Why SA broadband costs are so high

The EU has a GDP of €2980000/km². SA has €270000/km². In other words, for every kilometre covered in the EU region, the potential return on investment is 11 times higher than in SA.

To make that simpler to understand, SA’s telecommunications companies must connect Johannesburg to Cape Town, with the intervening 2000km interrupted by the odd cactus, diamond mine and Bloemfontein.

Compare that to the space between Liverpool and London – five million people at a GDP per capita of €40000.

Any country that has a high GDP and population density has a natural advantage in providing cheaper telecommunications to its citizens. If companies have a higher rate of return on their investment they can invest more and charge less. This applies to most of Europe and East Asia.

The global telecommunications industry, especially in the US, went through a massive boom-bust cycle from 1997 to 2002. According to Bankruptcy.com, telecoms operators comprised eight of the 15 largest public company bankruptcies in the US in 2002: Worldcom (assets of $104-billion), Global Crossing ($48-billion), Adelphia Communications ($22-billion), NTL ($13-billion), XO Communications ($8-billion), Williams Communications ($6-billion), McLeod USA ($5-billion) and Asia Global Crossing ($4-billion).

And that’s just the US. In 2003, Deutsche Telekom reported a net loss of €24.6-billion, the largest in European corporate history. Both France Telecom and Vodafone reported losses of more than €20-billion in 2002, and at the time, France Telecom could boast the highest corporate debt on earth ($70-billion). The global telecoms industry wrote off more than $2.6-trillion in 12 months.

Ever heard of Global Crossing? They get the credit for coining the statement “Data consumption will double every 100 days”. Apparently, one of the junior accountants used this assumption in his most optimistic financial scenario forecast and the chief executive loved it so much he based his entire business model on it.

Global Crossing spent more than $50-billion on undersea cables, connecting North America to three continents (Asia, Europe and South America) and fibre-optic cables in North America, in the process connecting more than 200 major cities on four continents.

As it turned out, the assumption was wrong.

In 2000, Global Crossing was valued at $48-billion. It filed for bankruptcy in 2001, the biggest bankruptcy in US history (until six months later when WorldCom went belly up). Two years later, it emerged with a valuation of $1.25-billion, the aforementioned assets intact, and virtually no liabilities. While under bankruptcy, the company slashed its long-term debt from $11-billion to $200-million, but it still retained the assets that were purchased with this debt.

The result? The core infrastructure needed for transmitting data between Europe, Asia, South America and North America was installed for free, courtesy of the investors and creditors of Global Crossing. Furthermore, thousands of kilometres of fibre-optic cables were laid in the US, also free.

In July 2002, WorldCom went bankrupt, taking with it the debt incurred for building the world’s biggest Internet backbone, UUNet, which single-handedly carried a third of the world’s Internet traffic, as well as 6000km of fibre-optic cable into businesses across the US.

In April 2003, WorldCom wrote down its physical assets (no goodwill included) by $70-billion. These were physical assets, paid for in hard cash, and ultimately written down by 75%. WorldCom emerged from bankruptcy in 2004, freed of $35-billion in debt, renamed as MCI Inc and was eventually acquired by Verizon Communications in 2005 for $8.4-billion.

Another lesser-known consequence of the over-investment in infrastructure in the US was the disappearance of AT&T as an independent company. Founded in 1885 by Alexander Graham Bell, it was acquired by SBC in 2005 after being caught up in the hype of infinite demand for bandwidth.

At one stage, AT&T was laying “2200 miles of cable per hour” on the back of the Global Crossing and WorldCom forecasts, the end result being massive write-downs and the eventual absorption of the 120-year-old industry legend into SBC.

And guess who were the biggest suppliers to WorldCom and Global Crossings? Lucent Technologies and Nortel Networks. Both bankrupt.

Does this sound familiar to you? Sub-prime maybe? In fact, it is very similar, except that no governments bailed out the telcos. Both the telecom and credit bubbles were grounded on false assumptions, namely: “Data consumption will double every 100 days” and “House prices will always rise”.

The result in the telecoms industry was a massive over-investment in infrastructure, followed by massive write-offs, lay-offs and bankruptcies. The silver lining was a surplus of high-tech capacity which resulted in fast broadband connections and cheap prices for consumers.

Between Global Crossing and WorldCom, a total of R2.46-trillion (in today’s rands) was spent on broadband infrastructure, which benefited every continent except for Africa, Australia and Antarctica.

Keep in mind that African countries north of the Sahara can easily access the global communication grid due to the close proximity of the North African coastline to Europe and the Middle East.

This is borne out by the fact that five of the top eight African countries, in terms of broadband penetration, are north of the Sahara. Sub-Saharan Africa, on the other hand, is effectively cut off from the grid by virtue of geography.

We can’t lay lines across the Sahara, so the only route is under the sea. And we haven’t had a sub-Saharan version of Global Crossing yet! (Although Global Crossing did plan for an undersea cable circumventing Africa, called AfricaOne. Sadly for us, they went bankrupt before the cable was laid.)

From the above, it is apparent that both Europe and the US have a massive competitive advantage when it comes to broadband. SA must contend with a lower population density and GDP per capita, and at the same time does not benefit from the glut of undersea and local capacity created by the likes of Global Crossing and Worldcom.

• Europe has an 11 times higher return on investment than South Africa for laying telecommunications cables in the ground.
• The US has tens of thousands of kilometres of fibre-optic cable in the ground, connecting businesses and homes, which was effectively paid for by the shareholders and creditors of companies that are now bankrupt.
• North America, Europe, Asia and South America have a subsidised undersea cable system on which to rely for cheap international bandwidth. Again, this subsidy was kindly provided for by investors and creditors in Global Crossing.

So try to apply a little perspective the next time you’re sitting in New York City, surfing the net at 10Gigs/sec and paying $30 a month, uncapped. The only way you get to this broadband Nirvana is if someone along the way dies. Probably Telkom. And in the end, you’ll be paying anyway because the government will have to ride to the rescue with a bail-out, using taxpayers’ money.

• Knott-Craig, the former MD of iBurst, is a venture capitalist with stakes in several start-up companies