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Telkom slashes govt pricing in 'defensive move'

Paula Gilbert
By Paula Gilbert, ITWeb telecoms editor.
Johannesburg, 22 Nov 2016
Treasury says its renegotiated fixed-line contract with Telkom will save hundreds of millions of rand per year, over the next two years.
Treasury says its renegotiated fixed-line contract with Telkom will save hundreds of millions of rand per year, over the next two years.

Telkom's decision to offer government discounted fixed-line prices is a defensive move by the telco as global fixed-line markets continue to experience a decline, according to analysts.

"I think this strategy is part of a defensive strategy to protect fixed-line revenues, while seeking growth in other areas of the business, such as mobile and advanced ICT services," says Richard Hurst, director of enterprise research at Africa Analysis.

This as National Treasury released a statement saying Telkom, through Business Connexion (BCX), has offered government discounted prices for its fixed-line telecommunication services. This was after negotiations on an existing contract to government for both national and provincial departments.

"The National Treasury has, over the past year, concentrated efforts to effect greater efficiencies in government procurement. The renegotiated contract will save hundreds of millions of rand per year, in the next two years," Treasury says.

"Telkom is still by far the dominant player in the fixed-line market, and already connects huge numbers of the government buildings across the country, an area where its up-and-coming fixed-line competitors still have a long way to go," according to Brian Neilson, director at BMI-TechKnowledge.

He says government is probably Telkom's single largest customer and offering a big discount would therefore present "mainly as a defensive move on Telkom's part" as well as acting as "a disincentive to others seeking to build access infrastructure to all these buildings".

"Whilst fixed-line voice will continue to decline, it will still form a significant part of revenue, especially from sectors such as government which are rather slow in migrating to next-generation voice services such as unified communication," adds George Kalebaila, IDC senior manager for telecoms, media and Internet of things in Africa.

He says this move will position Telkom to offer a migration plan to new-generation voice services and entrench the BCX brand within public and government sectors.

Fixed-line declining, not dying

Hurst says in SA, as around the globe, the fixed-line market is experiencing a decline. However, all the analysts agree the market is still extremely relevant for telecoms operators.

"Government spends a huge amount of money on fixed-line services, with the SAPS being one of the largest spenders on landline voice in the country, so there is room for saving on both fixed and mobile services. Despite the general global trend towards mobile telephony, fixed-line services remain highly relevant, especially in government," Neilson says.

"I think that we should not rule out the relevance of fixed-line, especially when we consider that the world is moving to a high-speed data environment. There are some bright spots in the fixed-line market, most notably FTTx, but this platform is seen more as a replacement," Hurst adds.

Fixed-line's decline was clear in Telkom's latest interim financial results, for the six months ending 30 September. The telco's fixed-line voice usage and subscription revenue decreased by 4% to almost R7 billion, driven by competition, mobile substitution, a 7% decline in the number of lines and customers migrating to lower value bundled offerings.

In contrast, Telkom's mobile business is picking up speed, with mobile voice and subscriber revenue rising 30% for the half-year to R520 million. This is on the back of a 42% year-on-year increase in the number of active mobile subscribers, now at around 3.2 million.

"Fixed-lines are still a very important part of business infrastructure, and government no less than any - these are very large organisations with heavy telecoms overheads. From the carrier side, voice revenue is rapidly evolving with VOIP, LCR and mobile, which drives the strategy of a provider like Telkom towards value-added services; that's what you're seeing here," according to Kalebaila.

"Offering savings on fixed-line services while driving business towards BCX is clearly part of that evolution; it's a sign of Telkom finding synergies with its BCX acquisition, and we can expect to see a lot more of that."

Neilson says that "clearly such a discounted service would have the effect of taking money off the table for Telkom". However, Hurst says the strategy will probably lead to an increase of revenues in other areas linked to the provision of fixed-line services, like managed data services.

Kalebaila believes Telkom can afford to discount fixed-line services due to its extensive and mature fixed-line services, especially xDSL. He says Telkom has recouped return on investment on these assets and therefore can afford to offer them at a discounted price ? as a way of sweating these assets.

"Moreover, the government sector is one of the biggest consumers of fixed-line services, with legacy Diginet services still the main form of connectivity, especially for local government," Kalebaila adds.

Government savings

"Government has gone all out in the past year to reduce its telecoms overheads, commencing in 2015 when National Treasury issued a call for expressions of interest and requests for information from interested service providers for fixed and mobile communication, respectively," says Neilson.

Treasury confirms the Office of the Chief Procurement Officer has been in negotiations with the top 100 suppliers to government, with a view to reduce costs and strengthen the national fiscus. This was in line with finance minister Pravin Gordhan's announcement during the recent Medium-Term Budget Policy Statement (MTBPS) that fiscal consolidation in government spending would be required.

The first leg of Treasury's negotiations focuses on the travel industry, followed by construction, ICT, telecommunications and leases.

"In the current tough economic climate, many businesses are reviewing their ICT spend. As the continent's leading provider of end-to-end ICT solutions, we are able to look at the total picture and then identify the areas where greater efficiencies are possible. These skills were used to great effect with the government and we are pleased to have been able to come to an agreement," says BCX CEO Isaac Mophatlane about the discounted rates.

Treasury says BCX's collaboration with government is a bold and practical step towards putting the South African economy back on track.

Chief procurement officer Kenneth Brown says under the leadership of minister Gordhan, his office will "unwaveringly pursue efficiencies in government procurement, to effect major savings".

"I am delighted BCX supports this endeavour in word and deed. I call on government's other top suppliers to follow BCX's sterling example," he adds.

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