Telkom warns of regulatory threats

The regulatory environment is stopping Telkom from exiting loss-making units and is a risk to its business, says the telco.

The fixed-line operator, which for many years had a monopoly over the local communications sector, wants less regulation, because that would allow it to offer more competitive pricing and exit areas that do not make any money, but add to its cost base.

Telkom this morning released its annual results for the year to March and said it cannot continue to absorb competitive pressures “ad infinitum”. The competitive and regulatory environment weighed on Telkom's results in the year to March, says CEO Nombulelo “Pinky” Moholi.

Revenue from continuing operations, which excludes Multi-Links and Vodacom, dropped from R35.2 billion a year ago to R33.5 billion, while profit from continuing operations fell from R3.35 billion last year to R2.2 billion.

Telkom battled with lower income from its voice business, which dropped 16.8%, to R13.7 billion. Although data revenue increased 7.7%, to R10.7 billion, the gain was not enough to offset dwindling voice revenue, says Telkom.

Moholi says voice revenue has continued to decline, as is the case with most fixed-line operators around the globe. However, the local situation is more acute, because of the high penetration of mobile, she notes. SA has an estimated cellular penetration rate of 107%.

Interconnect rate reductions and aggressive pricing from competitors put Telkom's voice revenue, its traditional mainstay, at “risk”, it says.

Telkom is vital to SA's economy, says Moholi, but it is not free to get out of loss-making businesses, such as payphones, because it cannot even drop a product line without permission from the Independent Communications Authority of SA (ICASA).

Acting CFO Deon Fredericks says the key for Telkom is to increase volumes by being more competitive.

“Who is counting the cost of all this regulation, or even better, the cost versus the benefit?”

Internationally, comments Moholi, regulators drop retail price controls in the fixed-line segment as soon as there is competition, which has not happened in SA. Instead, Telkom is regulated at both the wholesale and retail level.

Moholi can understand regulation of retail prices when there is not competition, because that acts as a proxy to competition. However, she argues there is no need for ICASA to determine what retail prices the operator can charge because there is competition from mobile operators and Neotel.

Local loop unbundling is a “major” risk to Telkom, notes Moholi. She says the risk is magnified, because Telkom does not know what form unbundling will take, or what the costs of letting go of the last mile will be.

Moholi says unbundling was first mooted about five years ago, but the telecoms landscape has changed dramatically since then.

ICASA has set November as a target for when the last mile will be opened to competition, but has yet to publish a discussion document that will provide clarity on how it intends to handle the process.

Telkom has been in discussions with the regulator to gain clarity around the issues involved, comments Moholi. She says a market study should be undertaken to determine if there would be any benefit in unbundling the local loop.