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.
Telkom’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.”
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.