Silent fibre-optic war rages

What you need to know:

  • Underpricing is reflected in a market report by Altech to its stakeholders. The South Africa-based technology company is the majority shareholder of Kenya Data Networks (KDN), a pioneer and major player in the inland cable business
  • The landing of three international submarine fibre-optic cables in Kenya (Seacom, TEAMS, and EASSy), bringing to an end dependence on limited and expensive satellite bandwidth, has revolutionised the country’s Internet and broadband sector
  • The effect has been a huge drop in international Internet bandwidth pricing, with wholesale prices falling by more than 90 per cent, making it a mass market product
  • Companies that started out as mere Internet service providers, such as AccessKenya, Kenya Data Networks, and Wananchi, transformed themselves into second-tier telecom firms by rolling out national and metropolitan fibre backbones
  • Analysts have cited the lack of clear market segmentation, which would set apart wholesalers from retailers, as having a negative impact on the data market, especially on pricing to end users

As the fight for voice revenue hots up among mobile operators, a bigger battle that is likely to shape the face of the telecommunication industry over the next decade is quietly being played out among inland fibre-optic providers.

It is a battle that is bringing out the ugly side of business through price undercutting and in some instances accusations of sabotage of cables.

It is also likely to keep the price of Internet artificially high as rivalry for the data market triggers a rush to invest in infrastructure.

Underpricing is reflected in a market report by Altech to its stakeholders. The South Africa-based technology company is the majority shareholder of Kenya Data Networks (KDN), a pioneer and major player in the inland cable business.

“In Kenya, we have seen lower growth rates, higher churn rates, and slower trading decisions as both major customers and retail clients shop around and negotiate extensively before making a choice,” Altech says in a report compiled to comply with its listing obligations at the Johannesburg Stock Exchange.

The landing of three international submarine fibre-optic cables in Kenya (Seacom, TEAMS, and EASSy), bringing to an end dependence on limited and expensive satellite bandwidth, has revolutionised the country’s Internet and broadband sector.

An additional cable, the Lower Indian Ocean Network (LION2), went live in April this year, intensifying competition for connectivity.

The effect has been a huge drop in international Internet bandwidth pricing, with wholesale prices falling by more than 90 per cent, making it a mass market product.

Wholesale prices on international fibre-optic cables came down from Sh315,000 ($3,500) to Sh36,000 ($400) previously charged by satellite service providers.

The reduction and need to link the mainland to the undersea cable offered an additional business opportunity for investors.

Companies that started out as mere Internet service providers, such as AccessKenya, Kenya Data Networks, and Wananchi, transformed themselves into second-tier telecom firms by rolling out national and metropolitan fibre backbones.

Jamii Telecom was the only one set up as a cable service provider while the government’s cable, the National Optical Fibre Backbone Infrastructure (Nofbi), was handed to Telkom Kenya. But it is the decision by providers initially set up to provide wholesale Internet to also become retailers that is causing concern.

Analysts have cited the lack of clear market segmentation, which would set apart wholesalers from retailers, as having a negative impact on the data market, especially on pricing to end users.

With every provider seeking to lay their own inland cable, the price for end users will remain high.

According to Jamii Telecoms Limited general manager John Kamau, the entry of wholesalers into the retail segment does not affect those operating in the retail business because pricing is dependent on value-addition. His spat with Safaricom reveals the under currents in the inland cable business.

“It is true that Safaricom pays rent to us and has to include a profit margin in their prices, but pricing is not the only tool we use in competition. What matters is value-addition,” said Mr Kamau.

Safaricom chief executive Bob Collymore said this scenario puts retailing companies at a disadvantage because their prices are inevitably high.

“This has put us at a disadvantage because they can now offer some of the services we do. But because we have to pay rent for the infrastructure and then add our margins, our prices end up being higher than those of some of our competitors,” said Mr Collymore.

Safaricom now plans to invest in laying its own inland cable, ending six years of buying capacity from Kenya Data Networks, Jamii Telecom, and the National Optical Fibre Backbone Infrastructure.

The mobile service provider plans to spend Sh14 billion to lay its own fibre-optic cable across the country.

“It doesn’t make sense that I am competing with Telkom Kenya and JTL and at the same time am paying rent for occupying their cables. This has made it hard for our prices to be as low as consumers would expect,” said Mr Collymore.

The underpricing saw KDN fire 51 employees in May, citing a need to tame rising operating costs as it found it difficult to retain its clients.

“Increasing competition in all areas of the business has impacted on revenue and margins to the extent that in some cases, we are developing products that will cannibalise our own market segments, but will prevent us from losing total market share,” Altech notes.

The move for wholesalers to also retail will impact small players who may not be financially empowered to lay their own cables as this is a capital-intensive venture.

The huge capital outlay is reflected in the fact that Altech spend over Sh7.2 billion to buy a 51 per cent stake in KDN. The South African firm later used Sh3.4 billion to fund capital expenditure.

Efforts to push the government to open up its cable to other providers have not been successful. In July last year, at a meeting chaired by Information permanent secretary Bitange Ndemo and attended by telecom operators, it was resolved that a team consisting of representatives from the government, Telkom Kenya, Kenya Data Networks, Jamii Telecoms, Safaricom, and Frontier Optical Networks (FON) Ltd be formed to manage Nofbi.

Telkom Kenya has been managing the cable on behalf of the government at an annual fee of Sh250 million and sells capacity to other operators.

The accusation then was that Telkom Kenya was not selling capacity to other players aggressively.

Little seems to have come out of the meeting in terms of getting Telkom Kenya to loosen its grip, sending other providers on an investment spree in laying their own infrastructure.

Mr Ali Hussein, a telecoms analyst, said it is too expensive for every operator to lay their own fibre and the cost will be passed to the consumers.

“It is a very heavy investment that may not be worthwhile. The best thing would be for providers to team up and roll out the same fibre, then compete on the basis of value addition,” said Mr Hussein.

Shared cost of infrastructure will mean a lower consumer cost for data, which is what all users want, he said.

According to Kenya Data Networks, which fell out with Safaricom last year, it would be best to have a clearly segmented market where wholesalers only deal in bulk sales, leaving the retail business to Internet solution providers.

“We had issues in balancing our services for both the large and small customers in 2010, hence our decision to concentrate on wholesale. It equates to competing with your own customer ISPs, which it not good practice,” said KDN’s head of public relations, Ms Susan Muthui.