Can’t compare SA to the US

I am beginning to think I should have called this blog “Grouching about Telkom”.  Telkom’s latest is that criticism levied against it for its mixed price changes are unwarranted and that what Telkom is really doing is “tariff rebalancing, the net effect of which was to decrease costs for voice usage”.  Basically Telkom’s price changes are not really intended to reduce costs overall but rather to charge more for services which Telkom feels it hasn’t been charging enough for and reduce prices in other areas.  The net effect is that you are not saving all that much if you use a range of Telkom’s services.  On the other hand if you only use those services which are getting cheaper then you will notice a reduction in price.  My difficulty with this approach is that Telkom’s prices are too high across the board and Telkom shouldn’t be “rebalancing” is charges across its range of products and services but rather cutting its prices.

The clincher for me was the following assertion:

At this stage it was difficult to benchmark South Africa against other international country examples given that it had not yet reached significant economies of scale, Hayward said.

Although with roughly 150 000 ADSL customers now, it was achieving some economies of scale, this would be much more so once it reached its target of more than a million customers in the next few years.

Another reason why it was not accurate to compare costs between South Africa and a developed country like the US – which was part of the basket of countries that Muller compared SA high usage ADSL pricing with – was that most internet content comes out of the US, placing SA at a huge cost disadvantage in terms of getting that into the country.

So, we would never achieve the same pricing structures as in the US, said Hayward, using the analogy of a burger. Because South Africa also has beef, the price of a burger in both countries can be compared, but this would not be possible if there were no cows.

So basically, we can’t compare the local market to overseas markets because we don’t have as many people using telecoms products and services, particularly data services.  That may well be the case if you look at it in isolation but if you consider that we have so few people using ADSL and other Internet access services because they are priced beyond the reach of the majority of South Africans by Telkom!  I have commented on this previously and I still maintain these arguments are nonsensical and that Telkom is missing a huge opportunity to expand its user base.

Consider how gaming consoles are priced.  The upcoming PS3 is going to be the most expensive gaming console on the market when Sony releases it.  Notwithstanding its cost, the device probably costs $100 to $200 more than its proposed retail price to manufacture.  The reason it is effectively being sold at below cost is because Sony hopes to hit certain sales targets at which point it may well bring the cost of manufacture down below the retail price.  In addition, Sony hopes to use sales of the PS3 to distribute its Blu-Ray player as widely as possible in an effort to make it the dominant standard over HD-DVD.  I see no reason why Telkom could not employ a similar model and charge less for its services and, in the process, grow its user base substantially.  Instead, Telkom seems to be fixated on making its massive profits and not at growing its business in any meaningful way.  That just creates opportunities for competitors.

Speaking of comparing SA to overseas markets, Slashdot has a post which discusses the low prices overseas telcos charge for data services.  It quotes a article which states the following:

A year-and-a-half ago, pricing of DSL and cable modem service was roughly the same. But over the past year, the phone companies have launched an aggressive assault by dropping prices. At the end of 2005, the average price of DSL service was about $32 per month, roughly $9 less than cable, according to research firm IDC. AT&T has twice lowered the price of its DSL service and now offers its 1.5Mbps service for $12.99 for the first year.

Consider that at today’s exchange rate AT&T’s 1.5Mbps DSL service would cost less than R90 per month for the first year.  Then consider Telkom’s proposed price reductions in that context, bearing in mind the bandwidth you get for those “lower” prices.  Let’s face it, South Africans are being screwed over in the name of rampant profiteering.

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