Industry overview

Market dynamics

While traditional telecoms revenue growth has continued its decline over the last year across the globe, the explosion of internet applications and rapid innovation in smartphone capability, LTE and the Cloud, is revolutionising the sector, driving growth in data-intense pockets of the market. However, monetising this growth in data demand has proved difficult as customers are demanding more minutes and higher bandwidth while spending less and less. Adding to this pressure, telecoms operators are also seeing an increase in their cost base as inflation, regulation and capital expenditure take their toll on the bottom line.

Increasing competition from non-traditional players such as Internet companies like Google and Skype, retailers, media players, and handset manufacturers is also placing traditional telecoms operators under pressure.

However, a number of adjacencies such as ICT services and content do offer additional grounds for operators to grow revenues and defend their existing franchise. Capturing these will require telecoms players to explore new business models, including selected partnerships, which will enable them to tap into innovations and aggregate the most relevant services and applications.

Further to this, the business-to-business ICT space represents an attractive opportunity, expected to grow faster than business-to-consumer and to provide a way for telecoms companies to deepen their enterprise customer relationships.

Data traffic including Internet, Voice over IP, Point-to-Point, video and IPTV is growing rapidly. Internet user data growth is expected to remain robust in South Africa, passing 50% before the end of 2017¹.

Many telecoms operators around the world are already deploying or planning to deploy fibre networks as consumer demand for high-speed data access and volumes continues to rise.

In South Africa, the telecoms market mirrors the global industry. Between 2013 and 2018, fixed and mobile voice market revenues are expected to decline by 3% and 2% per annum², respectively, while demand for data, IT services and TV will increase at attractive rates.

Penetration of fixed broadband services is low among South African households. This suggests an opportunity for growth in the fixed broadband market, which Telkom is well-positioned to exploit, given its extensive infrastructure across the country.

Conversely, mobile broadband penetration in South Africa is high. Unlike in developed countries, mobile broadband usage dominates fixed. However, the recent decline in MTR has put increasing pressure on mobile ARPUs. Less established mobile operators, including Telkom Mobile, are engaging the regulator on this issue.

Over the next decade, a larger ecosystem of disruptive Over-The-Top (OTT ) and Voice over IP (VoIP) players such as Google, Skype and locally, Vox, ECN and AppChat, will see the introduction of a broader field of competitors to the local telecoms market.

Competition

It is anticipated that the other licensed operators (OLOs) and internet service providers (ISPs) will increasingly move into the corporate and voice service markets, with telecoms service providers expanding into managed data networks and international traffic markets. Over the next few years the formation of alliances between smaller licensed operators, established telecoms service providers and content providers, to focus on the delivery of converged services, can be expected.

Market consolidation is also anticipated, with Telkom’s competitors expected to grow through mergers, acquisitions and alliances. Furthermore, the entry of multinational corporations into South Africa will provide an incentive for their service providers to establish or enhance their presence in South Africa.

The effect of declining demand for voice on revenue has been further compounded by fixed-mobile substitution and growing customer demand for faster data services at cheaper rates. This has prompted highly aggressive and targeted pricing tactics by OLOs and ISPs, which could greatly intensify with the forthcoming launch of fibre services. This pricing pressure is particularly disadvantageous for Telkom, given its service obligations as the national incumbent, and the associated cost base.

The South African mobile market is already a contested space, with more established players like MTN and Vodacom holding most of the market share. The price competition seen in the fixed market is also active in the mobile arena as competitors vie for a greater portion of the market. As the fourth entrant into the market space, Telkom Mobile has chosen to follow a niched approach to its target market that will place it out of direct competition with MTN, Vodacom and Cell C.

Global trends have shown that fixed-line operators have benefitted from spectrum constraints placed on mobile operators, which have forced them to offload data onto fixed networks. Accordingly, Telkom as both a fixed and mobile operator is better insulated than its mobile competitors in this regard. The Group’s complement of mobile and fixed services also means that Telkom is well-placed to satisfy the recent explosive growth in data demand with unique converged solutions.

Telkom is the only player with developed fixed and mobile infrastructure and is plugged into main business areas in South Africa enabling easy provision of bundled services.

The integrated use of mobile and fixed is pivotal to the achievement of meaningful socio-economic development in South Africa and in fulfilling government’s service delivery objectives. Telkom’s unique infrastructure and network places it in a strong position to support e-enablement in South Africa, which has the ability to empower businesses through the integration of technology into their operations.

Despite Telkom’s differentiated position within the telecoms market, there are a number of regulatory issues affecting its ability to compete on a level playing field.

Regulatory issues influencing competition

Telkom continues to engage with the ICASA on a variety of issues including local loop unbundling, the access line deficit, interconnection rates, spectrum fees, licence fees and quality of service issues.

Self-provision and fixed-line voice competition

As the incumbent fixed-line operator in South Africa, fixedline voice revenue remains at the core of our business. The playing field was changed with the introduction of Neotel, which competes with us in all markets, and the granting of an electronic communications network service (ECNS) licences to the State-owned Broadband Infraco (Pty) Limited, whose main objective is the provision of wholesale bandwidth to other licensees at cost-based prices. Other licensees, including the mobile operators, who used to obtain their transmission infrastructure from Telkom, are now adequately licensed to provide their own infrastructure and also to provide it to other licensees, in competition with Telkom’s network services.

Spectrum licence fees

The Administrative Incentive Pricing basis for spectrum licence fees was introduced through regulation by ICASA in 2010 to incentivise spectrum users to make the most effective and efficient use of the radio frequency spectrum, specifically with regard to spectrum use in rural areas. Telkom has paid spectrum licence fees of R100 million for the 2013 period. The Authority also intends amending Telkom’s radio frequency spectrum licences in order to capture Telkom’s current use of spectrum. Following these activities the total fees payable should remain below R100 million.

Review of universal service obligations

In August 2010, ICASA issued a discussion document on the review of universal service and access obligations (USAOs). As indicated in last year’s report, we have submitted our views on the proposed USAO model to ICASA but no further progress has taken place. We are still of the view that there will need to be further consultations with ICASA before the regulations are finalised. The latest consultation with the Minister of Communications on a national broadband strategy for South Africa may also result in a rethink of the concept of universal service and access and Telkom has made suggestions to the Minister in this regard to achieve a more balanced obligation regime on operators.

Price controls

We have filed our retail tariffs in accordance with the regulations governing the standard terms and conditions for individual licences, which contemplate that such tariffs be filed with ICASA but do not require ICASA approval to be implemented.

Local loop unbundling

LLU in its original form is a regulatory remedy that enables telecommunications operators to access customers and competitively provide broadband services to them over the ‘last mile’ infrastructure of an incumbent operator. This was deemed necessary by regulators when there were no efficient alternative methods to enable this form of competition among operators. However, other forms of wholesale services are now available, including BitStream, which can give operators access to Telkom’s broadband infrastructure without requiring the physical unbundling of the loop.

After a lengthy consultation process, ICASA has come to the conclusion that LLU is a fairly complex and costly process that will require ICASA to conduct a regulatory impact assessment, as well as a market review to determine the necessity and scope of any LLU remedy, before it can be mandated by regulation. ICASA, however, has suggested that in the interim a BitStream product should be offered by Telkom from 1 November 2012 subject to the recovery of Telkom’s Access Line Deficit (ALD). However, since ICASA has not yet agreed to a process to recover the ALD, Telkom has not been obligated to introduce BitStream.

Mobile and fixed-line termination rates

ICASA has imposed a three-year glide-path for new termination rates, which came into effect on 1 March 2010. From 1 March 2013, Telkom’s fixed termination rates were reduced to R0.19 (between 0N area codes) and R0.12 (within 0N area codes) and the mobile termination rates of Vodacom and MTN were set at R0.40. There will also be no difference between peak and off-peak rates for call termination services. The smaller players – being ourselves (Telkom Mobile) and Cell C – are entitled to charge up to 10% more for calls terminated on each of our respective networks.