Fixed broadband in Africa is finally turning the corner

Posted by Kalyan Medapati Friday, May 28th, 2010

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Broadband in Africa always faced hurdles, ranging from very low PC penetration to lack of sufficient international bandwidth. Many of these problems remain, but some of the thorniest ones are being remedied. Among them is the issue of expensive international bandwidth. Arrival of international submarine cables is no news. For East Africa, we had three new arrivals this year bringing in an additional 3 TB of international bandwidth to East Africa where previously no submarine capacity existed. Among the cables are Seacom, which is now commercially operational, and Eassy and Teams, which are scheduled to go live during this year.

Some of the operators in the region are reported to have been spending nearly 50% of their OPEX budgets on buying international capacities, mainly on expensive satellite links. These links are expensive because satellites carry relatively very low capacities. In contrast, submarine cables carry a glut of capacities which in turn bring down backhauling costs.

Submarine cables aren’t bringing down the broadband prices, at least not yet

So is this international bandwidth capacity glut in East Africa reducing broadband prices? Not quite. The wholesale prices paid by operators for international bandwidth has fallen quite dramatically, but this is not decreasing the operational expenditures of the ISPs yet. This is mainly due to sticky satellite backhauling contracts that operators currently have in place. In other words, operators are locked into long term contracts with satellite back haulers, sometimes for as long as 5 years. So what happens is the operators are paying both the satellite and international fibre back haulers at the same time. This increases the international backhaul capacities but keeps the total costs still higher. And for this reason their OPEX spends are still too high and consequentially there are no cost gains for operators to pass on to the customers.

This to most part explains why operators are increasing capacities on their retail offers but not really decreasing the package prices. That is operators are reducing per MB costs, but not introducing cheaper packages. Given these rigidity in the backhaul market it could be a while before full range of benefits from gains in international bandwidths are passed on to retail customers, keeping the prices high in the interim, and very much keeping the barrier imposed by prices on broadband penetration alive for a while.

Disconnected hinterland is still a problem, and an opportunity

Apart from East Africa Backhaul System (EABS), the issue of inland terrestrial backhauling is still to be addressed. EABS when commissioned will connect Kenya, Uganda, Rwanda, Burundi and Tanzania. Countries like Central African Republic, Zambia will continue to have connectivity gap to bridge.

For private parties to get into international terrestrial back hauling in Africa means dealing with several different legal systems, and it can also get very political. This increases risks involved, sometimes making such projects commercially unviable. On the other hand, there isn’t much in terms of public projects either. If there is, it isn’t visible. Without sufficient cables running from coastal landing points to hinterland countries, high bandwidth costs (based on satellite connectivity) will continue to price hinterland Africa out of high penetration.

FTTx rollouts emerge despite risks

All of the above is more or less expected but what was surprising though is the level of enthusiasm from investors and operators in the potential for Greenfield wire line rollouts. Investments in this area have been treated as highly risky, given a very vague picture on the nature of demand for the high end services, affordability of such services in developing markets. But some operators/investors are emerging as pioneers by taking these high risk bets.

Wananchi group backed by East Africa Capital Partners (EACP) is going into cable business. They are currently running trial triple play services in Nairobi, with voice, TV and broadband offered on a hybrid coaxial network. Kenya Data Networks (KDN), a carrier of carrier agrees that there is an addressable opportunity in wireline business, although if and when KDN gets into rolling out last mile fibre network, the company is likely to run an open network allowing other operators to provide services to end users.

Wananchi Telecom, a Wananchi group business overseeing all telecom activity, has a 5% ownership of the TEAMS undersea cables, and leased terrestrial backhaul capacities from Kenya Power and Lighting Company (KPLC) and Tanzania Electric Supply Company (TANESCO). Their HFC based cable TV network is being built by Cisco, and it is targeted to pass over a million homes in Kenya, and half that in Tanzania over next 3 years. The network as it is being rolled out is also capable of providing high speed broadband based on DOCSIS 3.0 technology. Wananchi named the service Zuku. EACP, the financial backer of the project, secured a few co-investors to build the network, with all of them bringing different capabilities to the business. In addition to their cable platform, Wananchi are also planning a DTH service, to be launched later this year.

So it’s not all that bad

Although there are hurdles translating the benefits of submarine cables into retail price drops, and in connecting the hinterland, Africa is dynamic. There is no doubt that despite risks the opportunities that Africa offers has many takers. It may not have been entirely true in the recent past but it is now, and Bharti’s recent move offers a fine example, so is the Wananchi Group’s high risk bet rolling out cable networks in East Africa.

In a few years, the submarine cables and cheaper international bandwidth, FTTH networks, DTH services and 3/4G wireless technologies will have Africa’s fixed telecoms and media landscape completely transformed.