The massive job cuts looming at Telkom are probably an inevitable consequence of the company’s decision to get rid of its legacy copper network. That management is making the transition so suddenly, however, begs the question: is it moving too quickly?
Telkom last week revealed that it will cut as many as 3 000 jobs in its wholesale Openserve business – the division responsible for building and maintaining its fixed-line and mobile networks – and in its consumer division. Further job cuts are likely to follow in a second phase later this year, possibly at its IT services business BCX, which already recently went through a painful downsizing.
As the company said on Wednesday in a statement, the economy is in a deep rut. All the operators are feeling the pinch. But Telkom has a unique set of challenges, some of which are of its own making. Chief among these is that it allowed fibre competitors to emerge five years ago while it rested on its laurels assuming the market was happy with slow and unreliable ADSL connections at a time when streaming video from Netflix and other video-entertainment companies was starting to take off. Once consumers have tasted fibre, and how it transforms their digital lives, they never go back to copper.
Legacy copper is expensive to maintain and much more prone to faults than fibre connections – and certainly more than mobile, where it’s almost never necessary to send a technician into someone’s house to make repairs. Copper is regularly stolen in South Africa – it’s a national scourge – and is expensive to replace. It’s also highly susceptible to lightning, which sends fault levels – and customer frustrations – soaring in the summer months.
So, it’s hard to blame CEO Sipho Maseko for wanting to wash his hands of the metal. It’s yesterday’s technology and it’s expensive and difficult to maintain. Fibre is, without doubt, the future of broadband in the cities, with fixed-wireless (4G/LTE and the soon-to-be-launched 5G) a reasonable alternative where fibre is too expensive to deploy.
Should have moved faster
Telkom’s problem is it should have moved faster than it did to corner the fibre market. It was there for the taking before Vumatel spawned an industry when it launched fibre broadband in Parkhurst in Johannesburg and quickly proved the business case. Vumatel, and a dozen or more competitors, have now wired up the big cities and are increasingly eyeing the townships as the next prize. Before it arrived on the scene, Telkom – and executives at the big mobile operators, for that matter – frequently said it made no financial sense to deploy the technology into homes in South Africa given our geographic dispersity (we don’t live in high-rise apartment blocks) and low incomes relative to developed markets.
Telkom only reacted when it saw the threat Vumatel posed, but by then it was already late to the game. It took years to turn the ship, and by then it was already losing fixed-line subscribers hand over fist to the more nimble upstarts (and to fixed-wireless alternatives). It has been shedding fixed-line subscribers (with their lucrative ADSL subscription and voice revenues) at an increasingly alarming rate in recent years.
There’s no doubt that Telkom now needs to move quickly to salvage what it has left in its fixed-line division, where the number of lines in service has fallen to below two million for the first time (about a third of what it was at the peak about 20 years ago). Worryingly, its fibre roll-out has slowed in the past year, though the “attachment rate” – the percentage of customers who sign up for fibre services where they are available – has jumped, making the business arguably more financially sustainable. Perhaps the fibre land grab is already nearing its end and a slowdown in fibre-to-the-home roll-out by Telkom is justified, but with Vumatel and others now actively eyeing the township market, perhaps the race hasn’t ended. It’s a risky bet to take at this juncture.
Painful as the retrenchments are – especially given the wide-scale layoffs taking place across the economy – they are probably justified given the position Telkom finds itself in. The brutal truth is, without copper, Telkom doesn’t need as many employees. And it’s still overstaffed from its legacy as a state-protected monopoly, when it offered sheltered employment to many tens of thousands of people. In a competitive market, it’s had to slash its prices – which, at one stage, were, frankly, obscene – cutting deep into operating profit margins. This competition is great for consumers, but bad news for the employees of companies like Telkom forced to right-size as a result.
A bigger long-term challenge for Telkom could come in its mobile business. It seems almost counterintuitive to suggest this, especially in light of how quickly Telkom has grown this business in recent years on the back of its popular, well-priced and data-rich FreeMe contract and prepaid plans. But its latest set of results, to September 2019, show a worrying slowdown in net subscriber additions.
Telecommunications is a volume game, and if you’re going to beat Vodacom and MTN, you need to build scale fast. You need a subscriber base to justify the capital expenditure required. That’s probably why Maseko tried (again) to buy Cell C late last year (his offer was rebuffed). Though Cell C’s debt problems would make any deal difficult, a combination of Telkom and Cell C would create a more formidable rival to the two big incumbent operators.
But Cell C had already made up its mind: it was “marrying” MTN. When Telkom came knocking, they’d already exchanged vows. The companies’ expanded roaming agreement effectively means MTN is going to run Cell C’s network, dramatically reducing its capital expenditure and putting it on a more solid footing (especially if it is recapitalised successfully in the coming months). That combination poses a meaningful – perhaps even an existential? – threat to Telkom’s mobile business. Years ago, instead of exiting its 50% stake in Vodacom (and handing control to the UK’s Vodafone Group), Telkom’s management team at the time – it happened before Maseko took the reins – should have fought much harder for control of the country’s biggest mobile operator. Vodafone won the prize, to Telkom’s long-term disadvantage.
With a fixed-line business under pressure, an IT services company feeling the pinch of the protracted economic downturn and a mobile business facing strong rivals in MTN and Vodacom – and possibly soon a revitalised Cell C – Maseko has a difficult road ahead of him. He’s a shrewd businessman, though, and there’s no doubt he is acutely aware of the challenges. It’s not overstating things to say that how he responds to them in the next year or two will define both Telkom’s future and his legacy in South African business.
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