Johannesburg, 08 Jul 2010
Telkom will have its work cut out for it when it launches its mobile operation later in the year, as the company will challenge incumbents in a saturated market, note analysts.
The fixed-line operator is launching what will be SA's fourth mobile operation and expects to spend about R6 billion over five years to develop infrastructure. The move is necessary, says Telkom, because the company is seeing slowing revenue from fixed voice lines.
“The majority of global fixed-line incumbents have discovered that a successful operation requires an integrated mobile business. We believe that there is a market opportunity in SA as mobile voice and especially mobile data are still experiencing growth,” says Telkom.
Its future growth hinges on its data offerings, African expansion, and SA - where mobile is vital in offsetting the dwindling number of fixed-voice minutes.
During the company's last results presentation, outgoing CEO Rueben September pointed out that calls from landlines to mobile phones were slowing, as people used cellphones more often. “This is another key reason why Telkom needs to be mobile urgently.”
September said the company was aware of the risks of entering a saturated market as the fourth player. He said, to be competitive, the company would offer a hybrid of voice and data on mobile.
“We will launch with 'me too' products as well. These are the products that the others are doing.” September added that over time, the company would extract value from fixed and mobile convergence.
However, analysts argue that the telco will have to come up with something really exciting to lure away people who already have contracts with Vodacom, MTN and Cell C.
Despite concerns in the industry that Telkom will have to come up with a very innovative offering, the company says it does have advantages off which to leverage. The company says its existing business and customer base give it a competitive advantage.
“This is particularly so as wireless growth slows and converged data becomes more prevalent. A product range spanning both mobile and fixed value pools will assist Telkom to defend itself more effectively against competitors and to grow revenue,” says the telco.
September said Telkom would exploit its IP and next-generation network to roll out mobile. In addition, the company has signed a roaming agreement with MTN that allows it use of the cellular company's towers.
In addition, interconnect agreements with the other cellular companies are “at an advanced stage”, the company says.
“The mobile business is designed to also assist Telkom in addressing fixed-line cost challenges and to position Telkom more competitively in the market,” the telco says. It expects to initially offer prepaid, postpaid and hybrid voice, as well as prepaid, postpaid and hybrid data.
Out the box
Irnest Kaplan, MD of Kaplan Equity Analysts, says Telkom's target market is already saturated. “Everyone has a cellphone, it's very saturated, at least among the people who can afford it.”
Kaplan queries: “On what basis will they be able to convince potential customers to switch?”
He says the company will have to provide customers with one of three incentives, or a combination of better service, cheaper pricing, or a unique product offering.
Telkom has an opportunity to use service as a differentiator, as current service levels from mobile operators can be improved, says Kaplan. However, the company will find it difficult to offer drastic price savings, as most calls will initially be off-net, which will mean that the company will have to take interconnect rates into account.
However, Telkom does have an opportunity to leverage off its current network and client base and offer a unique service that could include a bundled offering, says Kaplan. Telkom could, for example, bundle its fixed products with a wireless service that would save end-users money, he says.
Should the company only come out with a “me too” offering that resembles what is already in the market, Kaplan does not expect mobile to be a material contributor to the company's profit in years ahead. “Unless they come out with something that totally amazes us, I'm not going to be excited.”
Richard Hurst, independent telecoms analyst, says Telkom is coming in at a disadvantaged position. He points out that Cell C, which launched after Vodacom and MTN, has had to battle to gain market share.
Hurst says Telkom will have to be more agile and innovative. “Coming in as the fourth player, it's really going to be difficult for them.”
Vodacom and MTN are expected to “fight tooth and nail” to keep their customer base from moving to Telkom, says Hurst. In addition, the advent of mobile number portability did not result in large numbers of people switching networks, he says.
Hurst is sceptical that Telkom can offer a bundled product that can lure current cellphone users onto its network. “Even if Telkom bundles, there are a limited number of landlines. In the mobile game, you need millions of subscribers.”
Telkom will have to be extremely innovative, says Hurst. Even then, he does not see Telkom Mobile reaching the same size as MTN and Vodacom.
Chris Gilmour, Absa Investments analyst, concurs. He says Telkom is far behind the curve. “How do you take on heavily entrenched companies like MTN and Vodacom?”
Gilmour agrees that Telkom will have to compete on costs, as well as offering innovative products that no other company can offer. However, Vodacom is already encroaching on Telkom's turf by offering ADSL that is being bundled with a switchboard service to allow voice calls.