Macroeconomic constraints hobble Telkom

great article with a very real perspective on the issues

One of the first lessons in economics is that capping any price constrains supply. This simple concept indicates that regulating prices is not a solution. The result of a price cap is that demand exceeds supply and producers provide even less of a product or service than without the price cap (as marginal revenue decreases and there is less incentive to provide more).
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does this imply

One of the first lessons in economics is that capping any price factor constrains supply. This simple concept indicates that regulating bandwidth supply is not a solution. The result of a bandwidth cap is that demand exceeds supply and producers provide even less of a product or service than without the bandwidth cap (as marginal revenue decreases and there is less incentive to provide more).
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Didn't Telkom retrench 30000 people a few years ago? Surely a lot of them had the necessary skills to install lines (you don't exactly have to be a rocket scientist).

Maybe I'm wrong but I don't buy this nonsense.
 
Great article to put things in perspective:

But...this doesn't make the blame go away. Telkom was government owned and still is partially. ICASA, Telkom, and the government all seem to be in bed together at the moment so its safe to assume that best business practices have not been adhered to currently and in the past which has resulted in the current problems in the market. Instead of the government thinking its a cash machine it should start to do what it was elected to do, stop sleeping around and start running the country in a way that is beneficial to every single one of its citizens. Telkom also needs to start taking some social repsonsibility and help in transforming the country if they were clever enough they'd realise there is alot of investment potential for South Africa (Potential revenue for them too) and if they helped turn the sector around everyone would be alot happier, efficient, profitable and all round content.

Rant over.... oh and I suppose I should wake up now. :)
 
suppose the article is good - but found myself yawning and skipping thru the thing - boring read!.
 
Dominic, your argument is wrong from a basic economics perspective. I think what Iraj is trying to say is simply that capping the prices of internet access from Telkom would result in Telkom capping the supply of the product (in order to maintain their margins/profits). In effect, it would then require ICASA to become more specific about this and that, i.e. deciding on behalf of Telkom what to offer and at what price (Please Not). This will make the already murky area of regulation even murkier. His argument is simply that we need to increase competition. But there is nothing new in that, is there?
 
The article clearly state that govt need to encourage more investment in telecoms infrastructure - either from existing players, or inviting more players into the field. They will not reach the "magic" 6% growth rate if they dont increase investment in telecoms. Its as simple and complex as that. At the same time, dont expect prices to come down - businesses need to recoup their investments (though they are making insane profits).

However, we need drastic price reductions if govt is to half poverty and unemployment by 2014, another target for govt. Good luck to them trying to balance them both.
 
This article touts every excuse under the sky. Fact remains, Telkom is a monopoly. Telkom charges multiples of the rates of similar services overseas.

Economics 101? Supply and demand? I don't buy any of it. Telkom have adopted a strategy of short term gain at the expense of South African public and no amount of amateur Economics is going to change that.

Telecoms are a basic resource in the modern world. People do not have alternatives. The Telkom share price has performed so well because its profit margins, operating as a legalised monopoly, are sky high and people do not have an alternative supply. It has very little to do with good management. Rape and pillage would be a more accurate description.
 
Gatecrasher said:
This article touts every excuse under the sky. Fact remains, Telkom is a monopoly. Telkom charges multiples of the rates of similar services overseas.

Economics 101? Supply and demand? I don't buy any of it. Telkom have adopted a strategy of short term gain at the expense of South African public and no amount of amateur Economics is going to change that.
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I thought the point was that he wants the telecoms arena deregulated or regulated such that it wll make entry to the market easy so that competition will drive down prices and drive up quality same as it has in the rest of the world?
 
BobJones said:
I thought the point was that he wants the telecoms arena deregulated or regulated such that it wll make entry to the market easy so that competition will drive down prices and drive up quality same as it has in the rest of the world?
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Well, of course, that should have happened 20/30 years ago. But the article makes Telkom out to be the hero struggling against adversity. The title of the article is "Macroexconomic restraints hobble Telkom", not "Regulatory restraints hobble Telecoms Industry."

To give skills shortage as an excuse for demand outstripping supply is silly after Telkom has laid off 30000 staff.

Telkom is not the victim here.

But they do pay the piper.
 
Gatecrasher, you seem to be forgetting that economists have crystal balls that only see accurately into the past!

And yes, the tone of the article does make Telkom out as a victim of government policy, but it does spread the tar about pretty evenly.

But you should read the article more closely and you'll find the thing common to most economic crystal ball gazing ie any number of plausible reasons to explain the past and a couple of simple generalizations to predict the future.

How wrong can you be predicting anything from about 3% to >6% growth.:rolleyes:
 
Oupoot said:
Dominic, your argument is wrong from a basic economics perspective. I think what Iraj is trying to say is simply that capping the prices of internet access from Telkom would result in Telkom capping the supply of the product (in order to maintain their margins/profits).
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This is the theory. What are Telkom's input costs? If they supply ADSL to a million people does it cost a million times as much as supplying one person? Or is the cost actually fixed? If most of it is a fixed sunk cost then capping prices would give Telkom an incentive to increase supply in order maintain their income and profits.

Do we even know the maximum capacity of the infrastructure in place? Is the capacity there to supply far more, i.e. Telkom is creating an artificial shortage?

if one believes that capital markets are efficient
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If one believed in the Easter Bunny...

Skilled labour shortage in technology gets mentioned regularly. If there is a shortage why are jobs so hard to find? People with these skills are leaving South Africa because they cannot find work here.
 
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Noted Facts:

Telkom retrenched most of its skilled labour in favour of tech that could cut costs.

It should of redeveloped its pool of employee's into fields where tech cant go.

We face a skill shortage, *DOAH!* HELLO AA & BEE took care of that one.
Its going to take a while until we can start pumping out qualified AA compatible people. Its not something that can be done over night. Its been 12 years, its going to take another atleast 8 until we start getting high volumes of fully qualified proffesionals in the market.

Although Neotel is in South Africa, it can outsource its high end technical requirements to India (which there is no shortage of) so the macro-economics of SA are not valid...
 
bekdik... there's a job writing headlines for "you" reserved for u:D
 
Article is wrong

Something about that article doesn't gel. It purports that Telkom's primary impediment to increasing capacity/supply is a shortage of the requisite skilled labor within the economy. But at the exact same time, we have thousands of qualified engineers etc. who struggle to find decent jobs. And also at the same time, Telkom has been retrenching 7000 people over the past few years. Telkom's huge margins also allow them to potentially pay top dollar for the country's best people. Sorry, I'm not buying it. High-margin companies like Google are able to attract the US's best people. Why? Because of good management. Telkom could surely easily do the same. People don't want to work for Telkom because they've dragged their own name through the mud.
 
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In light of all the above, the question one should then ask: who paid Iraj to do the research - Telkom, the DoC or ICASA? Simply put - professional economists wont do this sort of research without compensation. Economics is a fuzzy field - the exact same data could be used to come to two different conclusions which may even be in direct opposition to the other. It aint beyound the reach for economists to argue that Telkom, DSTV, SAB, etc are operating in a competitive market, or there is a natural monopoly, etc. It is up to the researcher & his paymaster to decide what the purpose is.
 
I don't buy the 101 economics either, especially with regards to the supply and demand. Telkom are already throttling the SAT-3 cable with exhorbitant pricing, when there's ample supply available through the cable. It's only being 25% used atm, or something in that area. They're creating an artificially high price barrier.
 
But should all the blame be thrown at Telkom's door? Not surprisingly, complaints against Telkom fall into two categories. The first is that it can't supply the services it is supposed to offer.
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The answer to the above question is a resounding Yes. It isn't that Telkom can't supply the services, it's more like they do not want to supply the services. Abusing it's protected monopoly, Telkom has created a niche for itself in the market: reduce operating costs, limit supply, maintain high prices and the business generate supernormal returns because the market has no viable alternative!

The other major complaint is the high prices that we pay for these services. Although prices have been decreasing due to regulation, compared with other parts of the world South Africa is still paying too much.
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Wrong again. Telkom's prices have only reduced as a direct result of competition. International telephones rates dropped when VOIP services were legalised and entrants into this niche started offering services to the market. Broadband prices remained stagnant until the last 2 years or so and only started reducing as a result of 3G/HSDPA and other wireless competitors trying to carve their own slice of the market. What regulations have contributed to these lower prices is minimal - just look at the ICASA ADSL regulations which took nearly 2.5 years and has the same jelly-like consistency as economics 101 (ie. can be molded to reflect different positions / viewpoints).

I do agree that Telkom is not soley responsible. We have the conflicting government interest as manifested in policies directed by the DoC and slow, incompetent regulation by ICASA to thank for the current situation:
... the market realises that the struggle to supply is not a Telkom problem. It is a South African structural problem that will ensure high margins and abnormal profits as demand will exceed supply for the foreseeable future. This will be so not only for Telkom, but for Neotel.
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Thanks to Telkom, the entire country is faced with so many problems, that Telkom alone cannot correct them. Telkom is just the spoilt bully that needs the other kids help to stand up because it's trapped by it's own weight.

If Telkom was truly hobbled and struggling as depicted in this article, how on earth does it continue to generate Billions-Rand worth of profit every year while it's fixed-line customer base has been steadily declining for the past several years? It's these record profits that have artificially kept Telkom's share-prices so high. Nothing to do with market analysts agreeing with good or bad management. Simply greedy profiteering for as long as it lasts. That is the ultimate objective of any capitalist society - to make as much money as possible.
 
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