A few weeks ago, M-Web filed a complaint with the competition commission against Telkom, the monopoly fixed-line telecommunications operator. M-Web, SA's largest consumer-focused Internet service provider (ISP), is unhappy with the margins it makes selling access to Telkom's broadband digital subscriber lines.
"We make a zero or negative margin," says CEO Kim Reid. "Broadband is overpriced in SA, but it is difficult for us to on-sell the product."
This isn't the first time M-Web has accused Telkom of anticompetitive behaviour. The past decade has been marked by a steady stream of complaints by ISPs to the competition commission and to Telkom's regulator, the Independent Communications Authority of SA (Icasa). Some disputes have landed up in the courts.
Relations between ISPs and Telkom have been fraught with tension since 1997, when Thintana - consisting of SBC of the US and Telekom Malaysia - acquired a 30% stake in Telkom from government. Telkom's new foreign shareholders quickly claimed that the Internet Protocol (IP), the international standard for addressing and sending data on the Internet, was the company's exclusive preserve under the then newly gazetted Telecommunications Act.
The case went to court but, in the face of a legal backlash and widespread condemnation, Telkom eventually - and grudgingly - gave up its attempts to monopolise the protocol. However, the stage had been set for the years of animosity that followed.
Telkom has built a formidable legal and regulatory department that is unmatched by any of its competitors. It has not been shy to use litigation to maintain and entrench its monopoly of fixed-line telecoms in SA.
Many ISPs claim that Telkom continues to engage in anticompetitive practices, even after last year's decision by Thintana - seen by many in the industry as the aggressor within the company - to sell its stake.
Things are slowly changing, though. Last year, communications minister Ivy Matsepe-Casaburri, who was concerned about delays in the licensing of a second network operator, opened the market to more competition by determining that value-added networks services (Vans; these are mostly ISPs) could carry voice traffic on their networks. She also allowed Vans, private telecom network operators and the cellphone companies to resell spare network capacity .
The market could have been opened to a much greater degree, of course. Icasa, wanting to foster competition more quickly, interpreted Matsepe-Casaburri's determinations liberally. The authority interpreted them to mean that Vans could build their own networks independently of Telkom. But, two days before the determinations were due to come into force, on February 1, Matsepe-Casaburri issued a "clarification" stating that it had never been her intention to allow Vans to "self-provide" network facilities. This came as a surprise and a major blow to ISPs, which had hoped to use the policy changes to build their own networks in competition to Telkom or to use the right to do so as a lever in price talk s with Telkom.
Matsepe-Casaburri's clarification has left the industry in a state of confusion. Some ISPs, particularly smaller ones, argue that the clarification has no force in law as it was made extra-legally. Some are taking advantage of this legal uncertainty to build broadband wireless networks using unregulated frequency spectrum - the so-called industrial-scientific-medical (ISM) bands at 2,4 GHz and 5,8 GHz. Wireless operators, many of them using outdoor Wi-Fi technology, have sprung up in Johannesburg, Cape Town and in some smaller centres.
Larger ISPs are less convinced that the policy changes that took effect on February 1 allow them to self-provide. They also have more to lose if the authorities take action against them.
"[Matsepe-Casaburri] put out a press release that isn't law. Strictly speaking, we can self-provide," says Dave Gale, business development director at Storm, a telecom service provider. Storm won't be building its own network, though. Gale says the final Convergence Bill might explicitly state that Vans may not self-provide. "I am not rolling out a wireless network until the ink is dried on the signatures on the . . . bill."
M-Web's Reid says it is quite clear to him that ISPs may not build their own networks under any circumstances. "The mobile operators can do it, but we can't."
Douglas Reed, CEO of JSE-listed DataPro, agrees. "The legal advice we have is that it is illegal to self-provide over an illegal frequency, and that includes the public ISM band . . . We've just bailed out and decided not even to pursue a strategy in that regard."
Reid says the option is to exert pressure on government to open the market to further competition. "Since February 1, nothing much has happened. We still have Telkom charging high rates and everything we do [as ISPs] still sits on Telkom's infrastructure."
SA's telecom policy environment, which protects Telkom from competition, has hindered the development of the Internet and stymied the emergence of new businesses that rely on consumers having access to fast and cheap networks, he adds. New research indicates there are only 1,7m private Internet users in SA. "That is ridiculous."
Reid says companies such as Google and eBay have been successful only because cheap access to the Internet has led to its rapid adoption in the markets they serve. "They don't make their money out of connectivity. But in SA we are all still connectivity companies."
He says there are two important policy changes that should be made to help remedy this. First, the undersea cables that link SA with the rest of the world must be declared an essential service so ISPs can have access to international bandwidth at much lower prices.
Telkom, however, has warned that any move to do this could scupper future investments by it and other operators in new cable projects. Reid scoffs at the suggestion. "Telkom has had its time and has made huge returns [from the cable system]. Open the thing up."
Second, government needs to unbundle the local loop so other telecom operators and ISPs can have direct access to Telkom's telephone exchanges. This should obviate the need for consumers to have to pay for a Telkom line before they can buy Internet access from an ISP.
Reid is, however, sceptical that anything meaningful will happen soon to pry open the market to proper competition. "When it happens, I'll believe it. There's been a lot of talk but nothing has been done to activate this market."
Most ISPs identify the unbundling of the local loop as critical if broadband prices are to come down to the levels consumers enjoy in developed markets. But new wireless technologies could have an equally important impact.
SA already has several wireless broadband operators. Unfortunately, the first of these that began providing services, the state-owned broadcast signal distributor Sentech, botched the introduction of its broadband products. It has recently launched new products in an effort to catch up with Telkom and other wireless broadband rivals.
Sentech now wants to raise funding from the private sector - as much as R1,5bn - to expand its footprint. It is talking to a range of companies, including Datatec, an IT distribution and services company listed on the JSE, and Detecon, the management consulting arm of T-Systems.
Then there's Sentech rival Wireless Business Solutions, which operates a network called iBurst. It has been more successful than Sentech in signing up customers, but is a relatively small operator that will struggle to compete against rivals with deeper pockets, especially cellular companies MTN and Vodacom, both of which recently switched on high-speed third-generation networks.
Vodacom recently triggered a mini price war by slashing the cost of surfing the Internet using its network. MTN and Cell C followed suit.
What's clear is the industry is changing. DataPro's Reed thinks that change is occurring much faster than people realise. He notes that:
- Government and Icasa are putting pressure on Telkom and the cellular operators to reduce their prices.
- There is talk that the local loop may be unbundled.
- The landing points for the Sat-3/Wasc/Safe undersea telecom cable that links SA with Europe and Asia might be opened up to competitors. ISPs have long complained about the prices they are charged for circuits on these cables. They say these prices are keeping Internet costs in SA artificially high.
- Vans providers can carry voice on their networks.
- Dozens of regional phone licences, in the form of the underserviced-area licensees, are being awarded outside the big urban centres.
- After finalising its shareholder agreement and its business plan, the SNO should come on stream soon.
- Mobile virtual network operators may soon be licensed, introducing more competition to the cellular incumbents.
New technologies, such as voice-over-IP - on fixed lines and the cellular networks - should force operators to cut their prices, Reed says.
"What is happening in telecoms now is the equivalent of being around on the Witwatersrand in the 1890s," he says. "It changes daily."
In this fast-moving environment, ISPs will quickly morph into general-purpose telecom providers, Reed says. Consolidation will ensue.
"We are seeing the breaking down of the monopoly and jockeying for position to see who will be the next big competitor [to Telkom]," Reed says. This will be followed by aggressive consolidation as the bigger players bulk up by swallowing their smaller competitors.
However, Telkom's power in the market should not be underestimated. Because it owns the physical network in the ground, it is able to use fees levied on consumers for access to the local loop to cross-subsidise product areas that face competition, Reed says.
It's unlikely government will unbundle the local loop, he adds. "I'm also not sure I agree with it [unbundling]. What the state needs to do is grant more licences."
But Hillel Shrock, business development director at Dimension Data subsidiary Internet Solutions, says introducing competition is more complex than people realise. "We tend to want to oversimplify things, depending from which paradigm we are looking at the issues. The operators will say we need competition and will then do everything in their power to block it. The Vans players, to some extent, also look at it from their own perspective, and often quite immaturely."
It's easy to argue for the introduction of more competition. However, if this is not managed properly, it could have a big impact on the nature of investment the country is able to attract.
"What is required is a firm set of policy priorities, and that is a difficult exercise, especially if you are viewing it from a sectoral interest perspective," Shrock says. "We just don't seem to have a clear view of what those priorities ought to be. It is incumbent on all of us - the industry and the policymakers - to craft a new set of policies and strategies.
"We are tweaking things here and there . . . [but] we haven't formulated a high-level strategy detailing how the industry will look in five or 10 years."
Though the Convergence Bill attempts to deal with these issues, many of the problems with the bill stem from the same lack of a broader vision. A laissez faire approach to competition won't work either, Shrock believes. "There will be too many unintended consequences. How will you divvy up the spectrum, for example? Also, a free market in telecoms plays into the hands of the traditional players, which then requires [regulatory] intervention. The big players, who have had advantages for many years, will use their muscle to eliminate efficient competition."
A completely free market is, however, unlikely, says Gale. "To bring down prices, you have to have strong competition. A duopoly does not equal strong competition."
Gale says government should have been planning to introduce a third fixed-line network operator at the same time that the SNO is licensed. "We need competition right down to the level of the wire in the ground. [But] I don't think they have the political will to jeopardise the investments made by Telkom and the SNO."
Still, many ISPs will agree that, however frustrated they are at the pace of change, progress is being made.
