After years in planning, Telkom is expected finally to unveil its mobile network in a fortnight. However, analysts say the company will have to pull out all the stops to gain any traction in the cellular market.
David Lerche, telecommunications equity analyst at Avior Research, says Telkom may be on the right track as it is expected to begin by targeting the rural areas where the incumbent operators are not as entrenched.
According to Lerche, Telkom will first tackle the rural prepaid market and only focus on contract customers later.
“The prepaid market is considered more elastic, and is easier to churn,” he says. However, Telkom will need a solid distribution system in place to make this work.
Vodacom, MTN and Cell C have had more than 10 years to build a significant distribution presence, and Telkom will have to match or even better that, Lerche says.
“Pep Stores is the largest distributor of airtime in the country and the operators incentivise companies like that to sell more. Telkom will have to break into that model.”
Lerche says that although the entrenched mobile players already have vast formalised distribution partners in the more built-up areas, they have not really formalised the rural market to the same extent.
He says if Telkom tackles that market first, it could gain some of the traction it needs to make the business a success. “This is possibly why they are pushing for an asymmetrical interconnect fee,” he says.
MTN and Telkom will face off on Saturday at the Independent Communications Authority of SA over a dispute over interconnect fees — what the operators charge each other to carry calls between their networks. Telkom wants to charge 93c/minute to carry rivals’ calls on its new mobile network, arguing that any less would be “unsustainable”.
“Rural users are more likely to receive calls than make them, which would mean Telkom could get more income from targeting those users,” says Lerche.
He says Telkom has ambitious plans for the mobile business and it hopes the mobile operation will break even financially in three or four years.
Telkom is expected to do well in the corporate market, where it is already strong with fixed-line and data services. Here, it will be able to cross-sell solutions and offer discounts to big business customers.
However, to gain traction in the consumer market, Telkom will need to come in at a particularly attractive price, says Lerche. “It can’t be 2% or 3% lower than the competitors, it has to make it worth the consumer’s while.”
He says Telkom will most likely drop prices by between 10% and 15% compared to the competition. “It is also likely it will drop prices one or two times more after that,” he says.
Telkom has been working on a mobile business since it disposed of its shares in SA’s largest mobile business, Vodacom, last year.
It has been playing its cards close to its chest regarding its plans, mainly because it is not keen to let its competitors know how it plans to go to market.
However, in recent months some details have been revealed. In the first few months of life, Telkom will roam on MTN’s network to fill in gaps in its coverage.
However, Lerche says Telkom wants to have most of the urban traffic migrated away from MTN’s network and onto its own infrastructure before the end of the year.
The company has a lot riding on the success of its mobile plans – along with its Nigerian operation Multi-Links, the two businesses are meant to fill the revenue gap the sale of Vodacom left behind.
Independent telecommunications analyst Richard Hurst says Telkom’s inability to turn around the deeply troubled Multi-Links has left investor confidence at an all-time low.
The company’s decision to get into — and then out of — the broadcasting industry with its investment in Telkom Media has not make investors any less jittery.
“Everyone is wary of Telkom’s business strategy. If there is even a hint of failure in its mobile plans, confidence will plummet,” Hurst says.
He says there are concerns the company is coming into the mobile market far too late. “The group’s CEO, Jeffrey Hedberg, has a lot of work cut out for him. Telkom is a big ship to turn around,” he says.
Though investors aren’t particularly confident, BMI-TechKnowledge MD Denis Smit says there are important strategic reasons driving Telkom’s decision.
He says the mobile business will need to be successful but, more than that, Telkom simply needs a mobile business. “Mobile broadband is the future and it needs to have access to that,” he says.
South Africans have to wait only two more weeks to know exactly how Telkom will play its cards. — Candice Jones, TechCentral
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