Tuesday, September 29, 2009



September 28 2009

A pricing circus is playing out in the quest for reduced internet connectivity rates, two months after the landing of the undersea fibre optic cable at the coastal town of Mombasa. In what might be seen as a conspiracy by shareholders of the cables against consumers, the pricing formula remains unclear, with many consumers saying that, while speeds have increased, charges remain significantly high.

The over-hyped expectations of the drop in prices in Kenya with the going live of Seacom and the East African Marines System (Teams) undersea fibre optic cables are now somewhat more “grounded”.

If the current market pricing mechanisms are upheld, Kenyans could continue paying the high prices of internet connectivity but only for higher capacities for the next three or so years, according to people familiar with the matter.

Picture this: A few years ago a megabyte of broadband was selling at between $4,000 and $6,000, but currently for wholesale arrangements the price has been reduced to about $400, more than 10 times less. Although Internet Service Providers (ISPs) currently buy the same capacity at $400, many have not come out openly to reduce end-user tariffs.

It is equally difficult to know who has bought capacity from either Seacom or Teams, making it hard for consumers to make informed decisions on who to buy from. Speeds have improved, but prices for bandwidth are still painfully high for many Kenyans. This leaves the question whether the whole hype surrounding the fibre optic has turned into a false promise.

Operators have been accused of behaving like a cartel to fleece Kenyans but they counter that they need to recoup their investments first. They say meaningful price reductions will take up to three years to materialise.

Mr Michael Joseph, chief executive officer of Safaricom Ltd, argues that it is important to understand that reduction in price will not happen overnight.

“We have only connected to the Seacom cable, which has an impact on Safaricom pricing. Very soon, we will connect to the TEAMS and have access to about 19 per cent of its capacity. Ultimately and hopefully, pricing will be driven by competition,” Mr Joseph said.

He says although it will now be possible to scale down dependency on satellite, it will take some years before Kenya can comfortably do without it.

“Satellite capacity vendors such as Intelsat offer this capacity on the basis of long-term contracts, with better pricing obtained based on the length of contract. Users such as Safaricom cannot immediately exit these contracts without paying heavy penalties,” he added.

Information and Communication Permanent Secretary Dr Bitange Ndemo says the government will be forced to step in and regulate internet connectivity charges if the prices will not come down significantly in the next one month.

He says that ISPs are raking in “|obscene” profits from the high cost of bandwidth despite the operationalisation of the fibre optic cables.
They are being mischievous,” Dr Ndemo said. “We have been talking about $6000 per Megabyte, and they telling us that they are lowering to $600, which from our calculation their pay back would be less than six months.”

The cost of one megabyte of bandwidth locally has been going for between Sh298,000 and Sh445,000 ($4000-$6000) until recently when the fibre optic cables landed. Many ISPs say they have reduced this to Sh45,000 ($600) but the government wants this lowered further to Sh15,000 ($200).

Mr Ndemo says the argument that the providers have increased capacity for the same price is not valid since majority of Kenyans cannot access afford the current internet connectivity rates.

Zain Kenya Managing Director Rene Meza says bandwidth prices will take some time before they fall as operators. “In the long run competition will drive prices down. This is evident in our latest packages, in which prices have come down compared to what they were afew years ago,” says Mr Meza.

Mr Nicholas Nesbitt, the founder and chief executive officer of Kencall, an outsourcing company, says business processing and outsourcing (BPO) companies can benefit tremendously from lower prices, but adds even at the current pricing bandwidth prices aren’t too high to prevent the companies from operating profitably.

At Kencall, data costs have shrunk by 90 per cent since Seacom went live, he said. Where the company previously paid $3,000 for a one megabyte per second (Mbps) connection via satellite, it now pays just $300.

But JBA Advertising Ltd, an IT startup offering online advertising solutions, is yet to see any meaningful price reductions.

“I don’t know if it is justified for the operators to argue that they have to recoup their investments, but personally, I expected to see a significant drop in prices,” says Ms Wairimu Karumwa, one of the founders of JBA. “ISPs have the potential to offer improved services, greater speeds, but this is not the case on the ground. Congestion is still prevalent.”

The arrangement in the TEAMS cable that individual shareholders negotiate and pay for the cost of onward connectivity to Europe from Fujairah in the United Arab Emirates might make the cable more expensive, market observers say. Its rival cable, Seacom, offers a single price.

A Kenya-Europe link was part of the original plan for TEAMS but details were not clearly provided on how it was going to be established. The cable has been grappling with shareholder issues that recently saw some smaller investors forced out of the initial shareholding structure.

The cable, whose date of going live has been a secret, was laid under the Indian Ocean at a cost of $130 million by Alcatel Submarine Networks.

The only companies charged with the first distribution or resell of Seacom’s broadband in Kenya are not directly reducing the prices, but instead offering more bandwidth or higher internet capacity for the old high prices.
Wholesale prices

The same pricing mechanism has been adopted by Internet Service Providers (ISPs) like AccessKenya, which has successfully tested the cable and connected its corporate customers. Last month AccessKenya doubled bandwidth to for corporate customers at its usual price.

While most ISPs seem to be avoiding the bandwidth pricing issue, Kenya Data Networks announced a drop of 90 per cent on wholesale prices, from the current industry average of $4,000 per megabytes to $400 per megabytes.

Reliability of the cables is one of the worries that players are battling with.

Mr Jonathan Somen, AccessKenya group managing director, says: “Seacom is a great cable, but the traffic comes to Nairobi on only one connection which has already suffered a couple of outages in the last weeks. We were able to roll our customers back onto satellite service within 10 minutes when these outages occurred, ensuring that all customers were able to resume working quickly, albeit with the higher latencies you experience on satellite.”

UUNET Kenya Managing Director Tom Omariba says price reductions will come 20-30 per cent, unless the players revert to “overselling capacity, which will mean a bad end-user experience.”

Mrs Angela Ng’ang’a-Mumo, Telkom Kenya’s head of corporate communications, said Orange in July brought down its commercial prices by 50 per cent through the launch of Broadband Nyumbani (broadband through ADSL) and Internet Everywhere 3G+ products.

“We concur with the sentiments raised by other operators. However, our intention is to follow market mechanisms. Consumers would opt for increased speeds as opposed to reduction in tariffs,” she said.

Last mile solutions

Rural areas remain underdeveloped, with very little telecommunications infrastructure in place. This is the reason internet connectivity in Kenya will remain expensive, compared with developed countries.

Afsat Communications says the continent experiences a capacity crunch and the landing of the cables in the region is welcome, but adds the operators will need time to recoup their huge investments.

Some of the costs saved by operators will be eaten up by retention of some bandwidth on satellite for redundancy purposes due to unreliability of the cables.
Safaricom CEO says there are only so many places that can be served by fibre and copper, leaving the last mile solutions to be delivered largely on wireless platforms like 3G and WiMAX.

“So far we have not seen any purposeful moves by the industry regulator to reduce the costs of this spectrum,” he adds.

Like its peers, Wananchi Group says the competitive market environment should dictate prices. “The landing and commissioning of the Teams and Seacom cables bodes well for both corporate and individual consumers in Kenya,” says group chief executive officer, Euan Fannell.

“They will receive better service and more enhanced features of the internet. Market forces will ultimately determine internet pricing in Kenya.”