Toughest challenges loom for Telkom

Instead of wasting billions of rand on misadventures in Africa, Telkom should have begun building fibre-to-the-home infrastructure years ago. Now it’s likely to face significant competition in this market. By Duncan McLeod.

Duncan-McLeod-180-profileTelkom’s share price has risen sharply in the past year on optimism that the new leadership team under CEO Sipho Maseko has what it takes to turn the lumbering telecommunications giant around.

Since last June, the share price has gained more than 150%. And since its low point in May last year, it has soared by a staggering 250%. The question now is whether the pendulum has swung too far the other way — does the rally still have legs?

Maseko has been tackling many of the big challenges – chief among them the unprofitable Telkom Mobile and the bulging salaries bill — and this has investors snapping up the company’s shares.

But reducing the size of Telkom’s bloated workforce — a difficult job involving fractious negotiations with unions — and reaching an agreement with rival MTN to deal with the mounting losses at Telkom Mobile will address only the short-term problems. The real challenges are still to come.

Parkhurst, the Johannesburg suburb planning to install a fibre-to-the-home broadband network, represents what could become an existential threat to Telkom. Residents, fed up with lack of Telkom infrastructure in the area have contracted Cape Town-based company Vumatel to extend fibre to 2 100 homes.

Unlike the legacy copper infrastructure that Telkom uses to provide broadband ADSL services, fibre is capable of next-generation broadband speeds. Parkhurst residents will be offered speeds of up to 1Gbit/s, more than 250 times faster than most ADSL links.

Vumatel is backed by Niel Schoeman, the same businessman behind Conduct Telecommunications, a fibre-to-the-business provider that was recently acquired by fast-growing national and metropolitan fibre specialist Dark Fibre Africa.

Schoeman says that if the R30m Parkhurst project is successful, Vumatel intends “ramping up quickly”.

Within three or four years, he wants to have deployed fibre broadband to as many as 100 suburbs and 200 000 homes at a cost of up to R3bn. He doesn’t believe Vumatel will have a challenge raising the money because there is plenty of funding in South Africa chasing big infrastructure projects, he says.

If Vumatel gets it right, it will be the first true alternative to Telkom in the residential fixed-line market. Neotel was supposed to be that company, but it pursued lower-hanging fruit in the enterprise and wholesale markets.

Vumatel is taking an approach quite unlike that of the incumbent operators, which favour the “vertically integrated” model under which they provide all services — the infrastructure, data, voice calls and content — to their customers. It intends building “open access” fibre-to-the-home networks, letting Internet service providers, content suppliers and others compete on an equal footing for customer attention on top of its infrastructure.

Schoeman says Vumatel is taking a long-term approach in securing a return on investment — up to 10 years. “This is a utility,” he said. “You can’t look for short-term returns if you’re installing a utility.”

Telkom CEO Sipho Maseko

Telkom CEO Sipho Maseko

Should Telkom be worried? On Friday, it finally announced plans to roll out fibre to homes in 20 upmarket suburbs. This is something it should have begun years ago instead of embarking on misadventures in Nigeria and elsewhere.

Now it’s likely to be just one of a number of players in a race to wire up leafier suburbs — the same ones where it makes most of its money in the residential market.

Suburbs in Gauteng that Telkom has identified are Groenkloof and Brooklyn in Pretoria and Houghton Estate, Bryanston, Sandhurst, Westcliff, Rosebank, Craighall, Craighall Park, Illovo, Parktown North, Hyde Park and, yes, Parkhurst in Johannesburg. In Durban it will focus on Kloof (including Winston Park and Everton) and Reservoir Hills and in Cape Town the Foreshore, Bishopscourt, Camps Bay (including Clifton and Bakoven) and Plattekloof.

But it now faces the real prospect of significant competition not only from nimble start-ups such as Vumatel, but also from the big, deep-pocketed mobile operators, which are also keen to start playing in the home fibre market.

  • Duncan McLeod is founder and editor of TechCentral. Find him on Twitter
  • This column was first published in the Sunday Times

Share this article

  • MelcolmX

    Got Fibre optic in SF in ’92. Standard speed 20 megs per sec pay little more for 80 megs
    If this is 22 years later here I can only say that you will probably receive that speed beyond 2025. I have 4MBS supposedly! However a 4MBS page takes 30 sec to open??
    Telkom says this is normal?? Is this not false advertising! SA citizens need to be more proactive paying for service that is non existent! Check your line speed!!

  • http://www.InTheCube.co.za/ InTheCube.co.za

    Telkom’s days are numbered. Their share price is building up in a bubble that will burst soon. For the first time, they face significant competition in every sphere of their business: mobile operators are eating away at consumer voice minutes, broadband subscribers, and even analogue lines. WISPs and new FTTH companies are fighting for customers that Telkom refuse to service or customers who are fed up. VoIP operators, metro ethernet, business class fibre, and high quality wireless last mile services operating on licensed spectrum are eating away at their business clients. Telkom Mobile is only inching along due to fierce competition in the mobile market. Fixed line connections are the lowest they’ve been in 20 years. They face significant competition on international submarine links, as well as on national long haul fibre routes.

    One has to wonder why the share price is continuing its upward trend, while their market share is eroded away on a daily basis? What is the driving factor? It makes zero sense.

  • Davebee

    Your reasoning is quite correct Duncan in that Telkom still has a mountain to climb with regard to hanging on to their gains.
    Why should this be? Well, look no further than their political masters in the ANC, Luthuli House has hog tied the company by listening to the unions more than listening to sound technical advice and getting rid of their massive work force with its equally massive transport and fuel costs. Telkom should have been first out of the gate in the last-mile fibre route yet they clung to the old legacy technology of copper to placate their COSATU/Solidarity militants and now they and sadly South Africa will pay the price as we all lag further and further behind in the digital speed world.
    Sad, but so very PREDICTABLE.
    What’s even sadder is that Cwele, the politically appointed dunce that Zuma has put in charge of the digital comms 21st century here in SA is as clueless as his so-called boss

  • Joe Black

    Well all the rubbish Telkom has gotten up to over the years was accompanied by a play-by-play criticism from yours truly and just about every other person in SA with two neurons to rub together and the time to take an interest. And now all that remains is: We told you so.

    This is a particularly poignant example of why it is bad for parties and politicians to abuse incumbents to further their own agendas.

  • Singatha Jongihlati

    Kudos to the likes of Vumatel in taking on the Telkom behemoth, but one can just not ignore the fact that true fixed line broadband in this country is and will still remain the preserve of the “Elites” according to Telkom’s roll-out plans for FTTH(see suburb list above). Good article but I’m afraid a sad day/week/month/year(s).

  • Gladiator

    Yep when one looks at the money and energy squandered starting with Vodacom sale of 15% of the 50% owned for R22,5 billion, wonder what happened to the other 35%. Then on to MultiLinks R14 billion lost selling off the remainder for US$ 10 equated to R80 million someone needs to just do simple arithmetic, then lets close off Telkom Media a perfect platform for video on demand but no now we enrich some other cadre tender currently just released, then we put together 8ta now Telkom Mobile do agreement with MTN probably for some additional money which also probably squandered again, then appoint Bain and Co without tender for R80 million same crowd that sold off SAA assets now they have to sell SAA headoffice and get bailed out by the taxpayers strange how every Sunday paper advertises Telkom property auctions really same modus operandi. Sell off IWay then Telkom International for a song wonder what happens to the International call termination payments now. Then attempt to buy BCX for R2,4 billion one does not have to be a rocket scientist to work this one out considering the taxpayers paid for the entire copper infrastructure and exchanges in the first place. Someone needs to wake up seriously otherwise you and I are going to pick up their future tabs I agree this bubble is going to burst shortly then the shareholders will probably start class action against the company. I really hope the directors have looked carefully at their responsibility and liabilties otherwise they themselves may face more than a rap on the fingers and a overnight governance course as was enforced on Sipho. Looking at their financials they seem to want to outlitigate everybody.

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