Picking apart the figures

Telkom`s head office telephone numbers should be given a "007" prefix, because, as its results show, it has a licence to kill competition and confidence in the ICT sector and hold the economy to ransom.

This is not a matter of griping about one company having a fantastic business model or product that sees high demand in a competitive environment, such as the Microsofts, Coca-Colas, or Anglo Americans of this world. But rather a bitch about how an unencumbered incumbent can rake in profits so huge they would make an oil baron blush.

In its latest interim results for the period ended 30 September, Telkom posted a 9.9% surge in operational revenue to R23.456 billion, while operating profit jumped 37.3% to R7.517 billion. The measure of its profit-generating ability can be seen in the earnings before income tax, depreciation and amortisation, which improved to 44.5% from 40.6%.

By just taking operational revenue, one can reason that Telkom has a stranglehold of about 3.5% on the total country`s gross domestic product (GDP) of about R1.4 trillion - by Telkom`s own admission, telecommunications makes about 6% of GDP.

Compare that to the gold mining sector that makes up about 8% of GDP, and has six squabbling major companies yet employs more than 100 000 people. Telkom employs about 28 000 people, reduced from 60 000 six years ago.

Telkom`s international counterparts must be eyeing it with envy.

Paul Vecchiatto, Cape Town correspondent

Telkom`s international counterparts must be eyeing it with envy. For instance, British Telecom (BT) earned 12 US cents per share in its last six-month period, while Telkom posted $1.18 per share. This means Telkom`s earnings per share were 10 times higher than BT`s on revenue that is seven times smaller.

Is Telkom really 70 times more efficient, more innovative and better at winning customers than BT, which operates in a competitive market?

Of course, a large chunk of Telkom`s profits come from its 50% stake in cellular network operator Vodacom, which operates in a highly competitive environment. What is more, cellular has been highly successful at connecting the disadvantaged in a most profitable commercial manner.

So successful, in fact, compared to land-line connectivity, that the poorest of the poor have been induced to pay international rates for local calls through prepaid cellular calling. This is because Telkom refuses to roll-out lines into areas that it sees as un-commercial.

The land-line figures cause some confusion. Telkom says revenue grew a "modest" 4.3%, because of low effective tariff increases. Then it says fixed-line operating margins grew 23.2% because of improved efficiencies and cost reductions. Later, in the results statement, Telkom says fixed-line data revenue grew by 17.5% and ADSL adoption surged by 161.2% to 95 290.

Telkom says it has reduced the overall average tariff basket by 3%, yet it is still growing its data business robustly, so it can afford the "tariff reductions". And these reductions are not broken down into any specific product or service so it is almost impossible to say where they actually occur.

The fact they are below government`s targeted inflation rate of between 3% and 6% is spurious, as the overall profits are three times above the top bar of that range.

The loss of revenue from dial-up minutes, because of the move by consumers and small businesses to ADSL (an always-on connection) may explain Telkom`s move to a per-gigabyte pricing structure that became effective from 1 November. While the smaller offerings actually see a price decrease, anything above the hard caps means an effective price increase due to a range of penalty tariffs.

Here we have an instance of where Telkom is acting unfairly with the market. It has all the information readily to hand. This means it can develop pricing models that are so sophisticated it can justify almost any kind of action it takes, and unravelling the figures is almost impossible.

Of course, one must always bear in mind that Telkom is a commercial operation and its mandate from shareholders is to generate profits. What is more, its biggest shareholder is government with a 38.5% golden stake and it will do nothing to jeopardise Telkom`s business.

Last year government received R228 million in dividends from Telkom and the Department of Communications` strategy for 2005-2008 states that it expects dividends to increase over the next three years - it should know.

All of this adds up to the sad realisation that real competition, which will unlock real value for the whole economy, could remain a distant goal to be talked about and legislated about, but possibly never achieved.