Telkom Direct stores: a vital channel to market as the company faces challenging times?Until almost exactly one year ago, Telkom and Vodafone had each owned 50% of Vodacom, the pan-African mobile operator with 35 million customers in South Africa, Tanzania, Lesotho, Mozambique and the Democratic Republic of Congo. Earlier this year, the UK-headquartered mobile giant secured a controlling interest in Vodacom with the purchase of an additional 15% stake from Telkom. The remaining 35% owned by the South African incumbent was listed on the Johannesburg Stock Exchange and unbundled to the company's shareholders.
When plans for this transaction were first announced late last year, Lloyd Gedye of South Africa's Mail & Guardian reported the stated rationale for Telkom's sale of its stake in Vodacom and noted that many analysts "had expressed skepticism at Telkom's ability to make a success of going it alone in the mobile space and have questioned how Telkom will survive without the Vodacom cash cow."
Back in November 2008, then, Gedye wrote that Telkom CEO Reuben September was arguing that the deal would unlock significant value for the company's shareholders because its fixed-line business had "been undervalued while it clung on to its 50% stake in Vodacom".
How much validity is there in that notion of Telkom's wireline property being undervalued? The notion is, at the very least, open to question according to An Ovum note issued this week in response to Telkom's announced plans to roll out its own mobile services. Ovum examine the background to this strategy and observe that fixed-line penetration (currently under 9%) is continuing to fall in South Africa so "mobile is clearly the communication mode of choice, and this is where [Telkom] needs to be for its customers."
However, the note continues, establishing a new mobile operation in South Africa won't be easy, as mobile penetration is already above the 100% mark and because Telkom will be competing with two large, well-established players in Vodacom and MTN.
A third mobile operator, Cell C, has achieved a 15.57% share (according to WCIS) of the country's mobile market since its commercial launch in late 2001. For other mobile service providers, South Africa has offered a very challenging competitive environment. Back in March, in an article on the prospects for MVNOs in both Africa and India, DevelopingTelecomsWatch noted that Virgin Mobile South Africa had failed to capture even 1% of the country's mobile subscriptions by the end of 2008. The significance of the recently-launched CDMA mobile offering from Neotel, Telkom's principal challenger in the fixed-line arena, remains to be seen.
While Ovum's note politely points out the level of challenge facing Telkom's proposed new mobile offering, others have responded with far less restrained language. An article by Tiisetso Motsoeneng of Reuters today quotes one analyst who certainly pulls no punches.
"To be targeting the retail market in that industry, I think it will be suicide for Telkom," Jan Meintjes, an analyst at Gryphon Asset Management said. "I fail to see how a converged strategy of fixed and mobile is going to be earning significant margins," Meintjes said. "Unless they can show to the market that there's a specific niche that they're targeting and how they can exploit that in terms of earning margins on that business that will give them an accepted ROE on their capital expenditure, I don't see how that can be value enhancing."
The Ovum note, however, reminds us that in South Africa, Telkom claims not to be starting a mobile network operation from scratch. The note points out that the group already has fixed core network assets, which are used by both Vodacom and MTN for backhaul, and an established channel to market through over 134 Telkom Direct shops. Ovum contend that Telkom can choose to "develop a new brand and associated lifestyle concept to target some of the high-spending customers". Also, the Ovum note continues, Telkom could potentially have greater appeal to enterprise customers due to an ability to bundle services across fixed and mobile networks.
Lloyd Gedye's article late last year indicated that another use of the Telkom's Vodacom windfall might be to acquire a number of new mobile licences in numerous African countries. These would be in addition to the company's existing interest in Nigeria. According to Candice Jones of ITWeb, however, Multi-Links, the Nigerian telco in which Telkom has had a controlling interest since 2006, "is in dire straits, knocking Telkom's annual results set with a R1.7 billion net loss."
Let's see if this difficult experience discourages Telkom from further international expansion. My sense all this year is that African mobile markets are more likely to consolidate than they are to offer rich opportunities for new entrants.
While mobility in South Africa offers a new source of revenue for Telkom, Ovum argue that any new revenue streams from mobile - or from enhanced ICT services currently being developed - "are unlikely to significantly bolster its financials in the near term." Of more immediate concern, Ovum contend, is Telkom's rising cost base. Ovum's note expresses the belief that by implementing best-practice approaches in its own transformation, Telkom is giving itself a fighting chance in the challenging times ahead of it.
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