Can Telkom revive itself?
The big question facing both investors and industry stakeholders is whether Telkom can pull itself up by the bootstraps and get back into shape.
Over the past few years Telkom has had a tremendous run. The company’s profits increased from a humble R 4.2 Billion in 2002 to a staggering R 14.5 Billion in its last financial year.
The share price showed equally impressive growth. The company listed in early 2003 at R 28-00 a share and has recently peaked at over R 190-00 a share amidst talks involving MTN and Vodafone.
But it is not difficult to make lots of money when you are the sole provider of a vital service, especially if the company pursues short term profits over long term sustainability. This profit driven strategy however had a price in Telkom’s case, and it may just come back to haunt the company now.
The previous CEO, Sizwe Nxasana, started the rot by shedding a significant portion of the workforce. He was able to stand tall before shareholders having increased profits by cutting back on employee expenses, but service levels started to suffer and customers grew increasingly frustrated with the operator.
Some observers noted that infrastructure investment and signing up new customers also took a back seat to keeping investors happy.
This profit-growth party could however not last. The staff cuts meant declining service levels and it was only a matter of time before Telkom had to start investing in upgrading their aging network.
When Papi Molotsane took over from Nxasana as Telkom CEO in September 2005 he appeared to have realized that Telkom needed to step up a gear to prepare for a more competitive telecoms market.
From the start Molotsane declared his intention to make Telkom a more customer centric company. He also announced that the incumbent would be spending R30 billion on infrastructure with a large part of the money going towards building a New Generation Network.
Unfortunately Molotsane was out the door before much progress could be made. Rumour has it that he bumped heads with the Department of Communications (DoC).
Too little too late
Whilst Telkom appears to still be pursuing many of the objectives Molotsane put in place it may be a case of ‘too little too late’.
The company recently cautioned investors that their basic earnings per share and headline earnings per share for the six months to September 30 would be 14%-20% lower than its figures from a year ago.
Telkom laid the blame at the door of bundled services which were made available at discounted rates and an increased investment in its network. The company also lost a few large contracts to competing operators.
Neotel bagged the lucrative SITA Government contract while Internet Solutions and Neotel combined forces to grab the R192 million TENET contract from under Telkom.
Unfortunately for Telkom the bad news is that these are the basic characteristics of a competitive market, and that it is far from over as they will soon have to face even more pricing pressure on most of their products.
Neotel has said that they will be able to provide more affordable international bandwidth to South Africa through SEACOM, an undersea cable system that will be operational in 2009. This will effectively break Telkom’s monopoly that they had through their shareholding in SAT-3 which is currently South Africa’s main source of international bandwidth.
The incumbent’s stranglehold on international fiber bandwidth has long been a very lucrative part of Telkom’s business, but with more competition and another cable system looming these margins have already come under fire.
Uphill battle
One of the major problems for Telkom is the negative perception in the market towards the company and its inability to adapt to a fast changing environment. By shielding Telkom from competition Government has created a near impotent company which is struggling to reinvent itself as a modern telecoms player.
Globally, incumbent operators are facing a similar challenge of diversifying admist declining voice revenues. The ones that are up for the challenge have successfully reinvented themselves as strong content and service providers.
Another big problem for Telkom is their terrible reputation both in industry and with consumers. Their inability to deliver services and failed customer care efforts leave much to be desired.
A recent Ask Africa Orange Index survey placed Telkom stone last – by a massive margin – for customer service and satisfaction in the telecoms space.
A big part of the problem is that Telkom’s answer to a challenge is often to send in their lawyers to fight off competition and change. The company would be well advised to save the money they fork out on legal expenses and hire more staff to serve subscribers and clients better.
More competition
Telkom’s failure to perform in a market that was practically handed to them on a silver platter by the DoC has spurred their clients like Vodacom and MTN to start developing their own fixed line infrastructure. Both cellular operators have gone on record as saying that Telkom’s high prices and poor service delivery left them little choice but to invest in their own fixed line infrastructure.
Telkom has effectively dealt itself a double whammy because they will not only lose that revenue but they now have to face more competition in the fixed line sector.
Furthermore, Sentech was recently awarded R 500-Million from Government for its wireless broadband rollout, and iBurst is aggressively increasing its service offerings in both the broadband and voice markets.
Telkom may also face stiff competition from Internet Service Providers like Internet Solutions, Verizon Business and Vox Telecom who may be awarded exactly the same license. There are talks that as many as fifteen players could be given exactly the same rights as Telkom in the next year.
This all seems like doom and gloom for the fixed line incumbent, but Telkom still has a very tight grip on the ADSL market as it is unlikely that local loop unbundling will happen any time soon.
Its newly licensed subsidiary Telkom Media looks well positioned to become the country’s second largest pay-TV operator, and this may give the company a much needed new revenue stream.
This discussion may however prove to be futile if MTN sees value in buying Telkom.
The talk that Vodafone may list Vodacom on the JSE as it increases its stake in the mobile operator means that MTN may just be able to snatch up Telkom’s fixed line assets to create a new African telecoms champion.
So Telkom as we know it may not exist for too much longer.
If MTN however does not buy Telkom, they will have to figure out a way to survive and a change in strategy would be well advised to ensure that they are able to come to terms with a competitive telecoms environment.
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