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The day the monopoly died

By: Belinda Anderson

Posted: 2004/09/10 Fri 05:00 | © Moneyweb 1997-2004


Sometimes, when an announcement is made, the dust settles and the market moves on. In the case of Communication Minister Ivy Matsepe-Casaburri’s watershed announcement on September 2nd on the liberalization of the telecoms sector, exactly the opposite has been the case.

Since the big day, the market has been awash with speculation and anticipation of what the news might mean for the industry and for consumers.

Africa Analysis telecoms analyst Dobek Pater described the changes as a reduced rendition of the “big bang” theory, where telecoms is thrown wide open in one fell swoop. Phatang Nkhereanye, manager for legal services at Transtel described them as “monumental changes that have turned the industry on its head”.

The changes in a nutshell

Perhaps most importantly, the Minister legalized Voice over Internet Protocol (VoIP), or making calls over internet networks. So consumers would, for example, be able to hook a microphone up to their computer or connect their company PABX to an internet network through which to route calls over the internet.

The Minister also said service providers – or Value Added Network Service Providers (VANS) to be exact – could offer voice services. And, mobile operators will soon be able to use fixed lines of any network other than Telkom for their interconnect between base stations. This in turn should bring costs down.

Further, she added that anyone could apply to provide pay phone services. So you could, according to Pater, have a proliferation of small operators on street corners legally providing pay-for call services. And lastly, the Minister said schools could get 50% cheaper internet access. But, Pater said this raised the question of how government would reconcile such a rate reduction with the fact that Internet Service Providers are private companies that need to make a profit: “Will ISPs be able to choose not connect a school at all, if they have to do so at a reduced rate?”

Confusion and further announcements

But, there are also a number of things the Minister did not say in her announcement, which is causing some confusion. The Department had not provided any further clarity on some of the issues, as requested by Moneyweb, at the time of publishing.

Communication Users Association (Cuasa) executive committee member Ray Webber said: “The rules of the game are still unclear, but at least it’s a step in the right direction.”

Among the issues, it is unclear whether the legalisation of VoIP includes the international links. Says Irnest Kaplan, managing director of Kaplan Equity Markets: “Nowhere does it say you can purchase international bandwidth directly”.

The market is now waiting eagerly for September 17, when the Minister will hand the SNO over to Icasa for licensing. The next important date thereafter is the month of October, when the Minister promised to announce further liberalizations. These will include the remaining under-serviced area licenses (there are three so far, but more to be licensed), service-based licenses to be operational in May 2005, the SNO, Convergence Bill and BEE Charter (this should relate to approving the final draft).

What do the changes mean for consumers?

Regardless of the permutations of how the industry reinvents itself around the changes, the bottom line for consumers is that telecoms costs will come down from February next year, there will be more options and faster broadband internet connectivity.

And, consumers should hopefully also – by sometime next year – be able to keep one number regardless of which operator they choose. This week, Icasa held hearings into the issue of number portability, which according to Webber is “absolutely key for competition”. It has set April 2005 as the deadline for the mobile operators and landline players; Telkom, and hopefully the SNO, to implement this.

As for how much costs will come down by, this will depend on clarity from the Minister and on how much of the savings the service providers and operators decide to pass on to consumers. Tim Parsonson, a founder of Storm Telecoms estimated costs could come down by as much as 70% for international calls and at least 30% on local calls. He said consumers would be “dazzled by choice” previously unknown to them and that they should demand that broadband prices – currently 20 to 50 times more expensive than in some countries, he estimates – move down to more normalized pricing levels relative to the rest of the world.

And that’s about all that ordinary consumers need to know.

But, the implications of what the Minister said on September 2nd are much broader for the industry players themselves and for how investors need to position themselves in the wake of the changes.

Impact on Telkom

Although Telkom’s share price fell initially on the news of the liberalizations, it did not fall far, before rising for most of the week and falling again on Thursday. The company has been widely quoted as saying the changes would open up new opportunities for it. And other players agree. For example, Grintek CEO Shaun Liebenberg said this week that Telkom would be forced to innovate further in terms of its offerings to customers, and this opened up new opportunities for it to work with Telkom, with which it has a good relationship.

Parsonson from Storm said the changes presented a big opportunity for the market “and even Telkom if it plays it right”.

Kaplan said the news would be bad for Telkom’s fixed line business in the short-term, but as the overall market was stimulated, this would lessen the effect on Telkom for the longer-term.

Rhys Summerton, telecoms analyst from Citigroup Smith Barney is even more bullish. He released a report shortly thereafter the announcements saying Telkom was still a buy, up to its target price of R120 a share. He estimates that competition will impact Telkom’s revenues by just 3,1% by 2007.

However, Allan Gray chairman Simon Marais was less upbeat. He said in countries with a competitive environment, broadband prices were falling, which did not bode well for telco margins.

Impact on the SNO

Pater said the SNO had yet to be licensed and there was no 100% guarantee there would be one. If so, Telkom would remain in the privileged position of being the only fixed line operator.

But, it now seems more likely than not that the SNO will indeed go ahead.

However, if other operators like the VANS can apply for licenses to offer a range of telecoms services, then Webber said this raised the question of whether the SNO really was such a viable proposition.

Also, Pater said it was not clear whether private telecommunication networks (PTNs) would effectively become PSTSs (the category of license that Telkom had) by allowing the public to make use of their networks. “Theoretically we could have another couple of hundred telcos in the country, although in reality it is difficult to envision Standard Bank becoming a telco”. To elaborate, Pater said there were too many complexities in terms of interconnect and billing, and this was nowhere near the core business of a business such as Standard Bank.

Impact on mobile operators

For the cellular operators, the Minister’s announcement means that their input costs should be lower. Whether they transfer this cost benefit to the consumer remains to be seen. However, they would probably be under greater pressure to do so particularly with the introduction of number portability – if a subscriber can have a single mobile number regardless of whether a Vodacom, MTN or Cell C subscriber, the operators will have to make their offerings as sticky as possible.

Teljoy CEO Theo Rutstein, speaking on the Moneyweb Power Hour this week, said perhaps even more exciting for the mobile space than the Minister’s most recent announcements, was the decision taken before that to hand out 3G licenses “at virtually no cost”. Rutstein said this would “open up that whole aspect of being able to communicate without the attachment to wires, on a worldwide basis in a total convergence sense.”

Impact on service providers and vendors

Global networking equipment giant Cisco Systems said the changes should “herald a new era of growth for service providers”. Able to offer voice as well, the VANS could bundle this together over internet networks with their data offerings.

Speaking on Moneyweb’s Personal Finance Live programme on 1485AM this week, Mark Baptiste, Cisco’s director for service providers in SA, said the market was now wide open. He said apart from opening up new opportunities for the service providers, the changes would also inspire Telkom to move up the value chain.

The changes in the industry, he says, will come about faster than anyone thinks – he predicts that within 12 to 18 months, there will have been a number of big changes. And broadband will be faster than anyone can fathom – in the order of 100 times.

Hillel Shrock, director for new business development at Dimension Data subsidiary Internet Solutions, said immediately after the news that the changes marked a “new era in telecommunications”. Apart from its corporate clients now being able to use their existing infrastructure to make calls, Shrock said the changes would drive competition at the infrastructure and facilities level, forcing down broadband prices.

International spokesperson for Avaya, a global group that builds communications networks, Mato Petrusic said on the Moneyweb Breakfast Programme of 1485AM that IP telephony was one of the fastest growing technologies in the world and its use resulted in cost savings, as well as reduced maintenance costs by having voice and data networks on the same platform. South Africa, he said, was probably one or two years behind other developing countries in the Western parts of Africa, Eastern Europe and the Middle East in terms of telecoms. But, the changes would mean South Africa leapfrogging a few of the steps that these other developing nations were going though. He predicts VoIP, IP telephony and wireless technologies are going to be the biggest trend in South Africa in the near future.

A few shares that will benefit

Beneficiaries of the changes would include companies like Dimension Data, Grintek, Reunert, Altech, Bytes and Business Connexion, as well as the mobile operators MTN and Vodacom (through listed entities Venfin with 15%, and Telkom, with its 50%).

Apart from the fact that Didata owns Internet Solutions, it also a Cisco partner, rolling out network solutions for companies. It also stands to benefit from an increased number of offshore companies relocating their call centres to South Africa, particularly when costs come down.

Grintek, with its telecoms division, also stands to benefit, as would Reunert, through Nashua Mobile, a large independent cellular service provider. Other beneficiaries could be Bytes Technology Holdings, through its PABX business. The broader Altron Group stands to benefit further through Altech’s independent cellular service provider Autopage Cellular.