Neotel: What went wrong?
This is undoubtedly the most noticeable school fees that the new fixed-line operator Neotel is paying.
Never mind the brave face that the shareholders and management are keeping, it’s been very hard for Neotel.
Financial losses widened in the 12 months through March 2010 to R1.15bn from R739.5m a year earlier prompting the company’s auditors to warn that recurring losses and a shareholders’ deficit raised substantial doubt about it continuing as a going concern.
This is really hard.
But what went wrong?
There are a couple of factual reasons why Neotel is caught up in this continuing spiral of problems.
Firstly, believe it or not, it is its main competitor Telkom.
Telkom may not be a well run competitor, but it ensured Neotel must be squeezed out of the lucrative long-term commercial contracts, which is where the money is.
You see, as a strategic business imperative, Telkom went on a drive, locking businesses into long-term fixed line contracts with reasonable discounts on the conclusion of these deals. So, when Neotel went to market, long-term contracts of up to five years had already been entered with Telkom. In short, Neotel had to either scrape the bottom of the barrel or shun commercial contracts completely.
This then forced Neotel into a very sensitive, sulky segment of the market, the high density big city domestic alternative.
The house-hold segment is very cost sensitive. If the head of the family or bread-winner decides the bill is too high, the decision is made there and then to curtail the contract. On the contrary, businesses do not often behave like that. Even if a decision like that is to be made, it takes a little longer.
As they say, timing is everything. It was a matter of bad timing for Neotel. The operator came into the industry when there was a huge exodus from fixed-line to cellular telephony. So the timing was bad. No one can dispute that. Not even Neotel.
People, especially in the domestic market, use cellphones nowadays. It has become more than just a convenience. It is a way of life. It is about which hand cell unit you have. What gizmos it has. Executives walk into board-rooms with more than one cellphone in both hands. This is evidenced by the phenomenal growth cellular operators like Vodacom and MTN have experienced in the past years.
Secondly, I stand corrected here. But I think Neotel has had problems with access to capital.
I know Neotel’s board of directors recently made a pronouncement it was “satisfied that the company has access to adequate resources to stay in business for the foreseeable future”.
Frankly, I think that’s being dishonest.
Neotel came into operation at about the same time as the beginning of the financial crisis. So, money was scarce. Companies with excellent business cases could not find money to borrow.
This was evidenced by the company’s announcement last year when it confessed to its workforce that some of the employees may face retrenchments.
The telecoms business is capital intensive. It’s easy to fall by the way side if you do not have deep pockets.
This business can also be a game of “patience”. In other words, you pour in the money and you wait. This is because once you are in, you are in. Look at Telkom, a very badly run entity. It has written off some R8bn in the past couple of years due to financial losses in Multilinks and yet it’s managed to pay out billions in dividends in the past two years.
Yes, it can be a game of patience.
Look at Cell C. It has been operating for some ten years, but it’s only just breaking even now.
So, once you are entrenched it is difficult to dislodge you.
So, what does Neotel do now?
Neotel may plainly have to buy customers. Get in there and offer hugely unprecedented discounts. Buy, buy, your customers and offer service quality unseen in the market.
But remember, it is a game of patience.
Source: Moneyweb
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