indepth
TELECOMMUNICATIONS


With the 2010 FIFA World Cup on the horizon and Telkom’s divestment of Vodacom, the telecoms landscape in South Africa is enjoying as much of a rollercoaster ride as ever. From carrier pre-select and Local Loop Unbundling, co-location, new players and new cables, perhaps the only really predictable thing in this sector is that there won’t be any shortage of bones of contention.
The Seacom undersea cable, for which we can largely thank Neotel, is set to increase South Africa’s international bandwidth 40-fold, and will kickoff the beginning of an enormous shift in the Internet landscape. Of course, Seacom is not the only cable but, as World Wide Worx managing director Arthur Goldstuck says, “It spells the birth of an entirely new industry, and we are already seeing the market champing at the bit to become part of that industry.”

THROWING THE BONES

Out of all the cables, Seacom is currently most prominent in the news, having finally landed in June. This $650-million project is a joint venture between Industrial Promotion Services, VenFin Limited, Herakles Telecom LLC, Convergence Partners, and the Shanduka Group. Seacom will have a capacity of 1.28 Terabits/s, and runs for 13 700km. Neotel is Seacom’s primary customer – Neotel controls the cable landing system in South Africa.

The expectation around the landing of telecoms cables is not just about Seacom, though – Seacom is simply the start of a series of important connectivity projects not just in South Africa, but across the African continent. The result is effectively a completely new telecoms landscape.

PRE-SELECTION AND THE LOCAL LOOP

Following lengthy debate and submissions, Local Loop Unbundling (LLU) was at last addressed by then minister Matsepe-Casaburri in 2007, with her announcement that this would be achieved by 2011. Realistically, the process of unbundling the local loop involves a lot more than just the will to make it happen, the technical and legislative processes involved are complex and plentiful. It’s true to say that there’s been no small amount of foot-dragging, but that has been a feature of LLU initiatives globally.

The EU, for example, made it mandatory back in 2001; in 2007, progress was so slow that it felt obliged to announce the creation of a body with the power to intervene and simply separate networks from access providers for once and for all. Incumbent local exchange carriers (ILECs) have been notoriously difficult when it comes to giving up the control they enjoy as a consequence of their ownership of so much infrastructure. To say that they effectively have to be pushed every step of the way is something of an understatement.

To 2009, then, and the advent of Carrier Pre-Select (CPS), proposed by the Independent Communications Authority of South Africa (ICASA), widely seen as a precursor to LLU. CPS has been used by a large number of countries to kick-start the free flowing competition that should be the consequence of LLU, allowing smaller telcos to compete with the incumbents. The idea behind it is that it’s a mini version of unbundling in that it allows customers to choose their service provider and make calls over another providers’ network, usually accessing this using a prefix. Eventually, moves are made to implement automatic pre-select; the fact that, in South Africa, this second phase at time of writing would exclude cellphone users (who are believed to account for around 90% of calls made in the country) has raised some concerns.

With CPS, there’s no physical change to the current infrastructural set up, the carrier simply pays an interconnection fee to the network provider where the call is terminated – a sort of LLU “lite”, offering a virtual solution to the LLU problem and paving the way for the latter’s roll-out. The main advantage to consumers is that it usually creates a price war of sorts, meaning they can shop around for the best value. Providers, meanwhile, rather than looking to invest in rolling out their own physical infrastructure, usually look to services as their key differentiator from the competition, leaving end-users in an attractive position.

 

 

 

 

A hybrid solution

Carrier Pre-Select will certainly get the ball rolling, as will the liberalisation of licensing but LLU is still a necessary inevitability – it’s only when providers have equal, complete access to Telkom’s infrastructure that the real games can begin. As pointed out earlier, it simply does not make economic sense for new entrants to the market to roll-out their own networks on anywhere near the same scale as the incumbent – something has to give and the giver has to be Telkom. Many observers now expect that the legislation that will finally bring about LLU should see the light of day by 2010.

The Local Loop Unbundling Committee (LLC) indicates that a hybrid comprising of three unbundling models is likely to be how the South African version of LLU looks. According to the LLC, these models are:

• Full unbundling: Also known as “raw copper access” this is where the competitor leases the line from the incumbent and has full control over the copper pairs, allowing them to offer all available services. Pricing is regulated but the incumbent retains ownership of the loop and responsibility for maintaining it.
• Line sharing/shared access: A form of full unbundling, this allows users to take voice and data services from two different suppliers. The incumbent retains control over the copper pair while allowing a competitor to lease part of the spectrum to offer services over the non-voice part of the loop. This model allows users to shop around for their preferred broadband provider without having to install another line. This method is prone to “crosstalk” and slower speeds.
• Bit stream: Wholesale access that a company, such as an ISP, to buy xDSL products from the incumbent, which retains control over the subscriber’s line and can therefore decide which services the competition can offer. As such, this version of LLU seriously limits the level of genuine competition and is widely viewed as a disincentive to rolling out improved technologies on the part of the incumbent. The service is often appealing to ISPs but not to organisations seeking to compete fully with the incumbent telco. For this reason, some countries do not consider bit stream to be part of the LLU process.

 

 

Co-location, co-location, co-location

A central part of the LLU issue is co-location – the opening of local exchanges to competitor’s equipment that has caused many a headache in countries around the world, offering no shortage of “lessons learned” scenarios for those keen to look at them. Incumbent operators from Britain to New Zealand have demonstrated what can most generously be described as reluctance to share facilities. Co-location, when it does finally take place, is generally rolled out in one of four ways:

• Hostel/segregated/caged: The competitor seeking access has their equipment housed in a separate area or room of the incumbent’s facilities/building.
• Co-mingling: The competitor’s equipment is housed in the same shared are as the incumbents’.
• Distant co-location: Competitors’ equipment is housed in a different location from the incumbent’s and connected via external cabling, allowing it to access the exchange from a different location.
• Virtual co-location/bespoke: Competitor’s equipment is installed and maintained by the incumbent; the rival provider has no access to the premises. According to the LLC, any form of co-location should be “fully allowed as may be necessary to ensure flexibility and reasonable access to the local loop for new entrants.” The report also recommends that the co-location costs be regulated, taking into account such factors as security, electricity and rental. ICASA should further be granted permission to physically inspect the incumbent’s premises to ensure that all necessary infrastructure is in place. Separation of powers

From the above point of view, some commentators are of the opinion that Carrier Pre-Select, welcome as it is, must not be allowed to inject a sense of complacency on the LLU front. Early 2009 saw the handing out of electronic communications network services (ECNS) licenses, which allows a broad spread of new players into the telecoms space. This followed a legal battle between Altech and the DoC to allow value-added-networks (VANs) to roll-out their own infrastructure – that the then Minister of Communications Dr Ivy Matsepe-Casaburri even considered launching an appeal against the decision in Altech’s favour was interpreted by many as continuing evidence that those looking to do business in this space can take little for granted on the regulatory front.

Complexity continues – and those who make representations to ICASA and other governing bodies have their own unique take on things and wish-lists that would make life a little harder on their competition as well. The CPS regulatory hearings started a month late and ICASA has said that LLU, expected to truly get underway early in 2009, may not now kick-off until the next financial year.

Many commentators believe that, until such time as rival operators actually roll-out their own networks, these sorts of challenges will remain. “Operational separation” is viewed as central to the success of many LLU initiatives. This model promotes transparency by encouraging the incumbent to split into wholesale, network operations and retail divisions, allowing a situation to develop in which all those looking to offer services are able to do so on an equal footing. In the UK, incumbent provider BT called it “equivalence of inputs” -the incumbent is obliged to offer the same products, services, processes and prices to its competitors as it does to its own retail division.

Telkom, for its part, claims to be happy with the CPS and pending LLU scenarios. Indeed, by most players’ admission, the incumbent doesn’t stand to make any gains from CPS. Be that as it may, it seems the LLC is keen to learn from lessons in other countries (such as Australia’s Telstra, which had to have operational separation forced onto it by a new law): it has issued a recommendation that Telkom form “a new facilities and services management entity... on such terms and conditions as shall be agreed with ICASA.” This is followed up with calls for pricing to be regulated and a situation in which, regardless of who owns the local loop, all license operators be granted access to it. “Any form” of co-location that will ensure flexibility and reasonable access to the local loop for new entrants should also be “fully allowed”.

Getting heavy handed?

If all the recommendations surrounding co-location sound a little heavy handed, it’s worth noting that incumbents in other countries have employed all manner of tactics to keep competitors out, with some closing exchanges that offered sufficient space for co-location, the installation of new facilities that offer only very limited space for co-location and the lack of adequate facilities such as air-conditioning in areas designated for use by the competition. Among the more popular foot-dragging tactics, number-portability restrictions have seen incumbents the world over looking to place as many hurdles in the way of customers looking to jump ship as possible, or at least forcing them to retain certain services if they can’t hold on to them for others. For example, some customers may be allowed to access a rival ADSL service but the incumbent will insist that they lose their phone number if they decide to use the rival for voice services as well.

NEOTEL EXTENDS ITS REACH

As the saying goes, it’s an ill wind that blows nobody good and Neotel is citing the global economic downturn as a source of opportunity for it opened two data centres in Cape Town and Johannesburg in 2009. A R120 million investment, the centres mark what CEO Ajay Pandey told ITWeb was an end to Neotel’s offering of purely “vanilla” (i.e. basic connectivity) services.

Through the centres, the second national operator is able to offer corporate clients sophisticated managed services on an as-needed basis. At the time of writing, Neotel was set to launch a stateof- the-art telepresence facility in Johannesburg, with plans for another one in the Cape.

Unlike some of the other more recent entrants to the space, Neotel has rolled out a telecoms structure of its own in a bid to compete with incumbent rival Telkom. Neotel’s number of base stations are set to double in 2009 while a financing deal worth R7.2 billion means that, even in these troubled times, the operator has yet to go cap in hand to its shareholders to finance expansion – a point that Neotel feels gives it a significant edge over the new competition, few of which have the resources to roll-out infrastructure of that nature. The SNO’s partnership with MTN is earmarked to see the development of a nationwide transmission network within two years. Vodacom, free from its 50% ownership by Telkom, announced in March that it had received board-level approval to join with MTN and Neotel to roll-out 5 000km of fibre option backbone nationwide.

With the first phase of the network will eventually link to Richards Bay, the landing point for many of the international undersea cables.

MTN (and, if they do follow through, Vodacom) will then have access to both the Seacom and EASSy cables, recently landed. The roll-out of an alternative fibre network will, to some extent, make LLU a moot point for the mobile operators anyway, as they will no longer have to lease infrastructure from Telkom.

TELKOM ALSO CUTS FREE

Telkom, having parted company with Vodacom, is now free to enter the mobile market under its own steam, through partnership with an existing provider as well as selective building of its own mobile capacity. This will make it the fifth mobile provider in South Africa. Telkom’s sale of its Vodacom stake may have taken it out of the mobile market temporarily, but the incumbent is quick to point out that it, too, had been restricted by the relationship as a shareholder. With its work on a fixed-wireless network already underway, Telkom is now in a position to compete aggressively with its former partner to offer converged mobile data and voice services – something its shareholder agreement prevented it from doing. It will also be able to expand its reach into the African continent more aggressively now, mixing it with the likes of MTN and Voda.

For all its upbeat demeanour, commentators have been quick to point out that Telkom’s parting of ways with Vodacom will see it losing 40% of its revenue. However positively one wants to view the incumbent’s new role in the market, the current global economic climate means that it’s unlikely not to feel some financial pain. The company is adamant, however, that its “defend and grow” policy will see it right, pointing to the opportunities inherent in its 100% acquisitions of Nigerian wireless operator MultiLinks and Africa Online (East Africa) as statements of intent in the future strategy department. Concerns about whether or not the telco has the in-house savvy to fit its mobile ambitions could, to a large extent, be quelled depending on who Telkom chooses to partner with in South Africa. The incumbent has itself admitted that it will be looking to outsource a significant portion of its operations in the future.

A LANDSCAPE TRANSFORMED

Reshaad Sha from Cisco Internet Business Solutions Group sums up the telecoms landscape in South Africa succinctly in the World Wide Worx report, when he says: “As one would expect, changes in the telecommunications market – from a monopoly, to a duopoly, and more recently becoming an oligopoly – should create sufficient levels of competition. This, in turn, should gradually alter pricing structures, making them more favourable to consumers and businesses.”

Why has this not happened in South Africa until now? Sha explains: “To begin with, the duopoly has not existed for long; Neotel has only recently been in a position to offer commercial services. In addition, it is not easy to build a telecommunications network that covers the entire country, while, at the same time, competing with an established incumbent. Furthermore, mobile operators have been restricted previously to a mobilebased infrastructure and were not enabled sufficiently to impact the various components that contribute to the cost of a voice call. As South Africa enters this transformed telecom landscape, service providers will change the way they operate.”