Neotel expands in Southern Africa, raises the stakes

Neotel, South Africa's second fixed-line operator, strongly signaled its intention to increase market share by moving into five southern Africa countries.

Neotel has signed a partnership agreement with Infraco to expand into Lesotho, Namibia Botswana, Zimbabwe and Mozambique, adding to the existing client base in Tanzania and Zambia. The countries are all members of the Southern African Development Community (SADC).

"We have therefore embarked on a proactive strategy to provide interconnect into those countries, to offer an alternative to the incumbent," said Imran Abbas, executive head of Neotel's Business Support Services (NBSS).

Access to alternative international gateway through the SEACOM undersea cable is the main reason for the move, the company said. Most African countries have one or two gateways, mainly through satellite, which limits competition and keeps prices high.

The agreement between Neotel and Infraco will allow ISPs and other providers in the countries routes for their capacity -- the link between the two companies will allow providers in landlocked countries to route their capacity through Neotel to SEACOM. At the moment Neotel will not sell services directly to end users in these countries.

Abbas was quick to address any misconception that the latest move was driven by inability to face competition in South Africa.

"We are not going to be selling services to these countries," said Abbas. "Our priority remains South Africa and we have already made tremendous strides in connecting the five metros and will next focus on growing the network across the rest of South Africa."

Neotel has already acquired Transtel, which gave it a small base of South African multinational companies in the region. The company is likely to eventually offer services in other markets.

"What is likely to happen is that South African companies we are servicing inside the country will pull us with them as they expand their businesses into the African continent," Abbas said.

The move into Southern Africa is likely to affect the pricing dynamics and raise telecommunication penetration numbers in the region. Although it will depend on whether Neotel interconnects with the incumbent fixed line operators only or if it also interconnects with ISPs in the countries.

"If Neotel interconnects with other operators like ISPs who are competitors to the incumbent fixed line operator, this would result in greater competition by allowing the competitors to make use of an alternative international gateway and compete on price with the incumbent," said Dobek Pater, telecommunications analyst at Africa Analysis.

Neotel, which is partly owned by SEACOM through Tata Communications, is hoping to lower prices and allow businesses in the region to use more data services.

Neotel's connectivity to these countries would result in greater bandwidth availability at lower prices. This would allow businesses to run more bandwidth-intensive applications and greater freedom in sending and receiving large data files, added Pater in an e-mail interview.

Currently, there are a small number of users who pay high tariffs to providers but the equation is likely to change, to higher number of users and lower profit margins for the operators.

"Operators will have to move in the direction of offering more sophisticated data network management services on the back of greater bandwidth availability and lower prices. Normally, such services are far more expensive and lucrative for the ISPs, giving them additional opportunities to generate revenue," added Pater.

While most of the countries Neotel is moving into have connectivity issues, Pater has identified Mozambique as a bit of an oddity among the five countries because it has a SEACOM landing point in Maputo.

Telecommunication de Mozambique, the largest corporate ISP, and mCel, the mobile operator, have direct connectivity to the SEACOM cable. Vodacom Mozambique also has access to the cable, since Vodacom Group is an investor in the SEACOM.

This expansion will prove to be a winner for SEACOM over The East Africa Sub Marine System cable, although there is no competition between the cables in Southern Africa. The two cables will only compete in the East and North East African markets.