indepth
ISPS AND VANS

While the first decade of South Africa’s Internet history was about a segmented market of corporate and dial-up users, we have since entered a market promising a radical new mix of services carried (hopefully) on long-awaited new infrastructure.
The principle drivers of change in the ISP sector has been an ongoing redefinition of its role and function as an ever-increasing number of players, services and carrier technologies join the mix.

 

LOOK BACK IN ANGER

 

Over recent years, the self-imposed tier structure of the market has largely fallen away; marketing initiatives have come to place increasing emphasis on quality of service rather than solely focusing on technical prowess and breadth of infrastructure, which have become part and parcel of customer expectations. With all the key players either rolling out their own high-end infrastructures or partnering with others to do so, customer choice has expanded exponentially over the past five years. As convergence demands come to the fore, the line between service provision and infrastructure ownership will continue to blur.

 

Dodging the arrows

 

WISPs have endured the slings and arrows of the uncertainty that comes with operating in a legal limbo-land for several years. As localised wireless networks – typically implemented in housing developments or multi-tenant housing – shared Internet connectivity is sold cheaply to residents; WISPs typically use the unlicensed 2.4 and 5.8 GHz ISM spectrum. Under the terms of the old Telecommunications Act, it was illegal for such networks to cross physical boundaries or other civil structures like roads between buildings. While those involved argued that such structures in housing developments are typically owned by the body corporate of the developer, this wasn’t enough to prevent ICASA from shutting down nearly a dozen such networks and in some cases even confiscating equipment back in 2005.

 

To be fair to ICASA, many of those operating were doing so without a license or offering services that exceeded the terms of their license. However, many operators pointed to the difficulties arising from legislative confusion and conflict as a major contributor to confusion, as well as delays in processing license applications and misinformation.

 

THE NEXT MAJOR IMPETUS

 

It is widely accepted that the next major impetus for ISPs, ASPs and VANs is the activation of the Seacom undersea cable. As World Wide Worx’s “Internet Access in South Africa, 2008” puts it, “With bandwidth more readily available and probably at substantially lower prices than charged by Telkom for access to the existing SAT3/SAFE cable, it is certain that many more providers will emerge to take advantage”.

 

The report goes on to caution that this will not be good news for everyone, though. “Many of these new and existing providers will be unable to sustain their business models, either as a result of fierce competition or because they have not balanced technical models with business models. The result is likely to be some consolidation as larger ISPs and telcos acquire the more promising of the smaller ones, and as many unviable business close down. We therefore expect the ISP/IAP growth curve to fall from 2009 or 2010.”

 

The Seacom undersea cable, for which we can largely thank Neotel, is set to increase South Africa’s international bandwidth 40-fold, and will kick-off the beginning of what World Wide Worx describes as a “seismic shift in the Internet landscape in Africa”. But Seacom is not the only cable which is likely to change the complexion of the connectivity landscape in this country almost entirely within the next three to four years. “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,” says World Wide Worx’s managing director Arthur Goldstuck.

 

UNTANGLING THE CABLES

 

Goldstuck says that the two biggest changes in the South African connectivity environment are regulatory and physical. “The granting of broader telecommunications licenses and the arrival of a new undersea cable. The first occurred in January 2009, but remained hamstrung by the availability of only one source of international bandwidth; the second would resolve the first problem.”

 

For a sense of how Africa’s cable investments compare with those of the rest of the world, the following table, compiled by Michael Ruddy of Terabit Consulting, paints a fairly bleak picture:

 

 

The table indicates that Sub-Saharan Africa accounts for less than 2% of global investment in undersea cable capacity. According to Terabit Consulting, $6.1-billion in proposed investment is on the table, which suddenly positions Africa as the global hotspot for cable deployment. The World Wide Worx report notes: “With $1.8-billion in signed contracts, this already brings Africa on a par with the Australian sub-continent.”

 

SEACOM

 

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.

 

 

World Wide Worx has compiled the most up-to-date matrix of African undersea projects currently available. The following table shows the annual capacity per cable as well as intended cables in GB/s, with totals:

 

 

THE ROLE OF CELLULAR NETWORKS

 

Cellular networks continue to play a growing role in the provision of broadband Internet both locally and internationally.

 

MTN, Vodacom and Neotel are rolling out their own fixed-line infrastructure in order to side-step Telkom but this will also shake-up the ADSL market, territory traditionally dominated by Telkom. In the meantime, a variety of ISPs that aren’t already offering voice services are gearing up to do so. Telkom, meanwhile, adhering to the notion that variety is the spice of life, has demonstrated willingness to sign interconnection agreements with VANs and ISPs. The price is (not quite) right.

 

When it comes to costs, the cellular providers haven’t exactly been bashful, charging interconnection rates of R1.25 a minute, during peak times, although ICASA had said that mobile operators had agreed to drop the termination rates by the beginning of February 2010. According to ITWeb, a report released after a meeting between ICASA, operators and the Internet Service Providers’ Association indicates that operators will start implementing a new way of negotiating interconnection rates. The negotiations will have to also incorporate aspects of competition law. “New contract agreements will be in place by the end of December, with full implementation of the new rates as soon as February next year.”

 

Most of the operators, however, are spluttering into their tea. Vodacom CEO Pieter Uys has called on ICASA to approach the matter with caution, so that no harm is done to mobile companies’ financial stability. “This would simply reduce the extent of competition in the industry and discourage investment in telecommunications infrastructure, which – in the context of South Africa – generally benefits the poor and marginalised as borne out by the 110% mobile telephony penetration level achieved since the advent of mobile 15 years ago,” he says. Uys has also claimed that dropping the rates would harm it more than the other operators, and he would rather see a gradual reduction in rates over time.

 

MTN declined to provide any details on its stance on the matter to ITWeb, saying only: “This resolution will now be reviewed internally.” Cell C’s executive head of regulatory affairs, Nadia Bulbulia, says it has been fighting for lower interconnect since it entered the market eight years ago.

 

World Wide Worx notes that the graph above is clear indication that reduced cost of data results not only in increased usage, but in increased usage to such an extent that it overwhelmingly makes up for any margins lost to a price decrease. This is the “volume” argument for price drops, which the networks have tended to reject.

 

 

BROADBAND ON THE RISE – SLOWLY

 

While research organisations such as World Wide Worx and BMI-Tech are forecasting significant uptake in broadband services here between now and 2010, commentators continue to point towards price as a key inhibitor of real growth in the area. Local Loop Unbundling should help to drive prices down but the reality is that most ordinary South Africans can barely afford a PC, never mind the cost of broadband Internet.

 

 

While ISPs have, over the years, been re-sellers of broadband packages offered by the larger telecoms carriers, Telkom’s ADSL package is far and away the market leader. According to Goldstuck, Telkom ADSL has been the main driver of broadband uptake over the past four years. Until now – in the third quarter of 2009, Vodacom became the single largest broadband provider in South Africa, overtaking Telkom’s ADSL for the first time.

 

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 – something that its union members will no doubt have a lot to say about. Whatever way you slice it, 2009 looks set to be a very interesting year for the company.

 

Telkom’s control over last-mile infrastructure may well be on a ticking clock legislatively speaking (although it is increasingly difficult to see how the 2011 deadline will be met as not much has moved since a 2007 discussion document was produced) but such dominance of the infrastructure and access to international bandwidth has given it what many consider to be the kind of unfair advantage that will last for a long time after the deregulation dust has settled. MyADSL’s Rudolph Muller told ITWeb that, if the ISPs really wish to access the lower-end of the market, they need to look at offering PCs bundled with Internet access for R100 per month; most of the major providers offer bundles, but none of them at anywhere near this lower price.

 

The major cellular operators will no doubt be looking at the lower-end of the market with some interest. Cellphone penetration in South Africa is massive and represents a giltedged opportunity for the cell networks to turn ISP in a big way – as the chapter on mobile indicates, price is playing a significant role in the jockeying for market position while the recent move of the likes of MTN into the fixed-line space at least opens up the possibility of a fixed-ADSL price war at some point in the future. In the meantime, Muller told ITWeb that local providers should not underestimate the power of GPRS as a platform for Internet access for the masses – familiarising users with services such as email will surely drive interest, whetting people’s appetite for all that PC-based Internet can offer.

 

GETTING CLOGGED IN THE SPECTRUM DEBATE

 

Wireless broadband got off to something of a shaky start but while iBurst’s partnership with Vodacom can be seen to have brought benefits in the form of access to the cellular operator’s not-insignificant distribution network, many would suggest that the wheels at Sentech are not so much wobbling as falling off. The state-owned wireless outfit announced its withdrawal from the retail sector in September 2009 – MyWireless, VAS and BizNet services were slated to end on November 30th. Funding seems to be at the heart of the problem but Sentech itself stated that its offerings were uncompetitive and too costly to make an impact in an increasingly-competitive market. Those on the receiving end of poor service will have other ideas on why the company has failed to make an impact on consumer subscribers.

 

Sentech will now concentrate on wholesale broadband. Cynics will no doubt cast a jaundiced eye over such ambitions, however. Sentech’s WiMAX service, for example, appears to be in a permanently ephemeral state. Its ownership of a large chunk of the highly-desirable 2.6GHz band (capable of carrying WiMAX, mobile networks or LTE) has yet to hit pay dirt, resulting in the Treasury reprimanding the organisation for wasting R500 million on promised-but- undelivered WiMAX services. The apparent waste of space has caused no small amount of outrage among other providers jockeying for a slice of scarce spectrum; ICASA has made a commitment to give Sentech a timeframe in which to use the spectrum or lose it. While some view the prospect of a state-owned body being forced to hand over spectrum in the same terms as hell freezing over, a new distraction has added to the mix in the form of companies that have already been allocated spectrum being eligible to apply for additional frequencies.

 

REAL BROADBAND

 

The term ‘broadband’ is often bandied about, but is not clearly defined in a South African context. The ECT Act refers to broadband as being “a high capacity link between end user and access network suppliers, capable of supporting full motion, interactive video applications, based on the technology available at the time”.

 

Speeds of several megabits per second are normal in many countries now, and these would certainly support this definition. Unfortunately, none of the current offerings in South Africa meet this definition, although Telkom’s ADSL service now offers a 1Mb/sec service, and Vodacom’s HSDPA claims 1.8Mb/sec. However, the local market typically refers to broadband according to the International Telecommunications Union (ITU) definition that views anything faster than ISDN basic rate (144Kbps) as broadband. Disgruntled users will tell you that, some days, it feels like dial-up all over again. The key advantage of true broadband is that it supplies each customer with enough bandwidth to support a range of multiple, simultaneous voice and data services, made possible over multiple channels. Neotel says it will provide true broadband, but until that actually happens…

 

Asymmetric Digital subscriber Line (ADsL)

 

Telkom’s ADSL offering has been the main driver of broadband adoption in South Africa for the last four years, but as World Wide Worx’s Arthur Goldstuck says, Telkom is both the villain and hero of Internet connectivity in South Africa. The fact remains that Telkom still has control over the ADSL market, and users can only get lines from Telkom, while the process of unbundling the local loop is not being fast-tracked like it should be.

 

As telecommunications carriers the cellular networks are already licensed to perform most ISP functions, but the slow speeds of the 2.5G (GPRS) networks originally excluded them from the Internet provisioning mass market. While 3G networks got off to the sluggish start in 2005, with substandard transfer speeds at prohibitive prices, this performance has improved significantly over subsequent years, as has pricing. According to the various providers, High Speed Data Packet Access (HSDPA) technology is currently capable of theoretical 3.4, but in reality, 1.8Mbps is more realistic with in-bundle data rates costing anywhere from R1.85 per MB to 19c on the high-end offerings for Vodacom and R2.23-19c per MB on MTN’s service.

 

Currently the cell networks are partnering with existing ISPs and seem content to deliver access while collaborating with ISPs to deliver relevant services, although this situation could still change rapidly as they seek to roll out their own infrastructure, such as MTN’s partnership with Neotel to roll out a national long-distance fibre-optic network...  

 

NEXT-GENERATION NETWORKS AND SERVICES

 

The single most significant change in the Internet business is the range of services offered. Where early ISPs offered a stock standard compliment of leased lines, e-mail and Web hosting, the modern ISP has evolved into an e-business partner, an application host and a telephony provider, amongst other things. And while for consumers the demand remains focused on more affordable high bandwidth options, the corporate and SME markets are increasingly looking to ISPs to provide an extensive range of additional technologies and service options.

 

The need for speed

 

The enhanced speeds and built-in intelligence of MPLS make it an ideal platform from which ISPs can provide a new layer of connectivity to the corporate market – the VPN. Already, the provision of VPNs to corporate customers across MPLS infrastructure has become a key line of business for ISPs such as Internet Solutions, Verizon Storm Telecom and MTN Network Services, where the various MPLS classes of service prioritisation are key to providing intelligent, hierarchical routing for corporate traffic.

 

Peeling back the layers

 

Beyond VPNs, MPLS is also proving an ideal backbone for the carrying of other traffic such as voice and application data, while also being able to integrate seamlessly into wireless protocols. The single biggest boost to the traditional ISP business may yet come in the form of Internet telephony services through the use of VOIP, with some ISPs predicting as much as 50% of their revenue to come from voice services within a few years. While many businesses are wisely waiting for the hype fog to clear before assessing its true cost-saving potential, most ISPs have already established separate arms of their business to cater for the increasing uptake of VOIP services.

 

Beyond voice, the new generation of ISP networks are also being pre-configured to deliver ASP-type services to the corporate market. The logic is that once an organisation has a VPN in place with guaranteed SLAs, it will have both the confidence and financial incentive to maximise its facility to deliver applications over the network for a fixed monthly cost. This way a company can outsource application management issues such as licensing and upgrades to skilled professionals, rather than make the significant investment in acquiring and maintaining applications within the organisation itself.

 

 

FUTURE CHALENGES

 

Although it may seem that the marketplace for ISPs has developed rapidly in recent years, with a number of new potential lines of business opening up to corporate- and consumerfacing service providers, the flood gates holding back resentment towards Telkom have eventually broken.

 

The most obvious area of contention is around the dual role that Telkom plays in Internet provision market – as both as supplier and competitor. The gradual deregulation of the telecommunications industry has been an arduous and flawed process. Some of the regulatory uncertainty created will naturally affect the shape of current and future ISP business models.

 

Despite fierce rivalry and jockeying between most large ISPs, there is near universal consensus on one issue: Telkom’s high prices, for everything from leased lines to ADSL and telephone calls (which affects modem users). Most ISPs feel that these high tariffs severely inhibit the uptake of Internet service and increased usage, and that this in turn constrains the growth and competitiveness of South African business.

 

Another source of dissatisfaction is the fact that Telkom competes directly against ISPs for business, and prices its offerings to ISPs accordingly. ISPs and VANS bemoan the lack of competition in the leased-line market and regularly lodge complaints of anti-competitive behaviour with the regulator. This issue may be partially overcome through Neotel’s arrival on the scene, although there is little incentive for it to charge significantly less than the incumbent, not least because it’s having to start from scratch with building out its own high-speed infrastructure. To gain critical mass as swiftly as possible, Neotel has had to target the corporate market first although it is increasingly pitching to the SME sector to offer voice, data and mobile services. Its fixed-wireless offering to the home user could make inroads to Telkom’s traditional market although it remains to be seen whether the SNO can overcome initial hiccoughs regarding quality of service.

 

The unbundling of the local loop, scheduled to have taken place by November 2011, should also see to it that ISPs are able to access their fair share of what used to be a Telkom pie exclusively. If it ever actually happens; many commentators have expressed concern over the seeming lack of movement beyond talk on this matter.

 

Where to from here?

 

Nobody could have predicted the expansion path of the ISPs and VANS sector back in 1994, and with the technological and regulatory revolution that awaits the market in the years ahead, future predictions remain foggy. With the granting of new licenses set to shake up the landscape even further, the advent of new undersea cabling, fibre optic rollouts that don’t involve the incumbent and the ongoing battle over spectrum and the technologies it will carry, established players will be looking to invent and re-invent themselves to stay in the game even as new players and technologies join in.