New breed of telecoms operators

An international telecoms investor may enter the South African market in 2009, which will again place companies such as Telkom in line for a possible acquisition.  This is one of the key findings in of a whitepaper entitled “The emergence of a new breed of operators in South Africa,” which was launched today by Delta Partners.

“The South African telecoms market has seen an incredible amount of activity – especially towards the end of 2008 and as 2009 begins to pick up steam,” says Kristoff Puelinckx, managing partner at Delta Partners.

“Thanks to a very favourable outcome in last year’s court case between the Department of Communications and Altech, local network operators and smaller businesses are now allowed to roll out their own networks. Combined with the imminent landing of the SEACOM sub-marine cable on South Africa’s East Coast sometime in mid-2009, the scene is now set for drastically increased competition and cheaper access to bandwidth.

“In this environment, it’s very possible that an international investor may enter the local market with the intention of striking while the iron is hot. It is known that several key industry players from outside South Africa are keen to enter the market in the right conditions,” he says.

To this extent, it’s very possible that Telkom may become a target for acquisition yet again this year – despite it still being quite a sizeable buy (even without the Vodacom part of the business).  
 
The battle for corporate customers
 
As the mobile network operators continue to invest heavily in their corporate and hosted service offerings – through acquisitions in the IT sector and ongoing investment in growing their respective fibre optic networks – the battle has begun for a bigger piece of the corporate pie.
 
This will prove to be a challenge for organisations such as MTN and Vodacom, as they now have to compete with a huge number of smaller VANs and resellers, many of which have already developed very innovative offerings incorporating voice, data and managed services with a single point of contact for the entire offering.
 
“There’s already been a lot of lost terrain in this sector and newcomers to the corporate sector – like MTN and Vodacom – will have to work hard to regain this territory,” Puelinckx points out.
 
Cost optimisation
 
The current economic uncertainty that is gripping the global market is certainly having its effects on the South African market.  As access to capital and revenues continue to shrink, there will be a shift in focus for many organisations towards cost optimisation.
 
“Even during times of abundance, businesses are always reviewing their models, finding ways to optimise their costs – whether through the outsourcing of non-core business operations such as call centres or back-office functions,” Puelinckx says.

The theme of cost containment extends further than the corporate world as infrastructure and network providers also look to make the best use of assets – such as fibre optic networks and cellular base stations – that are already rolled out.
 
“ICASA encourages operators to share infrastructure and subsequently share the capital and operational expenditure associated with maintaining telecoms infrastructure.  We are going to see the extent of this infrastructure sharing deepen in 2009 as operators try and contain their costs,” Puelinckx says.
 
Consolidation
 
While the local telecoms industry has practically been thrown open as a result of continued liberalisation, tough economic times could restrict the expansion of many smaller telecoms operators and VANs.
 
“These organisations will lack the necessary capital to expand effectively and could either be faced with acquisition or the need to merge with other organisations to survive what is set to become a very saturated industry selling what will become a commoditised service,” Puelinckx explains.
 
A new landscape and a ‘new breed’ of operators

The telecoms landscape has changed significantly over the last decade, and 2009 promises to bring about some of the biggest changes and developments yet.  

“People often refer to a ‘perfect storm’ and Delta Partners believes that the South African telecoms market is beginning to experience the very beginning of a storm that is set to change the way we perceive telecoms operators,” explains Puelinckx.
 
Consider the following issues:
•         Telkom and Vodacom are now poised to take new directions, following the sale of Telkom’s stake in Vodacom to Vodafone in 2008.
•         MTN and Vodacom are now bigger broadband providers than Telkom
•         Neotel will have its first full year of operations in 2009, and then 500 VANS could now become network operators
•         The world is the deepest economic crisis since the Great Depression, leaving some operators strapped for cash and others with tremendous bargaining power

“At the very least we dare say that 2009 will create a new breed of operators in South Africa. The new challengers to the industry and consolidation of current players through financial pressures are bound to shake things up, and the established giants that we’re all accustomed to will be forced to transform themselves into more than simply ’the network behind the service’,” Puelinckx concludes.

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