Monthly Archives: April 2007

Telkom – lessons from an unregulated monopoly

A free market in telecoms is near impossible. But many young tech enthusiasts are blissfully ignorant to this fact. South Africa is no different. Often one hears the mantra, by the ZAdigirati: If only there was competition in South Africa, then the outrageous internet and telecoms costs would come down.


Telkom Hellkom Djouma
Originally uploaded by Deon Louw Botha.
How does this idea explain this story then?

Mhambi read via Wired Gecko about report on Engadget that the Indian Government aims to supply each citizen with a 2Mbps internet connection by 2009. Wow, amazing.

“…now the real hotness is in connecting up an entire nation. According to IndiaTimes, the government is proposing that all citizens of India receive complimentary 2Mbps internet by 2009, and the service would be provided by the state-owned BSNL and MTNL. Officials backing the plan are hoping that giving all residents access to high-speed internet would “boost economic activity””

The government intervening to supply cheap telecoms dumbfounds most of the tech ideologues. Even when it worked before in places like South Korea.

Ideologues?

Yip, you heard me. In the West the prevailing orthodoxy is such – there must be competition in telecoms provision, because the free market must prevail, service will spread and it will drive down prices. A British academic, Richard Barbrook, hit the nail on head when he coined this pervasive ideology the Californian ideology. It’s worth a read.

A brief look at the history of telecoms should indicate that things are not that simple. Telecoms tend to be natural monopolies. The economic value of the network rises exponentially with the connections or users added, and considering the costs of constructing the network, especially the last mile, it’s economically inefficient to have two separate networks. If left alone the larger network will swallow the smaller.

In practise Western governments accepted this fact. The USA realised that for the US to get a large network they should allow AT&T to develop unhindered, but to regulate the prices and the the roll-out to sub economic parts of the country (called universal service). Although nominally a private company Ma Bel (AT&T) under these conditions grew fast and provided all Americans with cheap phone calls. The government regulated its prices but the economy of scale it achieved made it still possible for AT&T to be hugely profitable.

In the 80’s with the rise of Thatcherism and Ronald Reagan, right wing ideologues launched an assault on this old idea of a public telephone monopoly under government control. Competition was forced into all markets and also this market. But this particular one was no free market. To create competition a web of legislation, regulation and monitoring had to be spun, else the incumbents would just swallow up the new comers.

After more than a decade of a dearth of true competition, the UK started showing some of its benefits in 2003. Broadband prices started to fall, and true competitors entered the market. By this time however countries like South Korea enjoyed much higher bandwidth at lower prices for a number of years. That is broadband provided by monopoly state owned companies.

Why had competition taken so long to take hold in the UK? BT, the UK incumbent, had tried every trick in the book to forestall competition in the last mile. (The so-called local loop.) Competitors had to be allowed to connect to BT’s local exchanges, because it would not have been economical for them to replicate this infrastructure. It was even claimed that BT had engineered its technical protocalls to interface less effeciently with that of its rivals. But with the vast amount of resources thrown at the problem of opening up BT (including regulatory splitting it into two seperate parts, one of which only business is to allow acces to the local loop), eventually it paid dividends.

In the US they did not try to solve the real problem at all. Instead of opening the local loop they split AT&T into a number of geographically defined telcos. They kept them separate via regulation. Each was a monopoly in his own back yard. Prices predictably went up. Today with regulation lifted somewhat, the telcos are swallowing each other once again.

What can South Africa learn from the US, UK and Korean experience?

It is possible to create a competitive market of sorts in telecoms, but it takes years, and complex legal and technical regulation, constant vigilance and strong willed enforcement. The simpler route to the information super highway, is to ditch the copious amounts of regulation and have one national monopoly, with no or little profit motive.

Currently, with Telkom, South Africa has the worst of both worlds. A private company that’s not properly regulated. That coupled with tech stake holders barking up the wrong ideological trees is a recipe for disaster. No wonder predatory elites can use this state of affairs to milk South African internet users dry.