Telkom aims to become a radically different company, exiting loss-making businesses, putting a new strategy on the table in six months, and levelling the playing field for Internet service providers (ISPs).
The telco has already recently seen yet another high-level shuffle, and among the upcoming changes is a step towards separating its wholesale and retail business, which will see it sell wholesale services to ISPs at the same price as it does to its retail arm. This is expected to deliver savings of R875 million to the market in the next five years.
The pricing split, reached in an agreement between Telkom and the Competition Commission, came after Telkom admitted to squeezing the margins of tier one ISPs. It follows last year's recommendation by the National Planning Commission that the company be divided.
Although the move will lead to short-term pain for Telkom, the end result should increase competition in the fixed Internet sector and provide it with a chance to start anew. In addition, the company is finally set to reveal a new strategy in about six months, after Cabinet - in mid-2012 - scrapped a proposed deal with South Korea's KT Corporation, which offered to buy 20% of Telkom, for R3.3 billion.
Fundamental split
CEO Sipho Maseko says the 130-year-old group has complex problems and is at a major inflection point. Telkom is currently defining its mid- to long-term strategy and plan, as well as determining how to manage its wholesale and retail structural options, he says.
Telkom is thinking about its role in the wholesale sector and getting to the right model will be a journey, says Maseko. The second issue it needs to work out is what its retail participation is, and where fixed, mobile and - potentially - triple play fit into this model, he says.
The current pondering around whether to split Telkom into two is a "strategic" enquiry, Maseko adds.
The Competition Commission and Telkom have agreed to resolve a number of complaints by ISPs against Telkom dating back to between 2005 and 2007. The settlement, which still has to be signed off by the tribunal, includes an admission of guilt and a R200 million fine, to be paid over three years.
The deal includes a "functional separation between Telkom's retail and wholesale divisions, along with a transparent transfer pricing programme to ensure non-discriminatory service provision by Telkom to its retail division and ISPs".
Telkom has also agreed to wholesale and retail pricing commitments for the next five years, which should lead to R875 million-worth of savings to customers and there will be effective monitoring of its future conduct. Telkom admitted its pricing structure squeezed margins at ISPs.
Over the next three financial years, Telkom will drop its wholesale pricing and has also agreed not to reverse this in the 2017 and 2018 financial years. Commissioner Shan Ramburuth said: "We are satisfied with the settlement agreement and expect that it will lead to a more open and competitive market and translate to lower prices for consumers."
Maseko explains the commission wants an accounting separation between wholesale and retail, and wants the company to be transparent about how it prices its offerings. It wants Telkom to offer the same pricing to other providers as it does to its retail arm, he says, which would be the start of a split.
Good move
Internet Service Providers' Association regulatory advisor, Dominic Cull, says if the agreement is properly monitored and implemented, it should lead to a more competitive fixed-line Internet market. He says it should make Telkom's pricing more transparent, but needs to be enforced.
Cull notes the agreement is a combination of a fine and pro-competitive behavioural changes, which is more beneficial to the market than a straightforward fine, which was the case in the last matter.
However, there is not enough detail to comment further and there also needs to be a balance between Telkom's needs to keep some information confidential to be competitive and a transparent pricing model, says Cull. He notes it is a step in the right direction.
Ovum analyst Richard Hurst adds that, while a positive step, an operational split would be daunting for Telkom. However, he notes it gives the company a chance to start afresh. "That's going to be an interesting egg to unscramble."
Change afoot
A new strategy for Telkom will start being unveiled in about six months or so, and the group will begin making announcements as soon as each puzzle piece becomes clear instead of waiting for the whole meal to be present, says Maseko.
He says the strategy will be defined by himself and deliberated by the board, and then shared with stockholders, including all the options and Telkom's preferred way forward. Shareholder input will be taken into account. "The board is on top of it, I'm on top of it."
Telkom is pondering a number of options, but will take its time to decide as it does not want to make a knee-jerk decision, says Maseko. He says the group has to work out where each part fits and how to be cost competitive.
Maseko says Telkom needs to be, and will be, competitive in all pricing, both at a retail level and wholesale. He says the group will be ruthless in executing its strategy and is focusing on operational efficiencies.
In the future, Telkom will be "radically" different and will execute better, do less but better, and behave differently in the market, says Maseko. "We're going to fix it."
Maseko says the group will also look at merger and acquisition activity to unlock value for shareholders, which includes reviewing its investments. He says, if it acquires, it would look to self-fund and it may sell some assets that could do better in another company's hands.
The group is also doing "a lot" to fix its relationship with government, its single biggest shareholder, says Maseko. He has met with various ministers since becoming CEO about three months ago and is working to rebuild trust.
There are several aspects that can be done straight away, he notes. These include managing costs, fixing customer service, which he says "sucks", and focusing on return on investment, as shareholders will not forgive the company if there are no returns.
Sasha Naryshkine, Vestact analyst, writes in a note that Telkom has seen its fixed-lines fall 22% over the past 11 years, and - in the past decade - the number of minutes spoken on the Telkom network has fallen nearly 44%. "It is fair to say that they have seen their core (original) business absolutely annihilated."
Naryshkine adds that, if Telkom is to succeed, all of SA will win. "Just think how we could advance education with a high-speed broadband connection in every single classroom around the country."
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