Villain to hero
History has shown that fixed-line telcos with no mobile partner find the going tough in a converging telecoms sector.
When it comes to winning hearts and minds, Telkom may be as successful as the American army in Iraq, but that might all be about to change. Telkom’s imminent sale of its 50% stake in Vodacom to Vodafone has presented it with a golden opportunity to become the new consumer champion.
History has shown that fixed-line telcos with no mobile partner find the going tough in a converging telecoms sector, so it is no surprise that Telkom chief executive Reuben September announced recently that Telkom was looking to go it alone in the mobile space.
Other new entrants such as Cell C and Virgin Mobile have found it a difficult market to get into, capturing 10% and 1,25% of the market respectively.
This can be mostly credited to the interconnect regime, which is heavily skewed in favour of the two incumbents MTN and Vodacom.
They lobbied the Independent Communications Authority of South Africa (Icasa) in 1994 to raise the interconnect fee by 525%—from 20c to R1,25—when they saw competition approaching on the horizon in the form of Cell C.
However, it is this interconnect regime that could turn out to be Telkom’s winning hand, if it plays its cards right.
Interconnect fees are the rate that one telecommunications operator charges another operator to terminate a call on their network—for example, what MTN would have to pay Vodacom if one of its subscribers called a Vodacom customer.
The current interconnect fee in South Africa is R1,25 and analysts predict that mobile call costs could be slashed by between 30% and 50% if it was regulated to a cost-based rate.
However, the regulator has found this task very difficult. But Telkom could theoretically bring this interconnect fee down through healthy competition, all it needs to do is throw its weight around, something that smaller players like Cell C and Virgin Mobile could not do.
Telkom has a substantial network as a fixed-line operator and could realistically roll out a supplementary wireless GSM network in urban areas within a six to eight-month time frame using the access to the 1 800MHz spectrum to which it recently gained access.
Telkom could then partner with a mobile player, like Cell C, to roam on its network for national calls.
This would allow Telkom to fill a space that is somewhere between a mobile virtual network operator, like Virgin which uses Cell C’s network, and a true national mobile operator like MTN, Vodacom and Cell C.
With this network footprint in place, Telkom could aggressively enter the mobile market, offering converged services such as packaged broadband, fixed-line and mobile services to its already existing large customer base.
However, the key is that Telkom, with its large network footprint, could offer substantially cheaper on-network call rates than those offered by its competitors.
Because of Telkom’s financial muscle, network footprint and customer base it could afford to undercut the big players like MTN and Vodacom, where players like Cell C and Virgin Mobile could not, because the interconnect regime is so skewed against them.
If Telkom reduced on-net calls between Telkom Mobile and Telkom fixed-lines to 50% of the rates offered by Vodacom and MTN, which would still be profitable, this would become a highly attractive offer to a consumer who has a Telkom landline.
Likewise, Telkom could negotiate a special interconnect tariff with its likely partner Cell C, so that all calls from Cell C to Telkom landlines and mobiles are substantially cheaper.
This would place pressure on MTN and Vodacom to compete by lowering their prices and could potentially undermine the interconnect regime that has protected them from real competition.
Analysts agree that this is a great opportunity for Telkom and could help turn its corporate image around.
“It would be very attractive,” said analyst Dave Gale. “Because everyone is trying to get the price of cellular down. It’s going to take a big animal to take the incumbents on. People would stop looking at Telkom as the villain.
“If they partnered with someone like Cell C it could work and Cell C would almost fall over itself to partner with Telkom; it could have a marked impact on the sector,” said Gale. “Telkom needs to be a little innovative going into the future.”
Another analyst, who did not want to be named, said that there was definitely scope for Telkom to leverage its existing 4-million fixed lines and a potential partnership with Cell C to take on Vodacom and MTN in the mobile space. The end result would likely be the introduction of some much-needed competition into the sector, but would not shake the market up substantially.
“It would depend on how quickly it can build up a substantial subscriber base in the mobile space,” said the analyst.
Telkom goes mobile
In an interview with the Mail & Guardian at Telkom’s recent results announcement, chief executive Reuben September said that Telkom’s position had always been to sell its stake in Vodacom only if there is an alternative equal to or better than Vodacom.
However, September said that Telkom recently acquired access to the critical spectrum 1 800MHz to 2 100MHz, which would allow it to roll out a fixed wireless network that could be used for mobile.
‘That puts Telkom as a stand-alone in a completely different perspective,” said September.
‘We have a very strong underlying network and we have a very strong relationship with our corporate customers.”
September made reference to the success of Multilinks, Telkom’s Nigerian business.
‘In Multilinks we are a dual-licence operator on the fixed and mobile side and it’s a vision of our capabilities in a very short space and time,” he said.
‘We want to do the same thing here in South Africa.
‘We are looking at this process as the liberator for Telkom in bringing the underlying value to the table,” he said.
September told the M&G that Telkom would not consider a full national roll-out of infrastructure.
‘That I would not consider in any space of time,” said September.
‘What is clear to me is that we need to build in selective areas, where the underlying strength of our network, coupled with our channels to market and our relationship with customers will bring us returns.”
He said Telkom would work with partners that allowed it to roam over their networks.
‘I can tell you that there will be partners available,” said September.
‘We will not be a pure mobile virtual operator, it will be a part build, part partnership.”