Beware digital self-destruction
It was so intent on protecting its legacy business, it threw market logic out
Lurking in Telkom’s stellar annual results this week was a tacit admission that the organisation came close to selfdestruction in the past decade.
Back in 2010, its fixed-line business entered a 10th year of decline. That marked a strategic watershed in its history at a time when it had not yet launched its mobile service. It was so intent on protecting its legacy business, it threw market logic out of the window and doubled down on what might be called accounting logic.
It drew on a concept called “access line deficit”, which meant that line rental charges were too low to cover the cost of providing the fixed-line services, and should be increased every year. Although it never provided evidence for this deficit, the Independent Communications Authority of SA (Icasa) initially went along with the fiction.
Icasa supported Telkom’s contention that use of its ADSL services should incur both a line rental fee and an ADSL rental fee, even before a single megabyte of data had been consumed. It rejected internet service providers’ (ISPs’) argument for “naked ADSL”, meaning that these artificial costs should be eliminated, so that users would pay for the service itself and not the underlying infrastructure.
In the real world, the cost of a service is covered by the cost of using the service. Banks still hold onto the service fee concept, believing customers should pay for the privilege of being customers even before they have conducted any custom. The advent of low-cost and zero-cost banks like TymeBank and Bank Zero challenges that, though not yet as vigorously as the advent of digital data destroyed the fixed-line rental concept.
Fortunately for Telkom, sanity arrived in 2013 in the form of new CEO Sipho Maseko and a formal rejection by Icasa of the impact of access-line deficit on its charges. However, fixed-line rentals kept going up for the rest of the decade.
The graph comparing fixed-line rental increase with the decline in the number of people renting is a fascinating one: it shows a direct correlation, and should be a case study in both digital self-destruction and in a business ignoring a strategic reality plain to everyone else. Maseko allowed the accountants to have their fun, presumably because it was obvious to him that the fixed line was dead.
Speaking to Business Times on Monday, after Telkom released annual results showing stable revenue for 2020, Maseko acknowledged the strategic challenge he had faced.
“We had two problems at the time. The first one is that we did not have any alternative revenue, so we were dependent on copper lines and voice. You know what happens when your numbers are down and you’re the only show in town. The DNA of the company at the time was that we were a monopoly and it didn’t matter whether you liked our service or not, you had to pay. We had immense pricing power, so it informed our mindset.
“When we introduced naked ADSL, it was unthinkable inside the business. We formed Openserve, offering open access to all ISPs. I was almost lynched in here. When I said we want to separate our wholesale business and we’re going to brand it separately, people had indigestion on the spot. So it’s a journey that we are on, and we keep pushing uphill.”
Among the challenges to ditching the deficit-based model was the massive head count at Telkom. “There were 30,000 of us at the time, but now there’s about 10,500, and the machine has not collapsed.”
It helps that a mobile business does not need a vast team of field technicians. It also helps that the fixed-line business faces oblivion: it is down to 1.2-million lines, from a high in 2000 of 5.5-million. ADSL lines, which reached the 1.1-million mark in 2015, are now down to less than 300,000, with fibre connections overtaking them.
Maseko points out that every fibre line does the work of 20 ADSL lines.
“We need new numbers for the new business, because it’s now about traffic, not about lines. We have to find a way to represent the financials and the metrics in a way that demonstrates use of the new generation technology, as opposed to the legacy of lines.”