Telkom is planning to spin off its large wholesale services division as a separate business, with its own brand identity, in a move that promises to shake up fixed-line telecommunications in South Africa.

Though the company isn’t giving away too much yet — a detailed announcement, including the new name, is expected in the coming months — it intends creating an independent wholesale business that serves the entire market, and not just Telkom, on a fair and transparent basis.

Under the new arrangement, Telkom will simply be another — albeit very important — customer of the wholesale unit.

Internet service providers (ISPs) will welcome a move to separate the businesses — Telkom’s wholesale arm has been accused in the past of favouring its retail business to the exclusion of rival ISPs.

What’s not clear yet, though, is just how far Telkom intends going. It agreed to a “functional” or accounting separation of its retail and wholesale businesses in a settlement agreement with the competition authorities for prior anticompetitive abuses. But a full “structural” separation is possible, too.

Martyn Roetter, international associate to telecommunications consultancy BMI-TechKnowledge, says Openreach in the UK, which manages BT’s infrastructure assets, is an example of functional separation. A good example of structural separation is Chorus, which was spun out of Telecom New Zealand.

“BT argues that functional separation is better than structural separation because it is easier to fine-tune regulations as and when needed. Another claimed advantage of functional vs structural separation is that the former permits coordination of investment decisions between the services and the network infrastructure operations. Of course, in this context one person’s beneficial collaboration is another person’s unfair or discriminatory collusion,” Roetter says.

Separation, he adds, “can help reduce — although probably not remove — the natural suspicion and concern of wholesale customers that they are being treated unfairly compared to the retail business of a vertically integrated operator and that their confidential business plans may be leaked to the latter”.

Whatever form Telkom’s separation takes, the hope is that it will result in less discrimination against third parties. It makes particular sense in South Africa, Roetter says, given the lack of competition in fixed-line infrastructure into homes and businesses.

“Separation is an alternative to consumer protection regulation in the form of retail price controls. It can help reduce, although probably not entirely remove this concern, depending on the form it takes and the regulatory conditions that are established, and whether they are actually enforced.”

Still, separation should lead to greater competition at the retail level, resulting in lower prices and better customer service, Roetter says.

It’s imperative, however, that regulators try to establish a “balance of incentives and penalties for the wholesale unit that will reward it for reducing costs and improving quality, and penalise it for acting like a complacent monopoly that is not responsive to its customers”.

“Penalties should be levied if quality targets are not met, and rewards [offered] if they are exceeded,” he says.

Roetter’s colleague, BMI-T MD Denis Smit, says that in theory separation of Telkom’s business could pave the way for the creation of a national broadband network (NBN) as envisioned in government’s South Africa Connect broadband policy.

“Government would invest in the new NBN while divesting in the retail operations. To unbundle, however, would require a de-listing of Telkom and this poses some tough but not insurmountable challenges,” Smit says.

“Firstly, national treasury may find itself paying ‘twice’ for the Telkom assets as government largely paid for much of Telkom’s infrastructure in the first place. Buying minorities out could also be construed as ‘empty money’ as that investment could alternatively go into investments in underserved areas.

“Treasury is also under huge pressure with the economy and may not have the appetite for this. It would also take a long time to do.”

Cheaper ADSL
News of the impending shake-up comes in the same week that Telkom Wholesale announced a new product for Internet service providers (ISPs) that offers them access to the copper ADSL network at less than R50/month.

Telkom’s wholesale services MD Prenesh Padayachee says the business intends announcing new products and services every two months as part of a much accelerated product development plan.

Although the new, low-priced ADSL product is not technically broadband — offering Internet access at 1Mbit/s — it will allow ISPs to offer South Africa’s first retail fixed-line Internet services at less than R100/month (before mandatory dial-tone service fees are included).

Padayachee says the new product, which is firmly aimed at expanding affordable access to the Internet, should have a big impact on ADSL growth by attracting more price-conscious consumers away from the mobile operators.

A large number of South Africans rely solely on relatively pricey mobile data bundles to access the Internet and Padayachee believes a more affordable ADSL option, offering larger data caps or even uncapped data, could entice many of these consumers onto the fixed-line network.

However, a big obstacle remains the fact that Telkom customers still have to pay for a legacy dial tone – a monthly analogue line rental fee – even if they all they want is Internet access.

Telkom has long argued the line rental fees are necessary to recoup at least some of the cost of maintaining the copper infrastructure into homes and businesses. Indeed, it claims it still loses money for each line in service — the so-called “access line deficit”.

But Padayachee hints strongly that Telkom may revisit how it structures these charges, possibly doing away with a separate dial tone fee and having one fixed charge for copper access. “It’s the way the world is going,” he says. If it happens, it will be further evidence the impending separation of the wholesale business is already having a real impact on Telkom’s approach to market.