Telkom braces for competition

By Nicola Mawson for Telkom
Johannesburg, 08 Aug 2006

SA`s sole fixed-line operator Telkom has indicated increased competition in the local market is likely to threaten its bottom line.

In a 448-page document, filed with the US Securities Exchange Commission, it said increasing competition in the South African market might result in lower overall tariffs and market share. Increased competition is also expected to increase costs.

Telkom also expressed concern over incidents of theft and vandalism, saying if it is unable to reduce such occurrences, profit and revenue would decline.

The second national operator (SNO), which Telkom does not expect to start operating until this half of the year, could result in revenue being lost as government - which owns 38% of Telkom`s issued shares - may move to implement policies and regulations that are not beneficial to Telkom, it said.

The South African government has an indirect 30% equity interest in the SNO through other state-owned enterprises, as well as holding a significant stake in Sentech.

Beneficial to competitors

"To further its policy of liberalisation of the telecommunications industry, the government may adopt and implement policies and exercise its right to approve regulations that benefit our competitors, but are not beneficial to us. In addition, to further other political or social objectives, the government may be required to act in a manner that may be detrimental to our business, but advantageous to our competitors."

Telkom also expressed concern that government may move some of its business to the SNO. Government, which accounts for about 9% of Telkom`s fixed-line revenue, is in the process of centralising procurement, it said. "The government could transfer some or all of its business to the SNO or other operators when they commence operations."

The entrance of competition also caused worries for the fixed-line operator on the staff front, as it is concerned it may either lose staff, or not be able to attract and retain "highly-qualified employees".

The Electronic Communications Act, which came into effect on 19 July, is expected to "substantially increase competition in our fixed-line business". Telkom also said the process of converting its licences to the new licensing framework could be complex and may result in a decrease in net profit.

Customer migration

In addition, the telecoms operator said competition from Vodacom, MTN, Cell C and SA`s latest mobile entrant, Virgin Mobile, has resulted in "significant customer migration and call substitution from fixed-line to mobile services".

Should this trend continue, Telkom expects its growth rates, operating revenue and net profit to decline. Mobile operators offering 3G services are also affecting its bottom line, it said.

Its 50% subsidiary - Vodacom - is also being affected by increased competition as calls are increasingly terminating on other mobile networks as opposed to Telkom`s fixed-line network. Vodacom`s interconnection payments have increased and its margins have decreased because the cost of terminating calls on other mobile networks is higher than the cost of terminating calls on Telkom`s fixed-line network.

As a result, Vodacom`s South African net interconnect revenue has been declining in recent years. Similarly, Telkom has incurred increased payments to other operators as a result of the growth in interconnection traffic for fixed-line calls terminating on mobile networks.

If mobile customers continue to increase and there is little or no growth in fixed-line customers, this trend could continue and Vodacom`s and Telkom`s margins and net profit could decline. Moreover, the introduction of mobile number portability - due in September - is expected to enhance competition and increase its churn rates, Telkom said.