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?

India update: loose ends from previous entries

MTS: Russian cellco's Indian operation - world's first CDMA2000 1x Advanced deployment

The time is fast approaching when I'll want to revisit the twists and turns of the much-discussed MTN-Bharti Airtel merger. That mooted deal, though, is by no means the only interesting story on the Indian telecoms scene so in the meantime I'd like to follow up on a number of issues covered in previous articles here.

Early last month, this blog discussed the desire of Scandinavian telecoms firm Telenor firm to secure a controlling interest in the Indian mobile operator in which it is a shareholder. A stumbling block had been the concerns of the country's security agencies, worried about the Norwegian firm's links to Bangladesh and Pakistan, both neighbouring states inside which terrorist attacks on Indian targets have been planned. When DTW last picked up this story, it looked as though a solution might be on offer - in the form of the transaction being approved on the condition that none of the staff who have worked at Telenor's Pakistan operation will be employed in India. Courtesy of India's Economic Times, I learned yesterday that this proposal to allow Telenor to increase its stake in Unitech Wireless has been sent to the Indian cabinet for approval. Doubtless the Norwegian firm will be hopeful of a positive outcome.

Another recent India-focused DTW article explored how the Government's security fears may be set to affect other telecoms businesses. That piece mentioned the case of ByCell, a Russian-backed firm that has been prevented from entering the Indian mobile services market, with security concerns about the company and its shareholders being the deal-breaker.

Now, another Indian telecoms firm with links to Russia is also the subject of worries over foreign ownership rules. Sistema Shyam Teleservice (now branded MTS India), a CDMA cellco in which Russian conglomerate Sistema has a controlling stake, has been asked to seek fresh approval for its wholly-owned subsidiary Shyam Internet Services, an ISP. According to an Economic Times article yesterday, the subsidiary never secured the mandatory Foreign Investment Promotion Board (FIPB) approval.

The article states that the issue came to light when the cellco's ISP subsidiary, which currently offers services only in Rajasthan, sought approval from the Department of Telecommunications (DoT) to be a pan-India player. MTS India has reportedly told the DoT that since FIPB had previously approved Sistema's 74% stake in the company, it was therefore "assumed that this approval covered all wholly-owned subsidiaries." MTS representatives seem to be confident that this issue can be resolved quickly and without much fuss, but it's worth pointing out that this is not the first time the cellco has run into trouble over failure to obtain FIPB clearances.

Early last year, according to the Economic Times piece, Sistema grew its stake in the Indian mobile operator to 73.97% despite only having got FIPB approval for a stake of 51%. This was resolved, but perhaps the Sistema people will be hoping that these trangressions have not tried the patience of the Indian authorities too far.

On the mobile side, MTS India remains a vigorous proponent of CDMA technology as a good fit for the country. On Tuesday, the operator announced its membership of the CDMA Development Group (CDG), the international consortium of CDMA service providers, manufacturers, application developers and content providers whose roles are to ensure interoperability among systems and encourage the adoption of CDMA2000 wireless technology worldwide. The previous day, the cellco had announced its plan to adopt 1X Advanced technology to support its growth plans. An announcement about the completion and publication of specifications for CDMA2000 1x Advanced was only made last month, so MTS India's claim to be the first service provider in the world to offer this "future-ready technology" seems credible.

CDMA2000 1x Advanced is intended to enable best-in-class and simultaneous voice and high speed EV-DO data services. MTS India CEO Vsevolod Rozanov says "with a need to offer uncompromising, seamless call connectivity with fewer call drops, and data services at ever faster speeds, operators are in search of solutions that utilize limited spectrum more efficiently, to be able to support a larger subscriber-base on it. 1X Advanced is designed to meet both these needs and will help MTS to significantly increase its capacity to provide outstandingly clear voice quality to its growing subscriber base."

This operator, then, seems bullish about the prospects for its advanced services. Last month, DTW covered the apparently less successful efforts of India's two major state-owned telecoms businesses to compete in that space. That article noted that both BSNL and MTNL have registered very low subscriber numbers for their 3G offerings, failing to capitalise on the first-mover advantage they should be enjoying - India's private sector mobile operators continue to wait for oft-delayed licence auctions to take place. I am not sure to what degree high handset prices have been a barrier to consumer adoption of the state sector telcos' 3G services - in previous articles here, it has been noted that the two state-owned companies have a rather lower ARPU subscriber base than some of their private sector rivals. If the price of devices is a major stumbling block, MTNL will be hoping that its recently launched own brand 3G handset - priced at around USD 110 - will have a positive impact.

MTNL is also looking to develop its 3G play in partnership with franchisees, whose role will be to acquire, serve and retain customers and provide customer care, according to a Business Standard article of 16th July. Two interested parties have emerged - Virgin Mobile and Spice Group. The former is well known globally for its MVNOs in the UK, Australia, Canada, France, South Africa and the USA. The Virgin Mobile brand has also been present in India for a little while, with services offered via the CDMA and GSM networks of Tata Teleservices.

Whether the franchise route will turn out to be the best way forward for MTNL remains to be seen. The DTW article which covered the public sector telcos failing to sell good numbers of 3G subscriptions also mentioned the criticism BSNL has received for selecting the franchising model for its WiMAX deployment. A vocal critic was the WiMAX Forum's top representative in India, who has asked the telco to consider how much revenue it may be foregoing by employing this approach.

This criticism, then, implies that the franchisee in this arrangement can make a tidy sum. Perhaps with this in mind, and presumably encouraged by its existing arrangement with BSNL, wireless solutions provider Harris Stratex is eyeing a role in MTNL's WiMAX franchisee project, according to Thomas K. Thomas of Business Line, writing recently.

In the case of 3G mobile services, perhaps MTNL's management would be encouraged by how successful Virgin Mobile has been in the UK and be attracted to the idea of working with a company whose brand value can prove very attractive for consumers. That said, in April this blog discussed how much less successful the Virgin Mobile MVNO in South Africa has been. In terms of market maturity (measured by mobile penetration), Virgin Mobile South Africa made its debut rather later than its UK counterpart had done some years before, thereby finding itself needing to win custom away from the incumbent MNOs. I don't have figures to hand, but I daresay that here in the UK, the Virgin-branded MVNO was the first supplier of mobile services to many of the customers it signed up. In India, mobile penetration might look attractively low to Virgin Mobile, causing the group to hopeful about experiencing growth more akin to the UK scenario than the frustrating South African one. I wonder, however, how strong an affinity for the Virgin brand exists in the minds of Indian consumers. Here in the UK, the brand is associated with a plethora of other products and services and its founder, the charismatic Sir Richard Branson, is often described as one of this country's most admired citizens. Does this brand resonate much more strongly here in Britain than, say, India?

It remains to be seen whether these franchising deals or the launch of new devices will do much to improve the fortunes of India's two ailing state sector telcos. For Amit Gupta of telecoms and IT advisory firm Ovum, none of this is as important as the need to privatise both BSNL and MTNL. In a recent opinion piece, he argues that "political intervention, a bureaucratic culture and pre-liberalization mindset are the root causes for BSNL and MTNL’s poor performance". Even with control handed to new investors, argues Gupta, "the challenge to transform BSNL and MTNL from state owned sick companies into customer centric service providers will be daunting". He feels that "due to the size and complexity of these companies, it won't be possible for an outsider to manage change without the cooperation of the existing employees", which could be tricky if we believe the argument that "at the same time, investors will have to cut the flab from a bloated workforce." These concerns notwithstanding, Gupta continues, "privatization is the only economically viable option" if these companies are to be saved from "their eventual demise."

Amit Gupta argues against the value of the Indian Government merely divesting stakes in the two operators while retaining control. He feels that this is inadequate. I imagine, then, that he would warn off any potential bidders for minority stakes in either opco. One such might be the giant US telco AT&T, which is reportedly considering a bid for a chunk of BSNL.

I've written so much about India on this blog since February that I daresay other loose ends from previous entries may need tying up soon. Watch this space. The next article on India may well zero on that mega-merger whose developments have rumbled on all summer.

India update: loose ends from previous entries

Mobile Merger Mania Mystery Tour: calling in Africa, Turkey, the UK and points worldwide

T-Mobile UK campus, Hatfield, Hertfordshire: uncomfortably close to DTW HQ

Late last month, I turned the gaze of DevelopingTelecomsWatch away from the world's developing countries and emerging markets and focused my attention much closer to home.

Getting all self-indulgent, I described the possible effects of a rumoured T-Mobile UK-Vodafone UK merger on the area where I live. This is because I am personally acquainted with a few people who make the pleasantly short commute from here in St Albans to the T-Mobile campus in nearby Hatfield. Without any real numbers to hand, my sense, then, is that the Deutsche Telekom-owned cellco is a pretty significant employer in this part of the world. So, in a town where the unemployment figure has recently surged upwards, albeit from a very low base, a true merger of the two MNOs is unlikely to be warmly received. I think this is the first telecoms story that I've ever heard being discussed by parents waiting for their kids outside my son's nursery school.

Perhaps a more predictable setting for talk of telecoms M&A activity is Investor's Business Daily, whose writer Reinhardt Krause believes that "after slowing to a crawl in the first half of 2009, deal-making among phone companies is bouncing back, a shift that's playing out in developed and fast-growing emerging markets alike." Krause quotes a former colleague of mine, Thomas Wehmeier, an analyst at Informa Telecoms & Media, who says that "the talking that has been continuously ongoing is finally bubbling up to the surface in the form of actual bids and deals."

Krause cites a number of prospective deals:

• Hutchison Whampoa may seek a merger for some or all of its money-losing operations in Europe, including 3 UK
• The merger talks between Bharti Airtel of India and South Africa's MEA mobile group MTN
• China Mobile being "on the prowl for more deals in Asia"
  
• The much-discussed notion of Zain selling its African operations

When asked about the last of these, Wehmeier expressed surprise, but conceded that "Zain is seeing that operating in the African environment is not simply a way to print money, not matter how impressive the rate of subscription growth."

Tom Elliott, an analyst at Strategy Analytics, meanwhile, says that Zain may be tempted by the huge "one-time gain" it would realise by selling its African assets. As Krause's article states, in 2005, Zain acquired Celtel International's African operations for USD 3.4 billion and, if the current rumours are to be believed, is now looking to sell these (plus some other acquired later) for around USD 10 billion. The even larger sum of USD 12 billion has also been mentioned - and for a very interesting discussion on how that a 12 billion dollar valuation could be calculated, I'd heartily recommend a nice article written by Carlos Valdecantos of Spain-based management consulting and advisory firm mmC Group.

The Zain story is certainly the one to which most time has been dedicated here at DTW but, as discussed, the T-Mobile-Vodafone issue is the one whose impact I'd be most likely to feel in day-to-day life here in London's commuter belt.

The last time I looked at this, I briefly raised reasons why such a deal might not be plausible. These included the idea that UK authorities might be concerned about the market power of the merged operation in a consolidated mobile market and the question of why Deutsche Telkom would offload such a significant asset at the bottom of the market.

Paul Rasmussen of FierceWirelessEurope, writing late last week, has an interesting take on these two concerns. Rasmussen has listened to sources who believe that DT may prefer an asset swap to a sale, favouring the acquisition of a "comparable mobile operator in central or eastern Europe" from a group interested in T-Mobile UK.

Rasmussen cites "insiders" who claim that DT's CEO, René Obermann, is keen to avoid a sale of its UK subsidiary, not least because this would create doubts about the company's ambitions to remain a global player. "Early speculation has placed Vodafone Turkey as a possible candidate", writes Rasmussen.

Vodafone's Turkish operation must count among Big Red's least satisfactory acquisitions. No dent, for example, has been made on Turkcell's leading share of the market, currently estimated at 56.40% by WCIS, which is actually slightly higher than it was at the same time last year.

In March, another Informa Telecoms & Media analyst, Dario Talmesio, profiled the performance of Turkcell and, when analysing the competitive environment in the company's home country, asserted that the cellco's achievements were "facilitated by the exceptionally weak state of Vodafone Turkey."

Talmesio wrote that "Turkcell continued to hold a competitive advantage against its British-owned rival... with Vodafone Turkey scoring particularly low compared with Turkcell in key areas, such as quality of network, commercial distribution and customer satisfaction".

On a personal note, I've travelled to Turkey on business a several times and have had the pleasure of making the acquaintance of people working with just about every significant telecoms operator there, as well as many more in the mobile VAS space and with various consultancy firms. There does seem to be a very strong feeling in Istanbul that Turkcell's dominant position is unlikely to be threatened any time soon. I've even heard the suggestion that Turkish consumers can be quite resistant to foreign brands competing with ones perceived to originate from their home country. Even this seemingly quite intangible advantage might weigh heavily in Turkcell's favour. Personally, I have a fairly strong aversion to slugs and snails - almost a phobia - so, Turkcell's use of the latter in its branding does not float my boat. It doesn't seem to put off the majority of Turkish cell phone users, however.

Turkcell's snail: not to my taste, but works just fine for Turkey's mobile users

One can see, then, why Vodafone might look to retreat gracefully from Turkey. Why, though, would Deutsche Telekom be keen to have a crack at all these problems which Vodafone has seemingly failed to handle? Well, as Paul Rasmussen writes, "such a move would nicely complement Greece's OTE", in which DT has been growing its stake since last year and which has a SE Europe footprint, with mobile operations in a number of Balkan countries.

If we're going to ask what is attractive about Vodafone Turkey, we might equally ask why Vodafone would be interested in T-Mobile UK. Beyond the opportunity to jump instantly to a 40% share of the UK mobile market and into a clear leadership position by market share, does the Deutsche Telekom-owned cellco not come with considerable baggage?

As Paul Rasmussen notes, analysts are beginning to question the value of what T-Mobile UK has to offer. He writes that "while the company has around 16 million customers, it is largely made up of an unstable base of prepaid consumers who can switch carriers easily to chase the cheapest or best value plans" and notes that "T-Mobile also generates around 45 per cent of its cash flow from its MNVO deal with Virgin Mobile, a deal that could easily evaporate if a new owner ruffled Virgin's sensitive feathers."

Bearing all of this in mind, you'd have to ask why media speculation abounds about the UK's two other leading mobile operator, O2 and Orange being interested in T-Mobile UK.

One suggestion raised by Paul Rasmussen is that this stems from each operator seeking to "spoil the ambitions of the others", leading to "the winner overpaying while the losers then complain bitterly to the regulator in an effort to confuse and delay the acquisition." Rasmussen argues that "The 'losers' could then attack the unsettled T-Mobile subscriber base with attractive offers and packages. Why so cynical, Paul?

Scary stuff.

Let's keep watching.

Mobile Merger Mania Mystery Tour: calling in Africa, Turkey, the UK and points worldwide

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?

Bharti Airtel to go international in 2009? Could competitive pressures at home make it a must-do strategy?

Earlier this month, I was wondering where MENA region-headquartered groups such as Orascom Telecom, Etisalat, Zain etc. might next go shopping for extensions to their empires. I discussed the view that the current economic climate has created a nice opportunity for Gulf-based telcos. That view was echoed this week by my former Informa Telecoms & Media colleague Nick Jotischky, whom I last saw in Dubai last December at GSM>3G Middle East, the final Com World Series event in which I was involved before leaving the company.

My guess for a while has been that any telcos struggling in the current climate may be prepared to sell off assets at rather lower prices that they would consider in happier times, hence the opportunity for MENA region players. Moreoever, writing this week, Nick notes that traditonally strong and expansionist mobile players such as Orange/France Telecom and Telenor are now more reluctant to get involved in further acquisitions activity, which may make the prices of potential targets lower still for Gulf region telcos looking to expand further. In Nick's article, he wonders whether powerhouse cellcos from China and India might also have the appetite for global expansion. "Some say the global mobile telecoms industry could go the way of the steel sector, which is largely dominated by emerging market players," writes Nick.

Nick notes that Bharti Airtel and China Mobile are the leaders of the two fastest-growing mobile markets in terms of subscriptions, with India adding just over 100 million subscriptions in 2008 and China 89 million. Nick feels this means that these two giant cellcos are therefore focusing on their domestic markets, noting that China Mobile is also busy rolling out its TD-SCDMA network. Bharti Airtel, Nick asserts, "has intense - even brutal - competition to contend with while preparing to launch its 3G network."

One element of the tough competitive environment in India is the fact that state-owned operators BSNL and MTNL have beaten Bharti Airtel and other private sector MNOs to the punch in terms of going to market with 3G services. According to a telecoms.com article, BSNL has rolled out 3G services in an additional eleven cities following the launch of its first 3G service in Chennai earlier this month. MTNL, meanwhile, has launched 3G services in central New Delhi with the stated aim of attracting 200,000 to the service within two years.

The article notes that "if BSNL and MTNL were to have a substantial head start over 3G rivals, particularly if the spectrum auctions, as many industry commentators now believe, are unlikely to take place until the end of this year, the licences would surely look less attractive to investors weighing up India's 3G opportunity." If this has the effect of driving down the amount of money the Indian Government is able to raise through the long-delayed auctions, the article continues, this too could work to the advantage of BSNL and MTNL because the price they both have to pay for their 3G spectrum has to match the highest winning auction bids in each of the respective circles.

As the telecoms.com article also notes, BSNL also has a first-mover advantage when it comes to BWA spectrum because while the BWA auctions are scheduled to take place the same time as the 3G licence awards, "BSNL is already sitting on a chunk of pan-Indian 20MHz spectrum in the 2.5GHz band." Again, the article continues, BSNL does not have to pay for its BWA spectrum until the BWA auctions take place.

In the mobile space, Bharti Airtel, with 26.38% of subscriptions according to the World Cellular Information Service, leads a select group of larger Indian cellcos. Other major players include Vodafone Essar (18.77% market share), Reliance Communications (16.63%) and Idea Cellular (11.71%). Of the two state-owned 3G early movers, BSNL is another significant player, occupying fourth place in the market with 12.74% of subscriptions. MTNL, which is also active in wireline telephony and CDMA WLL, is a much smaller GSM mobile player, with only 1.20% of subscriptions.

Of the few further existing opertators with single-digit market share, one in particular has been in the news quite a lot of late. CDMA network operator Tata Teleservices (7.01% market share) has announced that it will be seting up 100 new cell sites in the state of Gujarat by August, according to a Business Standard story today. This seems to be the latest component of a drive to extend the geographical reach of the Tata network. In October, Global Mobile Daily reported the company's plans to expand its services into the Jammu and Kashmir operating circle by the end of November, thereby becoming the fourth operator in that market alongside BSNL, Bharti Airtel and Aircel. The war chest for this expansion will be boosted by the USD 822.67 million which Tata Teleservices raised by selling a 49% stake in its tower unit to Quippo Telecom Infrastructure, a deal which was announced in January.

The CDMA operator has certainly been deemed attractive by NTT DoCoMo of Japan, an existing shareholder which has had a move to add a further 20.25% stake in the business approved by India's cabinet, according to a Global Mobile Daily story of 24th February. This stake was up for grabs because its previous owner, the broadband player Tata Communications was strapped for cash and had pressured the Indian Government to allow the sale of a share in the CDMA mobile operator, according to an earlier Global Mobile Daily article, which reported that Tata Communications has been "particularly hard hit by the credit crunch and that the operator has told the Department of Telecommunications that it will be nearly impossible for it to carry out its business plans unless it receives new funding."

Government approval was needed because the state holds a 26.12% stake in Tata Communications, formerly known as VSNL, and was therefore able to veto the sale of the company's stake in Tata Teleservices, in which DoCoMo already owned a 26% share. According to yet another GMD story in January, Tata Communications is also planning a USD 51 million bond issue to help finance its bid for WiMAX spectrum.

Tata Teleservices is aiming to grow further by addressing the relatively untapped rural market, having done a deal with Impetus Infotech India to launch services for value-added services aimed at farmers and related communities, providing updated information on current prices of commodities across the country. According to the Business Standard article, Tata Teleservices expects around 60-70% of new additions to its subscriber base to come from rural areas.

Tata Teleservices may also ratchet up the competitive pressure in India's mobile market by enabling Virgin Mobile India, in which the CDMA MNO owns a 50% stake, to enter the GSM space. Prior to reading an Economic Times article earlier this week, I had not realised that Tata would be following Reliance Communications in migrating from CDMA to GSM family technology. This mobile standards migration seems to me quite reminiscent of what has happened in Brazil, where the operator Vivo, which had been the lone CDMA player, chose to make the move to GSM in order to compete more effectively with its rivals.

At present, Virgin Mobile is positioned as India’s first youth-centric mobile service, according to this week's Economic Times piece, and its services are offered on the Tata Teleservices CDMA network via a brand franchisee arrangement.

"Our agreement with TTSL is technology neutral. At present, our services are restricted to CDMA. Once TTSL unveils its GSM network, we will extend the Virgin services into GSM as well," says Virgin Mobile India CEO M.A. Madhusudan. The article states that Virgin Mobile is now gearing up to launch its GSM service as soon as Tata Teleservices does. "Nearly 73% of the Indian mobile market is controlled by GSM operators. An entry into GSM will help us to expand our addressable market and also increase our average revenue per user. Currently, our ARPU is nearly 30% higher than the industry average," said Mr Madhusudan. The article continues: "In a bid to expand its portfolio, Virgin is also keen to enter the business phone segment", qouting Mr Madhusudan: "We are in talks with multiple handset vendors, including Research in Motion... there are also plans to launch data cards."

CDMA operators migrating to GSM. Virgin Mobile beefing up its MVNO play. State-owned operators stealing a march in the 3G space and in the WiMAX services arena. I imagine this is what Nick Jotischky meant by 'brutal' domestic competion for Bharti Airtel. I can therefore understand speculation about India's mobile market leader looking beyond the borders of its home country for growth opportunities. As Nick noted this week, the Indian cellco has shown its hand before, having failed in a previous bid to acquire South Africa's MTN. Nick feels that "as an operator with proven experience of coping with the lowest tariffs in the world while sustaining growth, Bharti would have an innovative approach to the challenges presented by African markets" and argues that "at the root of this innovation in India is Bharti's use of outsourcing, in not only its network and IT functions but also its call-center and customer-relationship services." Nick feels that this kind approach would be an alternative to the one taken thus far by African operators and says that "it will be worth watching how new entrant Econet Wireless Kenya fares, having pledged to use outsourcing as a key strategy."

Nick feels that China Mobile, meanwhile, may be encouraged by recent success in Pakistan and go on to expand elsewhere in Asia. China Mobile's Pakistan outpost, CM Pak (branded Zong), has, in Nick's view, built its success on cheap tariffs and an aggressive network rollout plan. Nick notes that "a sign of that success is the fact that in 3Q08, CM Pak added more subscriptions than any of its rivals."

Nick conludes his article by predicting that "we can expect China Mobile to stretch its Asian coverage and Bharti [Airtel] to return to Africa," but feels it would probably be premature for either company to reach out any farther. I have thought about the China Mobile case a lot less, but having considered the many competitive pressures endured by Bharti Airtel at home, my guess is that the Indian cellco must be thinking very seriously about where it might extend its footprint.

Bharti Airtel to go international in 2009? Could competitive pressures at home make it a must-do strategy?