South Africa - niche VOIP telecom player promising average 37% cuts on all calls

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The introduction of South Africa's competition framework in February next year will give a preview of what will start to happen once the words "monopoly" and "exclusivity" cease to be part of Government or regulator vocabulary. In a world once dominated by a small number of large entities (the incumbent, mobile operators) will be replaced by a whole raft of new service providing entities. There will then be one or two infrastructure providers depending on market size.

The service providing companies will not be defined by the technology they use but by the service they provide. The subject of the interview below is an ISP but it sees itself becoming a niche telecom player offering cheaper phone calls at all levels: local, national and international. It will not be the only player in the game and as it acknowledges there will be far fewer companies left standing in three years time.

Other countries may think that what happens in South Africa will not affect them. That would be a very bad mistake to make as the example of Telecom Namibia points up. It is currently shipping a great deal of its phone traffic for South Africa via London because it is cheaper to do that than exchange it directly with South Africa's Telkom with whom it has a direct link. Come February a lot of that traffic will go direct to South Africa without the need for Telkom at much lower prices. Mozambique will be able to decide whether to connect its fibre to Telkom or an alternative provider.

What happens to South Africa's prices and infrastructure will impact directly on all of its neighbouring markets, spreading out like ink on a blotter paper. Kenya and Senegal have announced competition frameworks. Uganda and Nigeria will follow. Tanzania's incumbment TTCL will soon see its monopoly end. Soon it will be very hard to protect the remaining monopolies as the barriers come down.

Recently in South Africa Russell Southwood interviewed Doug Reed, Managing Director, Datapro about his ambitions to become a niche telecoms company.

Where is Datapro in the South African market?

We’re primarily an ISP and the fourth largest in the market, similar to MTN Networks. Two years ago we got into VoIP and with new competition framework we will be expanding into this market next year. We want to be first to market and we’ll be offering calls at less than 35% of Telkom’s prices. We’re upgrading our equipment, putting in Verso Technologies equipment and Clarent switches. We’ll also be rolling out wi-max in major centres.

We have a lot of services around communications, things like CRM and electronic marketing. We’ve had to refocus slightly. We used to focus on productivity applications but with the growth coming up with the new competition framework, we’re not going to bother.

We have 3,000 customers. Most of them tend to be in the 20-150 PC user companies, just below the Top 500 companies and we dominate that space.

The company came out of Control Instruments, the company that developed on-board software. That was spun off and what was left a company providing services. I purchased a share and got involved 3 years ago. There was then a management buy-out financed by a VC company which itself was bought by a bank.

As we’ve developed a strong niche, we became an acquisition target because we were one of the few independents left. So we had to raise funds to fight off hostile take-over approaches and decided to list on the Altech (the equivalent of the UK’s alternative Investment Market). We were the first to do an IPO on the Altech.

What will be the impact of the competition framework?

We anticipate enormous growth of around 500% plus. Our biggest challenge will be coping with the pace of growth.

How does VoIP work now?

We’ve got an international telco licence and we offer call-back and least-cost routing to deliver the product. Telkom was offering calls to the UK at R2.67 a minute which it has recently dropped to R1.49. We’re selling at 40 cents a minute and still making a 60% margin which gives you some idea of scale of Telkom’s margins. In the future, we’ll put a VoIP gateway into customers’ PABXs that will handle all their calls.

So what will the savings be in the future?

The brand for the new service will be Vox Telecom. So on Vox customer to Vox customer it will be a 70% saving. On local calls to Telkom customers there will be a 10% saving. On national calls, a 35% saving. On fixed to mobile, a 35% saving. Overall there will be a 35% saving for our customers. The capital cost to install the necessary equipment will vary depending on the state of existing equipment but will be somewhere between R10,000-60,000.

What will Telkom’s response be?

If they thought about it intelligently, they’d see us as a wholesale customer. Even with a turnover of R100m, we’d only be 1% of the market. It would probably only need to react if we’re 10% of the market. It should make the terms of buying wholesale so attractive that we’d effectively be tied into them. Telkom is looking to retain 84% market share. It will be lucky to retain 50%.

What will the overall impact on the market be?

There’s going to be a proliferation of niche telcos and it’s going to be an absolute bunfight. Then it will come down to six players in the market: Telkom, the three mobile companies and two other groupings. We might be one of those groupings.

What about the SNO?

The SNO won’t get off the ground. There’s too many disparate organisations. Eskom and Transtel have already signalled that they don’t want to be in the business. The two consortia with 13% each are opportunists. The network assets will be sold.

So what are the other big opportunities with the competition framework outside your own company strategy?

Equipment vendors will do well if they make sure they get paid. There’s opportunities in things like network services and offering offsite redundancy. The country will do well. We currently spend 5.5% of our GDP on communications.

The way the competition framework has been put together suits South Africans down to ground. We get things done quickly. We will hit the market with hundreds of entrepreneurs selling our service, small PABX and least cost router operators. We’ll be ready to go by the end of June 2005.

The sceptics are saying that there will be a legal challenge that will delay things?

We’re going to do it anyway and fight it out. They’ve unleashed too much and you can’t stop it.

What’s the state of the broadband market in South Africa?

There’s currently 38,000 broadband customers. Telkom conceived the product and sold it to their customers first. They subsidised the line cost for their customers. After that, they then sold to ISPs on a wholesale basis. Despite these constraints, it took off. We have developed their product and are offering to by-pass their 3 gigabyte cap. We battled to get a 3:1 contention ratio in the beginning and then got it up to 8:1. We’re now achieving a contention ratio of 40:1. In order to offer more than the 3 gig cap we had to get rid of the abusers by putting them on their own pipe where they could only abuse each other. We made a decision to lose money and stay in the business.

Telkom are always trying to do something to the traffic to save themselves money. Basically they’re traffic shaping and therefore there are lots of customer complaints. We now sell a broadband service for R1250, including hardware to avoid caps. There needs to be no more than 20 users per customer.