POSTCARD FROM SOUTH AFRICA - STRANGER IN A STRANGE LAND
How come the largest and most sophisticated voice and data market on the continent is also currently amongst the most closed? Once the proverbial "man from Mars" had got his head around where to get a beer and got through saying "take to me to your leader" this would probably be the first serious question this highly sentient being might ask. Quickly followed by where else would an independent regulator need to get all its decisions signed off by the Government?
This is the country in which the incumbent reigns supreme. It may have lost a recent court decision on competition but in all other respects its monopoly is in fine shape. As operator of the only international gateway, Telkom reduced its international prices by 18%, a cut agreed with regulator ICASA. But because this was based on a basket of cuts and increases, it was less easy to see what happened to individual prices. Some countries were cut by as much as 20% but the top 30 most used countries actually went up by an average of 4%. Calls to the UK (which remains a significant large market) were increased by 8%.
The current price of international bandwidth from Telkom is around USD1000 per 64K segment although the underlying price (with bulk discounts) is closer to USD500-600 per 64K segment a month. With competition from the SNO delayed, there’s not much chance of a reduction in these artificially high prices.
Telkom is operating a VOIP gateway that has several countries using it. South Africa is already a regional hub but the VOIP gateway and Telkom’s ownership of the access to the SAT3 fibre cable will almost certainly help it build a growing and probably dominant position in the region.
Telkom IPO’d at R24 but with the news of the SNO’s shareholder troubles it went all the way up to R80 before falling back to current levels in the R60s. With Telkom growing at around 20% a year this is providing a lot of shareholder growth and the gloss won’t come until the SNO gets going.
And who knows when the SNO will get going. The putting together of the two bidding consortium is widely seen as a way of heading off the sort of legal disputes that followed the awarding of the third mobile contract to Cell-C. The main problem is widely presented as sorting out who is going to get what shareholdings but there is a broader problem of actually getting the different consortia members to agree on how they will run the business.
Ironically Nexus, the Black empowerment shareholder group, which has the least telecoms experience has one of the single largest shareholder blocks. It is also not clear whether it has the capacity to raise the capital needed (once the value is set) to match its shareholding. If it wanted to, the Government could play a more decisive role as it effectively controls the majority stake if you combine Eskom, Transtel and the "warehoused" 25%. After all, as with Telkom, it still actually owns the company on this basis and should probably protect the value of its assets.
The current shareholding position with the current "herd of cats" is not sustainable and will probably change very quickly once the company is operational. There are a number of local players with international connections who might get involved once the current dispute is settled and the company is actually in business.
Transtel and Eskom’s fibre assets will be transferred to the SNO. Once a valuation has been agreed on these assets, it will be the nearest thing to a benchmark for the value of the rest of the company. Once this has happened, Transtel will disappear as a company.
Between them Eskom and Transtel (respectively the power and railway parastatals), have two large fibre rings that cover all the major cities in the country with routes also running to the borders of most neighbours and a stretch that reaches to within 30 kilometres of Mozambique’s capital Maputo. This gap will soon be closed. On international level, SNO likely to start by using a combination of Sentech satellite capacity and existing fibre capacity from Telkom.
The optimists (and there are not many of them) say that if the SNO licence is issued at the end of March 2004, then some services can be offered immediately using satellite. If the decision goes beyond the election in May, then it could be delayed by six months to a year: a new Government will mean a new set of politicians who will need to understand the urgency of the issue from scratch.
There’s a clear gap between the national fibre links and the local loop and in the interim, this will be bridged through an interconnect agreement with Telkom. However in the future, there’s going to be plentiful wireless opportunities for someone. The SNO’s business model is likely to be very similar to Mercury’s in the UK: target the corporate customer and leave domestic customers to some later phase, if ever. However as one person who should know told us:"There is some headroom to reduce prices but it’s a case of balancing volumes versus making investment. Overall the cost of calling might get 10-20% cheaper."
VOIP calling is not likely to be legalised until the Convergence Bill is in place and therefore probably not much before 2005. A while back, Telkom pulled the plug on three illegal call-back operators who land "somewhere" and go through to least-cost routers. One of them, a Chinese company was openly advertising its wares in Chinese and was only caught after someone informed on them. The call-back market is largely based on large diaspora communities: for example South Africa biggest Jewish community outside Israel and USA and largest Indian community outside India. Estimates of the size of this grey market vary between 20-30%. However in the meantime, corporate IP calling is an attractive area and will continue to expand over VPNs. With 70-80% savings possible, it is not hard to see why this is an attractive route.
The third player, Sentech is using the terms of its licence to sell satellite bandwidth and its new broadband offering. Whilst it has some talented people working for it, the company is hamstrung by its origins. It is fully government owned and has a monopoly in the field of broadcast. This means it’s not very good at this new-fangled competition business. Also it’s unlikely that the Government will allow it to keep investing at current levels unless it starts making some serious returns.
It somehow contrived to launch its MyWireless offer without actually having the product available. Although it is drawing favourable comments on the mail-lists, it remains to be seen whether its pricing will be sufficiently attractive to compete in the large urban areas of South Africa.
The pricing of both MyWireless and Telkom’s DSL service offer have squeezed the ISPs. Both Sentech and Telkom want to sell directly to customers and have in the words of one operator "p***ed off the ISPs". Telkom is charging a lot for the ADSL loop but hardly anything for the internet service: R700 for the DSL element a month as against R150 for the internet element a month. ISP need to service customer demand but are not making money on the service. DSL is also rolling it out very slowly and with 15,000 customers has not yet hit its targets. Present prices are unlikely to encourage widespread take-up. There is a strong need for the regulator to establish wholesale prices at the same level that Telkom sells to its own customers.
It is not all doom and gloom. As elsewhere there is real competition in the mobile market and it has led to a massive increase in the user base. On a pricing level, once you get below all the complicated tariff structures, the largest player is 2% more expensive than MTN who is in turn 3% more expensive than the third operator Cell-C. The SMS market is growing with for example MTN’s post-paid customers averaging 30 per month and their pre-paid customers 12 per month.
So the man from Mars would probably report back that Earth time in South Africa moves exceedingly slow and that there are better parts of the earth than this strange country to invest in. Perhaps he’ll pencil in a return visit in three years time.