The National Planning Commission's (NPC's) mooted structural division of Telkom into two entities is bad news for the operator, as costs would be pushed up, jobs may be cut, and the operator's retail business could disappear, say industry commentators.
The commission's final National Development Plan (NDP), handed to president Jacob Zuma last week, suggests Telkom should be broken up into two businesses: a wholesale unit, focusing on backhaul operations, and a retail telecoms business.
The NDP aims to stimulate economic growth and trim unemployment. It also seeks to introduce a market-friendly environment and loosen government control in the communications sector in a bid to spur competition and expand ICT penetration.
However, commentators warn that splitting Telkom into two will not have the desired effect, as the group's strategy around mobile and fixed-to-mobile convergence relies on access to its vast network.
A high-level Cabinet committee is being led by communications minister Dina Pule in a bid to explore possible options for Telkom, after Cabinet rejected a tie-up between the operator and KT Corporation in the middle of the year.
Stifling growth
The NDP says Telkom still dominates the telecommunications backbone and telephony markets, which has been ineffectually regulated and led to high input costs for businesses.
In addition, says the document, Telkom's monopoly has led to a deterioration in fixed-line connections, which will further undermine SA's future competitiveness, unless this is addressed. Telkom currently has less than three million active fixed lines.
Structural changes
The NDP moots the establishment of a common carrier network, possibly by structurally separating Telkom's backbone operations from its retail services. It says there also needs to be clarity about Telkom's future role, and regulatory incentives to ensure local-loop unbundling achieves its objective of expanding affordable access to high-quality, high-speed broadband.
It says a structural separation of Telkom's local loop and backbone activities may be required. “While protecting the local-loop monopoly may ensure ongoing dividends for the state in the short term, the deteriorating fixed-line network may impose serious costs on society in the longer term.”
The NDP also says it will be important to address the inherent conflict of interest between the state's role as a competitive player in the market through its enterprises such as Broadband Infraco, Sentech and its majority share in Telkom, and its role as a policy-maker to pursue its goals.
The document calls for an assessment of state-owned enterprises, and a decision on the future role and configuration of the state's family of ICT enterprises, which includes Broadband Infraco, Sentech and Telkom.
Public enterprises minister Malusi Gigaba has said the department is in talks with the Department of Communications (DOC) around a possible merger of Infraco, Telkom and Sentech.
Bad idea
South African Communications Union president Michael Hare cautions that splitting Telkom into two entities will be bad news for the company, as 40% of Telkom's income comes from its wholesale arm.
Hare says the proposed move is likely to lead to job cuts, and retail costs will increase as Telkom will have to be reorganised, which will lead to retail buying backbone access from the wholesale unit, eliminating efficiencies between the two as there will be a middleman.
In addition, says Hare, it will cost billions to structurally separate the business. He questions where the money will come from. In the year to March, Telkom reported headline earnings down a third, to R1.658 billion, while its after-tax profit on continuing operations was 93% lower, at R179 million.
Hare says Telkom's retail arm will not be able to compete effectively and could disappear. “It's not really an option.”
Richard Hurst, Ovum's emerging markets analyst, notes that government is challenged as to what to do with Telkom after the KT deal was cancelled. However, splitting the company would badly affect its key fixed-to-mobile convergence strategy, which relies on mobile arm 8ta having access to Telkom's backbone.
Hurst questions how Telkom retail would compete in a landscape in which the mobile operators have multiples of its customer base.
World Wide Worx MD Arthur Goldstuck says a separation will only be good if done effectively and efficiently, “with the needs of the country given priority over looking after vested interests and providing favours to friends,” says Goldstuck.
Goldstuck says a new retail entity must be able to leverage existing resources and the key is to structure the units to benefit as much of SA as possible. He points out that the current situation cannot continue as consumers' needs are not being met.
Telkom's backbone is its jewel and the company has 140 000km of fibre, which is not being exploited, says Goldstuck.
Neither the DOC nor Telkom responded to requests for comment.
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