The Future of Broadband in South Africa

What is broadband?

In its simplest form, the Broadband is merely a higher speed Internet connection that has the capability of being always on, rather than needing to be switched on every time the user wishes to send and receive data.

However, inherent in the description itself is an assumption of relativity a higher speed Internet connection. This allows for interpretations varying across countries and operators and usage.

Broadband can be used in a more generic sense, to refer simply to high bandwidth data links, rather than specifically to access. For instance, an international broadband network connecting the backbone networks of multiple countries is often quantified in terabits per second, while a nation-wide broadband network deployed between the various cities of a country is typically measured in gigabits per second.

The most commonly used meaning of broadband, however, is in its application for connecting to the end-customer broadband access and in this form, the term broadband is still open to multiple interpretations. Whilst, in general, broadband can refer to connections where data speeds are faster than traditional dial-up connections, different countries have adopted different definitions, and even within countries, the definitions change from time to time and are always an upward moving target. In most developed countries, the current definitions peg broadband speeds as being greater than 1 to 2 megabits per second, although speeds of 10 megabits per second and more are now available in most countries. These definitions are generally based on the applications that are used by customers over their broadband connections, with the ability to use more bandwidth hungry applications, and the actual capacity requirements of these applications. Effectively, broadband speeds

Page 1

require to be at least sufficient to support a range of multiple, simultaneous combined voice and data services.

In South Africa, as in the rest of the world though not at the same pace, there has been an increase in promised access speeds, with customers having choices ranging from the conventional dial-up speeds to 4 Mbps for certain ADSL based broadband packages. However, advertised speeds represent the peak, and are typically much higher than the average speed that the end-user really gets, with contention ratios often exceeding 1:10, and even ratios of 1:100 not being unheard of. What drives Broadband? The earliest broadband service offerings were little more than fast Internet access. As the world started realising the potential of higher speed data connections, surging demand lead to a maturing of the technology and to growth in competition. As a result, operators have begun to offer bundles of services over basic broadband connections, adding value for the customer and essential revenue for the operator.

Currently, the Holy Grail of true broadband is Triple Play Voice, Video and Data/Internet, although quadruple play (the addition of mobility applications) is starting to gain populatory in certain evolved telecoms markets as well. Operators such as Fastweb in Italy are demonstrating that a bundled broadband service can generate higher ARPUs in the industry. The company offers a true broadband connection, which can be bundled with free national voice calls, with Internet access, and with video-on-demand, in a variety of combinations, leading to an enriching, value-for-money customer experience.

In maturing broadband markets, the trend towards value-added, bundled services is clearly evident. BT in UK, like most other operators world-wide, offers a series of broadband packages, from entry-level pure Internet access, through flexible bandwidth, full multi-service (voice, video calls, messaging and e-mail), to true content delivery (video and audio streaming) for high-end customers.

Neotel 2007

Page 2

In the developed world, broadband is changing the service models of fixed operators from separate, low bandwidth services, to multiple, simultaneous, combined voice and data services. Globally, the growth rate of broadband has been more spectacular even than that of mobile telephony. What restricts broadband? Providing very high bandwidth (upto hundreds of megabits per second) data services to select, high-revenue corporate customers has always been possible, at a price. The broadband challenge is to provide higher bandwidth to all types of customers, at affordable prices.

Operators running traditional voice networks now face the challenge of converting their networks to carry high data bandwidths, both in the backbone and in distribution and access. On the other hand, next-generation data networks treat voice as just another application and are therefore much better suited to providing both voice and data services the first pre-requisite for true broadband capability.

The speeds on a data network can be constrained at three levels:

The most common bottle-neck in a traditional environment used to be, and in countries such as South Africa still is, the last-mile that connects the customer equipment to the operators network. Since a voice channel can typically carry an analogue modem signal with a peak of 56 kilobits per second and dial-up services work over traditional voice phone-lines, that is the maximum speed theoretically possible on an analogue dial-up connection. In practice however, these speeds are further restricted by the quality and age of the copper line and effective speeds experienced can vary between 8 to 56 kilobits per second. ISDN provides speeds of 64 or 128 kilobits per second, but is also a switched (dial up) technology. Broadband wire-line access technologies include DSL (which is an overlay technology deployed over existing copper), co-axial cable (which overlays broadband over an existing cable television network) and FTTx (which brings optic fibre to a point close to the customer premise and is distributed thereafter through Ethernet the equivalent of an office LAN or DSL). Each of these technologies offer varying data connection speed capabilities, potentially even up to a hundred megabits per Neotel 2007 Page 3

second. Mobile operators often refer to 3G as broadband services, although very few of these currently demonstrate capabilities of transmitting data at speeds exceeding 2 megabits per second.

However, even with a very high capacity last mile broadband connection, the customer is not yet assured of being able to communicate at these speeds. All wireless last mile technologies, by design, divide the last mile capacity for all customers simultaneously using the service within the geographic area covered by the radio frequency, typically one of the three or four sectors on base station.

While wire-line data connections have the guaranteed ability to be able to carry the promised speeds to each customer without contention in the last mile, both wire-line and wire-less data connections are further limited by the capacities of the operators distribution and backbone network. Thus even with a last mile fibre to the home connection, capable of providing a hundred megabits or more on the last mile, the actual speed experienced by the customer for accessing any data / content will be limited to a maximum of 10 megabits per second if that is the capacity of the operators network. Most traditional distribution and backbone networks in Africa, fixed as well as mobile, were built to cater for voice traffic, which requires much smaller bandwidths, obviously resulting in limited existing network capacities to provide to its customers. Further, the maximum distribution network capacity is then divided, or contended, across all simultaneous users accessing the service at that point on the distribution network (say an exchange or a base station).

The international data content that a customer needs access to is further restricted by the speeds of the international connectivity available to the service provider from the country, as well as the speed and contention of the distribution and last-mile in the distant country where the content is located.

Thus, it is important for a customer to know the nature of his requirement, or more practically, for a service provider to understand the customers requirements, before finalising on the actual broadband package. Even more importantly, the customer, when choosing a service provider, must select not only a player who promises a Neotel 2007 Page 4

good last-mile connectivity speed, but can also support the last mile with robust, high capacity distribution, backbone as well as international connectivity.

In most developed telecoms markets, the customer is unaware of and unaffected by the location of the content being accessed over a data connection. The service providers and content providers take the appropriate measures, such as mirroring, to ensure that content can be made available through an optimised cost structure. Competitive forces in the infrastructure as well as content markets drive the margin squeeze which results in such cost reduction initiatives. In South Africa, as indeed in most of Africa, the cost of telecoms infrastructure itself has been so high, that standard cost-optimisation measures have been prohibitively expensive unless supported by a mass user-base. The vicious circle is compounded by the high cost of data connections which limits the number of customers able to afford content in the first place.

The suppressed demand for content also results in limited local content development, which consequently causes a higher usage of international content. Since the international leg of the data connectivity is the most expensive component of a broadband or high-speed data service, operators in South Africa choose to cap the amount of international bandwidth a customer can access per month. While South Africa is not the only country where such a capped model exists, it is perhaps one of the very few countries where the customer does not have other models to choose from. Most evolved telecoms markets offer the customer a choice of data speeds and desired usage limits to select from, often including a premium unlimited usage product offering for the higher-end users. Competitive dynamics ensure innovative product bundles and pricing strategies, resulting in customers being able to choose the optimal balance of their various requirements, including price, connection speeds, value added services required and amount of data to be accessed. Broadband technologies Globally, broadband access is dominated by two technologies DSL and cable.

Neotel 2007

Page 5

In Europe, and in the Far East, DSL has been the dominant broadband technology from the start, trailed by cable, and various wireless and satellite alternatives. In the US, cable operators led the migration towards broadband, exploiting the bandwidth capabilities of their infrastructure to deliver telecoms services in addition to television. Only today is DSL catching up with cable in the US market. The complete absence of Cable TV from the South African market has exacerbated the lack of affordable broadband.

In South Africa, one often hears the word broadband in conjunction with the word wireless. The idea of delivering broadband access using wireless technology has been around a long time. However, it is only now that it is becoming practical and cost-effective to do so. The first broadband wireless networks were high-end, line-ofsight systems that largely replaced point-to-point microwave links. Todays broadband wireless systems are non-line-of-sight systems with increasingly mobile capability, and declining equipment prices. New wireless technologies will provide true broadband access speeds and Quality of Service. The frontrunner today appears to be the WiMax standard, an alignment between IEEE 802.16 and ETSI HiperMan which has the support of virtually all of the major vendors in the industry, and is being tested by numerous operators world-wide.

There is certainly good reason to believe that wireless will have an important role in delivering broadband here in Africa. However, The Yankee Group predicted a couple of years ago that DSL will be the dominant broadband technology in South Africa, as in Europe. The most recent figures bear this out: there are now around 175000 ADSL lines in South Africa, leaving current broadband wireless alternatives trailing at around 25000 in total.

Mobile operators often like to talk of 3G as broadband, but, as has been stated earlier, 3G does not provide true broadband bandwidths, and cannot match the cost per bandwidth of true broadband. Nevertheless, 3G will have an important role to play in the African market. UMTS and CDMA2000 are the two dominant 3G standards. UMTS is being deployed as a 3G overlay to GSM networks, particularly in Europe, while CDMA2000, including its evolutions such as W-CDMA and EvDO, is a natural 3G migration for CDMA networks, but is also the preferred technology of Neotel 2007 Page 6

limited mobility (or fixed-mobile) players, since it combines a low cost per subscriber with the option of very high data speeds.

Mobile technologies, particularly 3G technologies such as CDMA2000 and UMTS, will provide a practical, ubiquitous alternative to broadband at the lower end of the market. For many people in Africa, their first experience of data services will be through 3G terminals, rather than through PCs. These services will fulfil a similar role as cheap consumer broadband in developed countries. In South Africa, 3G has currently overtaken the various current broadband wireless alternatives, but over time, with the introduction of newer technologies by pioneering operators, this gap is expected to be bridged significantly.

Across the African continent, satellite remains the last resort for broadband access in areas beyond the reach of terrestrial networks. Though overall costs are declining, they are still far above those of the terrestrial alternatives. Hopefully, as backbone optical fibre capacity grows, in projects such as the East African Submarine System (EASSy), terrestrial broadband will extend further across the continent.

Power Line Communications (PLC) has been talked about as a method of broadband access for many years now, but numerous technical difficulties have plagued its successful commercialisation. Although many of these challenges are being overcome with time, the business case and practicality of this technology are still to be proven.

Broadband in Africa

Asymmetrical DSL (ADSL) is being deployed by the incumbent operators in an increasing number of African countries: Nigeria, Kenya, Egypt, Ghana, Senegal, Tunisia, Algeria, Morocco, Madagascar, Ethiopia and South Africa, amongst others. The current numbers are generally small, amounting to only a few thousand lines, with the exception of South Africa where the ADSL subscription has crossed 175,000, but still represents an extremely small market penetration at less than 0.4%. Neotel 2007 Page 7

Hopefully these small beginnings will lead to larger roll outs, and growth in both demand as well as supply of bandwidth. Wireless deployments of high-speed internet and Broadband are more widespread. Systems are being deployed in South Africa, Lesotho, Botswana, Ghana, Nigeria, Morocco, Mauritania, Egypt, Tanzania, Kenya and more. As in the narrowband (voice) world, wireless (including mobile wireless) seems better suited to some of the conditions in Africa than wireline.

Balancing Act recently pointed out, Three years ago we used to ask African telco executives when they would roll out broadband in any form. The universal response was that the market was too small and the implementation too costly. Three years later it's easier to list the players who are not doing it than those who are. If broadband is delivered only via the incumbent operators, they will overcharge. What Africa needs is a transition from high-priced, low-volume broadband to low-priced and high-volume connections.

Broadband in South Africa

In South Africa, email and general web browsing continue to be the largest applications of high-speed / broadband Internet connections. These services, for the residential and small business segments, are still synonymous with internet access. Very few users in these segments have yet even begun to understand the immense potential of having truly high-speed access connections. Although voice chats and internet telephony have gained popularity, the poor connection quality makes most such calls frustrating experiences for the users. Activities such as gaming, online meetings, video telephony, media blogging, family security, applications are virtually non-existent in the country. The few power-users who are prepared to part with the hefty sums required to obtain Internet connections with speeds high enough to use these applications realise that the only benefit they have derived is that they reach their monthly data transfer limits earlier.

Some of the services currently claiming to offer broadband in South Africa include

Neotel 2007

Page 8

ADSL, offered by Telkom, as a technology allows for speeds of up to 8 Mbits/s on existing copper lines. In South Africa, the peak offering has recently been raised to 4 Mbits/s, but most users still user services where connection speeds are lower than 512 kilo-bits per second. The technology itself is upgradable to evolutions of ADSL, and to VDSL and its evolutions, potentially offering speeds exceeding 20 megabits per second to each customer, though this depends heavily on the quality of the copper network, and the distance of the customer from the exchange. However, the limitations for providing such high-speeds to the end customer are more often in the backbone network, which would need to be a next-generation implementation to support any reasonable number of simultaneous users at such speeds.

IPWireless, offered by Sentech (MyWireless), is based on the TD-CDMA standard, a subset of the 3G mobile UMTS standard. The service uses the 2.6 GHz band of the frequency spectrum. The technology offers peak speeds of up to 512 kilo-bits per second, but effective speeds experienced by users are further limited by the contention due to multiple users in the same area. Although TD-CDMA makes efficient use of spectrum, its inability to carry traditional switched voice efficiently makes IPWireless a relatively niche technology.

Arraycom iBurst, offered by WBS is a proprietary technology, based on the SDMA standard, incorporating intelligent antenna systems which interact dynamically to optimise the signal received by the customers unit. The technology offers maximum speeds of up to 1 megabits per second under ideal conditions, but like all wireless technologies, the effective speeds are lower than peak based on a variety of factors including distance from base station, quality of signal and number of users simultaneously accessing the same service in the same cell. Operating in the 1.8 GHz band of frequency spectrum, iBurst offers pure data capabilities, but is unable to support switched voice services. The evolutions of the iBurst technology are focused on optimising the usage of frequency spectrum by increasing the number of users per radio resource, thereby reducing the cost of operations for the service provider.

EDGE, offered by Cell C, and overlaid together with 3G UMTS by MTN and Vodacom operates in the GSM frequency spectrum, enhancing GSM speeds to up to 384 kilo-bits per second in ideal conditions. However, EDGE itself is

Neotel 2007

Page 9

only an interim step towards higher speed data technologies and evolves towards UMTS and HSDPA. 3G UMTS, offered by Vodacom and MTN, is based on the W-CDMA standard and allies with the 2G GSM standard. Operating in the 2.1 GHz band of frequency spectrum, this standard served as the first glimpse of hope for the possibility of high-speed mobile data connections. The speeds possible on WCDMA are up to 3 times faster than those on the GPRS, the early GSM data standards. Effective average speeds on a W-CDMA network are estimated in the region of 80 to 100 kilo-bits per second, and upto half a megabit per second under ideal conditions. The evolution path for W-CDMA allows operators to upgrade to HSDPA and HSUPA standards, the former of which have now been deployed by the mobile operators in South Africa in limited geographies. HSDPA, offered by the mobile operators, is an evolution of the 3G UMTS / W-CDMA standard, and allows currently for speeds up to 2 megabits per second under ideal conditions with effective speeds averaging at around 300 to 400 kilo-bits per second. However, upgrades and evolutions of the standard are expected to allow peak speeds of up-to 14.4 megabits per second, and effective average speeds of up to 2 to 3 megabits per second. Other technologies such as satellite and power-line broadband are also being used / trialled to a limited extent

Amongst the most promising technologies that are likely to be deployed in South Africa in the near future are the following:

Wi-Max, a standards based technology, is being developed under two different standards one for mobile deployment and the other for a fixed wireless deployment. Many telecoms players, world-wide as well as in South Africa, are in active trials or small scale deployments of WiMAX for "last mile" connectivity. In its fixed-wireless application, WiMax promises to be the closest substitute to wire-line access, with current peak speeds of around 8 megabits per second evolving in the future to 70 megabits per second under ideal conditions (over short distances). Since a WiMax deployment will eliminate the need to roll out wire-line telecom infrastructure all the way to the

Neotel 2007

Page 10

customers premises, the installation cost, provisioning time as well as operating cost for the technology is expected to be lower, allowing for better price-points for the customer. Although many players of all sizes are trialling this technology, an effective commercial deployment of WiMax will require the availability of a high-capacity back-haul network to be able to carry the data content for a large customer base. Similarly, in its mobile application, WiMax is expected to provide peak speeds of up to 15 megabits per second, with effective speeds in the range of 2 to 3 megabits per second. Data connectivity speeds in the WiMax standard are directly proportional to the bandwidth allocation of the spectrum, therefore allowing the operator to moderate the data speeds to be provided in different geographies by limiting the spectrum. CDMA2000 is the most widely deployed of the global 3G standards today, though it has not, to date, been used in South Africa. It offers a very smooth migration path from basic voice and data CDMA2000 1x, offering data speeds of 192 kbits/s through EV-DO, offering peak data speeds of 2.4 megabits per second (average 600-700 kilobits per second), EV-DO Rev A offering peak 3.1 megabits per second, and EV-DO Rev B which will deliver peak speeds of over 70 megabits per second with sufficient spectrum. This migration path mirrors the HSDPA/HSUPA/LTE path of UMTS. EV-DO Rev A, currently being deployed by leading-edge carriers, is the first wireless technology that will carry VoIP as efficiently as native voice. Unlike other 3G standards, CDMA2000 has been used extensively for fixed, limited mobility and mobile networks.

Growing Broadband in South Africa

Predictions of broadband growth in South Africa have been very varied. Now that the market is beginning to take off, more forecasts are available from various sources. However, it is imperative to bear in mind that the best-researched predictions of broadband growth world-wide have proven to be below reality. Given the current high pricing of data telecoms services in South Africa, the potential growth in the event of a re-alignment in prices can only be speculate upon.

Neotel 2007

Page 11

There are obviously some limits to the potential size of the broadband market. The Yankee Group observed that under 10% of South African households have PCs today, and this fraction is not likely to grow beyond 15-20% in the medium term. Even with strong competition, this does present an upper limit to broadband growth.

The ideal target for broadband rollout in South Africa far exceeds the current targets of all the operators combined. The country should be aiming for at least 5 million broadband users, amounting to a 10% penetration, over the next few years. Seen in the context of the current low fixed-line teledensity, this seems an impossible target; seen relative to mobile, it is certainly achievable.

In reality, reaching such a target would require much more than investment in telecommunications. For a start, the number of computers (or similar smart terminal devices), and the number of computer-literate people would have to rise to similar levels. The challenge becomes one of education, and a commitment not just to the Information Society, but to creating a society with a passion for knowledge, and a willingness to learn. Computer literacy is almost never an end in itself. Similarly, broadband is not an end in itself, but simply a means to ensure that people are able to function effectively in a 21st century world.

One of the things that we will have to learn is that no one size fits all. A business in Johannesburg, the economic capital of Africa, needs access to telecommunications that put it in the same league as its likely competitors in other major cities around the world. The needs of an individual in a rural area are clearly less demanding. We need to find ways to ensure that everyone has the opportunity to access to a minimum level of broadband service, without artificially constraining the high end of the market.

There is only one way to achieve both the growth and the price levels we all want competition. No amount of investment alone will create the vibrant, competitive market needed to make widespread broadband a reality.

Neotel 2007

Page 12

Telecommunications and the deployment of access facilities in particular is a capital-intensive business. Investment in such networks is only viable when done on a large scale, so as to achieve the requisite economies of scale. As a result, the optimum market structure is one with a limited number of sizeable infrastructure players. In deregulated environments, such as exist today in some developed countries, the market typically stabilises with no more than two or three major players.

The challenge in most developed countries has been to deal with a market skewed by the presence of a ubiquitous incumbent network. Much of the regulatory effort in broadband has therefore been directed towards de-skewing the market. In developing countries with a low fixed-line penetration, this may prove less of an issue, but only if there are incentives for substantial new investment. The recent focus on ADSL services by ICASA gives some insight into the issues and pitfalls of regulation of the broadband market. Unfortunately, most attention seems to have been paid to the symptoms, and not to the causes of the disease.

Applying the principles of economic regulation, ICASAs efforts to grow the broadband market and to ensure fair competition should really be focussed on the wholesale part of the market, where one player (the former monopoly incumbent operator) controls an essential facility (the local loop), and currently has significant market power (100% market share) in the wireline broadband market.

In the absence of true wholesale broadband in South Africa, we have yet to see the real underlying costs directly influencing pricing in the retail market. The major costs for retail players are typically the wholesale cost of wireline broadband access itself, the cost of national bandwidth, and the cost of international bandwidth. In South Africa, all three of these factors have, to date, been controlled by a single player. Placing controls on retail broadband services is unlikely to affect any of these factors, and will therefore have a limited impact on competition in the market.

Neotel 2007

Page 13

There has been much debate in the sector recently about the possibility of Local Loop Unbundling (LLU). However, LLU is but one extreme of wholesale access to facilities to deliver broadband (and other) services. There are several wholesale broadband wireline alternatives on the path to LLU that should be explored, since they hold the promise of competition, and may prove easier to enforce. These include Bitstream Access and Shared Access, both of which have been successfully enforced elsewhere. In line with international trends, players with Significant Market Power (SMP) in the wholesale market must be made subject to cost-based pricing of Bitstream services, and to other associated SMP regulation. This form of regulation redresses the historical competitive advantage of the incumbent, without limiting the form of retail product, which any player may offer consumers. In Egypt, the incumbent operator is required to provide wholesale ADSL to ISPs at prices stipulated by the regulator, resulting in the lowest retail ADSL pricing in Africa. A strong regulatory position, aimed not at individual operators, but at the principles of successful differential regulation of the telecoms industry, will serve to stabilise the market, create healthy competition and bring the benefits of innovation, value and choice to the customer.

In Conclusion

While broadband has arrived in South Africa, it is currently limited to a very small segment of the society. Its growth into the larger market arena is, however, inevitable. With a variety of operators providing various technologies to choose from, customers in South Africa will gradually start receiving more of the services that they have come to expect. The advent of infrastructure based competition in the fixed-line telecoms sector in the form of Neotel, and the next-generation network being deployed by Neotel is already creating an impetus towards customer focused products and services. Higher bandwidth services are now being promised by existing operators, and prices are gradually starting to decline. The evolutions of various wireless access technologies are bringing additional broadband services, as well as quicker & easier provisioning to the customer.

Neotel 2007

Page 14