Telkom caught in pricing poser - TechCentral

Telkom caught in pricing poser

Telkom SA MD Nombulelo "Pinky" Moholi

Telkom is stuck between a rock and a hard place. If the operator were to try to recover costs fully from its customers of servicing and maintaining fixed lines, it would have to double monthly line rental.

But if it did so, it would accelerate the already-steepening decline in the number of fixed lines in service. Yet new regulations and growing competition mean it may be unable to avoid a sharp increase in line-rental charges.

Telkom SA MD Nombulelo “Pinky” Moholi says that to keep the average fixed line in service it costs Telkom about double the R131/month it charges customers for line rental.

This shortfall — which adds up to between R2bn and R3bn a year, according to Moholi — is known as the access deficit. Telkom makes up for the losses through higher call charges and broadband line rental fees, among other things.

Moholi says the company is concerned about the impact lower call termination rates and local-loop unbundling — both regulatory interventions being considered by the Independent Communications Authority of SA (Icasa) — will have on its business.

Local-loop unbundling will open Telkom’s copper-cable network to rivals for the first time, and carrier preselect will allow customers to route voice calls automatically over rival networks. The two regulatory interventions, coupled with reduced call termination rates, have suddenly made the access deficit a very real problem for the company.

Telkom is damned if it does, and damned if it doesn’t.

According to the International Telecommunication Union (ITU), a UN agency, an access deficit arises when an operator’s average access charges (line rental and connection) are not set high enough to cover the long-run average incremental cost of providing a service.

“Access deficits are prevalent in many countries and are justified on the grounds that a policy of not charging for the full cost of gaining access to the network is aimed at ensuring universal access with all its associated benefits,” the ITU says.

Regulations and greater competition are conspiring to make the access deficit a threat to Telkom’s profitability. Moholi wants Icasa to take the access deficit into account in any regulations it sets.

She warns that if Icasa goes ahead with plans to reduce fixed-line call termination rates — the rates Telkom charges other operators to carry calls onto its network — it will have an adverse effect on the operator. Icasa wants the rate reduced to a flat 10c/minute by mid-2012.

Telkom has objected to this plan, saying its existing termination rates — local rates are set at 23c/minute in peak times and 12c in off-peak times and national rates are 33c and 19c — do not allow it fully to recover its costs.

“We will be in worse position because we are hardly recovering the cost of termination now,” Moholi says of Icasa’s plans to reduce termination rates.

Local-loop unbundling is even more of a worry for Telkom. Competitors have accused the company of profiteering from its control over the local loop.

Pressure is growing for Icasa to allow rivals access to Telkom’s access network, with government having set a deadline of November 2011 to complete the process.

“We are still waiting for Icasa to give us the models around pricing,” Moholi says. “We don’t have enough information to formulate a price yet. In the end, though, we cannot afford to subsidise our competitors. If we maintain the lines, we have to recover the costs.”

Icasa will have to lead the process, and provide clear direction about how unbundling will work, she says.

Whatever happens, though, Moholi says it is difficult for Telkom to reduce its costs dramatically to deal with the access deficit.
Copper prices are high, and every time there is a fault, the company has to despatch a truck to fix it. High staff costs can’t help, either. “You can try to optimise efficiencies, but there’s a limit to how far you can go.”

Another option is for Telkom to ask Icasa to allow it a once-off steep increase in line-rental charges. But this could chase away many fixed-line subscribers who are already struggling because of the weak economy. Hiking subscription charges too much would accelerate fixed-to-mobile substitution among consumers.

Telkom will be keen to avoid a situation where rival operators are able to use the access deficit to “cream-skim”.

The ITU says new entrants tend to enter markets where prices have been kept artificially high in order to cross-subsidise the access deficit and offer lower prices since they do not have an access deficit to fund.

As a result of competition and the access deficit, incumbent operators like Telkom are therefore likely to lose market share and face reduced overall profitability, the ITU says.  — Duncan McLeod, TechCentral

11 Comments

  1. My line was recently down for a week, without anyone attending to it.

    Maybe if they investigate the meaning of the word “service” it could mean less people are chased away, leading to less disconnections and more income.

  2. I’m wondering where the costs come from for maintaining and servicing the lines. I have a line issue maybe once a year, and a technician sorts it out in 15-30 mins each time – it’s usually a junior tech’s that plugged a wire in wrong at the nearest junction box.

    I know there’s a lot more to it that this, but the lines in my area are fine and have been since ADSL was introduced, so haven’t required extra maintenance for existing infrastructure. They have to be making a huge profit from the area that I live in.

    It would be interesting to see what makes up these maintenance costs; perhaps there’s a few areas with massive cable theft, so that say 10% of the lines take up 90% of the maintenance budget?

    Or perhaps it’s just good old fashioned inefficiency and too many layers of expensive bureacracy. Whatever it is, I’m convinced if competent management got in there, and was ruthless, it could turn it around improving every aspect of the business in a short timeframe.

  3. This article raises a lot of good points, but as I see it, the solution is for Telkom to increase volume (the number of people using their fixed line services), rather than trying to squeeze more revenue from the few subscribers who’re left.

    Their fixed line subscriber numbers have dropped consistently over the past decade. As a result, there are more and more idle pairs in the copper cables that make up their local loop infrastructure. Those idle pairs are generating absolutely no revenue, but still have to be maintained. Put another way, maintenance costs drop as subscriber density increases.

    The cellular operators have a fundamental advantage (the convenience of being mobile), so Telkom must come up with reasons for people to want to use fixed line services instead of just reaching for their cellphones — and at the moment, they aren’t giving us those reasons. Here are some free ideas:

    * make caller ID and voicemail free — we’ve all had that for years on our cellphones.
    * get rid of the peak/off peak distinction — voice traffic can’t cause congestion on a modern network.
    * get ADSL speeds competitive with cellular data. The most popular service, 384 kbps, is way too slow.
    * vastly increase ADSL caps. The cellular operators can’t increase caps much because all of their subscribers share the same RF spectrum, but ADSL provides a dedicated channel to each user. If Telkom would actually let us use that channel, the cellular operators wouldn’t be able to respond.

  4. an obvious but unpleasant solution is to have tiered access charges: high theft areas, new area (subsidized by gov maybe?) and established/low theft. So if it costs more to provide a line it should cost more to the customer.
    This would be both more fair to the avg consumer and allow telkom to recover costs and stop disrupting market structure.

    The long term solution (which wont happen) is for government to buy the local loop in exchange for it’s shareholding(40%) in Telkom. Fair trade I think. Then the local loop can be run by infraco who seems competent.

  5. Believing anything Telkom says is fairly tough.

    How can other operators all over the world turn great profits with prices a fraction of Telkom’s? If it really is costing them so much then surely they’re doing something wrong.

    It’s odd that all of a sudden it’s an issue — we didn’t hear anything about this when the CEO was pocketing R19 million and staff were being laid off in their thousands.

    Seems more like a tactic than the truth to be honest.

  6. Greg said it ” Too many layers of expensive bureacracy” ! Totally correct.

  7. Here comes another Eskom on

    Wait – we’ve seen this sort of whining before. Oh yes – it was Eskom wailing and telling us how much money they were losing.
    Then all of a sudden – govt approves a massive fee increase for them.

    That’s all Telkom is doing here – laying the groundwork for their fee-tripling maneuvre that they’ll pull in a year or two’s time.

    First its the whining, next we’ll see random infrastructure issues – then when they’ve brought the country to its knees and govt agrees to the increase, everything will be miraculously ‘fine’ again.

  8. Pinky Moholi, why are you talking another load of rubbish, again?

    In the mid nineties the worldwide trend was to grant incumbent monopolies a six or twelve month exclusivity period, to give them time to adjust to a new legislative landscape, before liberalising and allowing second and third etc national operators to come onto the market. But Telkom (heavily owned by government) hit the jackpot and was given an unheard-of five year long exclusivity period.

    In return for being allowed to remain as the only fixed line operator, Telkom was required to install 2.8 million new phone lines, and to engage in something called “rate rebalancing”.

    “Rate rebalancing” was another way of saying that the costs Telkom charged for a service must reflect the cost to Telkom of the service. Cross-subsidisation was to end. Telkom had five years to rebalance their rates, this was in fact a condition of their 1997 PSTS licence,

    In their 2002 Annual Report, Telkom declared that it had completed rate rebalancing. (Pinky, please note that you were a senior employee of Telkom at the time.)

    If Telkom is now saying that their current line rental charges do not reflect costs to the company, then Telkom is, at the very least, admitting that they did not fufill their 1997 licence conditions.

    Pinky, the truth is that there is not a problem. This is simply an exercise in managing perceptions. No coincidence that the way Telkom charges (the so-called ‘price cap regime’) is currently under review by lawmakers.

    There is no rock and hard place here, just more lies and almost no one in the industry who is prepared to challenge these liars and call it like it is.

    [As for the 2.8 million new lines, we will never know if Telkom did actually install those lines or not, because ICASA (formerly SATRA) never conducted an audit.]

  9. @Gerdus: >> an obvious but unpleasant solution is to have tiered access charges

    Agreed – our flate-rate over the entire country is somewhat of a unique situation. My brother’s in oz, and more for ADSL than me, and can’t get uncapped, because he lives WAY out of the city; if he were in a big city he could get uncapped for about half of what I could via mweb. Thing is, they don’t complain about it there because they actually understand it’s harder to get wires to remote areas.

    re:Eskom comparison – 100% right, it’s clear now the load shedding was simply scare tactics, as they stopped a few days after the price increase was approved. Basically they pulled an ENRON and conned the government. It seems that at a technical level, Eskom is fairly sound, it’s just the layers of management and incompetence that’s above the hard working guys that produce the electricity that is acting as a giant handicap to the organization. Pretty much the same as Telkom.

  10. The_Librarian on

    This shortfall — which adds up to between R2bn and R3bn a year, according to Moholi — is known as the access deficit. Telkom makes up for the losses through higher call charges and broadband line rental fees, among other things.

    — I find this hard to believe.

    A few years ago these same guys was posting massive profits year after year, and now, all of a sudden, they’re having issues.

    Seems the fat cat is about to experience some financial difficulties.

    One way out of this mess for telkom is to sell off the local loop…

    Interesting times. The shafter now becomes the shaftee.

  11. Until we see some break down of how these numbers were derived; numbers which are clearly at odds with operaters elswehere in the world; I can only concur with all those who are alluding to the fact that this is nothing more than “spin-doctoring”.

    I find it highly unlikely that this information would ever be made available, as it would likely reveal far too many levels inefficiency / market abuse / corruption.

    Come now back the numbers with some verifiable facts!

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