models for extending access
- Free ISPs – sharing
- IXPs, RXPs and international
- VOIP – Challenging the incumbents
- Cyber-cafes: Access without owning a PC
This section looks at how different
types of business practice and regulatory models can affect internet
growth. It takes four examples that affect different aspects
of infrastructure: free ISPs, internet exchange points, Voice
Over IP (VOIP) and the use of cyber-cafes where individual computer
purchase is too expensive.
Village Phone Programme: A Multi-Media Case Study
GrameenPhone is a commercial operation providing
cellular services in both urban and rural areas of
Bangladesh, with approximately 40,000 customers.
A pilot programme of GrameenPhone, through the Grameen
Bank and a wholly owned subsidiary called Grameen
Telecom, is enabling women members of the Grameen
Bank’s revolving credit system to retail cellular
phone services in rural areas. This pilot project
currently involves 950 village phones providing telephone
access to more than 65,000 people. Village women
access micro-credit to acquire digital GSM cellular
phones and subsequently re-sell phone calls and phone
services within their villages. Grameen Telecom staff
have announced that when its programme is complete,
40,000 Village Phone operators will be employed for
a combined net income of $24 million USD per annum.
In rural areas where isolation and poor infrastructure
services are often the norm, telecommunications can
play an extremely important role in enhancing rural
social and economic development. Grameen Telecom’s
Village Phone programme provides an excellent opportunity
to learn more about how private sector development
(PSD) in the telecom sector can make a significant
contribution to poverty reduction. The Village Phone
programme also provides an opportunity to review
innovative strategies for incorporating targeted,
micro-level PSD in the telecom sector within project
design. Documentation of the impacts of Grameen Telecom’s
Village Phone programme and its innovative approach
to poverty reduction provide valuable learning and
case study materials that can contribute to strategies
for improved success in poverty reduction.
Free ISPs – sharing
The free ISP model originated in
the UK, when the regulator OFTEL decided that the incumbent telecommunications
company BT had to share revenues with ISPs.
The basis for free ISPS is simple: the ISP and the company split
the revenue from the call made to access the internet, at an
agreed rate. It allows the ISP to offer its service for free
or nearly free and the company gets a percentage of the large
amount of extra traffic generated. In the UK free services attracted
millions of users and therefore pulled in a considerable amount
of new traffic. The largest of these – Freeserve – is
now one of the largest ISPs in the UK with 2.6 million subscribers.
When Egypt’s Ministry of Communications and Information
Technology (MCIT) wanted to spread internet technology across
the country, it announced a free internet access initiative based
on the revenue-sharing model. In partnership with licensed ISPs,
the government-owned Telecom Egypt has set up an estimated 15,000
ports, capable of serving 2 million internet users. Those taking
up the service have to make a local phone call for access; no
subscription is needed to access the net.
The user only dials his or her favourite ISP and gets access
immediately. The cost of the call is shared between the ISP and
the telecom operator, 70% and 30% respectively. The cost of one
hour’s connection is one Egyptian pound (about US$ 0.22).
There is a wide range of different ISPs who cover 90% of Egypt’s
inhabited areas and the number of users is around 1 million,
with most concentrated in the cities of Alexandria and Cairo.
Kenyan internet service provider Swift Global has launched a
free ISP in conjunction with fixed-line operator Telkom (Kenya)
and Interactive Media Services. Branded ‘Internet Direct’,
the service allows users to access the internet without having
to subscribe to an ISP. The revenue generated through this premium
rate telephone number is shared between the three partners.
Another variant is the free ISP service from MTN in Uganda. Its
fixed line customers can now dial up to the ISP of their choice
and but do not need to pay monthly ISP charges or any initial
connection fees. According to Erik van Veen its Chief Marketing
Officer: “The basic premise of the product is that, in
collaboration with ISPs, MTN has bundled the telecoms and ISP
costs into a ‘per minute’ dial-up rate.”
Sharing of revenues in this way is one of a number of regulatory
approaches that can be used to encourage the growth of internet
usage. Another approach is unmetered usage. In 2001 UK regulator
Oftel insisted that the incumbent telecommunications company
BT offer unmetered access to the internet at a fixed price. It
noted at the time that unmetered call durations are, on average,
four times longer than metered call durations. Unmetered access
requires available capacity but a fixed price, and it encourages
In the developed world, users are accustomed to ringing a nationally
available number at local call rates. However in many developing
countries (particularly in Africa) numbers of this kind have
not been introduced. In these circumstances, the unfortunate
user has to pay long-distance rates to connect to the internet.
A simple change in the regulatory framework can bring about its
IXPs, RXPs and international
The issue of the cost of international
connections has already been raised. For example, in most African
countries if you send email across town it makes a long and circuitous
journey to North America or Europe before going back to its intended
recipient. It costs money in international connectivity charges
and gives latency problems (a fractional but sometimes problem-causing
Local internet exchange points (IXPs)
allow one country to route all (or most of) its internal internet
traffic at a national level, thus saving money and adding speed
to the connection. IXPs are the keystone of the entire internet
economy: they interconnect different parts of the internet and
they allow different ISPs to connect with each other, creating
in effect a clearing house. Routing traffic the long way around
is not an efficient way to use the network and thus the IXP mantra ‘keep local traffic
Local IXPs offer both internet users and ISPs a number of distinct
improve quality by speeding up connection times: there is a
200-900 millisecond delay in each hop the message makes across
the system, compared to 5-20 milliseconds locally.
save money because the calling costs are all at a local level.
create new revenue opportunities because for example local
content providers can start creating things like locally hosted
web sites, a range of e-services and streaming. The latter
would simply not be feasible if an international connection
had to be made.
When Pacific Rim countries found
in the 1990s they were paying far more than they were happy with
for international connectivity, their approach was to say: Why
do we need to get to the USA anyway? Most of our trade is national
or regional. If we all peer our traffic within our countries
and then within our regions we can dramatically reduce our connectivity
Consequently, local and regional connectivity increased, international
connectivity decreased and costs came down. In the process, the
internet backbone providers found that the quality of connectivity
that they were offering their customers in domestic markets was
being reduced. The only way for them to maintain the quality
was to establish Points-of-Presence (POPs) at the national and
regional peering points in the Asia Pacific region. The internet
backbone providers now bear the international connectivity costs,
not the Asia Pacific ISPs (it is interesting to note that the
Korean Internet Exchange Point is today the largest in the world).
This shows how this approach can address international cost issues.
Africa is at a much earlier point in this cycle. The Kenyan IXP
went online fully in 2002 with initially four ISPs but is now
used by 10 of them. On an uncongested link, the latency is now
30-60 milliseconds. One rather conservative ISP decided that
it would only require a 64k circuit to handle likely traffic
and within two hours it was so packed that it got congested.
Before it was established, international connectivity charges
were nine times more expensive than local costs. Within a very
short period of time Telkom Kenya had slashed its international
call rates in half.
There are now six IXPs in Africa: South Africa, Zimbabwe, Nigeria
(Ibadan with only two ISPs), Mozambique, Egypt, and the Democratic
Republic of Congo (the last three opened recently). More are
promising to open in the near future.
The major issue is one of trust. ISPs need to be able to work
with their competitors and in some countries this level of trust
has not yet been established. As Brian Longwe of the African
ISP Association told a workshop at the Southern African Internet
Forum: “Getting any IX/ peering arrangement off the ground
is 10% technical work and 90% socio-political engineering.” He
also pointed out the importance of getting (“written”)
regulatory support. Setting up a local IXP is neither costly
Once there is enough traffic, continental exchange points develop.
The more you aggregate traffic, the better the deal you will
get. For example, if Africa were to develop a continental peering
point it would not have to pay to interconnect to the rest of
the internet. It would be of a similar standing in the network
hierarchy to a Tier 2 ISP or Tier 1 internet backbone provider
and would therefore ‘peer’ with other equivalents.
VOIP – Challenging the incumbents
The convergence between voice and
data is a development that is having a particularly significant
effect upon the relationship between ISPs and incumbent telecommunications
companies, particularly in Africa.
VOIP stands for Voice Over Internet Protocol and is sometimes
used as a shorthand for internet telephony: in other words calls
made over the internet. International VOIP minutes are estimated
to have tripled in 2002. International Data Corporation (IDC),
a market research firm, says that by 2004, VOIP minutes (retail
and wholesale) and revenues will grow to approximately 135 billion
minutes and approximately $20.7 billion, respectively, representing
estimated compound annual growth rates of over 100%. Beyond cost
savings, IP technologies will further the potential for the internet
to become the preferred medium for both communications and commerce.
As a result, the internet is expected to carry a growing volume
of US and international long distance voice traffic says IDC.
Other analysts forecast that, by 2004, IP telephony will account
for between 25% (Analysys) and 40%
(Tarifica) of the global international
voice traffic (compared to an estimated 3% of the total in 2000).
In Africa, VOIP is used ‘illegally’ by ISPs and cyber-cafes
to offer international calls to people at much cheaper rates
than charged by telephone companies. Because there is an enormous
gap between the cost charged for international calls and what
it actually costs to buy the connection, ‘grey market’ operators
are exploiting the price difference.
As this takes calls away from national companies, most governments
and regulators try to police the market. For example there are
periodic police raids and the confiscation of equipment in Kenya
and Ethiopia. In Ghana at one point the government even jailed
some ISP owners for a short period of time. VOIP calls are difficult
(but not impossible) to detect unless there is a large volume
of calls. As a result the grey market often makes up 10-15% of
the market in most African countries. In the case of Ghana Telecom,
the company has estimated that it is losing somewhere between
US$15-25 million a year in international call revenues to the
Why does this matter?
Because the internet is creating new (often not currently legal)
ways of doing business in developing countries. Regulators will
need to consider whether they open up the monopoly on international
call termination, and whether they involve those currently in
the internet business. In the long-term there will be a shift
from analogue to digital calling that will in large part use
the internet. Developing country telecommunications companies
need to plan for this transition now. It brings some advantages:
for example, the cost of switching equipment is cheaper and it
may help ease network congestion.
Cyber-cafes: Access without owning a PC
As we will explore in chapter 9,
the internet is a relatively expensive service to access for
those with low incomes. In most developed world countries, large
numbers of people have access to a laptop or PC, either at home
or at work. But for those with low incomes or people on the move,
cyber cafes that offered relatively cheap access were a natural
extension of the industry. Places like Easyeverything offer internet
access at US$1 per hour. Tourists and students formed a substantial
part of the initial users attracted.
In countries where the cheapest PC (US$200-300) can be a substantial
portion of the average annual earned in-come, the role of cyber
cafes is particularly important. Without them, the number of
people using the internet would be substantially smaller. Almost
all African cities now have a wide range of internet cafes that
offer access for between US$1 and US$5 an hour.
The cyber café allows users to control their own costs
and enables them to walk in straight off the street without having
to pay for their own machine. A similar approach to cell phones
is the selling of pre-paid scratch cards for the internet. The
user scratches to obtain a number, which he or she then dials.
No dial-up account is necessary and the number allows the user
a pre-allocated amount of time online.
In developing countries, the users of these cyber cafes tend
to be young and are often former students who had access to the
internet at university. They are mainly used for email: many
users communicate with friends and relatives in the growing African
diaspora worldwide. However there is increasing use of the internet,
which may challenge existing values: young women in some African
countries search for husbands in the developed world. Other uses
are illegal: there is a growing level of internet card fraud
where buyers use fake credit card numbers and get goods delivered
to accomplices in the United States.
Cyber cafes are an excellent
way of creating access in large population centres and are spreading
to smaller towns, particularly in tourist areas. However in rural
areas there are two particular problems. First, it is hard to
get the density of people required to create a sustainable user
base. Second, if it is a poor rural area, people there may not
be able to afford using even quite low-cost facilities. These
issues are explored in chapter 9.
The recurrent issue in policy terms is: who pays for the infrastructure
and how? A company invests in the infrastructure and has to be
able to make a return on its investment that will cover the capital
invested and provide it with a reasonable rate of return.
Any investment will need to make this return over a particular
period of time. So, for example, in former days a telecom company
would look to make a return on its infrastructure investment
in 10-15 years. In more recent times, these investment cycles
are much shorter: often companies look to make a full return
in five years or sometimes even less.
Often these calculations will not be completely transparent and
it will be the regulator’s role to clarify with those seeking
licences what the expected investment return cycle is. For example,
it would be no good the regulator granting a licence for five
years when the investment was only to be recouped in the seventh
All the models above apply different approaches to making the
market deliver high levels of internet use. However, the interests
of internet users and private companies are often different,
and whilst the market can extend internet access to many people,
it is clear that it is not enough on its own. When access is
not profitable, it is not provided by the market, and social
mechanisms are needed to extend access to the most disadvantaged
sectors of society.