

There were a couple of fiber links in North Africa. Go back 3 to 5 years and even fiber inside African countries outside a few countries in Southern and North Africa was scarce. The only connection to the outside world for many African countries was satellite.

Pretty much anyone who used the Internet regularly knew that reliance on satellite connectivity was the cause of high prices for internet access and telephony for countries relying either exclusively or mainly on satellite connectivity. On average, accessing the Internet cost Africans 50-100 times more than what it cost consumers in Europe, Asia and North America.

The hidden connectivity barrier

What wasn’t as widely known was that local (in-country) connectivity was as expensive if not more expensive than international connectivity over satellite in most countries. If you have tried renting a “leased line” or dedicated circuit in-country in Africa then you know that the prices were astronomical and dependent on distance from the capital city.

The intra-country connectivity is important because connecting to the internet or making international phone calls involves three important network elements: the connection from the user to the local service provider’s node or office (the “local loop” or “last mile”), the national or regional high speed backbone that aggregates traffic from all the providers and users and the international link which connects to the outside world.

Then a bandwidth bonanza

The situation has changed quite dramatically in the last one to three years. First off, the east coast of Africa now boasts three, yes three cables (Seacom, EASSY and TEAMS) in just 12 months! The West African coast that has long had the SAT3 cable, infamous for its sky high prices, now has another four cables in the process of being laid or activated (MainOne, GLO1, ACE and WACS). Most of these new cables will be active in 2011.

The excitement in East Africa with the landing of these fiber cables a few months ago was incredible. Telecom companies involved in the fiber roll out were promising “affordable” high speed bandwidth with prices pegged to drop by 90%. The East African operators, governments and the international development funding agencies vowed that the new cables would not go the way of the monopolistic SAT3 cable with its super expensive prices. Optimism was high, the Promised Land had arrived.

Local telecommunication companies and governments have been investing heavily in in-country fiber network backbones; the latter with soft Chinese money. Most African countries now boast of a fiber backbone network or one on the way in a year or so.

Yet prices still high

Despite all the initial excitement that greeted the landing or announcement of new cables and backbone networks in Africa, disappointment is setting in. Prices for Internet access have gone down by a factor of 2 rather than 10 as expected. Indeed prices are still high in most of Africa outside a few North Africa countries and others like Senegal. South Africa is a most puzzling case where prices are still higher than even East Africa with its new found fiber.

So with most African countries now boasting of fiber in the backbone and fiber available on all the African coasts, why are prices still high? Why do countries like South Africa and Namibia with world class intra-country fiber networks and good external connectivity (at least for South Africa) still have some of the highest connectivity costs in Africa? Why has all the fanfare and promises of low connectivity costs in East Africa not materialized with two fiber cables already operational and a third on the way?

Two reasons for the high prices

The main reason advanced by most operators is that fiber investment costs are very high and prices have to be high in order to recoup their investments. This is the reason given by East African operators in places like Kenya and the SAT3 operators in West Africa. Others point to a high demand-low supply as the cause.

In other places, like South Africa and Namibia, prices are high simply because of a monopoly or duopoly. Further examination reveals at least two other reasons for these high prices: the largest fiber owners in-country, have until recently, not been allowed to sell or provide services and most importantly, African service providers are still beset with archaic business models and anti-customer mindset! Let’s examine these two factors in some detail.

Reason 1: Hamstrung alternative infrastructure providers

As we saw above, intra-country connectivity costs are high and contribute to the overall high cost of Internet access. With fiber now available in-country in many countries, one should expect that prices would come down. The problem is that those with the largest amount of fiber are not allowed to sell or offer services!

You may not know but the largest fiber base in most African countries is held by the electricity companies and in some cases by oil and gas pipeline companies or rail and train operators. These companies need and laid fiber for monitoring and control of their networks. Until very recently, these electricity companies (dubbed “alternative infrastructure providers”) were not allowed to sell, lease or operate services on their existing fiber in many countries by the telecommunications regulators.

The situation is changing, rapidly in some cases, with electricity companies in Uganda, Kenya, Zambia and other countries now allowed to sell their existing fiber capacity mainly to telecommunications companies. The second National Operator in South Africa benefited from purchasing and acquiring fiber from these alternative infrastructure operators. As this fairly large fiber capacity has been brought into play, intra-country capacity has been greatly boosted and prices have come down.

African governments and regulators need to keep up with this deregulation trend and allow all the existing fiber in the hands of non-telecommunication entities to be made available for telecommunications services. Aside from making more capacity available, this new fiber also increases competition thus further lowering prices.

Reason 2: Archaic business model and mindsets

The second factor which I consider to be even more important is what I refer to as an archaic business model and business mindset. Telecommunication companies such as Internet Service Providers (ISPs) in Africa overwhelmingly rely on a small base of customers that they charge high prices. These customers (banks, large companies, multi-nationals, -collectively dubbed the “corporates,” large educational institutions, government agencies, development agencies and NGOs and a tiny number of high net worth individuals) need connectivity and are willing to pay these high prices.

This mindset still pervades the ISPs and thats why prices are still high as they “need to recoup their investments” from a small customer base. But this business model is flawed: there are millions of individual customers and small business that also need connectivity but cannot afford to pay the current high prices.

The success of mobile phone companies has taught us (and any ISP that is awake) that communication services are not the preserve of the rich and powerful. Unfortunately, the typical African ISP is unable to shift to a “large customer base, low margins” business model: drop the prices and attract a lot more customers. This is the main cause of recurring high prices.

Glo 1 landing in Nigeria

Mobile phone companies to the rescue

Fortunately for the consumer, the mobile phone companies with their understanding and masterly of the large-customer-base-low-margins business are getting into the act. These mobile phone companies understand that there is a killing to be made in providing data and internet services.

They are investing in fiber networks, purchasing most of the available capacity from alternative infrastructure providers like electricity companies and they have a tried and test last mile solution. By overlaying their 3G networks with fiber networks, they are capable of providing decent connectivity services at an affordable price.

The traditional ISPs and telecommunication companies in Africa are in for a rude shock if they stick to their existing business models. I would dare say that they will soon be extinct. And that’s a good thing too for they surely deserve what is coming to them!

And we the customers can take solace from the fact that we have cheaper internet connectivity coming to us soon. Now African governments and regulators only have to ensure that the mobile phone companies do not become new monopolies and forget the lessons learned on their meteoritic rise.

Alex Twinomugisha originally published Why Are African Internet Access Prices Still High? on Africa Business Source