Telkom to spin off its wholesale business - TechCentral

Telkom to spin off its wholesale business

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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.”

Prenesh Padayachee

Prenesh Padayachee

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.

  • This piece was first published in the Sunday Times

6 Comments

  1. Shaun Munro Carter on

    In the long run the rural and poorer communities will suffer since there will be no incentive to provide services where there is lesser returns on the investment. The whole reason for the original commission given to Telkom was to enforce a ubiqitous and standard service nationally. I would like to see the other telecommunications licence holders all taxed 50% of profits to get to a ubiqitous service offering for internet as well as voice services nationally. The fact the Telkom is the only one fined thus far is ridiculous and has left the country in a position where only expensive cullular services are possible and the few internet providers diversifying into traditional telco infrastructure provisioning for their customers but actually just “creaming” the market. How did it get to this, simple, ICASA is useless, the current government known bugger all about anything electrical and a few leaches managed to convince a few legal eagles they were being hard done by Telkom. In the meantime the country’s telecomms access infra is deteriorating at a rapid rate due to this. Soon Telkom will also only be able to play that type of game and it’s already started by getting rid of the staff that currently look after these rural areas and the non-profitable services..

  2. I think it’s a step in the right direction if done correctly. Functional separation is a non-issue, should have been proven out and accomplished seven years ago. Assuming they go to full structural separation, I think the logical next move is a combination with BBI. Scale will be one of the main factors incenting the wholesale player to expand service beyond the major metros. The other of course is regulation, and government must institute the proper rules to ensure that fixed backbone spreads (the access technology is less important, could be wireless as it generally is now). As long as they play in wholesale only, let them remain the biggest game in town. Let an open market push Telkom to increase bandwidth and keep up with the latest technology.

  3. In the end the whole thing will fall apart as the Usual Suspect BEE cronies and TRANSFORMATION parasites battle to get the keys to the village tap or village ADSL in this case.
    This is Africa and Mugabeism is still the only bizness model allowed folks.

  4. Government should rather use satellite television for SABC TV and commit all terrestrial spectrum to Internet and communications after analogue television switch off. Sentech has for years duplicated SABC television via the Vivid decoder – now the Sentech FreeVision decoder with Nagra conditional access.
    Telkom could take over most of the Sentech Terrestrial spectrum after analogue television switch off to provide Internet and communications all over the Sentech towers.
    OpenView HD satellite decoders and dishes are available for R399-00. Gov wants to spend R700 plus for DVB-T2 decoders and installation.

  5. De-ruralisation and increased urbanisation is a reality all over the world. If you believe in a capitalist model instead of a communist one, you should have no problem with this. Ironically though, China is one of the finest examples available for urbanisation and de-ruralisation.

    If it doesn’t make financial sense to role out to rural areas, then why should companies be forced to? Telkom was given a mandated monopoly, and in exchange it was forced to meet certain targets. You cannot compare Telkom to any other telco in RSA. It wouldn’t be fair in the least.

    And rural areas will have to be served with alternative cheaper technologies by niche operators who know how to carve out a profit in these areas. It has and is already happening – with WISPs, 3G, TV White Spaces spectrum, Satellite, and other wireless technologies.

    The market will auto-adjust and auto-correct the pricing discrepancies. For e.g. farmers in rural areas will need to make do with slower and more expensive wireless connectivity, or fork out big money for way more expensive faster wired or wireless connectivity. They would then factor these costs into the products they sell, making produce slightly more expensive. Meanwhile, people in urban areas who consume the produce at a higher price, but will benefit by paying less for faster broadband. This is just one example, but the same applies to equipment, fuel, groceries, transport costs, labour costs, etc…