ISPs In Africa Say Netflix and Other OTT Services Are Taxing Local ISPs, Threatening To Derail Broadband Investments
The thorny issue of international content providers like Netflix selling online VOD subscriptions services in South Africa/Africa, whilst simultaneously not paying a cent of their revenue to South African Revenue Services in the form of company tax, has been reported from a number of different perspectives. In the case of Netflix, at 300,000 paying subscribers in South Africa at roughly $10 per month, it amounts to a lot of corporate tax avoidance. But to be fair to Netflix, right now the way the law is written, Netflix isn’t legally required to pay the tax.
Yet a different issue with much more severe impact, conveniently ignored until recently, is the issue of how OTT content players who generate vast amounts of local traffic, contribute to the expansion of the local network infrastructures, in Africa/South Africa. ISP networks are expected to carry large volumes of traffic, at peak times, without any congestion, latency, or buffering to end-users binge watching Game of Thrones in HD.
In recent conversations with a few ISPs in Africa, they are hugely reluctant to continue to put in place the capacity that is needed, when they have to pay all the costs to do so. Historically, Netflix has argued that they shouldn’t have to pay ISP’s to deliver its video content because consumers are already paying for Internet access. In addition, their dominance and huge appeal to VOD customers gives them massive leverage to force ISP’s into submission to host their hardware, or the ISPs risk losing disgruntled broadband consumers.
The harsh reality is that especially in Africa, ISP’s are being squeezed even more by consumers who are demanding lower broadband pricing, whilst expecting their access circuits to go faster and faster, whilst they consume more and more video at higher and higher quality. ISPs say something has to give and have commented that it is threatening the growth of broadband investments as a result. It has been well reported that Netflix has grudgingly entered into paid peering agreements with networks like AT&T, Verizon and Comcast in the U.S., but in Africa, it’s a different story.
When Netflix entered the market in 2016, they were not entertaining any paid peering negotiations but rather focussed on settlement-free peering and deploying their Open Connect servers in local networks. Generally, some ISPs were ok to receive the Netflix servers just to ensure that they could deliver on their subscribers’ content experience, and ISP’s also saved on the lowered usage of expensive international bandwidth as Netflix servers were now in the country, serving the local demand.
However, fast forward two years to 2018, and this “squatting model”, as some ISPs refer to it, is now completely broken, thanks to the exponential demand of video and arrival of many other content giants who are finding their new homes in locations like Teraco data centres. When ISP’s in Africa factor in the likes of Google, Netflix, DSTV Box Office, Showmax, DSTV Now, AWS, and Azure, all who have the expectation to put traffic on the networks and expect everything to keep working, without contributing to the economic effect, it’s not a model for success.
Teraco data centres have become the preferred hosting location for many local and international companies, due to their network neutral placement, which all the ISP’s have a fiber connection to. The previous hosting model of placing servers within an ISP’s data centre building created a situation whereby it was very difficult, if not impossible, to move away from an ISP who became unreliable or uncompetitive, thereby creating the perfect opportunity for Teraco to prosper locally.
Ironically, most ISP’s have built up substantial local hosting portfolios over the past 10 years, and traffic delivery fees have always been a component of the monthly bill. The economics at the time were well understood. However, whether company servers are placed in ISP’s data centres or Teraco’s data centres, traffic still flows in much the same way to end users, and must be charged for. Most ISP’s whose hosting business is migrating to Teraco, face catastrophic revenue loss, and no means to fund the exponential traffic growth emanating from these data centres.
Local ISP’s in Africa tell me they simply can’t keep the pipes open without these content giants contributing pro-rata to the financial effect they have on upgrading these networks to deliver their content at the quality they expect. For them, ISPs say the free ride has to come to an end, especially in markets like Africa where broadband infrastructure is not mature or pervasive, and enormous build-outs are still required to connect millions of households, who want a high-quality VOD experience.
Some ISP’s have calculated that the local IP transit cost attributable to Netflix alone for delivering their content to a subscriber in South Africa, is roughly $0.40 cents per month, which is less than 5% of Netflix’s monthly $10 fee. ISPs argue that’s not a lot when you consider Netflix is taking out roughly $3M per month from the local South African economy and putting nothing back.
If Amazon AWS, Microsoft Azure and Google with their cloud platforms are successful in luring enterprise South Africa away from local ISP’s and onto their locally hosted cloud platforms, and traffic from the Teraco data centres continues to get a free ride, ISPs in Africa say it’s game over for everyone in the ISP value chain. Of course this debate is nothing new and we’ve seen Netflix and ISPs argue for years over who should pay for the network improvements that are needed to deliver all of the video that is going over the last-mile. But when ISPs say they are getting wary of continuing to invest, in a country like Africa where broadband still needs a lot of development, it’s bad news for all companies involved in the video ecosystem.