Business News

It is like waiting for a matatu. You wait for ages and none comes along. But just when you’re about to give up hope, three come  along at the same time, all trying to come to a screaming halt in front of you. Kenya now has three (or more) potential  international fibre projects that could be complete within 12 months. Each one is loudly proclaiming that it will deliver cheap  international bandwidth. Russell Southwood of [Balancing Act News] took the temperature in the market last week about what the  impact of this bandwidth will be upon the market.

The Kenya Government has signed an MOU to build a fibre link to Fujairah in the UAE currently costed at Ksh5.7 billion. The
construction and supply contract will be awarded early next year and the project, dubbed The East African Marine System (Teams),
will be ready by November, according to a joint statement issued by both parties from Dubai. Many in the sector believe that it
will be more like 19 months or more before completion.
The Kenya Government will have a 40 per cent holding in the project, Etisalat 20% and the remaining 40% will go to investors in
the East African region. The Government has said it will organize an IPO on the Kenyan Stock Exchange. Several Kenyan
companies have expressed interest and one said that the Government had told them it would “guarantee their loan”. The details of
the finance package have not yet been settled but it is unclear where the Kenyan Government will raise its 40% from. Will the
World Bank simply shift a portion of its EASSy funding to the new project as many think likely?

The Government’s commitment to a 12 month schedule is a bold move but one that must lay them open to a certain amount of
skepticism. The tender for expressions of interest was only issued 2 weeks ago and Government timetabling is notoriously slow
compared to the private sector. Apparently the Private Secretary has been telling interested parties that the Government wants
prices comparable to those to be found in India in 12 months time. This benchmark has been set in order that Kenya will be able to
compete in the international outsourcing market.

Apparently a number of interested parties said that they would put up all the money to build it if they could have a monopoly and
he sent them away disappointed. But more worryingly one interested party told us that it could only get involved if it also allowed
Telkom Kenya to be a shareholder.

The next international fibre project is KDN’s and it has now signed its contract with Flag Telecom. Its link from Mombasa will
terminate in an undersea junction in international waters off of the Yemen. It says the link will be fully operational in the first
quarter of 2008, just 15 months away. The company believes that it will come to market with capacity at $500 per mbps pm but
that the price of bandwidth will go up to those wanting to invest as time passes. In other words, for those who commit early prices
will be lowest and for those who come in late, prices will go higher. It also stresses that its landing station at Mombasa will allow
other carriers to co-locate there charging only electricity and services at cost.

So this leaves the third project EASSy looking as if it will be the third runner. NEPAD appears to have made little more progress on
persuading more African Governments to sign its political protocol. And whilst the members of the EASSy consortium (that still
includes KDN and Telkom Kenya) are still moving things forward, there remains a disconnect between the political and
commercial ends of the project. If both of the above projects go ahead, there is clearly much less need to build the Mombasa-
Djibouti section of the route and it has to be said that both of the above projects have better international connection points.

As if three were not enough, Ethiopia’s ETC has now had its international fibre connection working effectively for two months via
Port Sudan and Saudi Arabia. But because it is landlocked and it had endless fruitless arguments with Djibouti Telecom over control
of a possible fibre link, it wants to find a second international fibre connection. Therefore it is in serious conversations with both of
Kenya’s fibre network operators about connecting to the Mombasa links when they are ready. If this goes ahead, both it and
Kenya will then have two international fibre links.

Because the process of getting the international fibre to Kenya has been both confusing and “on-off”, everyone in the market
(including customers) have understandably not really grasped the impact of its arrival on their businesses. Until now ISPs and
satellite resellers have largely been in the businesses of living on the margin they make between buying and selling bandwidth.

These margins have been kept high as they have concentrated on selling to comparatively few customers. Ironically it has been a
high-price, low volume business where their primary commodity – bandwidth – has always been in short supply, not least because
some of them increased their margin by contending it as much as possible. This has meant that bandwidth quality is often variable
at best for those not paying “top dollar” for a premium service.

If you argue that international fibre prices should be low price, high volume, then the national business model changes: what’s
sauce for the goose is sauce for the gander. Bandwidth becomes cheap and plentiful at a sub $1000 threshold. The margins that can
then be charged make it difficult for those who are not operating at volume to stay in business.

However it does now open up opportunities for new services, content and applications that can be sold to customers who should
now be paying European prices for real broadband connections (1-2 meg upwards) rather than the paltry 64 kbps they are
currently receiving. There are at least 500,000 households in Kenya that are at an income level that make them potential targets for
broadband. It would take only half of those households to sign up for there to be the beginnings of a very different market.

The real sign that the market has not “got it” is that some key ISPs are not passing on the information about these soon-to-be
cheap prices but are seeking to protect their high margins by telling customers higher prices. A heads-up, guys. The sector is a
village and news will get round quickly and we’ll encourage the circulation of this price information. The market’s about to change
get ready to change with it.

At the national level, there is now a third source of fibre capacity. Jamii Telecommunications has signed an agreement with the
Kenya Light and Power Company (KPLC) to sell an STM1’s worth of its fibre capacity in Nairobi and Mombasa, with KPLC saying
that it will triple its capacity shortly. Two other companies – CTN and Cable Vision – have been granted a licence to sell KPLC’s
capacity and it is telling (in terms of the argument above) that both are in the video download and pay-TV business. Not so far
afield, Tanzanian power utility TANESCO is currently building out fibre capacity and has invited bids to sell this capacity. Again
KDN is poised to make a fibre connection to Tanzania.

However a recent ping on the Kampala-Nairobi route shows that neither KDN nor Telkom Kenya has got its fibre route
operational. KDN is promising it will be operational by the end of first quarter 2007 and that prices will be 20% cheaper.
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