The silence of the lambdas

Internet users in South Africa hold their breath as they wait for the arrival of new undersea cables which promise to bring much higher bandwidth at much reduced prices. Hopefully.

But what constitutes a good deal in buying access to undersea fibre? It used to be that Telkom was the only deal in town but by the end of 2010 there may be as many as four cables landing in South Africa. I suspect that if the incumbents had their way, there would still only be one way of buying capacity on undersea cables and that, essentially, is “renting” bandwidth. But with new entrants in the market, one can see at least three different models emerging, which, using a real-estate metaphor, we can call Renter, Sectional Title Owner, and Land-Owner.

Renter
In theory, renters have the flexibility of choosing where to rent but if there is no choice in the market, renting only benefits the landlord. SAT3 is a case in point, where Telkom have been able to charge usurious rates for access to SAT3 and the bandwidth “renters” have had no alternative but to pay what is asked. The renter also has little control of price increases and in all likelihood doesn’t benefit if the “landlord’s” costs go down. It is possible that renting may become more attractive if the telecoms market in South Africa becomes truly competitive but I am not holding my breath.

Sectional title owner
The arrival of Seacom has introduce a new (to South Africa) mechanism for buying access, the ability to purchase an IRU or Indefeasible Rights of Use for a certain amount of bandwidth on an undersea cable. This means that once you have paid the agreed-upon cost of the IRU for an agreed-upon amount of bandwidth, the only other costs your are liable for is an annual maintenance fee for the entire cable, typically less than 5% of your original cost. In real estate terms, this is a bit like being a sectional-title or condo owner. You are committed and involved in a larger property but you own your own space within it. This is a breakthrough for South Africa and a tribute to Seacom for breaking the telecom operator mold. The most obvious benefit of this model is great cost transparency and at least in the short term, a substantial drop in price for anyone buying IRUs. It also means the bandwidth is yours so you don’t end suspecting your bandwidth provider of not being quite up front about contention ratios, etc.

Land owner
Good as the ability to buy IRU’s for bandwidth is, it is not quite the holy grail of undersea cable access. If you are a sectional title holder and the developer decides to add 20 new floors to your building (the metaphor gets a bit shaky here but you get the idea) the developer benefits from new revenue but you don’t. There is an analagous situation in undersea cables. This first occurred to me when I heard that Infraco might be planning to sell bandwidth by the “lambda”. For the uninitiated, as I was, each strand of fibre optic cable can be divided up into a number of wavelengths called lambdas where each lambda is a specific color of infrared light transmitting at 10 Gbits/sec or more.

What makes owning a wavelength so special versus owning a specific amount of bandwidth is the fact that the technology for transmitting bandwidth over fibre optic cable is regularly improving by orders of magnitude. Thus, by upgrading the technology at each end of the fibre optic cable, the wavelength that gives you ten gigabits today, may give you a hundred gigabits tomorrow. Of course one has to factor in the cost of upgrading the terminating equipment but that is substantially less than the cost of laying new cable.

If this is true, Infraco is really going to set the competition cat among the Telkom pigeons.