Yes, it has improved its free cash flow significantly in the past year, it’s keeping costs under control, it’s reorganised its debt, and its data strategy in South Africa is beginning to show promise. But there’s very little room for another multi billion-rand error like Multi-Links.<\/p>\n
No one at Telkom will really admit that the purchase of Multi-Links in Nigeria was a mistake. At the time, it might be argued, Telkom couldn’t afford not to be in Nigeria. Hindsight, after all, is an exact science.<\/p>\n
The most, departing, CEO Reuben September would say at the company’s results presentation is that CDMA is “fundamentally a good technology”; he admitted that the lack of scale meant that the CDMA market in Nigeria is in trouble.<\/p>\n
Beyond Nigeria, September and the executive team are now being criticised for the R6bn five-year plan to enter the mobile space.<\/p>\n
“Is there space for a fourth operator?” is the common criticism, and “What does Telkom know about mobile?”<\/p>\n
See, there are no more rolls of the dice left.<\/p>\n
Telkom has to enter the mobile space, or risk a decade or so of literally winding down its legacy business.<\/p>\n
In fact, Telkom should’ve entered the mobile space properly a few years ago – but for that pesky Vodacom shareholding. It was a bitter sweet curse. The 50% shareholding in the country’s biggest (and most profitable) operator meant a juicy dividend every year. This was not unlike Avusa’s (now “unbundled”) shareholding in MultiChoice. Sit back and count the money… unless of course, you want to compete in that space.<\/p>\n
Why might Telkom succeed in the mobile space?<\/p>\n
The building blocks are there. It has a core network… a massive network of fibre crisscrossing the country (a network that Vodacom and MTN could only dream of). This core network already carries tremendous amounts of data and voice traffic. Layering a mobile network on top of that will be inexpensive and relatively simple.<\/p>\n
Pinky Moholi, MD of Telkom South Africa admits that when submitting certain rollout plans for internal approval, the business was asked if it was “not spending too little”.<\/p>\n
Telkom is busy deploying 2 000 base stations in the first year of operation. By contrast MTN rolled out 496 2G and 659 3G towers in 2009. Vodacom added 462 3G base stations in the year to March 2010.<\/p>\n
It’s not quite as simple as plug and play, but the core exists (the biggest amount of work and most expensive part of building out a network). Telkom’s also being smart and co-locating with existing operators, presumably MTN. This means it will use existing locations where it makes sense. There are two benefits. Firstly, it doesn’t need to go through the laborious environmental approval process for base stations. Secondly, many of these existing towers have fibre (linking them to the other operators), and Telkom will be able to leverage these installed connections.<\/p>\n
It’s been smart too in signing a national roaming agreement with MTN. This gives Telkom massive coverage from day one. You can be sure that MTN wanted the extra revenue, and that Telkom drove a hard bargain. Some analysts wondered why Telkom hadn’t partnered with its former “step-child” Vodacom, but you can be certain this decision was almost entirely driven by price.<\/p>\n
September said at the company’s results presentation on Monday that Telkom also benefited from the timing of this rollout. Not only were equipment makers ready to do deals at massive discounts (due to the global economic slowdown), but the strong rand also favoured the group.<\/p>\n
What else costs money when rolling out a network?<\/p>\n
Billing system? Check. Call centres? Check. Marketing? Check. Prepaid airtime channel? Check. Telkom is already an operator!<\/p>\n
This is simply another way of accessing its network.<\/p>\n
Where Telkom says it will compete is in providing “differentiated services”. At the start, it will focus on “simplicity, quality and value”.<\/p>\n
The market has evolved significantly over the past decade and Telkom is in a position to offer hybrid (2G and 3G) voice and data services. Their mobile strategy isn’t reliant on a legacy mobile voice business.<\/p>\n
Its roaming agreement with MTN is interesting in that it covers voice, MMS, USSD (the *120*-type services), 2G data as well as 3G. This is a massive departure from Cell C’s agreement with Vodacom, which excludes 3G roaming.<\/p>\n
So Telkom is able to offer nationwide 3G data services from day one, another advantage. If it were to build a network from scratch without a roaming deal, the business case would be sheer lunacy.<\/p>\n
Here’s another indication of how Telkom wants to shake up the market: it’s planning to offer 12 month rollover for unutilised minutes. This is big, and Vodacom and MTN will have to adjust their business models to be able to match that.<\/p>\n
It’s going to be shrewd and offer hybrid fixed and mobile services on the same bill. This will be a big attraction to many consumers.<\/p>\n
Telkom also has the reach and the customer base to leverage. It has 134 stores nationwide, actual physical locations that customers visit.<\/p>\n
It has over 3m customers that have fixed phone lines (postpaid and prepaid – excluding ISDN services). Surely it will be able to convert a decent chunk of those?<\/p>\n
If it offers real value, which it is threatening to do, we’ll see some interesting switching between operators in the next few years.<\/p>\n
And, don’t be surprised if Telkom secures a few big contracts with enterprise customers. It’s going to be in a position to offer Telkom Business clients a single contract and bill for hundreds (or even thousands of users) across many branches. No more separate company cellphone contracts.<\/p>\n
September says Telkom is targeting a minimum of 10% of the mobile market in the next three to five years. Obviously a statement like that is being driven by the business case.<\/p>\n
My bet is that it will surpass that target.<\/p>\n