Telkom Mo­bile to fight for its share

CityPress - - Business - JUSTIN BROWN justin.brown@city­press.co.za

CEL­LU­LAR WARS

Al­though Telkom’s mo­bile unit is at last prof­itable, it faces an up­hill bat­tle to sus­tain prof­itabil­ity. To main­tain its win­ning streak, it would have to lead an on­go­ing price war in a fairly sat­u­rated lo­cal mar­ket amid a stag­nant econ­omy.

Six years af­ter launch­ing its mo­bile busi­ness, Telkom’s cel­lu­lar unit this week turned an oper­at­ing profit for the first time.

This fol­lows al­most R10 bil­lion in in­vest­ment in the mo­bile di­vi­sion up un­til the end of the Septem­ber and more than R7 bil­lion in oper­at­ing losses from its launch in Oc­to­ber 2010 to March this year.

Richard Hurst, di­rec­tor of en­ter­prise re­search at Africa Anal­y­sis, said that Telkom had turned a profit by po­si­tion­ing it­self as the “cheaper al­ter­na­tive”, as well as con­tain­ing its costs.

Sipho Maseko, Telkom CEO, said that the com­pany would con­tinue to play “an in­sur­gency role in the mar­ket”, re­fer­ring to the on­go­ing price war that Telkom had led to­gether – but to a lesser ex­tent – with Cell C. “The smaller op­er­a­tors like Telkom and Cell C must play on price to in­crease their mar­ket share,” Hurst said.

Hurst ques­tioned how long the price war in the telecom­mu­ni­ca­tions sec­tor could be sus­tained. “Who can hold their hand in the pa­per shred­der the long­est?” he asked.

The prob­lem Telkom faces is that its two big­gest ri­vals, MTN and Vo­da­com, had much big­ger fi­nan­cial re­sources to ward off a price war.

Hurst said that it was un­likely that Telkom would ad­vance its mo­bile di­vi­sion by a merger or ac­qui­si­tion or that an in­ter­na­tional player would step in be­cause the gov­ern­ment – which owns al­most 40% of the com­pany – would prob­a­bly op­pose such a move.

Cur­rently, South Africa had 154% mo­bile pen­e­tra­tion and this was fore­cast to grow to 194% by 2022, he said.

“There will be growth in the lo­cal mo­bile sec­tor, but it will be slug­gish. How­ever, there won’t be that many new cus­tomers. If an op­er­a­tor wants to gain new sub­scribers, they will need to poach them from a ri­val,” Hurst said.

De­spite 15 years of op­er­a­tion, Telkom’s larger ri­val, Cell C, is largely a mar­ginal busi­ness that vac­il­lates be­tween prof­its and losses.

Cell C, which started op­er­a­tions in 2001 and has more than 25 mil­lion sub­scribers, only gen­er­ated a profit of R2.8 mil­lion for the half-year ended in June on rev­enue of al­most R7 bil­lion. In the half-year ended in June last year, Cell C sus­tained a loss of R1.1 mil­lion on rev­enue of just over R6 bil­lion.

A demon­stra­tion of how tough it is to build a cel­lu­lar busi­ness in South Africa, where there are al­ready two en­trenched in­cum­bents, is ev­i­dent from the fact that as at the end of June, Cell C had an ac­cu­mu­lated loss of R26.4 bil­lion.

Hurst said Telkom, un­like Cell C, had a num­ber of busi­nesses that could use the “back­haul” that had been de­vel­oped for the mo­bile unit and this would help Telkom turn a profit more eas­ily, as the costs re­lated to the mo­bile in­fra­struc­ture would be spread across a num­ber of Telkom’s units.

The back­haul of a telecom­mu­ni­ca­tions net­work com­prises the in­ter­me­di­ate links be­tween the core net­work and the small sub­net­works at the “edge” of the en­tire hi­er­ar­chi­cal net­work.

Maseko said that he ex­pected that Telkom’s mo­bile di­vi­sion would con­tinue to see im­proved prof­itabil­ity. He iden­ti­fied a num­ber of threats the com­pany was fac­ing, in­clud­ing lo­cal growth that is just north of zero, many play­ers en­ter­ing the fi­bre space, Liq­uid Tele­com’s ac­qui­si­tion of Neo­tel and more over-the-top con­tent play­ers en­ter­ing the mar­ket.

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