telkom

Telkom (JSE:TKG) this morning announced that it had declined an offer from Oger Telecoms as it was not in the interests of shareholders. It added that the disposal of the company "or its subsidiaries, joint ventures or any parts thereof will not be considered by Telkom without a compelling strategic rationale".

The company also announced the intention to invest in a fixed-wireless voice and data network as well as a mobile data network. It says it will unveil these plans in due course. Telkom spent R2,6bn last year on capital expenditure and is expected to spend R7bn during this year.

Previously the company's CEO Reuben September has repeatedly stated Telkom's intentions in the mobile space, saying that it wanted to "achieve a fixed-mobile service provider model across the fixed and mobile value chain". Speaking at the company's analyst day presentation today, September said that Telkom's core strategy of defending and growing profitable revenue "remains on track".

The company is continuing with its rollout of a WiMAX network, enabling consumers to connect to high-speed data services wirelessly. One would expect this to form the backbone of its planned network. The company said in June last year it planned to launch a voice service on WiMAX in the last quarter of this financial year (by March 2008), however this offering seems to have been delayed. Irnest Kaplan, MD of Kaplan Equity Analysts, says that he imagines the fixed-wireless deployment has "to do with using wireless to connect the last mile". Telkom is targeting the corporate market, townships and villages, gated communities and the youth/young adults with its wireless push. In its analyst presentation, the company says fixed-wireless solutions are cost-effective, scalable and a viable alternative when considering the effect of cable theft.

Telkom says that copper theft is responsible for 70% of the faults in its access network. This, the company says, causes "unacceptable delays in service provisioning, restoration" and "unacceptable contact centre queues and answer time". It says it will continue lobbying government to declare cable theft as sabotage and it will invest in the "alarming of cable routes and deploying armed response teams".

Its goal of investing in a mobile data network puts it head-to-head with 50% subsidiary Vodacom, which has spent billions on its 3G network. Data revenue from 3G and HSDPA services is still a small percentage of overall data revenue at mobile networks in South Africa, but this portion is growing. Neotel has also said it will offer fixed-wireless services. Telkom says it will offer a "3G interim service whilst ADSL is being installed". Telkom says it has access to GSM spectrum through the new Electronic Communications Act.

While the move may have surprised some, Kaplan says "the little players must never underestimate the incumbent's power". He adds that its obvious Telkom is "going to take the data side" of its business "more aggressively".

As to the mechanics of how Telkom aims to "selectively" roll out a fixed-wireless and a mobile network, it says it will consider existing co-location synergies and network sharing/roaming arrangements with mobile operators. One could naturally expect Telkom and Vodacom to work closely in this regard.

As to the future of its 50% stake in Vodacom, Telkom says the "disposal of Vodacom will be considered but only if compelling strategic rationale convinces" it to do so. It will measure all alternatives "against the full value of Vodacom". However, Telkom says it is pragmatic about its interest in Vodacom and that it has "identified a number of attractive alternative opportunities".

Telkom also said it will "substantially reduce its investment in Telkom Media". The company says peak funding of 100% of Telkom Media will now be R5,3bn. Telkom had planned to invest R7,5bn in Telkom Media.

After Telkom and MTN called off talks regarding a possible buyout in November 2007, Citigroup analysts suggested Telkom's "plan to enter the pay-TV market in South Africa should be scrapped because Naspers's Multichoice unit is well established". Other analysts were also opposed to the sizable investment in pay-TV which Telkom said it would make. Irnest Kaplan says this move comes because of "massive analyst criticism".

One analyst, who declined to be named, said that the changing economic environment in South Africa with higher interest rates and lower consumer demand could be one of the reasons for Telkom seemingly abandoning its pay-TV effort. Telkom, however, still maintains the Telkom Media "business model is sound". The analyst wondered whether with Telkom's reduced investment, the venture would be viable at all.

Telkom also offered guidance for its two African operations: Multi-Links in Nigeria and ISP-business Africa Online.

Multi-Links holds almost a quarter of the Nigerian CDMA market. It also has no restriction on the choice of technology used, plus the use of an international gateway. Telkom aims to invest heavily in marketing this operation (R105m in 2008/2009), and expects the number of CDMA subscribers to jump from around 800 000 to 3,5m. It also expects growth of in the leased line (data) as well as corporate and wholesale internet segments. Telkom also notes that the "data market in Nigeria is virtually green-fields". It will lay 3 100km fibre during 2008/09.

Telkom will build a landing station in 2008/09 financial year as well as a national network operations centre. When comparing this strategy to MTN's entry into the Nigerian market, the similarities are clear. MTN knew how to run a mobile network and it applied this knowledge to its entry. Telkom knows how to run a fixed-line network, especially a next generation network which it has been busy building in SA. It targets revenue of $1,5bn by 2010/11, with an EBITDA margin in excess of 20% (currently below 20%).

Africa Online, under the leadership of John Joseph, will double dial-up and wireless subscribers this year (15 000 to 34 000), and it will double that number again next year (to 67 400). This business is targeting revenue of $70m by 2009/2010 (currently slightly under $20m) and Telkom says Africa Online will be cash flow positive in the 2009/10 financial year.

http://www.itweb.co.za/sections/telecoms/2008/0803141050.asp

[Johannesburg, 14 March 2008] - While Telkom expects to lose 10% to 15% of fixed-line market share in the medium-term, the telecommunications incumbent says it is rallying a defence against competition from new entrants.

The fixed-line operator says it will increase capacity on its national core bandwidth by 1 000% and its metro layer core bandwidth by 1 600% in two years.

Earlier this week, MTN Network Solutions CEO Mike Brierley predicted Telkom would lose fixed-line market share in 2008 due to competition from MTN, Vodacom and Neotel. He also noted competition in metro fibre networks is strong.

Value-added network service providers, which will motivate to the Independent Communications Authority of SA next week to be allowed to roll-out national infrastructure, will add another layer to Telkom's competition in that arena.

MarketWorks business advisor Steve Edwards says: “I could give you practically any figure by way of prediction of Telkom's market haemorrhage over any particular period. But I think you can expect it to be large, given the company's own perception of threat, to the extent of trying to reinvent itself as an ICT company.”

Telkom's interim financial statements for the six months ended 30 September outline its potential threats and its “defend and grow strategy”.

It reveals that during that period, Telkom's national network increased by 167 nodes, with a bandwidth potential to increase by 17%. Moves were also under way to add more nodes and increase bandwidth potential by 47% for the next 12 months and 52 Metro Ethernet sites were rolled out in Western Cape and Gauteng to carry traffic, it says.

These activities were part of Telkom's move to build a next-generation network, the report says.

Own fault

However, Edwards blames Telkom for putting itself in a position where it could lose out to fixed-line challengers.

“Even if the cellular operators and their cohorts had stayed out of the fixed-line voice and data spaces, Telkom would continue to lose market share,” he says.

“Thanks to Telkom's internal inefficiencies, coupled with their mandatory social service obligations, they are not as light on their feet as any of their competitors. Also, having set pricing so high in their halcyon days of total monopoly, they have enabled their competitors to make relatively easy money out of even new, expensive infrastructure – however much the competitors like to squeal about anticompetitive behaviour.”

Telkom's “anticompetitive abuse” of its fixed-line infrastructure monopoly also set market expectations for data services as slow and expensive, he says. The result is that just about anything its competitors do looks like a service improvement or cost reduction and wins them credibility points, he adds.

“It's ironic, really, because Telkom's ADSL offering remains the most reliable, consistent and, effectively, the cheapest in that particular segment. That is, when you can find an exchange that can provide it, or a lackey that understands the importance of getting it installed really quickly,” he says.

Winners and losers

While Vodacom Business will not make a significant impact in the first part of this year, there will be activity from the company in the latter part of 2008, says Brierley.

“Vodacom is a significant company with significant resources. We obviously can't ignore them. But we're certainly not going to lie down and play dead.”

Edwards sees MTN winning Telkom's lost market share because it already holds significant market share, is aggressive enough, and has better service delivery and operational performance when compared to Vodacom.

“If they can just work some pricing magic, the day will be theirs. Neotel is too sleepy to make much of the opportunity in the short-term, though they and Vodacom will add to Telkom's misery once MTN has cleaned up,” says Edwards.

http://www.itweb.co.za/sections/business/2008/0803201100.asp

[Johannesburg, 20 March 2008] - The integration of Transtel into Neotel begins on 1 April, following yesterday's approval of the R230 million transaction by the Competition Tribunal, says Neotel spokesman Fani Zulu.

Neotel first announced its plans to acquire Transtel as a going concern in April last year. The acquisition allows Neotel to compete more aggressively with Telkom in the enterprise space.

“Neotel views the acquisition of Transtel as a strategic move to address a broader enterprise market. Transtel, with over 100 locations nationwide, will enable Neotel to deliver and support telecommunications services to address this market sooner than otherwise possible,” says Neotel MD and CEO Ajay Pandey in a media statement.

The acquisition also gives Neotel faster entry into the enterprise markets, and provides it with a platform to introduce its next-generation services for businesses, he says.

Transtel also brings an existing customer base, which is said to generate in excess of R600 million per annum, he adds.

One of the customers is Transtel's former holding company Transnet, which has told the Competition Tribunal that it intends to appoint Neotel as the sole and exclusive provider of electronic communications services to Transnet for a period of five years.

Integration roadmap

Pandey says Neotel will, over the next month, contact Transtel customers, suppliers and other associates directly to communicate how the transaction affects them.

Zulu says one of the major tasks will be to integrate Transtel's network into Neotel's next-generation network (NGN).

This includes “some level of investment” to upgrade the Transtel network and enable smooth and efficient connectivity with the NGN, he says.

It is unlikely that Transtel customers will be heavily impacted by the transaction, as the company will remain a subsidiary of Neotel, and not be swallowed up as part of the integration process, he says.

“Transtel customers will remain clients of that company, with the added benefit of gaining access to Neotel's NGN,” he says.

There will be no job losses as a result of the alignment of the companies' business processes, as some of the 550 Transtel employees have scarce skills that Neotel needs, he says.

“Neotel currently employs 20 to 30 new people per month and there is work to be done.”

Gaining traction

Zulu notes that Neotel has become a significant player in the enterprise market since it launched its offering in November last year.

Neotel has signed a number of blue-chip companies, and is seeing a lot of repeat business and clients taking on additional services, he says. Business revenue is also growing and new solutions are being added, he says.

The company is also moving at a brisk pace with its fibre roll-out, having already covered Sandton, Rosebank, downtown Johannesburg, downtown Pretoria, Cape Town and Durban. Companies that want fibre can effectively get it within 72 hours, he says.

“Those fibre roll-out plans that you usually see on PowerPoint presentations have become reality for Neotel,” he adds.

Johannesburg - The World Bank's International Finance Corporation (IFC) is urging the South African government to be true to the policy of open access and invite other credible undersea cable operators to land their cables and resell their capacity in the country.

The Department of Communications has reportedly said it could block the landing of the East African Submarine Cable (EASSy) project in South Africa under its current structure, given that cables landing here must have an element of local ownership.

However, Mohsen Khalil, Director of the World Bank Group's Global Information and Communications Technology Department, speaking to Fin24 from Washington, said South African companies would collectively be the second largest shareholders in EASSy - aside from the Special Purpose Vehicle (SPV) created to facilitate open access - with 27% between them.

The three South African investors are MTN, Telkom and Neotel.

The SPV will have 46%, and participants would get additional bandwidth to sell in the market, which should enable market forces to kick in and bring down prices, EASSy envisages.

Hybrid model

Khalil said the ownership model originally planned for EASSy was a completely open access SPV, but this "didn't fly". So it settled on a hybrid model after much negotiation, which still sees the SPV as the biggest shareholder, but gives other investors outright shareholding as well. The model, he says, combines principles of open access and market-based competition.

The model should also not disadvantage smaller operators, by combing them into a vehicle to make them more powerful in terms of their buying power. Khalil said this was also a departure from previous business models.

Khalil says a decision by the South African government to disallow EASSy from landing here would be "unfortunate and very surprising", and not something that he wanted to even contemplate. He said it would be very difficult to explain to consumers and operators why a cable that would bring down bandwidth prices and extend capacity was being disallowed.

The IFC has committed $32.5m in funding to the EASSy project, Khalil says, in line with its goal of helping to enable connectivity in Africa. It has a complimentary $424m project called the Africa Regional Communications Infrastructure Programme (RCIP), which aims to extend the geographic reach of broadband networks on the continent.

According the RCIP website, 20 countries in Africa lack direct terrestrial access to global networks (a fibre backbone), and are forced to rely on expensive satellite connectivity. International wholesale bandwidth prices are 20 to 40 times higher than in the US, and international calls on average 10 to 20 times more expensive than in other developing countries, it says.

Betting on SA support

So, the World Bank's support for EASSy and RCIP are interlinked.

The SA government broke away from EASSy earlier this year, amidst rumours of a bust-up between the companies involved and some of the governments supporting the goals of Nepad. Now, it seems to be driving a completely new east coast cable project, in a Nepad-led initiative.

Khalil said the reasons for this breakaway were not clear to him, other than what he reads in the newspapers.

He says it still hopes that EASSy can count on the support of the South African government, which had long been involved in planning the project. Likewise, Khalil said, Nepad had long been an active part of EASSy and although it had had some concerns, he doesn't believe these have gone unaddressed: "We hope its participation continues."

Khalil said an open access model did not only require the commitment of the participants in the project, but also that of the regulatory environments of the host countries.

EASSy, a partnership between 26 telco operators, most of them African, plans to connect 21 African countries to the rest of the world. It says because of the project, international connectivity prices will drop by two thirds at the outset - and fall further as volume and competition increase - and the number of subscribers will triple.

Cut prices dramatically

Despite the lack of clarity on who would and would not be allowed to land here - although the South African government insists it wants to encourage foreign investment and not exclude private operators - if all the cable projects currently under investigation do go ahead, the once-bandwidth starved region should soon have more than enough capacity. And this competition should bring prices down dramatically.

Khalil said it was encouraging that the region could have numerous international cables, whereas a few years ago, there was little interest in investment like this in the continent. He said EASSy had spent a lot of time and resources validating the business case, and if in doing so it had laid the groundwork for other operators, then it had already served a purpose.

Privately funded Seacom also claims it will be first to roll out an undersea cable along the east coast of Africa, planning to be operational by early 2009.

Khalil says the last outstanding investments in the EASSy cable project should be approved by the end of September or early October, and construction should start thereafter. EASSy could then be operational by as early as the end of next year, or early 2009.