Don’t write off Satellite yet.

By Tom Mulei Makau

tmakau@ieee.org

The landing of the submarine fibre optic cables on the shores of the east African coast
brings to close the notoriety of the eastern African seaboard being the longest stretch of
coastline in the world (7000 km) without a single submarine fibre optic cable landing on
it.
Industry analysts are predicting a massive reduction in international bandwidth charges
because bandwidth delivered via submarine fiber optic cables is cheaper compared to the
same bandwidth via satellite systems. However, I am of the school of thought that thinks
that we should not expect the massive reduction in costs with the arrival of the cables in
east Africa. I base my arguments on the fact that the historical underlying factors that led
to the insanely low prices in the US and Europe are not present in Africa to warrant such
a reduction. My other basis is that international bandwidth costs are just one of the costs
passed on to the consumer and not the only determinant factor of cost of connectivity in
Africa.

The dotcom bubble

The years between 1995 and 2001 witnessed an intense investment in ICTs in the United
States and Europe characterized by many start-ups and massive capital investment in
Internet infrastructure based on speculation of an impending IT explosion. These
companies had envisioned a huge market for high speed broadband internet.
In their investment quest, many of these businesses dismissed standard and proven
business models, focusing on increasing market share at the expense of the bottom line
and a mad rush at acquiring other companies leading to many of them failing
spectacularly.
This period before the burst saw the laying of hundreds of thousands of kilometres of
fiber optic cables both on land and under sea as companies invested based on pure
speculation not on strategic market research information. When the envisaged market
failed to materialize, these companies could not get a return on their investments or be

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profitable and went burst culminating in what is known today as the dotcom bubble burst.
Some of the casualties include WorldCom, Tyco, global crossing, Adelphia
communications and many more.

When these companies went bankrupt, their massive investment in national and
international fiber optic networks lay unutilized and was bought for throw away prices by
new investors such Comcast and Sprint. So low were the prices that some cable was
bought for 60 US cents per Mbps per kilometre in 2002 compared to the 37 US dollars
per Mbps per kilometre the Seacom cable is costing to build in 2009.

Because of the heavy investment in the cables connecting Africa, the operators have no
option but offer prices to the consumers that will ensure profitability to the investors
because any attempt to emulate their American counterparts will lead to failure to break
even or even make a profit.

The numbers
According to Gerry Butters, the former head of Lucent's Optical Networking Group at
Bell Labs, Moore's law holds true with fiber optics. The amount of data coming out of an
optical fiber is doubling every nine months due to improvement in modulation
techniques. Thus, excluding the transmission equipment upgrades, the cost of
transmitting a bit over an optical network decreases by half every nine months. This is
indeed very good news for operators and consumers alike as this effectively brings down
the cost of using an optical fiber connection for data transmission.
Over the past decade alone, the cost of moving bits over fiber has dropped so
dramatically that if the automobile industry could match it, you could buy a BMW for
just a dollar or two.
The downside to this is that operators must pass this reduction in transmission costs to
customers. This has the effect of lowering the average revenue per user (ARPU) and the
operator must increase his customer base fast enough to break even or be substantially
profitable.

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To attain a substantial internet penetration in Africa via fiber optic cables, a massive
capital investment in backbone and last mile solutions is needed because of the sheer area
to be covered, the African continent is larger than the USA, Europe, Australia and
Oceania put together but with a much smaller market for internet services due to the low
literacy levels and poverty. (Only 30% of Africans can read and write and more than 50%
of them live on less than a dollar a day, this is effectively the total market for internet
services in Africa). Some critics might ask then how mobile phone services have
managed to capture such a large market share within a short time, what they have to
realize is that the literacy levels needed to use a mobile phone are not as high as that of
using the internet and the cost of ownership of a computer is not comparable to that of a
mobile phone.

The problem for the operators seeking a large market share is that there is no mass market
in Africa to justify the massive investment and the lower costs they wish to charge. Just
to put everything into perspective, in the fourth quarter of 2008, Comcast grew its
customer base by an additional 331,000 new customers while AOL time Warner grew by
241,000 more internet users and 200,000 phone users in the same period. These two
operators have a wide market reach all over US and are not constrained by political
boundaries and licensing regimes as their counterparts in Africa whose operating licenses
are within countries and not all over Africa. It is very hard to get those growth numbers
across Africa let alone within one country.

As of March 2009, Africa had a total fifty four million users online out of which the top
ten internet user countries contributed 45 million users.
Eight of the top ten countries have access to submarine fiber optic connections; the two
that do not have this connection and still rely on satellite are Kenya and Zimbabwe that
share a nearly equal internet penetration percentage to countries with undersea fiber
connections. This shows that the demand for internet in Africa is more consumer needs
driven than price driven. Irrespective of the price, penetration numbers will remain fairly
constant. A good example is America with very low prices (25$ per Mbps) and a

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penetration of 74.4% against a demand of 15.7% as of March 2009, if the price
determined the penetration, we would expect a demand closer to the penetration rates.

The reliability factor

It is estimated that by 2011, there shall be four undersea cables covering the West African
coast and three cables on the east African coast. As of march 2009, there are 34 cables
landing on European coast lines and 22 cables on the South American coast line. This is
the amount of cable they need to provide the reliability they achieve of 99.5%, it will be
very hard to achieve this reliability on three cables covering an area larger than Europe.
Also worth noting is that most ISPs pass their traffic over several redundant cables that
land on different exchange points to increase network availability, the African scenario of
passing traffic on one or two cables calls into question the reliability of the supposedly
fast and reliable fiber optic links to the world.

According to the Network reliability and Interoperability council of America, fiber optic
cable dig ups and cable cuts contribute to 58% of the reported failure on the world. In a
country like the US where local government regulations on excavations and dig ups are
well obeyed, they still suffer cable cuts due to improper dig ups and excavations, one
wonders what will happen in African cities where such laws do not even exist or are
flouted with impunity.

In contrast satellite links offer very high reliability, reach and uptime compared to fiber
optic links explaining why major US and European companies such as Chevron,
Volkswagen, Mobil, AIG, Citicorp, Pizza hut and Wal-mart rely on satellite connectivity
for their business operations.

Conclusion
The arrival of the undersea cables in Africa is a welcome move to connecting Africa to
the world. However, analysts fail to notice that the environment in which African ISPs

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operate in is difficult due to political, historical and economic reasons. The low prices
being promised by operators will not sustain them because of a lack of readily available
mass market needed for such ventures. The incidents that preceded the dotcom bubble
seem to be repeating themselves in Africa with predictably the same outcome of burnt
fingers and bankruptcy.
When the undersea cable arrived in Nigeria in 2005, the government wrote off VSAT and
satellite operators in haste declaring them irrelevant to the country’s economy, today any
VSAT or satellite operator with presence in Nigeria is doing booming business as the
hopes that the fiber cable would bring prices down and improve penetration failed.

A reduction in connectivity fees does not automatically translate into more customers and
quality service. In 2001 Kenya witnesses a similar scenario when cybercafés started
charging one shilling a minute to surf the net down from 10 shillings, many a analyst
hailed it as a new dawn of affordable internet to the masses, the result of this is that many
cybercafés struggled to stay afloat, many closed shop and those that did not, ended up
offering very poor services.

The investment models in the US and Europe are very different from what is happening
in Africa, this is especially true for the metro fiber circuits. In Africa/Kenya, its is the
operators laying cable all around the city, the US and European approach is that the local
government/municipal lays the cables and leases it to the operators hence bringing down
the cost of operation and maintenance of the cables. The submarine cable is also laid by
open consortiums as opposed to closed consortiums in most Africa cable projects. This
does not give every operator a fairly equal chance to own the cable.

The incorrect hype being peddled around by ISPs that the arrival of the fiber optic cable
will herald a new era in telecommunications should be treated with caution as this is not
the first time such a development was seen as a panacea only for it to fail. Satellite still
has a place especially in Africa otherwise satellite companies that offer
telecommunication services would have gone under a long time ago as more and more
customers switched to fiber.