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    Telkom’s fork in the road

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    [By Duncan McLeod]

    There was an air of despondency at Telkom’s interim financial results presentation this week. But after several strategic missteps, the group is finally promising to get its house in order. It had better move quickly: rivals are gaining fast.

    Telkom’s results in the six months to 30 September 2010 paint a picture of a company in steady decline. In voice services, in particular, the business is going backwards.

    The number of fixed lines in service has fallen by more than 160 000 in the past year. And the amount of voice traffic flowing across its network has plunged 10,8% (it’s down 20,2% for local calls). Customers continue to switch from fixed to mobile phones.

    It’s against this backdrop that Telkom launched 8ta, SA’s fourth mobile network. In its first month of operation, it has signed up 186 000 paying customers. It’s too early to know whether it will maintain that sort of growth, or how profitable those customers will be in the long term, but it’s a start.

    The fixed-line business isn’t all doom and gloom, anyway. Data revenues rose 14,9% on the back of strong demand for broadband from business and retail customers.

    Particularly pleasing for Telkom, no doubt, is the 16% increase in the number of people with digital subscriber lines — DSL is a way of delivering broadband over copper cables. But here, too, mobile is a fast-growing threat.

    It’s clear that as wireless broadband technologies improve — real-world wireless access speeds should reach hundreds of megabits per second by the end of the decade — Telkom is going to have to improve its fixed-line offerings dramatically. That means spending a lot more on high-capacity infrastructure just to keep pace, and eventually building fibre to the home.

    Profit margins for delivering data are going to be squeezed tight. So, though data will continue to become a much bigger part of Telkom’s revenue mix, it doesn’t necessarily bode well for its bottom line. Operators worldwide are facing similar pressures.

    The problem for Telkom is that an important part of its growth strategy — expansion in Africa — is failing. Its Multi-Links acquisition in Nigeria has proved to be a disaster. Management now wants out. And its operations elsewhere on the continent aren’t faring too well either. Acting group CEO Jeffrey Hedberg wants Telkom to get its home market right first, before venturing again into new markets.

    The problem is that the squeeze is already on at home. In a few years, SA’s telecoms market has gone from being relatively closed and uncompetitive to one of the most cutthroat markets in Africa. Prices are in freefall and are likely to continue falling.

    And new regulatory interventions, especially local-loop unbundling, will pile on even more pressure. (Unbundling will give Telkom’s rivals access to the copper cables into people’s homes and businesses.)

    That means all operators are going to feel the squeeze. One option is to cut costs. But retrenchments at Telkom are fraught with political difficulty.

    The other option is to find new opportunities elsewhere in Africa, ones that will actually make money. The problem with this is that assets are expensive; and competition is intensifying in key markets like Kenya, Nigeria, Ghana and Tanzania.

    Hedberg says Telkom needs to focus less on strategy and more on operational delivery in the short term.

    But it also needs clarity about its future. Here, government, with its 39,8% shareholding, needs to provide leadership. Hedberg says Telkom requires urgent clarity on its shareholder, board and management structures.

    This, he says, will provide the certainty needed by management to deliver on the group’s mandate.

    Time is running short.



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