Neotel: The contender
Driving along the N1 north of Johannesburg, near the Buccleuch interchange with the N3 and the M1, it’s hard to miss the large, orange Neotel sign on an otherwise nondescript office block next to the highway. It marks the new national headquarters of SA’s second fixed-line network operator.
It’s also hard to miss the giant Telkom advertising boarding right alongside the company’s new offices. Neotel says Telkom rented the billboard before it chose the site of its head office and that the ad’s location is purely coincidental. But the ad, offering cheaper telephony for consumers, surely serves as a daily reminder to Neotel executives of the challenges they will face in competing with the entrenched fixed-line operator.
Neotel’s MD, Indian national Ajay Pandey, says the company is up to the challenge but concedes it will have to be smart in winning over consumers and building a profitable alternative to Telkom. "Telkom has a great network and great people and I must confess that the offerings we have in the market so far are because of support we’ve received from them."
Neotel’s entry into the SA market has been muted. It is already providing wholesale bandwidth to Internet service providers. Business services will be launched this month and consumer offerings, using wireless access technologies, should follow in two months.
Telkom and its monopoly prices have angered South African for years. Neotel, many hope, will finally bring down telecom prices, especially in broadband Internet access, and raise service standards. Government and business are hoping that Neotel will make it cheaper to do business in SA and help attract foreign investors to set up call centres and other outsourced services.
Pandey is confident that Neotel can carve a strong niche for itself in the telecom landscape and win market share from the incumbent operator. He hopes to have a 15% share of fixed-line revenues in SA. But he wants to do this without triggering a price war with Telkom. Neotel will offer consumers greater flexibility, such as freedom from long-term contracts, he says. It will also introduce simpler products that are easier to understand and promises to provide better customer service.
To do that, Neotel is building two broad networks. The first is a core network, consisting of fibre-optic cables running through the major towns and cities.
Neotel’s access network – the important bit that will link consumers to its core network – will be a mix of wired and wireless technologies. It will provide fibre access in major business centres, such as the Johannesburg, Sandton, Pretoria, Durban and Cape Town central business districts.
Its consumer-focused network, linked to the main network wirelessly, will initially be built in Johannesburg, Pretoria, Durban, Cape Town, Port Elizabeth, East London, Bloemfontein, Nelspruit, Witbank and other key towns. Those in more outlying areas will have to wait a few years for Neotel’s wireless services.
Attracting customers, though, will be difficult, given that Neotel is not keen to start a price war. And consumers need a real reason to switch. Experience in other markets shows that consumer apathy is one of the biggest enemies of second network operators.
Neotel will compete with Telkom on price, Pandey insists, but that will not be the company’s sole value proposition. He says residential subscribers will have access to a 24-hour call centre and won’t have to wait to have a service installed. He also promises that in broadband, where prices are particularly high, Neotel will not "shy away from taking whatever steps are necessary" to win market share.
"People are waiting six months for ADSL [Telkom’s fixed-line broadband] or for a phone line. I can’t have a phone when I want one. People can’t access call centres after 5 pm or 6 pm. Some of these things are obvious for me [to fix]. The incumbent will respond, for sure, but… all incumbents have grown when the market has been opened up."
Still, the mere presence of another operator in the market is likely to exert downward pressure on prices.
Pandey is resigned to the fact that the company won’t make much money carrying voice traffic on its network. In markets in Europe, Asia and North America, voice has become a commodity. In some jurisdictions, voice telephony is free or so cheap it may as well be.
"Prices need to be rationalised in SA," Pandey says. "Neotel will play a role, but whether it will be an aggressive or a subdued role will be decided closer to the launch."
Neotel sees more value in offering broadband services and bundled voice and data products. He hints at providing products where voice is little more than a value-add to the service.
Pandey won’t say how many customers Neotel hopes to sign up. He says the company will have a better idea once it has completed a pilot in Gauteng where it is constructing a network of base stations using a wireless technology called CDMA2000. The pilot will kick off in a month and will involve about 20 base stations.
The level of demand will determine how aggressively it builds its wireless access network, he says.
Neotel will begin by offering Internet access and other data solutions. It will also sign up voice customers, though that will not be the main focus. It will start by targeting mid- to upper-income households. There won’t be any big advertising campaigns, at least not until a commercial product is available later this year for what Pandey calls the "retail masses".
Neotel is also hoping for regulatory intervention soon to help it bring down prices. It wants access to Telkom’s so-called "last mile" of copper cables that link consumers to the incumbent operator’s core network. Government has already said it will unbundle the local loop – as this access network is known – but progress has been slow. Pravir Dahiya, Neotel’s head of networks, says the company is not counting on local-loop unbundling, but should it happen it would be beneficial to both it and consumers. It would allow the company to provide ADSL and other fixed-line services without incurring the expense of building a duplicate fixed-line network. "If it happens, it will be great news," Dahiya says.
A factor counting against Neotel is the time it has taken to get the operator off the ground. Telkom has been able to use the delays to entrench its position in the market and sign multi year agreements with the country’s biggest companies.
Pandey is critical of government and its approach to the liberalisation of the SA telecom industry. "Frankly, government does sometimes send mixed signals," Pandey says. "You don’t do telecom privatisation and liberalisation in a half-hearted fashion. You have to go the whole hog. The approach has to change."
Neotel was supposed to have been licensed in 2002, when Telkom’s statutory monopoly ended. The problems began when government failed to attract serious international bidders for the 51% strategic equity stake in the proposed company. The two bidders that did come forward failed to show they had the financial clout necessary to take on Telkom and were both rejected by the Independent Communications Authority of SA, which regulates the sector.
Government let the process drag on for almost two years and Telkom took advantage by hiking its rates. Then, in 2005, India’s Tata Group emer
ged as government’s white knight, agreeing to take an effective 26% stake in a restructured company. Tata has the right to appoint the MD and the chief financial officer and has effective management control through SepCo, a pyramid structure through which it can control Neotel. The other shares in SepCo are held by the two losing bidders, CommuniTel and Two Consortium.
Pandey says that though there was enormous friction in the past between the shareholders, mainly CommuniTel, Two Consortium and Nexus, all parties are now working well together. "We would not have moved as far as we have if it wasn’t for the support of our shareholders. The approach is that we are in it together, let’s move together if we can."
He concedes that a diverse shareholding "brings diverse viewpoints" but that once progress was visible, everyone supported it. "From the time we got our identity out in August [2006], we haven’t looked back."
Pandey says getting the shareholders to agree to the company’s roadmap was the first challenge. Other challenges have included acquiring staff in key technical areas; ensuring that funding for the business was in place; and putting a core network in place.
He says the next hurdle is getting cheap access to international bandwidth. Here, it is pursuing a number of options. The first involves using the Sat-3 submarine cable that links SA with Europe. Telkom has exclusive access to the Sat-3 landing station but that should change soon with new regulations on the cards that would declare the station an essential facility.
In the longer term, Neotel is considering investing in two new submarine cables that would run along Africa’s east coast. Construction of the first, the East Africa Submarine System, or Eassy, is expected to start soon. The second cable system, known as Seacom, is backed by US private equity group Blackstone.
"One of the key things for the company in the next 100 days is establishing an anchor point on international capacity," Pandey says.
Neotel now has 130 staff and will take on another 560 people as part of its planned acquisition of the telecom assets of Transnet’s Transtel business. Interconnection agreements are in place with all the major shareholders and mobile operators MTN, Vodacom and Cell C have signed on as customers.
"We are sitting on quite a few letters of intent from some of the bigger corporate names and will begin to announce some of these wins in the next few weeks," Pandey says. "You will see for yourself that we are not talking small numbers."
The corporate market, Pandey says, is "happy" to see an alternative to Telkom. He admits, however, that many companies have signed long-term, multi year supply agreements with Telkom which will slow Neotel’s ability to win corporate business. Most of SA’s top 100 companies have some sort of long-term agreement with Telkom. But even these companies, he says, will start nibbling at Neotel services even if they can’t move their main business across immediately.
As pressure grows worldwide on voice tariffs, telecom operators such as Germany’s Deutsche Telekom and the UK’s BT Group (formerly British Telecom) have come to rely on IT services as a way of growing revenues and profits. BT operates BT Global Services and Deutsche Telekom owns T-Systems, both large IT services companies that compete with traditional IT companies such as IBM.
Pandey says it’s a logical path for Neotel to follow as IT can no longer be dissociated from telecoms.
First, though, he says, Neotel must build a national infrastructure network. It will take 18-24 months to have this network in place and it’s likely that only then will the company begin building IT capacity, either organically or through acquisition.
Neotel is not interested in buying state-owned IT services company Arivia.kom, which is being privatised, but if other opportunities came along, the company would investigate them, Pandey says.
Loading ...