Telkom is destroying small ISPs and slowing down fibre network rollouts by offering its 25Mbps Openserve fibre packages below cost.
This is the view of an executive from one of South Africa’s leading ISPs, who spoke to MyBroadband on condition of anonymity.
ISPs have pointed out that Telkom’s retail division is selling 25Mbps packages on Openserve at a cheaper price than the open access rental fee of the line.
Telkom’s symmetrical 25Mbps/25Mbps fibre package is currently priced at R449 per month on a 24-month contract.
This price is R23.50 less than the R472.50 (including VAT) rental price for the line Openserve charges to all ISPs.
In addition, it is offering an asymmetrical 25Mbps/5Mbps package at R399 per month on a 12-month contract as part of a limited-time offer.
These prices are lower than any other fibre ISPs offering the 25Mbps package on the Openserve network.
Speculation in the market is that Telkom Retail is either losing money on each of these fibre packages it sells, or that the cost is being absorbed through cross-subsidisation with Openserve.
According to the ISP executive, Telkom’s prices are in violation of the Electronic Communications Facilities Leasing Regulations of 2010, which are more commonly referred to in the industry as “open access” regulations.
In particular, clause 9 (3) of the regulations state that:
“An electronic communications facilities provider must apply similar terms and conditions, including those relating to rates and charges, in similar circumstances to itself, affiliates, and other electronic communications facilities seekers requiring similar services, unless otherwise requested by the electronic communications facilities seeker.”
He said there is a good reason this clause is in the Electronic Communications Act (ECA). It is to stop the type of abusive behaviour that Telkom is now pursuing.
He claims Telkom is purposefully offering the below-cost special on its cheapest service to cause the most damage to ISPs and fibre network operators (FNOs).
Telkom’s initial announcement in February that it would implement free speed upgrades on its fibre packages was widely welcomed by consumers.
As part of this strategy, Telkom increased the download and upload speed of its entry-level fibre package from 10Mbps/5Mbps to 25Mbps/25Mbps.
Unfortunately the line rental for ISPs was unchanged. Telkom also kept the prices of its Openserve Broad Connect bandwidth products – previously called IP Connect – at the same level.
The result is that ISPs pay the same amount per Mbps usage on a customer’s line, which actually makes the total cost of the line more expensive to buy.
The overall effect is that ISPs have an increased cost of sales, which will eventually mean that weaker ISPs will likely fail or be swallowed, the executive said.
“On the ISP side, Telkom’s price is impossible to match,” he said.
“If you decide to match Telkom’s price and assuming all your other costs are ‘sunk costs’ you will make a loss of R70 per month per customer and, more importantly, a cash shortfall,” he said.
As an example, he said his ISP would have to burn R2,400 per customer over two years – R100 per month over 24 months – to compete with these packages.
“That very quickly becomes unsustainable,” he said.
“Furthermore, you are facing downgrade pressure from people that were on 20Mbps lines that got moved up to 50Mbps as part of the free upgrade but, as a result of financial pressure from the pandemic, would prefer to downgrade to 25/25Mbps and bank the cash discount,” the executive added.
“Bottom line, there is going to be carnage.”
An ISP’s only hope in this scenario is that another infrastructure provider comes to the area and offers an open access price that makes this customer profitable.
However, this is unlikely given that other fibre network operators (FNOs) are slowing down rollouts to keep their business case viable.
The executive said that major providers like Vumatel, Frogfoot, and MetroFibre either have to drop their prices to fall in line or face the accusation of profiteering.
“The choice is now abysmal for the infrastructure provider,” he said.
“New areas where FNOs were banking on a certain revenue per customer from their ISPs do not exist anymore because the customer has been lost to Telkom Retail.”
In addition, customers on faster lines would likely downgrade to pay less on the cheaper packages, which would now be more than fast enough to meet their needs.
This would shave even more off the profits of ISPs and have a knock-on impact on FNO rollouts.
“The net-effect is that what may have been a five-year return on investment (ROI) becomes an 8 or 10 year ROI which means they have to slow their rollouts,” he said.
Openserve also has an advantage in terms of rollout costs due to its existing copper network, which already covers a large number of neighbourhoods in South Africa.
With a higher rollout cost for other FNOs, it would be impossible to match Openserve’s prices to ISPs.
These factors would likely result in FNOs slowing down or halting rollouts of new builds completely in order to retain current customers.
He added that Telkom saying its R399 package is a limited offer, without disclosing an expiry date, is most likely a strategy to delay ISPs from lodging complaints with ICASA.
Making the R449 offer a 24-month contract means Telkom will not be able to change the prices in terms of consumer protection laws if ICASA finds its pricing is in breach of the ECA.
MyBroadband asked Telkom for comment, but the company said it could not disclose confidential commercial information.
It did, however, say Telkom Retail did not get preferential treatment from Openserve.