Telkom's core business comes under threat - TechCentral

Telkom’s core business comes under threat

Duncan-McLeod-180-profileAt Telkom’s recent annual results presentation, CEO Sipho Maseko revealed an astonishing fact. He said there are now at least 25 companies building fibre-to-the-home (FTTH) broadband infrastructure in South Africa.

That the interest in FTTH, which delivers Internet access speeds of up to a blistering 1Gbit/s, has exploded in the past year is not in dispute. After all, fibre is an easy sell: it delivers speeds up to 250 times faster than a typical copper ADSL connection. Fibre is the future of the fixed-line network.

But the rate at which consumers are turning to alternatives to Telkom to build these high-speed last mile networks is remarkable. Until a year ago, the operator’s absolute dominance over the “last mile” into homes and businesses seemed set to last for years to come. No more. Telkom’s core business has suddenly become threatened.

Hardly a week goes by now without another community or neighbourhood announcing it is going ahead with plans to deploy FTTH infrastructure. And more often that not, these contracts are not going to Telkom, but to small telecoms businesses with names such as Link Africa and Vumatel.

From Sea Point in Cape Town to Blairgowrie in Johannesburg and the Upper Highway area (Kloof, Hillcrest) in Durban, residents are banding together to get developed-world broadband into their neighbourhoods. Speak to them, and more often than not, the view is they’d rather have an untested start-up than Telkom delivering the work for them.

The speed at which these start-ups are emerging must be rattling cages at Telkom. For the first time, the lumbering incumbent, which once held an absolute monopoly over fixed lines, is having to compete for consumers’ attention with a range of nimble start-ups that promise superb broadband at decent prices, and often on an “open access” basis — meaning that consumers are free to pick and choose Internet service providers and service providers are able to get direct access to the infrastructure.

Sure, much of the FTTH activity is currently centred on the most well-to-do suburbs in South Africa’s big cities. But in some areas, like Johannesburg, it’s started radiating out to other areas.

The challenge for Telkom is that the new guys are cherry-picking its most profitable suburbs. In a few short years, it could have lost many of its best residential clients.

But the problems run even deeper than that.

Vodacom and MTN are both planning to get into the FTTH market in a big way. Vodacom says its proposed acquisition of Neotel — which is still subject to approval by the competition authorities — will give it the platform it needs to become a meaningful national competitor in residential fibre.

Until recently, Telkom pretty much ignored FTTH, focusing instead on sweating its investment in copper, deploying a speedier technology called VDSL. But relatively few customers have access to VDSL, with many still on 4Mbit/s or slower ADSL connections.

Fibre-to-the-home is startign to take off in South Africa

Fibre-to-the-home is starting to take off in South Africa

Telkom could have been far ahead of the game by now if it hadn’t wasted the R10bn-plus it did on an ill-fated adventure in Nigeria and then attempting and failing to take on MultiChoice in pay television. Imagine the unassailable position it would be in today if it had invested those billions in building fibre access into homes across South Africa.

Now it’s having to tackle more than two dozen start-ups — with Vodacom and MTN looming on the horizon — while embarking on the biggest restructuring in its history. As many as 7 800 jobs are affected by the latest shake-up.

The restructuring is necessary – by most metrics, Telkom remains overstaffed as a fixed-line operator, despite cutting its workforce by 45 000 since 1994.

Management’s strategy of “deep functional separation”, particularly of its wholesale services business, makes sense – at least on paper. It should change Telkom for the better. But the overhaul will require enormous internal focus by management at a time when its core business is threatened.

There’s still time for it to respond. Building fibre networks is a time-consuming and expensive process, and many city neighbourhoods will still be champing at the bit for access for years to come. But that Telkom’s core business of fixed lines is now threatened is no longer in doubt.

  • Duncan McLeod is editor of TechCentral. Find him on Twitter
  • This column is also published in the Sunday Times

19 Comments

  1. 101% correct Duncan, Telkom fiddled while Rome burned. Of course they also fiddled yet more when they could have formed a very profitable joint venture with a firm of KOREAN EXPERTS in fibre technology two years back but this marriage made in heaven was scuppered by a deployed cadre called? Oh, Whatsher face again?
    The sad fact is that they have missed the boat miserably and now their innocent staff are going to be ruthlessly culled as a result of their bungling.
    Just in passing, as far as I know no single manager at Telkom has ever been fired or much less disciplined for Telkom’s insane money losing venture into the TV industry. Par for the ANC of course.

  2. Telkom has been implacably opposed to LLU on copper – really sweating those assets – and frustrated that process for years on the basis that it would allow competitors to cherry-pick the most profitable exchanges. In doing so they have skewed the build/buy equation to the extent that these exchanges and associated revenue are lost to them as the new fibre players roll out. An historical learning that others should (but won’t) take note of…

  3. I love it! Brings joy to my heart when big bullies shoot themselves in the foot, both corporate and political. Hopefully this will be more like getting shot in the head. Everyone wants Telkom gone (not immidiately, but eventually, when we have alternatives). That day can finally be seen on the horizon.

  4. Fantastic! I dreamed about this day for a long time. And although Telkom has become less oppressive in recent years I am still convinced it is the best thing for SA telecoms.

    Go forth. Democratise the last mile!

  5. Greg Mahlknecht on

    Great article. Just one correction – I’m the one that started the Upper Highway initiative in KZN; the partner we’ve chosen, LinkAfrica, is far from a start-up; amongst other things, they ran the metro rings for eThekwini municipality and did a substantial portion of the work for MTN’s fiber backbone. They back-haul to the nearest Teraco, where the ISPs link in. It would be fair to say that a good portion of Telkom’s competition in this area have as much, if not more, experience than Telkom themselves in the FTTx market. And that’s another problem for Telkom.

    Open access networks are obviously the way to go, but just as importantly, I discovered engaging with the Telkom alternatives, was the open nature of their business. I spent months speaking to Telkom techies (some of them in the process of wiring up FTTH nodes in a nearby suburb) and leaning on the few contacts I have in Telkom management, and not even they knew if or when FTTH was coming to my area. Contrast this with LinkAfrica (I’m guessing the other providers are similar) where I had a meeting with them; a few HOURS later I had a KMZ of their fiber backbone in my area and a soft commitment “yes, we will wire up your area”, and 2 days later we had an MOU signed stating that if we got 40% non-binding interest in a concentrated area they would start construction immediately.

  6. Other news mentions affordable satellite linkup possibility in a few years time. This as a result of international agreements on transmitting signals. Signed by S.A to. It means global business. Not the few an happy locals like DSTV making and breaking rules. For South Africa a giant leap forward. Think alone learning, witch study books from heaven.

  7. Fantastic news. I live in one of the mentioned areas in Ethekweni where FTTH is in planning, today I could not even get 1/2Mbps through my 4mbps copper ADSL line, with no apparent sense of urgency by Telkom to upgrade the heavily congested exchange in Kloof and my ISP flapping about trying to “optimise the network” to avoid buying more IP capacity. Bring it on.

  8. Ross Gordon on

    It’s been a long slow death, but death they tell me starts at the extremities.

  9. Telkom have spent billions on the MSAN projects over the past 3 years which could have given them the edge. However, if you snooze you loose.

  10. Telkom will go the same route as BB Infraco. Just a slower death amd more billions of our tax money ploughed in as “bail-out”. Watch this space

  11. I have news for you CarlB.
    The local poephols from Telkom (Ekurhuleni) are placing their MSAN’s IN THE EXCHANGE, thus totally defeating the reason for the MSAN’s very purpose!
    All they have now done is to eliminate the MDF cross connection jumpers but the copper to the street boxes, local loops is STILL THERE.
    Small wonder then that Telkom is having their lunch eaten by Neotel, Vodacom and the other fibre firms. Serve ’em right.

  12. What a great story to read. I haven’t been on Telkom for about 10 years now, and I do miss out on the ADSL but somehow I’ve made do with Neotel and now only broadband. I refuse to give my money to this company and Im really glad to see that they are about to lose much more customers. And Im sure the 4000 odd people who you want to get rid off now, will be able to find themselves something at one of these start-ups

  13. Entirely there own fault. Watch this space Eskom, your years are numbered too.

  14. I agree here regarding Eskom. They have forced the hand of many consumers to look for alternate means to avoid the double whammy of ever increasing price and inconsistency (or absence) of electricity.

    Early days for Eskom, but a time will come when it’s revenue source will begin to dwindle, as more and more use alternate means to get their power.

  15. Just in perspective… the reason for MSAN in the Central Office (CO) is that Telkom has to replace existing legacy technology asap. The MDF remains. The intention was to, a bit later, move the MSANs to remote cabinets for optimal copper performance.
    However…. strategy has changed… with GPON (FTTH) focus now priority, they will now place the MSAN in the CO and feed customers with fibre. Much more cost effective with prohibitive power provision and wayleave issues.
    The MSAN chassis handles either and/or both copper and fibre. The system is ‘plug & play’ and extremely adaptable and easy to switch from copper to fibre or both on same chassis.
    FTTH is however (worldwide) not really financially viable (payback) unless the government subsidise or pay for fibre placement (eg Korea and Aus).

  16. Greg Mahlknecht on

    >FTTH is however (worldwide) not really financially viable (payback) unless the government subsidise or pay for fibre placement

    Wow. Is that Telkom’s stance on FTTH? No wonder they’re losing the race. Other FTTH providers in this country and around the world are happily making profits from it. I can believe that FTTH isn’t financially viable for Telkom, but don’t for a second think better run, more nimble companies can’t make it work.

  17. No that is not Telkom’s stance. (I do not work for them by the way). Telkom is doing quite well in the race, albeit they may have started a bit too late. Telkom is the ONLY operator to actually do full FTTH – to normal residential homes in suburbs. All the other operators focus on high-income estates and is not considering normal residential areas – logically due to cost. To only focus on the ‘cream’ and say you offer FTTH is somewhat misleading … not??
    Many operators all over the globe get the customer to pay for the connection from the property perimeter. This portion is surprisingly quite expensive. Persons I know in Sweden said it cost them some R8,000+.
    All I am trying to point out is that payback/ break-even is much longer than most anticipated.

  18. Greg Mahlknecht on

    >All I am trying to point out is that payback/ break-even is much longer than most anticipated.

    It’s about 10 years. Companies like Vumatel and LinkAfrica recognise this and cite this figure in their presentations. It’s no secret, and it’s certainly not a problem.

    >Telkom is the ONLY operator to actually do full FTTH – to normal residential homes in suburbs.

    Nope – the alternate operators will (same as Telkom) consider any area who expresses enough interest. I have firsthand experience of this. In many cases Telkom’s FTTH solutions are inferior – I know 2 people who have it and it’s strung above ground on the poles (a cheaper, quicker, inferior deployment method) yet they charge more than operators who do it properly in trenches.

    >Many operators all over the globe get the customer to pay for the connection from the property perimeter.

    This is usually a once-off cost of R1500-R1800, and many ISPs throw it in free for the larger packages.

    I’m not sure where you’re getting your information from, but it seems out of date – most your facts/figures were true a year or 2 ago.

  19. This article brings tears to my eyes… To think of all those days we were at the total mercy of this excuse of a company..