Cybersmart founder Laurie Fialkov warned that Telkom CEO Sipho Maseko’s recent comments about Internet service providers (ISPs) reveal a challenging future for the industry.
Responding to questions about Telkom Internet’s all-access subscriber decline, Maseko told Business Day TV that an ISP is a relic of the past.
He said the Telkom’s Internet service provider business is irrelevant, as people do not need an ISP to connect to the Internet.
“The way people consume the Internet now is no longer through an ISP,” Maseko said. “Once they get Wi-Fi connectivity, they don’t need an ISP,” said Maseko.
“But now you are able to break out into the Internet using fibre or LTE, or even on your smartphone. You don’t need an ISP to get into the Internet today.”
The hidden message in Maseko’s comments
While many commentators criticized Maseko’s comments as misguided and uninformed, Fialkov said the Telkom CEO’s view should be taken seriously.
He said Maseko has good insight into the direction the South African broadband market is moving and the technologies which are driving change in the industry.
By focusing on some of the technically questionable statements by Maseko, Fialkov said people are missing the hidden and scary underlying message for ISPs.
What Maseko is actually telling the market, Fialkov said, is: “Telkom’s strategy is to go direct to the end-user, and we are not giving up margin to the middleman [ISPs].”
Fialkov said Maseko could not make this statement as it would “completely alienate” the current Openserve client base.
He said the seemingly “stupid comment” that ISPs are a “relic of the past” makes the “margin squeeze that Telkom is imposing on its ISP customers a function of the market conditions and not a business strategy, which it clearly is”.
The tough future for ISPs in South Africa
Fialkov said ISPs whose business models rely solely on reselling products using other companies’ networks are facing a challenging future.
This, he said, is because the margin for selling white-labelled services from another operator will deteriorate over time.
Companies which used to be “pure wholesalers”, like Seacom, DFA, Telkom and Liquid Telecom, are now targeting end-users directly with their own retail offerings.
This happens because the margin on wholesale products has declined to a level which makes it difficult to include an ISP in the sales channel.
This margin squeeze will increasingly affect the traditional ISP business model, especially in an environment of falling prices.
“As an ISP which is only reselling another operator’s products your main differentiator is price. This creates a race to the bottom with very slim margins,” Fialkov explained.
Industry players aware of this situation
Fialkov said this changing environment is why a successful ISP like Webafrica is trying to sell the business to a larger player in the market.
It is, however, difficult for a potential buyer to spend too much on acquiring a large ISP like Webafrica because margins are likely to deteriorate.
“Current gross profit margins are not going to be sustainable in future – any company with experience in this market knows this,” said Fialkov.
He said even Internet Solutions (IS), which was the previous “golden boy” of the South African telecommunications market, is feeling the squeeze.
“IS now has to compete with its wholesale supplier Seacom for exactly the same clients as a ‘preferred infrastructure provider’,” Fialkov explained.
Seacom, which owns the infrastructure, has a big advantage over its resellers as it does not rely on only one portion of the service to make money.
He said it is nearly impossible for an IS salesperson to compete against a Seacom salesman who says, “you can buy directly from us without IS’s markup – it is the same service after all”.
Telkom is preparing for a battle with ISPs
Fialkov said, just like with IS and Seacom, Telkom is going directly to the market with its own ISP offerings and is therefore competing against its own resellers.
He said Telkom can undercut other ISPs, and because there is no real differentiator other than price it is difficult for ISPs to compete.
“Assuming Sipho Maseko can fix Telkom’s customer care, ISPs are facing a tough future,” said Fialkov.
“The Telkom CEO is not an idiot. He has an agenda which is the death knell for ISP resellers in South Africa”.
No comment from Telkom
Telkom was asked for comment regarding Maseko’s statements, but the company did not respond by the time of publication.