Telkom in trouble as South Africa’s key players struggle with the implementing the new digital playbook

29 November 2019

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The shift to digital products and networks in South Africa is putting huge pressures on the existing large players. No-one in the industry wants Cell C to go out of business but it is close to the edge. The once mighty Telkom is also in poor shape. Paul Hjul looks at how it is responding to these changes and finds that it is not alone in coming up with the wrong answers.

The tabloid press has smelt blood in the water and is rallying around the idea that Telkom is in deep trouble. It is true that recent financial performance indicators speak to stormy waters surrounding Telkom but the narrative is wrong. Telkom is no more in trouble today than it was eighteen months ago. All of the bad news surfacing in the last month is simply a case of the chickens coming home to roost.

Any critical analysis of the situation should begin by asking the question: why the company didn't implement and execute the transformation of the business and shift in attitude which was needed at Telkom as soon as the Electronic Communications Act became the law of the land? The formation of Openserve (a wholesale division modeled on BT's OpenReach) heralded a potential golden age for Telkom.

Unfortunately two main factors are likely to be responsible for the death of Telkom. Firstly, the formation of Openserve and the embracing of the idea of Telkom as a network infrastructure provider to a Broadband Internet space arrived five years too late. It was obstinately stalled for several years with insufferable and grossly misplaced arrogance and was preceded by twenty years of strategic fumbling.

Secondly, Telkom's failed to realize that by betting big on its mobile operation it was entering a space that was undergoing considerable changes and that these were changes that even global telcos are not entirely sure how to survive and thrive in.

Against the backdrop of a falling share price, a return of adverse consumer - and potential consumer - sentiment towards the company and the questions around its desire to buy Cell C, Telkom's CEO Sipho Maseko made some remarkably inept comments as an attempt to spin the attention away from admitting that the company had grotesquely failed to innovate in the Fixed Mobile Convergence (FMC) and Broadband space.

Telkom has four broad markets in which it offers products and services: Mobile (a focus on mobile data being implied), Broadband (which will need access to fixed LTE products and will need to offer full FMC to consumers but strategically will move to up-sell customers to FTTx) , Openserve (wholesale) and BCX (digital enterprise etc ...).

Telkom clearly misunderstands its true strengths and weaknesses and remains a company that is unable to learn from its failings in charting a path forward. Maseko’s comments suggest the company is overvaluing its mobile assets (subscribers and spectrum), whilst failing to understand the comparative advantage it might have in terms of fixed broadband and fibre.

The problem is not that it hasn’t focused on mobile but rather that the company handcuffed and demoralized its own Broadband and Internet business units and utterly failed to unlock the benefits of fixed mobile convergence (FMC). The billing nightmares and inefficient call centre systems associated with these products are all too obvious.

From a fear of being beaten up as being "anti-competitive", Telkom actively undermined Telkom Internet's position as the ISP with the largest and most balanced customer base and prevented the operation from performing critical up-sale to customers and developing a suite of convergence products.

Telkom failed to recognize the opportunity of local loop unbundling (LLU) and what it would mean for their capabilities in the wholesale space and how their competitors would take advantage of it.

Maseko's comment that "The way people consumer the Internet now is no longer through an ISP" by itself is a gaff, but coupled with the remainder of his remarks it is proof that Telkom doesn't understand the impact that fixed Broadband Internet will have on a society.

If we assume that Telkom could not (or cannot) put the necessary resources into creating a proper Broadband retail business then the correct response would have been to have spun out the businesses of residential telephony and Broadband and have sold the business off.

If Telkom’s strategy is aimed at the mobile users rather than households, you cannot up-sell an FTTH service to a mobile subscriber in a three click process but you can add additional services to a Broadband household - especially peripherals, content rights, mobile service contracts. It shows that the only reason Telkom is not forcibly migrating DSL customers onto Telkom Mobile LTE is because such a move would be met with the wrath of the competition authorities. Telkom is being driven by compliance rather than innovation that is not a good place to be.

Perhaps the best thing that can happen now is for Telkom to actually restructure its entire "Internet" and "Broadband" business into a new concern with new support, CRM and billing systems and appoint leadership who actually value the global system of Broadband Internet. With half a million subscribers a critical mass exists but each month that the company fails to value its Broadband household subscribers more subscribers will leave the company.

So how well are other South African players taking on board the broadband playbook? Cell C is in deep trouble. MTN is currently making the correct warm up notes around converting into a "digital operator" as needed to sing in tomorrow’s opera. During AfricaCom it made the concession that in making decisions on capital investments it would consider the case where it doesn't hold spectrum rights.

MTN remains under-prepared for the coming industry shift to data and the sheer depth of network resources it will trigger. This under-preparedness manifests itself in its position on the Wholesale Open Access Network (WOAN). Currently it is a position of setting up an entity to fail and then using that failure and the opportunity cost of the failure as a good excuse for operator incompetence.

For 5 years MNOs will say that they can't bring more capacity to the market because they are obligated to buy up 30% of their capacity from the WOAN and the WOAN will be failing to deliver sufficient capacity to meet demand. High prices and a non-competitive market will be the result. Moreover, it is quite clear that the approach towards a roaming agreement with Cell C is predicated on a closed RAN sharing contract which may not survive regulatory scrutiny. The regulator ICASA has announced that it will scrutinize the contract.

Vodacom is in the same boat as MTN just more so (and without even making the right noises). It might not have the equivalent of a Cell C arrangement but its relationship with Rain also raises questions that many are afraid to answer. But Rain - other than being first to market - has really offered a limited scope own-network Broadband over LTE and "5G" provider. (The quotation marks is because I adopt the view that the use of NR is not sufficient to really be a 5G player) I currently use RAIN as my service provider at home. It fills a gap but is nothing to write home about.

Liquid Telecom's is an interesting proposition, and in some respects is probably quite happy that Telkom is announcing a total lack of interest in Broadband Internet. But unfortunately it has taken Liquid far too long to bring to fruition an LTE network and a path to using their spectrum assets around the 3.5Ghz space.

Huge Telecom's has recently put out remarkably idiotic marketing material relying on a false comparison between "GSM" (by which they mean voice services using 2G or 3G MNO network infrastructure) and VoIP. VoIP was touted as the next best thing more than 10 years ago. The limitations of VoIP especially when deployed on "best effort" network services are well known.

Of course, IMS based delivery of voice either as VoLTE or as fixed voice services (as deployed by Telkom) over fiber is a major improvement over both "GSM" and plain old dirty VoIP. Huge of course has a reason for their marketing spin - namely a freshly inked deal with MTN.

So as a result of Telkom’s rapid exit from its copper based services market, South Africans now have a choice between VoIP offerings that lack QoS over best effort service providers and GSM rather than the natural successor which is voice over fibre with an IMS core.

In many ways Huge is taking up the opportunity which Telkom's failure to roll out apposite FMC products has created. What is particularly unfortunate is that none of the MNOs who have the ability to deliver Voice over X have made the leap to enter the space. Cell C has a remarkable VoWIFI and could really capitalize in the business market and Telkom has totally failed to dominate the space.

So looking at everyone who might be considered a “telco” in South Africa, with the exception of Liquid, they are all clinging to a mindset that is at odds with the industry transformation which is happening. MTN is gearing up to get out of trouble but has yet to demonstrate that it will.

South African telcos are bucking the trend, of diagnosing and addressing the fact that they need to change their business models (which is happening globally) because they have the convenient excuse of ineptness from government for many years. And if they can't blame the government they'll take to blaming the consumer.

Therefore two weeks after the wonderful experience that is the annual AfricaCom event it is probably a good time to acknowledge just how much trouble South Africa's telcos are in and how they need a material change in their approach towards the world in order for South Africa to avoid having a telecommunications and ICT sector collapse.

So Telkom is in deep trouble but it can get out of some of that trouble if it takes its massive fibre network and its ability to reach the majority of homes in the country and delivers quality Broadband products. But Telkom is not alone in the trouble it finds itself in.