The Telkom conundrum: Can a Telco catch up to leading mobile players?

The news is not good, and in fact has not been good for a while. South Africa’s largest telecommunications provider, Telkom, is in trouble. Of that there is no doubt. The depth of this trouble is what should concern us all. The billion dollar question is whether or not Telkom can dig itself out of the ever-deepening hole it’s slipping into. Or will the long-suffering taxpayer have to bail it out, which seems to be becoming the usual course for state-owned enterprises around the world?

With the release of Telkom’s interim results for September 2011, it is clear that making money is not something that Telkom is doing. It is also not entirely clear how it is going to do so in the future. Its mobile offering, 8Ta is burning cash at an ever-increasing rate, and the fixed line business appears to be in terminal decline. Competition is also finally making itself felt, with smaller and much more agile companies self-providing, and as a result lessening their dependence on Telkom at a rapid pace.

The bright light that was 8ta has been much more of a challenge than was anticipated, and despite relatively pleasing subscriber numbers, now hitting just over 1.1-million, its users spend, or average revenue per user (ARPU) is well below those of its competitors in the speace, Vodacom and MTN, at ZARR63.32. The fly in this ointment appears to be prepaid, with an average spend per user of only ZAR20.47 cents. It is clear people are happy to try 8ta, but not switch over as yet. Telkom it finally realising that competition in this saturated market will be far fiercer than it had ever anticipated.

The core activity of Telkom, and one it still has a virtual monopoly on, that of fixed lines, is also under threat. Telkom has lost well over one-million fixed telephone lines in the past few years from a peak of 5.5-million a few years ago. The losses also appear to be accelerating, with over 320 000 lines lost in the last two years alone. Part of this is fixed to mobile substitution, a phenomenon that is actually occurring all over the world. But a large reason is that the costs of fixed lines, unlike all other telecommunication costs have actually increased every year, rather than decreased.

Telkom appears to be well aware of all the above issues, and the new management team led by CEO Nombulelo “Pinky” Moholi, really appears to have the credentials to take Telkom forward. My real concern is that it may well be too little too late. Telkom is a huge company, employing tens of thousands of people, and deeply imbedded in the structure of the not so “New South Africa”. Simply put, it’s a state-owned enterprise, with all the responsibilities and baggage that brings with it.

These responsibilities consist mostly of a toxic combination of politics, labour, and other “issues of national strategic importance”. There is no doubt that Telkom is not an easy ship to pilot, let alone navigate through the rapids of the fast changing landscape that is Telecommunications. Revenue is under huge pressure for all operators, including the mobile operators. To add to this the advance of technology, especially in the data space, is forcing operators to spend ever-increasing amounts on infrastructure, just to cope with the changes.

The options that face Telkom are stark. It needs to reengineer its operations completely. Both from human resource point of view, a structural point of view, as well as technically, as the world goes mobile, and optic fibre takes over from copper, the costs and the technical skills needed will explode. None of this change will ever come cheap, and a loss making Telkom operation will struggle to find the finance necessary to finance all this change.

My sense is that in order to avoid the inevitable shipwreck that will overwhelm Telkom in the near future, some serious strategic thinking needs to happen. No company can sustain losses of the magnitude of Telkom’s for long, and funders, including the government, will soon tire of these issues, and make changes in management once again. In order to avoid this, the current management will have to be bold, fearless, and most of all act swiftly. If they do not, we will all suffer, as communication has become a vital component of modern life, much like water and electricity.

Image: RNW