Telkom’s nightmare
Papi Molotsane has a big problem on his hands. The Telkom CEO needs to look lively if he wants to avoid SA’s mobile operators eating his company’s lunch in the broadband market.
MTN and Vodacom have unleashed a price war in wireless Internet access. Less than a month after MTN slashed its broadband prices, Vodacom has responded by cutting its data prices by as much as 61%.
It’s ironic, but indicative of a distorted market, that it is cheaper in SA to access the Internet on cellphone networks than using fixed lines. I doubt there’s another country in the world where this is the case. Telkom’s broadband prices remain out of kilter with international norms.
With exciting new cellular data technologies on the horizon that will deliver the sort of latency (network response times) and speeds typical of fixed-line broadband, Telkom could quickly find itself marginalized in the fast-growing broadband market.
The question is whether Telkom understands the scale of the threat it is facing. Its voice business is in decline and has been for years. Consumers prefer the convenience of cellphones, even though mobile operators charge more for voice calls.
Now the company’s data services, which are the fastest growing part of its business, are under real threat for the first time. Yet, according to Reuters, Telkom executives told financial analysts last week that the days of “drastic” price reductions in broadband were over.
That may be what the analysts want to hear but the company can’t continue to prosper if it keeps its prices high in an increasingly competitive marketplace.Telkom says delays by second network operator Neotel in launching consumer services are playing in its favour.
It also says the slow rate at which its regulator is breaking its stranglehold on the market is giving it time to entrench its position. It expects to lose only 10% market share in fixed lines to Neotel in the next three to five years.
That may be true, especially in the corporate market where fixed lines are still the only practical option (for now). But it belies the fact that Telkom could lose significant market share to mobile and other wireless operators in the home and small business markets.
And mobile technology just keeps getting better, making it a practical alternative to fixed lines. Future cellular technologies, especially 3G LTE, promise to reduce latency to the levels that DSL users enjoy.
Then there’s WiMax, a broadband wireless technology that competes with the cellular 3G standard. Telkom already has a WiMax licence but bigger Internet service providers hope to receive the go-ahead soon to build WiMax networks of their own, bypassing Telkom’s access network.
With Telkom’s monopoly over access to the Sat-3 submarine cable soon to end, and the launch next year of a new cable system along Africa’s east coast, these service providers will soon become much less reliant on Telkom for bandwidth.
For many years, thanks to the influence of former shareholders SBC of the US and Telekom Malaysia, Telkom has underspent on infrastructure and engaged in price-gouging to boost its bottom line. Shareholders have been rewarded with huge dividends and a surging share price.
But if Telkom wants to retain its market share and grow its business in the long term, its profits may have to take a hit in the next few years as it invests in technologies that will keep customers sweet and competitors at bay. It will also have to invest in improving its customer service. And it will have to cut its prices dramatically.
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