4. Market structure, monopolies and multinationals

- Tier one – the big fish at the top of the feeding chain
- Tier two –Nnational and regional providers
- Tier 3 – A multitude of ISPs

Initially, internet service providers were non-profit organisations such as universities and research institutions. When the internet became a business in 1994, the number of ISPs increased enormously, but as time passed a process of consolidation took place, with many smaller ISP going out of business or being bought up by the larger ones. In broad terms, most ISPs started out selling ‘retail’; in other words directly to customers. As the process of consolidation reshaped the industry, the larger internet connectivity providers began to ‘wholesale’ bandwidth to ‘retail’ ISPs; selling to those who service customers directly.

In order for any ISP to operate it has to buy upstream bandwidth connections to allow its customers to access web sites hosted in other countries or to send email between different countries. This has led to the development of a three-tier market structure, that mirrors the telecommunications industry.

Tier one – the big fish at the top of the feeding chain
At the top level you have tier one, the internet backbone providers. These are the dozen or so international companies that own or lease the international infrastructure that links different continents, particularly the USA and Europe. The companies in this category include: AT&T, BT Ignite, Cable and Wireless, France Telecom and WorldCom.

With a few exceptions – such as the new and now troubled ‘upstarts’ (WorldCom) – these companies are the international telecom players who carry both voice and data traffic. And whilst there is intense competition for routes with heavy traffic (like those across the North Atlantic), there is less competition between carriers in a continent like Africa with a small flow of traffic, which may increase the cost of bandwidth. The issue of who pays what for international traffic is important as outlined below:

Graphic 1 Source: OECD, Netcraft, Brian Longwe.

Who should pay what? Argument one: Bandwidth costs in Africa in the 1990s were characterised by telecommunications companies and internet operators extracting maximum return out of their positions in monopoly or partially liberalised markets. In today’s liberalised markets in Africa, end user prices are broadly similar. In all cases service providers will cite their upstream bandwidth costs as their single biggest cost of doing business, and in all cases the average end user prices would be higher than prices in developed countries (particularly the USA and Europe). When an end user in Kenya sends email to a correspondent in the USA it is the Kenyan ISP that bears the cost of the international connectivity from Kenya to the USA. When an American end user sends email to Kenya, it is still the Kenyan ISP that bears the cost of the international connectivity, and ultimately the Kenyan end user who bears the brunt by paying higher subscription fees. The existence of reverse subsidies is the single largest factor contributing to high bandwidth costs. These reverse subsidies are costing the continent anything between US$250 and US$500 million per annum. Argument two: The Internet Backbone Providers in the developed world respond that they do not charge developing country ISPs any more than their other customers. They believe that the majority of international costs are incurred for a number of reasons including: poor telecommunications infrastructure at a regional and national level, fewer peering points than elsewhere and a lack of genuine competition in most developing countries. There is some evidence to support the contention about lack of competition. Ghana Telecom is part of a consortium that invested in a fibre cable and the members have a five-year monopoly, during which time they will recoup their investment before opening up the cable to other users. An E1 line (2.048 mbps) from Ghana Telecom using the new SAT3 fibre cable costs US$15,000 a month, approximately 60% of what it costs to buy equivalent satellite bandwidth. Nonetheless Ghana Telecom is responsible for the Accra-Lisbon section and that piece costs US$12,000 of the total price, the balance being international costs.

In any structure where there are relatively few providers, there are inevitably monopoly-related issues. The Tier 1 companies are at the top end of the ‘food chain’ and their pricing policies are bound to set the framework for what others can charge. There are both regulation and competition mechanisms at a national level in Europe, North America, Australia and New Zealand. There are a number of issues that remain to be tackled (such as the local loop) and the impact of regulation and competition policies obviously differs from country to country. However, the regulatory and competition agencies are arguably reasonably effective in dealing with the issues on which they choose to focus.

At a regional level, the European Union operates a competition policy that is often capable of tackling monopoly issues and ensuring fair play across member countries. For example, EU policy calls for members to unbundle the local loop. Whilst members are moving towards this goal at different speeds, it sets an effective overall competition objective. Outside these areas, it is much harder for a developing country to address international regulatory or competition issues, as there is no structure that has this function. In a continent like Africa, there is no way of mediating a dispute over rates or competition issues between say the powerful telecom company Telkom in South Africa and a small ISP in Lesotho. In several Eastern European countries, the old state company is now the de facto (private) monopoly.

In the days when nearly all telecommunications companies were government-owned, this role was the responsibility of the ITU which put in place the accounting rate system. With the involvement of governments, stateowned and private sector companies, its process of de-cision-making has been ponderous and its ability to address emerging international regulatory and competition issues almost non-existent. In addition, with the majority of voice and data traffic going through privately-owned companies, its influence over rates has waned to the point where accounting rates are no longer the benchmark for the sale of access to infrastructure that they once were.

Tier two –Nnational and regional providers
In the second tier, there are 50-60 providers who provide infrastructure at a national or regional level. Some, like COLT, chose to provide fibre links between cities in Europe with concentrations of financial services companies. Others, like Telewest and NTL, are cable providers. They have added internet access (along with telephony) in various forms to a service that was originally driven by offering ‘pay-for’ cable television channels.

A range of policy issues emerges at this level. For example in the UK the roll-out of ADSL is left largely in the hands of BT. The carrier dragged its heels over obligations to unbundle the local loop (ULL) and allow alternative operators access to its exchanges, and instead cut the wholesale price of ADSL to a range of different ISPs from £25 to £14.75 per month. As a customer you can buy an ADSL connection from a national ISP like Demon or Easynet, which charge less than £30 per month for broadband internet access. However if there are service issues, the ISP provider will often need to turn to BT as the underlying service provider to sort them out. Since BT controls the infrastructure and knows the number of customers each of its wholesalers has, it retains an unfair advantage in this new market. A similar process has occurred in some other European countries, such as Spain.

The same sort of arguments applies when an incumbent telecommunications company launches an ISP in a developing country. It has access to the details of the international bandwidth its competitors are buying from it. Using this it can work out each company’s customer base and revenues. An ISP started in these circumstances is usually subsidised in a variety of ways by its parent company. It will be hard to establish the level of this subsidy unless the company has transparent accounting procedures and the ISP operation is separated out from the main company’s other operations. Unless these issues are addressed by the regulator, there will not be a ‘level playing field’.

At the international level, there is also the issue of whether there is a single monopoly provider for international bandwidth. In the UK, for example, a number of international providers operate, but in Kenya there is only one company that can be used – Jambonet, a subsidiary of the incumbent Telkom Kenya – the international access point for all ISPs in the country. A monopoly provider will usually keep prices high. Luckily for Kenyan ISPs, the new government has decided to open up this market to competition and will shortly license more international bandwidth providers.

Tier 3 – A multitude of ISPs
The third tier in the industry consists of ISPs that service customers directly, of which there are many thousands. However the number of companies that can be supported by the market in each country will vary enormously. Be-cause the cost of bandwidth falls the more you buy, there is inevitably a tendency to consolidation. Initially there tends to be a large number of market entrants, each looking to establish themselves in what is seen as a new market opportunity. Over time the market consolidates with a much smaller number of players coming to dominate it.

In larger markets, a similar three tier structure is often in place. For example in South Africa there are over a hundred Tier 3 ISPs connected to five Tier 2 ISPs (MTNNS, SDN, UUNet SA, SAIX, and the Internet Solution), which in turn are connected to several global Tier 1 providers (Teleglobe, UUNet, Cable and Wireless).

South Africa’s Hierarchy of ISPs


Graphic 1.1. Source: Gregory Massel http://www.ispmap.org.za