THERE’ SA LOT ON THE LINE FOR TELKOM
Rivals MTN and Vodacom have deeper pockets and have a head start, writes
Over the past 10 years Telkom has gone from a monopoly to being just another telecom player. If it wants to stay relevant it will have to box clever.
For now, it is in a quandary.
The once-mighty fixed-line monopoly, which at one point controlled telecom access into and across the country, now faces one of the biggest dilemmas since it was spun out of the department of posts & telecommunications in October 1991.
Telkom must invest in 5G wireless technology to remain a significant player. The rapidly growing demand for data services such as video streaming and cloud-based business applications is making investing in this technology all but essential for telecom companies if they want to stay relevant.
The growing importance of the telecom sector can be seen in SA topping the daily amount of time spent online at 9.38 hours, way above the worldwide average of 6.37 hours, according to the Digital 2023 Global Overview Report.
The growth in digital services that requires broadband infrastructure is showing no signs of slowing down. According to PwC’s Entertainment & Media Outlook 2022-2026, sectors such as online gaming and video streaming services — buoyed by the Covid pandemic — are seeing a “rise to new heights after thriving under the lockdown conditions”.
This can be seen in total spend on internet access rising from R61.18bn in 2019 to R81bn in 2021. There is a similar story with video streaming services, where spend rose from R1.62bn in 2019 to R2.64bn in 2021.
PwC noted that data consumption in SA was not only growing rapidly but, in 2021, the country was growing faster than the global average.
Spending in these sectors is not expected to slow down any time soon. Total spend on internet access is expected to rise to R117.93bn and for video streaming services to hit R3.47bn in 2026.
TELKOM HAS A PROBLEM
The problem for Telkom is that though it has an extensive fibre network, South Africans are connecting wirelessly to the internet via their cellphones and mobile routers. And while it has grown Telkom Mobile into a sizeable operation, it is going up against rivals which have deeper pockets when it comes to rolling out 5G services.
5G is a seen as a game changer because it is 10 to
100 times faster than the legacy 4G. But setting up a 5G network does not come cheap.
Local telecom operators, for instance, paid out R14.4bn to buy “high value” broadband spectrum in the Independent Communications Authority of SA (Icasa) auction, which will be used to provide 5G services.
5G is a seen as a game changer because it is 10 to 100 times faster than the legacy 4G. But setting up a 5G network does not come cheap
The operators must then still invest billions of rand in rolling out these new networks because 5G is a new technology, and new infrastructure must be put in place. This makes it a lot more expensive than the move from 2G to 3G, and from 3G to 4G, as they were essentially just software upgrades.
WELL-RESOURCED RIVALS The problem for Telkom is that it has far fewer resources than MTN and Vodacom when it comes to making such a substantial investment.
The group’s latest results for the half year to endSeptember show the strain it is under. Revenue was flat at R21.2bn, operating profit collapsed 44% to R1.39bn, and its free cash flow decreased 200.8% to a negative R2.1bn.
The problems can also be seen in its balance sheet. Its cash balance crashed 35% to R2.3bn, and its net debt surged 29.8% to R14bn.
MTN and Vodacom are in far stronger positions. MTN saw revenue grow 15.3% to R196.5bn and has R44bn in cash and cash equivalents, for the year to end-December. Vodacom saw revenue rise from R49.8bn to R53.7bn and had R12bn cash in the bank, according to its interim results to end-September 2022.
The difference between the three can be seen in their share prices. MTN has risen 5.6% to R128 a share,
Vodacom is down 3.44% to R125.98 a share but Telkom has slumped 23% to R36.16 a share over the past six months.
MODEST GOALS
The difference in resources is seen in the ambitions of their respective 5G rollouts. MTN has more than 1,400 5G sites, says its 2022 annual report. Vodacom has 434 5G sites and Telkom has only 160.
Where MTN and Vodacom speak of wide-ranging coverage, Telkom is more circumspect on where it will set up its sites.
“Our 5G rollout is based on locations with high data demands, as well as other criteria such as affordability, using our current LTE ecosystem as an indicator,” said Telkom Group CEO Serame Taukobong at its results presentation in November.
While Telkom is taking a bespoke approach, MTN’s 5G network already covers 21% of the population.
There are several reasons why Telkom’s rivals have deeper pockets.
Atvance Intellect MD Steven Ambrose points out that MTN and Vodacom’s extensive cross-border operations give them a hedge against the rand.
MTN operates in 21 countries, while Vodacom owns the Kenya-based Safaricom, which generated R21.2bn in revenue for the half year.
OVERSTAFFED
Unlike its competitors, Telkom must deal with problems that come with the legacy of once being completely stateowned. This can be seen in it having substantially more employees than MTN or Vodacom against the revenue it generates.
Vodacom employs 5,583 people and brought in R102.7bn for the full year.
MTN has 16,390 employees and close to R200bn in annual revenue.
Telkom, with its 11,788 employees, generated only R43bn in its most recent fullyear results.
“Vodacom has half of Telkom’s staff but generates more than double its revenue,” notes Ambrose.
Unsurprisingly, given the
difficulty it is in, Telkom announced in February that it will be going through a process to restructure the company in terms of section 189 of the Labour Relations Act, which will see up to 15% of its employees retrenched.
NOT QUITE A SECOND-TIER OPERATOR
Though Telkom’s latest results are not great, this should be seen in the context of it having to reinvent itself from being largely a fixed-line operator, which could dictate prices for its customers and rivals, into a broad-ranging telecom company that is able to hold its own in a competitive market.
Its mobile operation, for instance, has well over 18million subscribers, despite being launched 16 years after MTN and Vodacom. Its enterprise-focused division, BCX, is expected to sustain the growth it generated in the first half in its IT business, and its fibre Openserve has done well, seeing a 13.6% rise in fixed broadband traffic.
And though having almost 12,000 employees seems a lot, this must be measured against a background where, as a government department, it once had a staff of more than 100,000.
TIME FOR A DEAL
Even so, the weakness of its balance sheet against those of its rivals leaves it at a disadvantage when it comes to dealing with the difficult economy and the fallout that comes with SA’s rolling blackouts.
This, along with talk of consolidation in the sector, has seen Telkom going into merger talks with both Rain and MTN in the past year.
Players across the sector are increasingly looking to partner up as growing demand for high-speed wireless and fibre broadband are forcing them to consider ways to scale their operations.
The first deal was announced in November 2021, between Vodacom and the Remgro-controlled Community Investment Ventures Holdings (CIVH), which owns Vumatel and
Dark Fibre Africa (DFA). This move would see them merge their fibre operations.
That merged entity will give Vodacom access to business that has access to DFA’s 13,200km fibre network, and the 31,000km owned by Vumatel. It would also make it less dependent on the 165,900km of fibre owned by Telkom.
This is why it came as no surprise when Telkom and MTN announced, in July 2022, that they were in merger talks. Nothing came from Telkom’s talks with MTN and Rain but that does not mean all deals are off the table.
Dominic Cull, a telecom lawyer and owner of Ellipsis Regulatory Solutions, foresees MTN buying out its tower operations before this year is out.
Cull says it’s clear that “MTN has to do a deal that matches what Vumatel has done with CIVH ... and Telkom is doing all the right things in puffing out its chest and balance sheet to try to get the best deal there”.
Taukobong talked up its tower businesses when speaking at the group’s results in November.
“In our masts and towers business for Swiftnet, we have increased our productive capital to 3,945 towers with 26 new towers and five inbuild solutions over the period. We have a healthy pipeline of permitting more than 2,000 sites.”
Though it is unclear what deals will be struck in the next year or so, what is clear is that if Telkom does not strike one, it could easily see itself on its way to becoming a minor operator in a market it once dominated.