{"id":546838,"date":"2005-09-21T16:24:09","date_gmt":"2005-09-21T16:24:09","guid":{"rendered":"http:\/\/localhost:8888\/wordpress\/technology\/546838-summer-sno.html"},"modified":"2005-09-21T16:24:09","modified_gmt":"2005-09-21T16:24:09","slug":"summer-sno","status":"publish","type":"post","link":"https:\/\/mybroadband.co.za\/news\/technology\/546838-summer-sno.html","title":{"rendered":"SUMMER SNO"},"content":{"rendered":"

The two are unlikely to find much time for shared levity in the next few years. Molotsane was installed this month as CEO of Telkom, taking the reins from Sizwe Nxasana, who has been appointed to lead FirstRand Bank. Molotsane’s task? Ensure that Telkom continues the company’s strong earnings growth while keeping competitors, especially the second network operator (SNO), at bay.<\/font> <\/p>\n

And that means keeping the other man in the photograph, Socikwa, squarely in his sights. As CEO of Transtel, Socikwa has been appointed to represent parent company Transnet on the SNO’s interim board. Socikwa was chairman of the SNO’s steering committee, which has been disbanded, and has been the official voice of SNO shareholders for some months. Though he denies it, he is expected to play an important executive role – perhaps even as CEO – at the first company to be licensed as an alternative provider of fixed telephone lines to Telkom .<\/font> <\/p>\n

Consumers will be hoping the two men’s smiles will be wiped away, that they will become mortal adversaries, and that as a result SA’s fixed-line telecommunications prices, among the highest in the world, will fall sharply. They may be hoping for too much.<\/font> <\/p>\n

The SNO, which should have begun operating more than three years ago when Telkom lost its statutory monopoly, is often held out by consumers and businesses as the great hope for bringing down SA’s high telecom prices and improving poor service levels in the industry.<\/font> <\/p>\n

Because of frustration with high telecom prices, the question on everyone’s lips is: when will we be able to apply for a telephone line from the new entrant, or get a broadband connection without having to contract with Telkom? The average Joe shouldn’t hold his breath in anticipation. Wholesale customers, such as Internet service providers, will be among the first to be served, simply because the SNO’s backbone infrastructure they need access to has largely been built.<\/font> <\/p>\n

"Providing a service to my mother in the rural Eastern Cape will take a little longer," Socikwa admits. But, he promises: "We have to provide infrastructure-based competition throughout the country and we will deliver to all customer segments. Some customers we will be able to reach quicker than others. It’s not that we are targeting wholesale and corporate first, it’s just that their requirements are easier to fulfil."<\/font> <\/p>\n

That the SNO will first serve business customers, especially those with high-margin services needs and those located along the routes of its fibre backbone, is inevitable, says Bill Hahn, principal analyst at global research and consulting firm Gartner. The business data services market, especially broadband, will become much more competitive because of this early focus. But, he says, experience in other countries suggests that consumers are "unlikely to benefit much from this directly and it may even be that voice prices won’t change much simply from having a new entrant".<\/font> <\/p>\n

Comments by Socikwa would seem to bear out this worry. Though he believes it’s inevitable that costs will come down because "that is the natural consequence of competition", Socikwa demurs when asked if the SNO would engage in a price war with Telkom.<\/font> <\/p>\n

"I don’t believe the SNO would be well advised to get into a price war. Issues around price will come up, especially in the early stages but, certainly from initial shareholder discussions, the approach will be to try to avoid any situation where there is a price war. We’d rather focus on service," he says.<\/font> <\/p>\n

Other countries that have undergone a "managed liberalisation" of their telecom industries have had similar experiences: though a second operator does help in bringing down bandwidth costs, meaningful price competition and product innovation follow only when laws and regulations are created that allow smaller companies, such as Internet service providers, to compete effectively with their larger, infrastructure-based rivals.<\/font> <\/p>\n

SA could do worse than to draw on the lessons learnt by Australia, which has followed a similar liberalisation path. It licensed its SNO, Optus, in 1991. Six years later the country opened its market to full network competition. Despite this, telecom prices in Australia are significantly higher than the average in OECD countries. Frustrated, the Australian government announced last month it would break up Telstra, the monopoly operator which still dominates the market 14 years after the introduction of competition, into separate wholesale and retail arms. The Australian government will also sell its 51,8% stake in the business.<\/font> <\/p>\n

Given the Australian example, it’s not surprising that cynics argue that the SNO will not provide meaningful price competition to Telkom. One only has to look at the cellular industry, where, despite there being three competitors, tariffs have remained stubbornly high. Cynics argue that there’s an unspoken cartel in the cellphone industry, so we should expect one in fixed lines, too.<\/font> <\/p>\n

Hard-pressed consumers won’t be the only ones disappointed that the SNO will want to avoid competing aggressively with Telkom on price ; government also won’t welcome the news. One of P resident Thabo Mbeki’s top priorities is to bring down the cost of doing business. Mbeki has identified telecom costs as an area that needs particular attention.<\/font> <\/p>\n

Under pressure from the presidency, the department of communications, which is charged with coming up with policy for the telecom sector, has been notching up the pace of liberalisation in the past 12 months. Analysts think some of the policy changes mooted by the department could have a bigger impact on the sector, and on telecom prices, than the introduction of the SNO.<\/font> <\/p>\n

Hahn is particularly downbeat about the advent of the SNO resulting in significant cuts in tariffs. He expects telecom prices will come down only through a concerted effort by government agencies to amend policies and be more aggressive in regulating the sector. "Hopefully they will investigate all claims about unfair pricing – and there are plenty – and then institute a fair and competitive solution," he says.<\/font> <\/p>\n

Socikwa acknowledges these concerns and promises that the SNO will be a formidable competitor to Telkom. It will target businesses and consumers, both urban and rural, he says.<\/font> <\/p>\n

He won’t be drawn on how much market share he expects the SNO will win from Telkom, or how exactly it might do this, but says the entry of the SNO will grow the size of the market for everyone.<\/font> <\/p>\n

Of course, it’s not only Telkom that the SNO will have to contend with. The cellular operators will prove to be even more powerful competitors in the residential market where, between them, they have signed up five times as many clients as Telkom. With an estimated 25m cellphone users, cellular teledensity is above 50%, and is expected to reach 65% by 2008. Compare this with the fewer than one in 10 consumers that has a line from Telkom.<\/font> <\/p>\n

To compete with Vodacom, MTN and Cell C, the SNO may launch a cellular network of its own. Originally, it was envisaged that it would be issued with a licence to operate a 3G network (a cellular network that is also capable of delivering high-speed Internet access) but Socikwa says it is not clear if its final licence will include the right to build such a network. "We must still have this discussion with the regulator," he says. "At some point the distinction between fixed and mobile networks will disappear as a result of changes in technology and we wouldn’t like our licence to restrict the SNO from being at the forefront of these m
\narket and technological changes."<\/font> <\/p>\n

Still, Socikwa believes that both Telkom and the SNO, when it is licensed, need to focus on improving the penetration of traditional fixed-line services, such as broadband, either through wireline networks or fixed-wireless technologies. "As we are facilities-based licensees, our aim should be to provide broadband infrastructure and services, particularly in the residential market," he says. "There are no broadband services offered to consumers in the second economy’ and we need to focus on that, too."<\/font> <\/p>\n

Despite the long delays in licensing the SNO, there are still many opportunities for it to make good money in providing a wide range of telecom services to consumers, Socikwa says. However, the years of delay – caused by, among other things, a lack of interest by foreign operators in the licence, shockingly bad bids from wannabe strategic equity partners, shareholder infighting and government bungling – have cost the SNO valuable time.<\/font> <\/p>\n

Pressure from government and shareholders, though, means things have been moving faster in the past 12 months. A foreign equity partner has been found in India’s Videsh Sanchar Nigam Ltd (VSNL, which is a subsidiary of the giant Tata group, has a controlling 26% stake in the SNO); the business plan and shareholders’ agreement have been finalised and are awaiting the approval of the Independent Communications Authority of SA (Icasa), which is expected by end-November; a name for the business will be chosen in the next few weeks; the hunt for office space is about to get under way; and, Socikwa promises, consumers can expect the operator to begin offering services, albeit in a limited fashion, in the first quarter of 2006.<\/font> <\/p>\n

Fortunately, the SNO won’t have to waste any more valuable time having to build a network from scratch. Thanks to prior investments of R1,7bn made in 2001 and 2002 by Eskom and Transtel, the new company already has a modern, national, fibre backbone network that links all of SA’s major cities and towns. Socikwa says this network, which is free of legacy technologies – importantly, it is not designed to switch voice but rather to route data (of which voice is a component) – will give the SNO an 18-month head start.<\/font> <\/p>\n

The two state-owned enterprises have other telecom investments they will bring to the table. Transtel, for instance, is the largest private telecom network operator in the southern hemisphere, providing international, long-distance and local telecom services to companies in the Transnet stable. It also has an extensive satellite (VSat) infrastructure throughout Africa.<\/font> <\/p>\n

The SNO will still have to make a significant investment in access infrastructure, though. This is the part of its network that will connect consumers to the fibre grid. It’s likely the SNO will invest heavily in wireless broadband technologies to do this and will probably draw on lessons learnt by VSNL and its sister company, Bharat Sanchar Nigam Ltd (BSNL), both of which have extensive experience in deploying wireless networks in India.<\/font> <\/p>\n

Socikwa says an investment of "billions of rand" will be needed in the next few years to build the SNO’s access network. The company will plunge itself deep into debt. "If we do the right things, we’ll be cash-flow positive on a cumulative basis in the sixth or seventh year of operation," Socikwa says.<\/font> <\/p>\n

The business plan includes a detailed funding plan. "All the shareholders are expected to chip in for their part of the equity," Socikwa says. The SNO itself will borrow money to fund the network roll-out. "The company will avail itself of all kinds of funding opportunities, all sorts of debt instruments."<\/font> <\/p>\n

There are no plans to list the company on the stock exchange – at least, not now. "With time and a bit of a track record, though, the board will have to decide whether to take the company to the market. However, that’s a few years down the line."<\/font> <\/p>\n

Acquisitions may also be necessary. In telecom services, for example, it might want to consider the purchase of an Internet service provider, rather than trying to establish its own from scratch.<\/font> <\/p>\n

The new company will be given a leg-up in some areas to help it gain a competitive footing. It will have access to Telkom’s telephone exchanges for an initial period of two years. A suggestion by government that it might force the unbundling of the local loop – the copper cable portion of Telkom’s network that links consumers with their local telephone exchanges – would give the SNO, and potentially also Internet service providers, permanent access to these lines. This could have a serious impact on Telkom’s earnings and the company, which has a powerful legal and regulatory department, can be expected to resist it strongly.<\/font> <\/p>\n

Other regulations are needed to give the new entrant a helping hand. These include interconnection guidelines, which will set the ground rules for when and how Telkom, the SNO and other operators will switch telephone calls and other network traffic with one another. Facilities leasing guidelines (these relate to local-loop unbundling), number portability and carrier selection and preselection will also have an important bearing on the SNO. "We’d like all of these regulations to be in place by the time we get the licence," Socikwa says. "We can’t get the licence and then have to wait for the regulations."<\/font> <\/p>\n

Experience in other markets suggests that the incumbent, if forced to open the local loop to rivals, often employs dirty tricks to frustrate them – temporarily "losing" the keys to the exchange, for example, or "accidentally" disconnecting a rival’s equipment. Does Socikwa expect Telkom to play dirty? "I wouldn’t use those words but we don’t expect that competing with Telkom will be easy," he says wryly.<\/font> <\/p>\n

Socikwa wants Icasa to introduce "asymmetric" regulations – rules that will intentionally disadvantage Telkom, which he says has "significant market power".<\/font> <\/p>\n

Another area where the SNO may need Icasa’s help is in gaining access to the undersea cables that link SA with the rest of the world. Telkom controls access to the Sat-2 and Sat-3\/Wasc\/Safe submarine cables, which link SA with Europe and Asia. Internet service providers, which have to lease bandwidth on these cables from Telkom, have accused the company of profiteering.<\/font> <\/p>\n

Socikwa wants the landing points for Sat-3\/Wasc\/Safe – located at Melkbosstrand near Cape Town and at Mtunzini north of Durban – declared essential facilities so that the SNO (and others) will have access to them. Telkom, however, has warned that this could deter investment in new cable projects around Africa, an argument that Socikwa dismisses as nonsensical. "For me, having a monopoly is the same as nationalisation," he says. "Breaking up a monopoly creates competition. You must implement regulations that stop a situation where there is one player controlling an essential resource."<\/font> <\/p>\n

Socikwa is confident that the SNO, despite the difficulties it must overcome, will be successful. He says the infighting that plagued the process in its early days will not re occur to split the organisation . He blames the ructions that almost threatened to sink the SNO on jostling for position between parties interested in acquiring the 51% Sepco stake, which is now controlled by VSNL.<\/font> <\/p>\n

"The infighting was before we had the full complement of shareholders and before we had a shareholders’ agreement. Everyone’s happy now. No-one was pulled in, kicking and screaming, to sign this agreement."<\/font> <\/p>\n

There are big hurdles ahead, of course. For one thing, Transtel and Eskom want to sell their combined 30% interest in the SNO. Both say they don’t view telecoms as their core focus. Socikwa says neither party has plans to offload its interest immediately, though. "There are no active discussions [about their plans to exit the business]. The focus now is on getting the SNO up and running."<\/font> <\/p>\n

The sooner, the better.<\/font> <\/p>\n

(c) Financial Mail
Reproduced with permission
Subscribe: <\/font>http:\/\/subscribe.financialmail.co.za\/<\/font> <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The walls of the fourth-floor boardroom at Transtel’s head office in Braamfontein are adorned with photographs. In one, CEO Karl Socikwa is seen sharing a joke with a former colleague, ex-Transnet director Papi Molotsane.<\/p>\n","protected":false},"author":23,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sma_x_autopost_status":"idle","_sma_x_autopost_error":"","_sma_x_post_id":"","_sma_facebook_post_id":"","_sma_instagram_post_id":"","_sma_threads_post_id":"","_sma_x_attempts":0,"footnotes":""},"categories":[17],"tags":[],"class_list":["post-546838","post","type-post","status-publish","format-standard","hentry","category-technology"],"_links":{"self":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts\/546838"}],"collection":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/users\/23"}],"replies":[{"embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/comments?post=546838"}],"version-history":[{"count":0,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts\/546838\/revisions"}],"wp:attachment":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/media?parent=546838"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/categories?post=546838"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/tags?post=546838"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}