No terrors for Telkom
Denis Smit, MD of market analyst firm BMI-TechKnowledge, says 10% is a fair estimate but points out that, as prices come down because of competition, the overall market will grow at the same time. So, while it may lose market share, Telkom could actually grow its business. Smit says he expects Telkom to "compete like hell" with Neotel. "People often underestimate Telkom," he says.
Neotel, too, is run by what Smit calls an "exceptionally talented management team", many of whom have spent years sharpening their skills in the competitive Indian telecommunications market. "Neotel will do very well. They’re a smart outfit and know not to over promise and under deliver."
Smit says that though Neotel has barely started operating, it has already had a big impact on pricing in SA, with other operators slashing their broadband prices and introducing new, better-priced product bundles.
Telkom’s most recent annual report says it has identified short-term initiatives to defend and extend core profit generators in the face of this new competition.
Telkom, the report says, is "de-emphasising those revenue lines that are most vulnerable to competition". That means it is downplaying voice revenues, which are already being challenged by intermediaries such as voice over Internet Protocol providers. Instead, Telkom’s strategy is to introduce annuity-based product bundles as a key feature of the drive to defend voice revenues. That means bundling broadband and voice and tying consumers into contracts.
But the company also warns that increased competition could result in a reduction in overall average tariffs and an increase in costs. That could cause growth rates, operating revenue and net profit to come under pressure. It is also vulnerable to churn – consumers switching from one provider to the other.
However, the biggest risk to Telkom may not come from Neotel but rather its biggest shareholder, the state. Government has made threatening noises to Telkom in recent months. In a recent interview with the FM, communications department director-general Lyndall Shope-Mafole warned that Telkom had to think beyond the profit motive. She said that if investors didn’t like that, they could "always sell their shares, frankly".
Telkom warns in its annual report that government could use its position as policymaker and shareholder in a manner that is favourable to its competitors and unfavourable to it.
Of course, Telkom is using its entrenched position to expand into new business areas.
It has made a R2,4bn cash offer to buy IT group Business Connexion, though that deal may be blocked by the competition authorities.
It is also getting into the pay-TV business with Telkom Media, a joint venture with Anant Singh’s Videovision Entertainment, that will provide subscription television over satellite and telephone lines. Telkom Media will spend as much as R7,5bn building an alternative to MultiChoice’s DStv.
In addition, the jewel in Telkom’s crown, its 50% share of Vodacom, will be relatively unaffected by Neotel. Neotel will compete for wireless broadband, but this has never been a major revenue generator anyway. Analysts have often said that Telkom’s 50% stake in Vodacom accounts for most of the fixed-line operator’s market capitalisation.
Telkom’s investors, who have seen the value of their investment increase sixfold since it listed in 2002, do not need to panic. Neotel has a long way to go before it poses a threat to Telkom’s core revenues.
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