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