South Africa's Telkom: a fighting chance?

Telkom Direct stores: a vital channel to market as the company faces challenging times?

DevelopingTelecomsWatch is picking up lots of chatter today about Telkom, the incumbent wireline operator of South Africa. This started when this morning's daily roundup from TeleGeography included the news that the company is planning to re-enter the mobile space in 2010 after only a brief period with no cellular presence.

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.

South Africa's Telkom: a fighting chance?

M&A activity set to change the landscape of SE Europe; Central Asia to follow?

The emerging markets focus of this blog has led me, in the main, to round up and review developments in low teledensity countries of Africa and Asia, with only occasional detours into somewhat more mature markets in Eastern Europe, Central Asia, Latin America and elsewhere.

This time, however, being here in Vienna (dodging the rain and catching up on paperwork right now) has inspired me to look a bit closer to (my) home.

According to a recent TeleGeography article, Greek telecoms group Cosmote has reportedly reached an agreement with Oger Telecom regarding the takeover of Romanian mobile operator Zapp. Cosmote's existing Romanian operation occupies the third position on the market with 22.55% of the 28.55 million subs, according to the World Cellular Information Service. Zapp is a much less significant operation, with 0.96% of subs - and this is down from 1.82% a year ago.

What, then, is the point of this prospective acquisition? Gaining a 3G proposition seems to be the answer - Cosmote Romania is, as the TeleGeography article notes, the only mobile operator in the country without a UMTS concession.

For a long time, Zapp was the Romanian market's lone CDMA operator. Although Zapp had already got into third generation service provision via the deployment of a existing CDMA EV-DO network, the company decided last year to use UMTS/HSDPA technology for its 2100 Mhz network as opposed to CDMA2000. I daresay had Zapp not gone down this route, the company would be a less attractive acquisition target for Cosmote.

Zapp is an extremely small part of the Oger Telecom portfolio, which includes South African cellco Cell C and Turk Telekom, Turkey's dominant wireline operator which has, according to another recent TeleGeography story, formed a joint working group with its parent company to prepare an offer for the Kyrgyz state-owned telecoms operator Kyrgyztelecom. That article states that the privatisation of Kyrgyztelecom "has been on the Government’s agenda since 1998, although little progress has been made" and that "in July 2008 Turk Telekom declared that it was considering bidding for the 77.84% stake in the telco, but two months later was barred from participating after it failed to pay a required security deposit within the deadline." According to this story, these difficulties have not deterred the Turkish operator from coming back for another attempt.

While keen to improve its proposition in Romania, Cosmote might appear to be in the midst of evaluating how much of the rest of its southeastern Europe footprint it would like to retain. As well in Romania, currently the group has operations in Albania and Bulgaria. Until recently, the Cosmote footprint also extended to Macedonia, a market from which the Greek group exited via the sale of MNO Cosmofon to Telekom Slovenije. On 31st March telecoms.com reported that the Slovenian incumbent had beaten Turkcell to the punch with a successful EUR 190m bid for the Macedonian cellco. That article notes that as well as operating a 3G-HSDPA network, Cosmofon has also acquired six regional WiMAX licenses and launched a nationwide WiMAX network.

Were Cosmote to consider retreating further from the Balkans, one party unlikely to approve would be Deutsche Telekom. A recent MarketWatch article indicates that the giant German telco's purchase of a 20% stake in Cosmote's parent company OTE is motivated by a desire to offset increasing competition from cable and Internet operators on DT's home turf - specifically by expanding its footprint in high-growth markets such as Bulgaria, Romania and Albania.

M&A activity set to change the landscape of SE Europe; Central Asia to follow?

A naked giant in a perfect storm

I enjoyed constructing the title of today's offering. The image of a stoic titan leaning into a howling maelstrom of wind and rain, bereft of protective clothing, is a colourful one, not least on a rare day of hazy sunshine and light Spring breezes here in the north London suburbs (when I started this; the rain is now hammering down). I don't expect it's at all obvious what the title refers to, however. I just looked back at recent post headings and thought they've all been a little too prosaic. That Spring feeling just seems to have me waxing lyrical. Dont' worry. What follows is the usual sensible stuff... and the nude giant in the story makes an appearance before the end of this piece.

The giant concerned is South Africa's former land-line monopolist Telkom, which continutes to adapt to a range of changes in its home market. The managed liberalisation of the country's telecoms sector was catalysed by the Telecommunications Act of 1996 and the Telecommunications Amendment Act of 2001, which paved the way for a second national fixed-line operator. With the exception of full mobility, that second wireline player, Neotel, provides a wide range of products including basic voice and data services, high-speed Internet access, VPNs, and network management and hosting.

The new kid on the block, however, has not found competing with Telkom to be without challenges. South African telecoms and tech news portal MyBroadband yesterday picked up a newspaper article whose broad theme is that although the Neotel provides a "welcome" alternative to Telkom, "it doesn't quite offer all the answers."

Penned by Barrie Terblanche of the Mail & Guardian, the article focuses on particular difficulties faces by Neotel in the business telecoms market. Terblanche writes that "years after Neotel received its license to provide South Africa with an alternative to Telkom, by far the majority of small businesses are still forced to depend on the old behemoth for basic fixed telephony – even those businesses situated in the middle of Neotel’s coverage areas in Johannesburg, Cape Town and Durban."

One reason for this, argues Terblanche, is the lack of fixed-line number portability.

The country's telecoms regulator, ICASA, launched a Mobile Number Portability system in Q4 2006, the first instance of MNP on the African continent. This might have happened even earlier had South Africa's three mobile operators not twice asked the regulatory agency to postpone the introduction of the MNP platform. As my former colleague Matthew Reed (editor of Middle East and Africa Wireless Analyst) noted in a South Africa market update some months later, Cell C, MTN and Vodacom claimed more than once not to be "ready to implement portability" on the earlier scheduled launch dates of March and September 2006. This aroused the ire of no less an individual than billionaire industrialist Sir Richard Branson, whose Virgin brand is used by more than 360 companies worldwide - as I write this, I am still aching as a result of my most recent session in a Virgin Active gym and have yet to pay off the credit card bill for my recent trip to the USA on Virgin Atlantic Airlines.

Branson's interest in South Africa's delayed implementation of MNP stemmed from attempts of the country's Virgin Mobile-branded MVNO to carve out a share of the cellular market. Early last month, when discussing the prospect for MVNOs gaining traction in Africa and India, I observed that this has not been an easy task, noting that Virgin Mobile South Africa had signed up just 600,000 subs by end-2008, of which only 200,000 were active. Back on September 27 2006, a member of Matt Reed's MEAWA team quoted Branson as saying "South Africa's mobile players are dragging their heels on this issue, because it isn't in their best interests... they want to lock their customers in. You shouldn't be held hostage by your mobile phone company."

In the same article, this was refuted by a Vodacom spokesman, who said that the delays had been caused by "the technically complex nature of MNP, which requires new business processes to be designed and implemented."

The article, however, also contended that Cell C, then (and now) the country's third placed mobile operator had lobbied for MNP to be introduced more quickly but that Vodacom and MTN had insisted on a longer delay.

Whichever operator(s) may or may not have been behind any alleged MNP foot-dragging, the MEAWA article of the time raised the question of whether number portability would really have any very significant market impact. "Local analysts have played down the likely effect of MNP on the market," stated the article, which reported the view that fewer than half a million subscribers would be likely to change networks within a year.

I don't have to hand a detailed analysis of to what extent MNP may have driven customer churn in South Africa. There was, however, a little jostling in the year which followed the implentation of number portability. Market-leading Vodacom lost ground a little, but maintained a significant lead over it rivals. The bigger winner over that period Sept. 2006-Sept. 2007 seems to have been Cell C, though not to such a degree that the market changed dramatically. Cell C has, however, coninued to make up ground on its competitors since then - according to the World Cellular Information Service, the Oger Telecom-backed MNO now owns 13.80% of South Africa's mobile subscriptions, up significantly from the 8.61% logged in September 2006. I am absolutely not qualified even to speculate to what degree this is due to MNP. That said, my sense is that number portability has not massively changed the South African mobile market.

What, then, is behind Barrie Terblanche's claim for the degree to which the non-availability of fixed-line number portability has hampered Neotel's efforts to compete with the incumbent wireline opearator? He contends "that only business start-ups really have a choice between Neotel and Telkom, because established businesses can ill afford to give up an existing number."

Terblanche goes on to say that it is not only in the small business space that Neotel is finding the going tough. "Another huge hurdle in the full-scale adoption of Neotel by slightly larger businesses", he writes "is its lack of line-hunting facilities. This provides a business with one public telephone number linked to several lines in the business. When a customer phones the number, the exchange hunts for the first available line and puts the call through." The lack of line hunting, apparently to be solved in the next few months, "means that a business with a PABX still has to rent Telkom lines for incoming calls", continued this Tuesday's Terblanche article.

Tuesday was a good day for commentary on the South African telecoms market. Carried the very same day by MyBroadband was another article taken from the country's Financial Mail. This one, penned by a Duncan McLeod, zeroes in on the former fixed-line monopolist. While Barrie Terblanche contends that Telkom is better positioned than its rivals to compete in the enterprise telephony markets, McLeod constructs an interesting piece around the large number of challenges faced by the incumbent.

The article begins by noting that Telkom is soon to dispose of its 50% stake in market-leading cellco Vodacom, which, despite the advances of Cell C, continues to own slightly more than half of the country's mobile subscriptions. McLeod feels that "the divestiture will reshape SA’s telecommunications landscape for the better" and asserts that "it's sink or swim time for Telkom." Despite Neotel's struggles in the business telephony space, McLeod feels that the incumbent's fixed-line business "is going nowhere fast and, with new competition, it is going to have a hard time defending its top-line revenue and profit margins."

Given the powerful position of Vodacom in its home country, and given its valuable collection of subsidiary opcos in Tanzania, Mozambique, Lesotho and the Democratic Republic of Congo, why would Telkom seek to get rid of its stake in the business?

Let me turn once again to MEAWA's Matthew Reed, who in November last year wrote that the sale would free Telkom "from an unsatisfactory relationship with Vodacom." Matt stated "Telkom had hoped that Vodacom would help it to expand into the fast-growing mobile sector and into new markets in Africa, but it has been disappointed by the level of cooperation."

As Matt noted then, Telkom has begun a wireless play of its own. Earlier this month, as reported by TelecomPaper, the operator launched its new Mobi service, which offers mobile voice over a WCDMA network. The mobile service is currently available in Gauteng and Cape Town only.

My understanding is that the shareholder agreement with Vodacom prevents Telkom from building a national mobile network. Instead, to establish a nationwide presence, Telkom must sign a roaming agreement with with MTN and/or Vodacom. Cell C does not fit the bill, having not yet established a 3.5G network.

Beyond the home country, Telkom may also be working to find its own route into the mobile arena. Matt Reed observed in November that the operator had, in 2007, "acquired a 70% stake in Nigerian CDMA operator Multi-Links... and... is thought to have had separate talks with both Zain and Nigeria's No. 2 mobile operator, Globacom, about the possibility of forging partnerships."

Will Telkom's sale of its stake in Vodacom prove, then, to be a smart move? According to Duncan McLeod's article, one vocal supporter of the decision is the incumbent's CFO Peter Nelson, who has praised CEO Reuben September, saying "it showed a lot of leadership and courage... the new Telkom is standalone — I call it the naked Telkom."

This naked giant, McLeod contends, looks set to be caught in "a perfect storm" with the telecoms sector wide open to new competition. Cellcos MTN and Vodacom are free to compete in the wireline area, McLeod writes, also inviting readers to "consider also that new undersea cables will finally end Telkom’s control of international bandwidth."

McLeod reports that Mr. September is, however, "clearly relishing the company’s imminent divorce from Vodacom and the demands of a competitive market" and expresses admiration for the Telkom CEO's willingness to take tough decisions, such as shutting down Telkom Media, the pay TV unit for which a buyer could not be found.

Duncan McLeod wonders whether September will "take flak" for deciding to postpone a project that was set to outsource 19,000 jobs, questioning whether this has resulted from political pressure ahead of the country's elections. CFO Nelson, however, has defended the postponement thus: "We won’t outsource problematic and poorly engineered areas because what happens is you lock in inefficiency and you pay for it forever." McLeod conceded that this is a fair argument, going on to say that "Telkom is still SA's most important communications operator. It is critical for the economy that it doesn’t stumble and fall. Whatever South Africans might feel about Telkom — and it’s often not flattering — September deserves their encouragement."

A naked giant in a perfect storm

Africa or India: Which will be first to see mass-market MVNOs?

I was pleased to see confirmation that those to whom I handed over the task of organising this year's annual Eurasia Com conference in Istanbul have found a speaking slot for Cristobal Alonso, Chief Commercial Officer at mmChannel, a technology company dedicated to the development and management of digital entertainment services and platforms on a B2B format.

Cristobal and I have been in contact since mid-2007 without ever having the opportunity to meet face-to-face. This is a shame for me given how much he has to share about boosting the take-up of mobile value-added services. You can get some sense of Cristobal's ideas by having a look at his blog, where I noticed that he and I have something in common - we have both recently had the pleasure of attending a Mobile Monday Istanbul meeting. In January, I gained from the wonderful networking opportunity which Mobile Monday events provide and made a short presentation on the theme of mobile social networking. Cristobal was at the February get-together, and on his blog he reports on that meeting's MVNO-themed discussions. I imagine that was a lively session, given that the mooted market entry of MVNOs in Turkey has been something of a hot topic for a while now. Cristobal is quite right to compliment the MoMo Istanbul organiser Natali Yeşilbahar for the great job she has done to boost attendance and further improve the usefulness of the discussion sessions.

I guess Cristobal maintains a keen interest in whether MVNOs will succeed in emerging markets, given that his blog also mentions the insightful materials on this theme recently prepared by his colleague Carlos Valdecantos. Carlos asks whether there is any realistic prospect for successful MVNOs in Africa, where "most markets are experiencing pent-up demand, customer segmentation has only started to be a buzz word, and capacity is scarce." As Carlos notes, this is a markedly different scenario from that seen in the mature markets where MVNOs have sought to exploit the challenges faced by their host network operators, namely "slowing subscriber growth, lack of consumer segmentation, and excess network capacity."

As well as discussing which MVNO business models might work in an African context, Carlos segments the continent's many markets according to the likelihood of their being able to bear the entry of MVNOs. Carlos believes the high potential markets (good market size/GDP, strong economic liberlisation and a "dynamic" telecoms sector) are Morocco, Algeria, Tunisia, Egypt, Ghana and South Africa:

Assuming the onset of the global economic crisis has not caused him to revise his view, I assume that Peter Boyd, the former CEO of Virgin Mobile South Africa, would agree with this assertion. Back in July 2008, Boyd was quoted in a Middle East and Africa Wireless Analyst article as saying that "if there is one place where consumers need choice, it's Africa." Boyd argued that "you don't need multiple network licenses – that's an inefficient allocation of resources. Having an environment that lets people plug in an MVNO is a much more efficient way to serve consumers."

My former Informa Telecoms & Media colleague Matthew Reed wrote the article, noting that "even in South Africa, MVNOs are technically illegal. The only way for Virgin to introduce one was by forming a joint venture with Cell C, which holds a license to operate." If this and other barriers to MVNO market entry could be overcome, Boyd felt that the MVNO model enables the host network to sell its spare capacity, giving it new income to recoup expenses or invest in extending its coverage. This sounds quite compelling when applied to markets in which MNOs and governments jointly have the aim of extending the availability of services to less affluent prospective subscribers in the under-connected hinterland.

Matt's article noted that Virgin Mobile, then lobbying the Independent Communications Authority of South Africa for reduced interconnection fees, had acquired very few subscribers compared to the more than 40 million subscriptions shared by South Africa's three MNOs. Matt noted that while Virgin Moblile was lagging far behind the MNOs in this regard, "one figure where [it] is ahead of its rivals is ARPU, as a result of targeting higher-spending users rather than the mass market."

Has this situation improved for Virgin Mobile South Africa? It seem the answer is a pretty clear 'no'. Now led by new CEO Steve Bailey, the company has yet to have had a significant impact on the market, according to a more recent MEAWA article. Writing last month, Dario Talmesio notes that although the MVNO still has the highest ARPU in the market, "it had signed up just 600,000 subs by end-2008, and only 200,000 of them were active – giving it a market share of just 0.4%."

Talmesio reminds us that before launch, Virgin Mobile South Africa had hoped to acquire 10% of South Africa's mobile market within five years and asserts that target is now unrealistic. Talmesio feels that the company is unable to differentiate its services other than by using its distinctive branding. 3G services are not an option, notes Talmesio, because host operator Cell C, has not deployed a W-CDMA network. Of the three cellular network operators competing in South Africa, Cell C is alone in not having a 3G offering. Rivals Vodacom (50.98% market share according to WCIS) and MTN (35.55% share) began to sign up 3G subscribers in December 2004 and June 2005 respectively.

Virgin Mobile is also prevented from lowering its prices, Talmesio writes, because of the high interconnection rates it continues to pay. Talmesio also states that the MVNO has a more limited handset portfolio than its rivals.

In contrast to Virgin Mobile's highest ranking ARPU, host network Cell C had the lowest ARPU in the country in 2008, according to Informa Telecoms & Media. Talmesio writes that "from Cell C's perspective, hosting MVNOs makes sense when they can complement Cell C's market position and reach a different segment of the country's customers."

Talmesio seems to feel that Virgin Mobile South Africa has just one unique selling point: "the simplicity of its semiflat tariff" with "VMSA customers pay[ing] a premium rate in return for getting a simplified tariff".

Talmesio also argues that lateness to market may have worked against Virgin Mobile in South Africa, noting that "mobile penetration was already 72% when VMSA launched" and that "by contrast, the UK's penetration was just 40% when Virgin launched [there]". Therefore, he writes, "VMSA had to try to lure users away from incumbents rather than focus on greenfield users, as Virgin Mobile UK did in the late 90s."

If this last point is one of the most important inhibitors to strong growth for Virgin Mobile South Africa, this might suggest that, favourable regulatory regimes permitting, less highly penetrated markets in Africa might prove more fruitful for future MVNOs. Of the countries coloured green on the map above, perhaps Ghana looks the best bet, then. I also wonder whether Nigeria might be a viable environment for new MVNOs.

Whether MVNOs do succeed in Africa, or in other emerging markets, remains to be seen. Writing for Billing World in September, Patrick McGrory of customer care and billing giant Amdocs felt that "new services — Internet access, VoIP, WiMAX — and evolving business models like MVNOs enable cheaper and faster deployment in areas that previously were not viable prospects".

Two companies seemingly not about to launch MVNOs in an emerging market are Ericsson and Nokia. A Total Telecom report last Friday rubbishes recent rumours that the Scandinavian firms were planning to offer MVNO services in India.

"The speculation is completely incorrect – it's pure nonsense," an Ericsson spokeswoman told Total Telecom.

"Nokia is not planning on offering MVNO services in India," commented a Nokia Siemens Networks spokesman, who added "we provided input and advice to the Telecoms Regulatory Authority of India to help educate them with our experience of providing services to MVNOs, and that was it."

The denials of these two companies notwithstanding, some analysts feel that the Indian market is ripe for exploitation by MVNOs. The Total Telecom article quotes a research note from Ovum which states that "being able to enter a huge market with a population of 1.2 billion people when the mobile penetration rate is extremely low at around 26% is certainly a dream prospect for MVNOs, and many will find it hard to resist." My former Informa Telecoms & Media colleague James Moore is quoted as saying "the MVNO model will be an opportunity for GSM operators without a 3G license to offer WCDMA services."

If Africa continues to be a hostile environment for prospective MVNOs, perhaps it will be India which proves to be the first emerging or middle income market in which virtual wireless operators gain traction and become a large scale phenomenon.

Africa or India: Which will be first to see mass-market MVNOs?