The pressure is on in telecoms - TechCentral

The pressure is on in telecoms

[By Duncan McLeod]

I’m sometimes asked by investors whether the growth story has gone out of SA telecommunications stocks. A series of regulations, coupled with growing competition and a weak economy, is putting pressure on operators’ margins. Is it time for investors to abandon the sector?

Before I attempt to answer that question, it’s worth looking back at how the telecoms sector in SA has developed over the past decade.

Ten years ago, the landscape was very different. It was dominated by Telkom, which was still enjoying the fruits of a government-sanctioned period of exclusivity. Competition was meant to arrive in 2001, but thanks to endless problems with the licensing of a second network operator and the collapse of the dot-com bubble, Telkom went on to enjoy its monopoly in fixed lines well into the middle of the decade.

Competition in telecoms was on the rise, of course, but not in fixed lines.

In mobile, Vodacom and MTN — and latecomer Cell C — were signing up millions of prepaid customers, extending telephony to the very people that Telkom was supposed to provide services to under its monopoly licence conditions but largely failed to do.

Consumers began deserting Telkom as they flocked to more practical and convenient mobile services and as the fixed-line operator “rebalanced” it tariffs, hiking local call rates and pushing up prices in other areas to the extent that they became unaffordable for the poor.

Despite the ongoing fixed-to-mobile substitution, Telkom’s share price soared on the back of cost-cutting and improvements in efficiency, led, in large part, by the group’s former foreign equity partners, SBC Communications (now AT&T) and Telekom Malaysia. Anyone who got in at Telkom’s initial public offering in 2003 made a small fortune, not only from the surging share price but also the generous dividends that were paid out as the group milked its monopoly for all it was worth.

The good days for Telkom shareholders are long over. The share price has been treading water, with analysts and investors concerned about management’s plan to build a mobile network — this after selling its 50% stake in its growth engine, Vodacom. They worry that Telkom is throwing billions of rand — it has promised to spend R6bn rolling out the mobile network — down a hole.

In hindsight, Telkom sold Vodacom at the right time. It struck a deal with the UK’s Vodafone, Vodacom’s other shareholder, shortly before the global financial crisis. The deal valued Vodacom at R150bn — that’s nearly twice its market capitalisation today — and so profited handsomely from its divestment. Shareholders earned billions of rand in a special dividend, with Telkom retaining billions more on its balance sheet to help fund, in part, its mobile ambitions.

But analysts have questioned the group’s strategy, wondering aloud whether it’s the right time to be entering a mobile market where Sim card penetration is, according to some estimates, above 120%.

Certainly, there are opportunities. Telkom is well entrenched in the corporate market, so cross-selling mobile, fixed-line and data products to large companies, and offering them managed IT services, means it’s in a strong position relative to some of its rivals. But everyone is trying to get into the same game, so margin pressure will continue to grow.

It’s not only Telkom’s share price that is going nowhere fast. Neither Vodacom nor MTN has set the JSE’s boards alight in the past year as investors fret that the sector has gone ex-growth.

In the mobile space, operators are under pressure because the weak economy has crimped consumers’ spending. And a raft of new regulations aimed at bringing down mobile voice telephone costs is going to add further pressure. Industry regulator, the Independent Communications Authority of SA (Icasa), is pushing ahead with plans to reduce wholesale call termination rates — what the operators charge each other to carry calls onto their networks — making¬† it easier for new competitors to emerge and putting downward pressure on tariffs (and profit margins).

It’s a rude wake-up for investors who have grown accustomed to strong growth from the country’s mobile operators.

Though some SA-based mobile operators are better placed than others to weather the storm — notably, MTN, which is still exposed to fast-growing markets like Nigeria, Ghana and Iran — they’re all going to feel the pinch eventually.

In the fixed-line market, Telkom is feeling the pressure from all sides. New undersea fibre projects have already exerted huge pressure on bandwidth prices and new terrestrial fibre projects — such as the national network being built by MTN, Vodacom and Neotel — will result in further substantial price cuts.

With upcoming regulation — especially carrier preselect rules and local-loop unbundling — Telkom will be hard-pressed to maintain profits at current levels. It’s hard to see how the company will avoid its profit margins simply being reset at a new, lower level as competition begins to take its toll.

Also, traditionally fixed and mobile operators are converging on each other’s turf, making the market much more competitive. MTN’s acquisition of Verizon Business (to create MTN Business), for example, puts it in direct competition in the enterprise data and managed services markets with companies like Telkom and Neotel. And the mobile operators are fast extending fibre networks across the country for the first time.

The increased competition and new regulations may be negative news for investors who own shares in the telecoms sector, but it’s positive for the SA economy.

It’s going to force operators to be nimble and efficient, to offer more compelling products, and to innovate to a much greater extent. Cheap broadband and telephony — including all-you-can-eat products — are soon going to be a reality in SA, and this will offer huge benefits to other industries, such as call centres and software development.

Not everyone is bearish on the prospects for telecoms stocks. Paul Theron of investments company Vestact wrote in a recent column on TechCentral that the mobile phone industry, in particular, is still in its infancy. “Saying that mobile companies are ‘mature’ in 2010 is like saying the motor industry had peaked in the 1920s once reliable petrol engines became widely available, or like saying that the pharmaceutical industry was done growing once simple blood pressure drugs were perfected in the 1950s.”

Theron is probably right — competition is going to unleash a wave of innovation, leading to further growth. But telecoms companies in SA, which were protected from the full force of competition by government for a long time, and which operated in a market where regulation was applied with the lightest of light touches, are now facing very real competitive challenges.

The low-hanging fruit has been picked. There’s plenty more fruit in the tree, but getting to it is going to require some hard work. The companies that will win — and the ones investors will back — are the ones that aren’t afraid of climbing the tree.


  1. very true!!! they need steve jobs thinking… say what you want abt apple but they are always producing game changing ideas. we need a steve jobs type but with better pricing… LOL!!

  2. It amazing how bad decisions can make a big company like telkom fail, instead of focusing on their customers and providing links to big customers like Vodacom, MTN , and Cell C with big links they rather played games and did not deliver. The end results the operators are self provisioning, meaning that they will loose this business. So i gues they will not only loose the Land line business , but also the big links that connect the operators. needless to say they will also loose the data to the mobile operators and companies like Mweb.

  3. What about other opportunities in the telecoms space that none of the majors yet dominate – such as in machine 2 machine communication? Telecoms is a far bigger playing field than just bandwidth and mobile… Comments?

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