New subsea cables are here, but how low can prices go?
07 August 2012 | Dobek Pater
Over the past three years, sub-Saharan Africa has seen significant progress in the deployment of new submarine cables, both on the west and east coasts of the continent. From three cables (SAT-2 and the SAT-3/SAFE cable system), there are now eight major cables, with more likely to come.
The arrival of new cables has had a significant impact on the wholesale price of international bandwidth for two reasons: increased competition in this segment as new players have entered the market; and the supply of international bandwidth exceeding the existing demand.
The decline in the wholesale price of international bandwidth has not translated in its entirety into lower retail prices of data, due to other cost factors involved. Predominantly, the constraint continues to exist in the national transmission and access networks.
South Africa has seen a cumulative price decrease across a range of international bandwidth products. Leading up to the arrival of SEACOM in July 2009, Telkom had begun to reduce prices on the SAT-3 cable as its exclusivity expired in late 2007.
SEACOM’s participation in the market and its targeted sale of IRUs resulted in around a 40% decline in the price per unit. This was further compounded by the arrival of EASSy a year later, resulting in a further 40% to 50% decline in the wholesale price.
WACS has again contributed another 40% to 50% decline, much of it based on presales concluded in the market in 2011 and early 2012. Overall, the cumulative impact of the three new cables on prices in the local market has been around 80% reduction. Prices are expected to continue to decline, with a slowing rate of decline to single digits per annum over the medium term.
The decreasing cost of construction of new cables has allowed investors in new cables to compete aggressively on price. Even so, the competition has become so intense that some operators may be willing to sell below their current cost, hoping to recover the losses and generate profit through subsequent cable upgrades in the long term (which will lower the underlying cost per unit).
Cable capacity on the east coast of Africa at present remains priced higher than on the west coast cables (out of southern Africa). This raises the question of price parity across all cables in the region.
The anticipation is that once the inland terrestrial networks have been developed sufficiently to connect the east and west coasts of Africa through a mesh, prices will begin to approach parity as service providers have a greater choice of sending traffic over multiple cables, but may never achieve full parity for a number of reasons.
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