NEW MODEL INCUMBENT TELCOS - TEN WAYS TO SURVIVE A COMPETITIVE ENVIRONMENT
Everybody always talks about African incumbent telcos as if their position is unassailable but they may yet become an endangered species. Some have been battered by aggressive mobile operators, whilst others are in a state of such neglect that it’s hard to imagine how they’ll be revived. For some, civil war has already dealt a mortal blow: the DRC is a case in point. The WTO deadlines for telecoms liberalisation are approaching and although some will drag their feet, there will eventually be some measure of competition in most markets.
Competition threatens the whole existing business model of the incumbents. They have built it on having very lucrative international revenues. These were once supported by the ITU’s "accounting rate" cartel and now the market rules. The impact of these new competitive international rates are breaking like waves at the door of Africa’s closed telecom markets.
So what’s an incumbent telco to do? Its business model was built on getting a large proportion of its revenues from international traffic in hard currency. Its international revenue will continue to drop over the next few years. In order to survive, it needs money in hard currency to invest to improve its networks. Minority shareholding, strategic investors are thin on the ground in the current climate.
In these circumstances, you might imagine that the management of incumbent telcos would be in continuous discussion about how they might address this challenge. Far from it. Most have as one close observer put it,"put their head in the sand and hope it will all go away." So in this off-the-record briefing, Russell Southwood looks at ten ways that the incumbent telcos might respond to these strategic challenges:
1. Rebalance your international and domestic charging
Your business realities are about to undergo a fundamental change. At present international call revenues probably make up between 60-65% of your business by value. In some places like Somalia it may be as much as 70-80%. In a deregulated market, these figures will probably fall to below 20%. You’re in a plane that’s about to lose altitude very fast.
Look at the numbers. Five years ago Kenya Telkom was charging an average of forty cents a minute on average for international calls. It’s now down to 9 cents a minute. Interestingly in Tanzania it went down to 7 cents a minute in 2000 but has now come back up to 14 cents a minute for reasons that will become clear in point nine below. Whatever the drop, this will remain core business paid in hard currency.
So here’s the bad news for your customers: international calls may get cheaper but local calls will get more expensive. In the days before it all changed Tanzania’s TTCL charged an average of US$3 per minute and 3 cents for local calls. The imbalance is less extreme now but domestic and international calling rates have to be rebalanced to charge more for local calls.
And the rebalancing will have to be done against a trend of falling international prices. All international carriers we spoke to said that the market will continue to fall. Peter Gbedemah of Gateway Communications predicts:"It will reach a position where the African wholesale international price will be no more 1 cent above the cost of a local call. But you need to know that there are companies out there who are willing to make 0.2 cents per minute on international calls."
There also needs to be a rebalancing in terms of how much the mobile phone operators are charged for the use of the network. This doesn’t simply mean what you think you can get away with in front of the regulator but knowing more about the payback cycles on your network and their mobile equivalent. Charge too much and the mobile companies will look at how they can replace using you by investing in their own network. Charge too little and they will take you apart and ultimately replace you.
2. Improve management, clear out the ‘dead wood’ and increase efficiency
African incumbent telcos need to address the cost side of their business model. They employ too many people to compete effectively. For example, one incumbent employs 21,000 people to supply 182,000 fixed and mobile connections. The SNO employs 300 people to supply 357,000 fixed and mobile connections. Do the math. The incumbent has only 8.6 connections per employee while the SNO has a staggering 1190 connections per employee. How come? The SNO’s key shareholder is a mobile company and mobile companies are now setting the benchmark in terms of efficiency and delivery.
Incumbent telcos need to cut out the endless secretaries and drivers at senior management level. Cuts start at the top. Botswana’s BTC has cut the number of management posts from 131 to 90. They need to cut out the non-productive workers who do not understand that hard work and efficient business practices are the only guarantee of a future job. The incumbents need to improve the cost at which they deliver each connection, whether it is fixed or mobile. By getting the cost base down, they stand a better chance of being able to make money from the residential market.
Such a massive transformation requires political will, a skilled and determined management cardre and a change process of fundamental proportions. What exists now? Companies that are run like branches of the civil service. Ghana Telecom has ten regional companies and 12 layers of management.
At present most companies have salaries that are based on seniority and position. In future companies will need to incentivise managers by performance, not by where they are in the pecking order or how long they’ve been there. In the case of Botswana’s BTC managers are now on three year performance-based contracts.
Currently many addressing this dilemma are in politically-imposed denial. Both the management contractors for Ghana Telecom and NITEL say they will not cut jobs. To be fair, both believe they can drive up the total number of connections delivered. We shall see.
As one person who sells minutes to African incumbents put it:"It’s a big, big political issue." Because they are or have been state enterprises, family links and nepotism run deep". As one competitor of an incumbent told us:"Far too many employees are connected to the Government. They need to do cut employees but as they do this perpetual restructuring, they take their eye off the core business. The Government and unions are always frustrating them. They’re not allowed to get rid of people and start competing."
But for the politicians, it’s a case of damned if you do, damned if you don’t. With no change, the incumbent telcos will decline in value as state assets. Allowing cuts in jobs will obviously be a major political issue. How do you square the circle? By finding ways to encourage the overall growth of the ICT sector so that new jobs will replace old.
3. Credit and cash-flow; don't finance your customers, finance the company
The incumbent telcos need to maximise their cashflow so that it finances the company rather than its customers. It needs to close the distance between billed and collected revenues. (The current legal dispute between TTCL and the Tanzanian government is based in part on different assumptions about collectable revenues at the point of sale. Needless to say the Government takes the more optimistic view).
The essence of improving cashflow is simple: cut off those who don’t pay, always. Then charge a hefty reconnection fee. The message is simple:"If you want a continuous phone service, pay on time." This is so basic that you wonder why it doesn’t already happen. As one company executive familiar with incumbents explains it:"There’s a reluctance to switch off people who don’t pay." They need to put in place Core Data Records (CDRs) and proper billing systems. In this way, they can cut down the queries that slow down payment.
Many of the biggest debtors are government ministries who because government owns the company, don’t think they can be cut off. So cut one off to encourage the others. It can be done with political will. The State Governor of Niger State has ordered all non-paying ministries to be disconnected from NITEL.
As operator in another country tells it:"We cut off the Office of the Vice President. They couldn’t believe it at first. They now pay. Luckily (in this country) Government has no sympathy for people who don’t pay. But developing a payment culture is challenging."
Because of these difficulties, wherever possible shift customers over to pre-paid systems.
4. Maximise business from your infrastructure; don't worry about cannibalising revenues
Whatever state your infrastructure is in, it has to be your main asset. Find every way you can to maximise your revenues from it: your key resource is the local loop. Leverage it to get as many people using it as possible. Traditional telco managements fret about cannibalising existing revenues.
But Peter Gbedemah of Gateway Communications thinks this is the wrong attitude:"The idea you’re cannibalising revenues is irrelevant. Either you keep your customers’ revenues or you lose it to the GSM operators." Most incumbents were slow to get into mobile telephony and are not effective at making the most of the opportunity.
- The incumbent’s mobile operation is nearly always smaller than the leading player’s. Focus attention on winning in this market because it’s where the money is.
- Don’t start an ISP. It’s a low value business and with the level of overheads incumbents carry, it will never make money. Wholesale bandwidth to others and let them take the risk.
- Putting in place roaming arrangements is very easy but it’s surprising how slow some incumbents have been to sort this out. As one international carrier executive told us:"If you have a mobile operation, set up roaming arrangements with the 150 top countries and your communities of interest like the diaspora. The money you’ll be able to make from that is obscene".
- Put in place an effective SMS messaging service. Then start building on to it value-added content services. Start with the things that sell: sports, news headlines (especially during elections), horoscopes and games. Also look at specialist markets like crop and fish market prices and stock prices.
5. Open new channels to your markets
BT has a wholesale services division in the UK. It sells to the many calling card companies in what is a very price sensitive business. This is not revenue that’s lost to BT because it still goes over the network but again they have given the risk to the card operators. Better to get less, safe revenue than more, risky revenue.
The incumbents need to establish retail sales channels for calling cards and call shops. This offloads the marketing costs to the "channel" and it gives them the responsibility for taking on the billing and the credit risks in payment-averse cultures. Make the terms as beneficial as possible because it’s easier to cut off call shop customers for non-payment than it is large institutional customers like Government.
Sign calling card deals with non-competitive carriers. It’s a cut-throat business so let them deal with it on your behalf.
6. Stop losing money on lines that don’t work; drive up maintenance efficiency
Install a Network Maintenance Centre so that you can monitor faults centrally 24 hours a day and issue work orders from a central point.
As one person put it to us:"Telkom Kenya have 0.5 million lines, of which only 0.3 million work at any one time. You are losing money and customers on lines that are not working."
You’re not just losing money on the line that’s not functioning. It’s also undercutting any confidence your customer might have in buying those fixed lines. So you’re losing twice over. So Kenya Telkom has fixed lines capacity to sell that exceeds its ability to persuade customers to take them. They just don’t believe they’re going to work as well as mobiles.
7. Don’t have a great future behind you - adopt the new technologies
Incumbent managements are full of former engineers whose formative experiences were in laying copper, analogue networks. Many of them have just not kept up with the fast-moving world of new technologies. Almost everywhere these new technologies form the battle cry of the new, insurgent private sector who want to compete with them. Not surprisingly, the telco managers with engineering backgrounds are extremely defensive as they feel that the barbarians are at the gate and that the newcomers don’t really understand the needs of traditional voice networks.
They should embrace the new technologies: in particular GSM, ADSL, VSAT, wireless local loop and local networks and voice over IP. It’s not just that they’re newer and whizzier but that the financial return from them is often much faster than from the traditional fixed network. Use a basket of technologies and use what is most appropriate in different places.
Although traditional telco engineers remain sceptical, there is a good prima facie case that voice over IP &SHY; sending telephone calls digitally &SHY; has lower network investment costs and planned well, can lower network congestion.
8. Care about your customers and they might care about you
The incumbents need to go from a position where their customers see them as their number one communications problem to them actually wanting to buy things from you. As we observed above (point 6 &SHY; maintenance efficiency), part of this is concentrating on actually delivering the service you promised them: not 77% of the time but 99% of the time. Get out and repair faults and do it within a time period that you can promise the customer:"We’ll repair your line within 24 hours, otherwise we’ll pay you a penalty cost for every day we faill to meet this promise."
The second part is creating a customer care culture in a continent that is notoriously bad at it. Thus far it only exists in the tourism industry in places like Kenya and South Africa. Employ people who are friendly, warm and responsive and give them the responsibility to solve problems for your customers. Get rid of the surly, rule-bound, paper-shufflers that are all too-often the public face of your organisation. Senior managers should get friends to buy products and services and tell them what the experience was like.
It is particularly noticeable in the corporate space that even where independent companies cannot compete on price (for example, South Africa) they are still beating the incumbents hands-down. Why? One word only, service.
When you’re a monpoly, you don’t have to compete. There’s only one place to get what you were selling. This position breeds arrogance and laziness and these are not qualities your customers will value when they have any choice about where they can buy these services from.
9. Fight the grey market with a carrot and stick
All incumbents are losing revenues to the grey market. However where there is a more competitive market in international calling (for example Uganda) there is almost no grey market. The price difference between the cost of buying international calling and what it’s sold at is much narrower and therefore it’s not worth the time and trouble to be a grey market operator.
So over time adjust your pricing to drive out the grey market. In these circumstances, it won’t be worth your employees’ while to be offering corrupt VOIP arrangements to cyber-cafes and ISPs.
Offer a number of approved companies wholesale arrangements. It won’t stop others setting up and offering even lower prices but it will help to stabilise the market.
The stick is having an inspection and security policy that seeks to identify those who are abusing their position. There’s no need for heavy police intervention. Seizing equipment and throwing people in jail is not the answer. Behave like South Africa’s Telkom. Just send a letter saying that it has come to your notice that the lines are being used illegally and then cut them off.
As one seasoned observer noted:"You should say that most people who use PRIs in any volume should only have one way lines. If you have a request for a two-way calling line, then you can have the identity turned on and the inspectors can pick it up."
10. Generate enough capital to invest in new equipment
Telephone equipment sellers have over the last ten years or more encouraged cash-strapped incumbent telcos to buy equipment using attractive lease deals and the incumbent’s senior managers have colluded with them. International donors have also encouraged similar processes whereby the money given funds equipment from the donor’s own country. The net result is companies with a patchwork quilt of different, often incompatible equipment that simply doesn’t behave as a single network. Maintenance efficiency goes down as engineers struggle to understand different equipment and keep it talking to others different bits of equipment.
Corruption plays it part. Incumbent managers often buy equipment for which there is no reasonable use. As we were told by a European international carrier executive:"One company we deal with bought a (a particular piece of switching equipment). There’s no reason why they should have it."
Unless you generate sufficient net profits to re-invest, then your network will go the way of dinosaurs.
In reality, the only way to achieve this scale of changes is to privatise the incumbents as quickly as possible. Some like Gamtel have achieved much of what we are describing in public ownership but they remain the exception rather than the rule.
These changes have to be talked about publicly if the consumers, the unions and the politicians are to understand why they are occuring. Incumbent managements need to wage a small "p" political campaign to explain what’s happening to its own managers, staff and users.