The Telkom story – From a dominant monopoly to begging for help

Two decades ago, Telkom was untouchable. It had a legally protected fixed-line monopoly, it owned half of the country’s largest mobile operator, and it was printing money.

Fast forward twenty years and things have changed. Dramatically. It is rapidly losing fixed broadband market share and it is struggling to compete in a saturated mobile market.

The company is finding itself in such a challenging financial position that it is retrenching thousands of workers to cut costs.

Investors are also losing confidence in Telkom’s ability to grow in the new converged telecoms market – the company’s share price plummeted from nearly R100 to under R30 in 6 months.

To understand how Telkom went from a completely dominant position to asking for regulatory intervention to help it to compete, one has to go back to the nineties.

The golden years

At the turn of the century, Telkom was sitting pretty. It was enjoying a legally protected monopoly, and with the government as its biggest shareholder, it was not going to change anytime soon.

If you wanted a telephone line, an Internet connection, or a data service there was only one choice – Telkom.

This dominant position gave it a perfect opportunity to maximize shareholder value by listing on the JSE in 2003.

As a monopoly, Telkom quickly became a darling among investors. The share price climbed from the listing price of R28.00 to R169.00 per share in less than three years.

With a 50% shareholding in Vodacom and the freedom to keep telecoms prices sky-high thanks to its monopoly, it was a situation which all companies dream about. These were Telkom’s golden years.

Competition is introduced

Telkom’s world started to change in 2005 when the Second National Operator (which became Neotel) was finally licensed by the government.

Neotel launched its business services on 15 November 2007, but an even bigger blow to Telkom’s monopoly was around the corner.

In August 2008 the High Court ruled that existing value-added network services (Vans) licences can be converted to individual electronic communications network service (I-ECNS) licences.

This means that all ISPs and other VANS license holders were now allowed to build and operate their own networks. This was the death knell of Telkom’s fixed-line monopoly.

Losing out on Vodacom

Vodacom was incorporated in South Africa in 1993 as a joint venture between Telkom (50%), Vodafone (35%) and VenFin (15%).

Vodacom became the dominant mobile operator in South Africa with 12.8 million subscribers and a net profit of R3.9 billion in 2005. It was a cash cow for Telkom.

When Venfin wanted to sell its 15% stake in Vodacom presented Telkom with the perfect opportunity to become the majority shareholder in the mobile operator.

Telkom foolishly let this opportunity slip through its fingers, and Vodafone purchased Venfin’s stake for R16 billion to give it a 50% share of Vodacom.

Three years later, Telkom completely exited its Vodacom shareholding by selling a 15% stake to Vodafone for R22.5-billion and distribute the remaining 35% to its shareholders through Vodacom’s JSE listing.

This was a tremendous blunder. Vodacom is now the most powerful telecoms company in South Africa while Telkom is struggling to make inroads into the mobile market.

Competition makes it difficult for Telkom

After the 2008 High Court ruling, Telkom started to face increasing competition from big and small players alike.

Mobile operators, for example, started to roll out fibre to their own base stations which removed a big revenue stream for Telkom.

Smaller companies also erected their own wireless networks to limit their reliance on Telkom and save money on Internet access and voice calls.

Another big blow came in July 2009, when Seacom launched services in South Africa, offering an affordable alternative to Telkom’s SAT-3/SAFE undersea cable monopoly.

Bit by bit, Telkom’s monopoly was eroding, and the company struggled to adapt to a fast-evolving and increasingly competitive market.

Telkom losing out in the fibre market

Telkom still had one big competitive advantage in the South African telecommunications market – its extensive fibre and fixed-line network.

Telkom had millions of lines going into South African homes and business, with around 1 million ADSL subscribers.

Through its existing infrastructure, Telkom had the opportunity to roll out fibre fast and affordably to homes and businesses across South Africa.

Unlike other fibre network operators, it did not have to trench, build new points-of-presence, and struggle to get into people’s houses. Its infrastructure was already there.

However, through inactivity and trying to protect its legacy revenue streams, it lost out to other fibre network operators in the most spectacular fashion.

Vumatel pioneered fibre-to-the-home in South Africa and launched its first services in Parkhurst in October 2014, two months ahead of Telkom.

Since then many other players joined the fibre revolution. These include Frogfoot, Octotel, Cybersmart, Vodacom, MTN, and SADV.

Initially Telkom, through Openserve, had a strong position in the fibre-to-the-home and fibre-to-the-business market.

This started to change, and Vumatel recently overtook Telkom in the number of homes passed and number of subscribers.

Other fibre network operators, like Frogfoot and Vumatel, are also rapidly growing their networks through large investments.

Telkom, in comparison, has all but given up on the fibre market. Telkom has cut its capital expenditure for its fibre network by 36.3% over the last year.

Telkom has also cut the share which FTTH gets and is now pushing most of its money into fibre-to-the-base-station (FTTbs) to support its mobile ambitions.

Struggling mobile player

Instead of defending its dominant position in the fixed-broadband market by investing heavily in fibre, Telkom focused its resources into becoming a mobile operator.

Telkom is therefore giving up its bread-and-butter business, where it has a huge competitive advantage, to chase success in a saturated mobile market dominated by Vodacom and MTN.

Telkom is finding it tough. It still has the monopolistic mindset from its golden years where the regulator and the government protected it from competition and smoothed its path.

It is therefore not surprising that Telkom is once again turning to the regulator to give it a competitive advantage.

Telkom is bemoaning the fact that Vodacom and MTN have a competitive advantage and is blaming them for its own struggles.

The company is quick to forget that it helped to create the regulations which benefitted Vodacom and MTN, and that it made tens of billions from Vodacom’s dominance.

Telkom is also quick to forget that it enjoyed the biggest regulatory benefit in the history of South African telecoms.

What Telkom is now facing in the mobile market is what a myriad of companies have faced trying to compete against it in the fixed-line market. And it is not easy.

While it is never good to see a once-powerful company struggling, retrenching staff, and begging for help, they were warned about this for years.

Their customers and partners have told them to change and become more customer-centric for years.

This has, however, not happened. It has never really changed its monopolistic ways and is now paying the price.

Many people, me included, are rooting for Telkom in the hope that it will continue to invest in its fibre network.

Telkom is well-known for having an excellent network and offering high-quality broadband products to the market.

It still sets the benchmark in many respects and it has the potential to have a massive impact on improving broadband access in South Africa.

This is an opinion piece.

Now read: We must cut jobs to save the company – Telkom

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The Telkom story – From a dominant monopoly to begging for help