Interconnection: the key to unlocking telecoms markets

Interconnection happens when two networks link up to exchange telecommunications traffic. Without it, you'd only be able to call Telkom numbers from Telkom phones, and you'd need to carry a cellphone around for each network. The idea is ridiculous, of course; in reality, without interconnection, the business case for any new telecommunications would be hard to make.

The marketplace has been awash in raised expectations for years now: first the cellular companies, then Voice over IP (VoIP) and now Neotel (previously known as the SNO [second national operator]), have all been expected to slash prices, raise quality and generally transform the market. If you take a long view of things, some of these expectations have actually been met.

Science fiction

The telecoms landscape we inhabit today, including many of the services we take for granted, was science fiction 20 years ago. Yet prices in South Africa have come down more slowly than in many other parts of the world, and remain expensive by global standards. From airtime minutes to ADSL, we're paying more than we believe we should be - and there's a pervasive feeling that South African telecoms users are getting a raw deal.

A problem is that the more the telecommunications market opens up, the more players there are out there trying to interconnect with each other. At the moment there are around 500 VANS licence holders in South Africa, most of them wanting to interconnect with Telkom and the three cellular networks. For the networks, setting up those interconnections takes a lot of high-level and expensive work - it's no simple matter to make a voice call from a VoIP network, for example, to one based on an entirely different technology.

Given this reality, it's no surprise that the networks have set up as many technical and financial barriers to interconnection as they can (and it's one more reason to choose your VoIP provider with care).

Fair terms

But interconnection still needs to happen - and more than that, it needs to happen on terms that just about everyone can agree are fair. That's unlikely to be the case if a dominant player like Telkom gets to call the shots - which is why regulators, like our Independent Communications Authority of South Africa (ICASA), are so important.

Among its many other jobs, ICASA needs to ensure that nobody is unreasonably denied interconnection - but at the same time, forcing everybody to interconnect with everybody else is a recipe for disaster. The major networks have to spend a lot of money to grow and maintain their infrastructure: forcing free-for-all access sounds great in the short term, but if the networks aren't compensated realistically there's no reason for them to keep investing to give others a free ride.

The German experience of deregulation is a good cautionary tale. The authorities forced widespread interconnection with the goal of making sure all services were as cheap as possible. But as a result nobody was prepared to invest in new infrastructure - and Germany now has a technology gap compared to its competitors. A good interconnection regime needs to ensure that the major networks don't lose their incentive to invest in new technology.

Optimal regulation

The UK's deregulation experience is an example of something close to optimal regulation of the industry, neither stifling competition nor creating disincentives to investment.

ICASA faces a daunting task in trying to repeat this success: balancing consumer needs with future investment needs is a difficult and delicate job, especially in a country obsessed with questions of price and free and fair access. On the one hand is the prospect of continued market dominance by a few huge players; on the other hand, short-term low prices that lead to an investment drought.

The future evolution of interconnection is worth watching closely, because it will determine the price and quality of our voice telecommunications for years to come. In the meantime, don't expect fireworks from Neotel or any other new entrant - they all have to negotiate interconnection, and the price of interconnection, with the same incumbent players.