How to stop predatory tendencies by internet service providers

The popular African saying that frogs croaking at a river does not prevent cows from drinking water may have taken a completely new meaning in the age of ICT for eastern and southern Africa.

The region now has two fibre-optic cables that became operational last year — the East African Marine Systems (TEAMS) and SEACOM. The East Africa Submarine Cable System (EASSY) project funded by multilateral financial institutions and African governments is yet to be realised.

In the meantime, problems and complaints abound on pricing, taxation and regulation in a catalogue of host countries — Kenya, Uganda, Rwanda, Mozambique and Botswana, for example. To the credit of the Kenya government, it leads the official awakening to the market collusion by ISPs in the region to fix Internet connectivity prices coupled with lack of willingness to reduce charges. Kenya’s current four-month deadline (ending March 2010) for ISPs to cut down the charges or face an official price cap has become a regional barometer on how governments will deal with the dithering ISPs. While much is at stake in policy and economic growth of the region, it is a time of reflection on the destructive power of bad policies when married to a predatory private sector.

Pricing jokes

In recent years while undertaking a number of comparative country case studies of ICT for the Economic Commission for Africa, I came face to face with the twin arguments of taxation of ICT services and the pricing strategies of ISPs. Along with lack of depth in government fiscal policies on the industry, and a lack of technology readiness blueprints to deepen content in ICT (a key to ICT benefits) the findings were worrisome. Vast potential is being curtailed unnecessarily.

First, the pricing jokes. Take the example of Kenya’s ISPs. With a straight face they claim that with the fibre optic cable connected, they have to keep their high internet charges until they recoup the fixed costs of their investments in earlier satellite connectivity contracts and the TEAMS cable.

TEAMS was financed to the tune of 85 per cent of public funds while Etisalat, a United Arab Emirates telecoms company held 15 per cent. The government sold its share to private operators, leaving the Kenya government with a 20 per cent stake. A secondary argument is made that if prices are lowered, up-take of internet demand may be too sluggish to make up for the price reduction. If the Communications Commission of Kenya (CCK) has a research department, it should mobilise data to analyse and puncture the fallacies and call the bluff on ISPs.

Each argument is a red herring and an abuse of economic theory. Generations of businesspersons and accountants have argued erroneously that given their rents and fixed costs, lower variable costs (read cheaper bandwidth prices in this case) are an opportunity to keep prices high in the interests of profit maximisation, recouping pre-invested rents and fixed costs (in this case TEAMS investments and satellite connectivity contracts) rather than expanding output.

The Kenya government, as part-investor using taxpayer shillings in the fibre-optic cable, should reject this extortionate myth and defend customers. Were the CCK to call the industry to order, it would save Kenyans billions of shillings, revenues that the firms have tried to corner by colluding to shave off the benefits of the landing of the fibre optic cable since last November. Government action would not just help the push for growth from ICT, but also buttress Kenya’s emerging regional leadership as much in policy as in applications such as M-Pesa.

The only reason why players can contemplate the exploitation of customers and perhaps even succeed in wedging them out of the technology benefits is lack of competition in the industry. More specifically, ISPs seek a windfall in the transition from contracts for provision of internet via satellite connectivity (at $5000-$6500 per megabyte) to fibre optic cable provision at vastly reduced prices — as low as $400 per megabyte.

Globally in digital markets, the underlying costs of supply are falling towards zero — for example digital storage, bandwidth, blogging accounts and services.

Kenyans expected that with Seacom and TEAMS cables going live, internet charges would fall, with dividends on faster connectivity and affordability. Not so, the firms argue falsely. Pay our ex-post facto fixed costs first. Key players like Safaricom have expanded their services to the provision of internet solutions to cyber cafes offering help for growth of services and firms. As a part-investor in fibre optics (with a 22.5 per cent stake in TEAMS whose board it chairs), Safaricom thus competes with traditional mobile service providers and ISPs in Kenya that have no ownership stake in the cable. For Safaricom, the market is a piece of cake, but a setback for governance.

It will shake the sector and perhaps make a large profit. So far, cyber cafe owners claim little in improved prices and no relief from internet connectivity that is still on- and-off.

Dropped its price

On the other hand, providers of optic fibre networks such as Access Kenya and Kenya Data Networks (KDN) have significantly lowered their supply prices to the industry. KDN dropped its price per megabyte to $400 — a reduction of over 90 per cent from the recent industry averages of about $5000.