The “functional separation” of Telkom’s wholesale and retail divisions, agreed to in a wide-ranging antitrust settlement announced last week, could be a precursor to the structural separation of the two divisions, analysts say.

Last week, as part of a R200m settlement reached between Telkom and the Competition Commission, the telecommunications operator agreed to the “functional separation” of its retail and wholesale divisions and to a series of price cuts, focused mainly on wholesale services.

But BMI-TechKnowledge MD Denis Smit says the phrase “functional separation” is a “bit of an enigma” given that Telkom has always claimed separation of pricing and accounting between its wholesale and retail businesses. In fact, he says, this claim featured in Telkom’s own arguments in its defence in front of the commission.

Until the full details of the settlement emerge, Smit says the issue that warrants most attention is Telkom’s agreement with the commission to cut prices. “The reality behind all of this is that Telkom is inching towards a new relationship with government,” he says.

The price cuts and the talk of separation all suggest the move is the “first step to physical separation”, a precursor if government intends to use Telkom as the basis of a national broadband network.

“This is the first step towards some sort of strategic realignment that will look at Telkom’s wholesale network being used more explicitly as a national network,” Smit says, adding that the settlement suggests a “change in tone” from Telkom’s management. Telkom has the strongest board its had in years and management appears eager to get the company back on track by making decisions, even difficult ones, quickly.

According to Smit, the real question is whether separating Telkom’s fixed-line business into wholesale and retail entities means doing the same to its troubled mobile business.
Smit says people shouldn’t be too quick to dismiss Telkom or call for it to be sold off to the highest bidder because “what happens at Telkom affects all of us”.

Internet Service Providers’ Association regulatory adviser Dominic Cull says the talk of “functional separation” suggests Telkom is trying to “firm up” the separation between its wholesale and retail businesses but that the exact nature of the move remains unclear.

Although the separation has, in theory, existed for years under the requirements of the Electronic Communications Act, “it’s difficult to change existing market structures with legislation”.

Cull says the move suggests Telkom is preparing for the sort of split envisioned by the national development plan. “The plan talks about a functional wholesale and retail split. Telkom will have to embrace that split and formalise it.”

This is supported by the fact that Miriam Altman, who was part of the National Planning Commission when the national development plan was written, is now head of strategy at Telkom.

“This is infinitely preferable to the previous settlement,” Cull says, referring to an earlier matter before the Competition Commission that resulted in Telkom receiving a R449m fine for anticompetitive behaviour.

While that resulted in a state-owned company paying a fine to the state, Cull says the price reductions Telkom has agreed to as part of the settlement are “far more useful” because they offer “meaningful market intervention”.

“From an Ispa perspective, it’s definitely a step in the right direction,” Cull says. The balance now needs to be struck between getting Telkom to reveal enough information about its pricing between wholesale and retail businesses to keep it honest, while “not hampering it or giving away all of its secrets regarding pricing”.

Nevertheless, Cull is upbeat about the move. “We’re starting to hear more reassuring levels of engagement from Telkom as to how it’s dealing with the problems facing it.” — (c) 2013 NewsCentral Media