Telkom spends to be competitive

South African telecoms utility Telkom has indicated it will have to increase its expenditure to ensure it remains competitive.

Earlier this year, the company announced it would spend R30 billion in capital projects, and much of this spend is mooted for the next-generation network (NGN), which is expected to mostly be in place by 2010.

Telkom says the first phase of implementing the NGN is expected to last three years and concentrates on enabling the network for broadband services.

Group executive of corporate communications Lulu Letlape explains Telkom has invested R4.9 billion during the year ended 31 March and plans to spend a further R25 million over the next four years to increase the capacity of its network.

"This is consistent with Telkom`s drive to evolve its network so that it is fully IP-centric and to ensure our obligations converge with the regulatory requirements. Approximately 50% of the planned capex spend will be spent on the NGN and customer centricity," she says.

Chairman Nomazizi Mtshotshisa says the incumbent operator will have no choice but to spend more. In its 2006 annual report, she states: "Telkom has no choice but to build long-term competitiveness and profitability. Although this will require increased expenditure, the optimal employment of capital and extracting maximum returns on assets will continue to receive key focus."

Telkom, which spent R7.5 billion on capital items this year, says fixed-line capital expenditure in the 2007 financial year is expected to be between 18% and 22% of revenue. The company reported revenue of R47.6 billion this year, of which capital expenditure was just under 16%.

The increase in spend is a result of its investment in capacity and to "accelerate the evolution to an IP-centric network". Mobile capital expenditure for the 2007 financial year is expected to remain at about 15% of revenue, it said.

However, Telkom expects that fixed-line revenue will be hit by tariffs, increased competition, the migration from dial-up connections to ADSL, the introduction of cost-based interconnection and continued fixed-to-mobile migration and substitution. Data revenue is expected to grow with the continued uptake of broadband, but overall margins will come under pressure.

CEO Papi Molotsane says accelerated liberalisation is challenging Telkom`s traditional position. "More importantly, it means greater regulatory certainty, which is good for the sector as a whole over the longer term."

He adds that Telkom is aware of the "opportunities in this dynamic environment" and has determined what must be changed in order for it to be a "more effective competitor". It aims to compete across the ICT value chain, he notes.

Molotsane adds that Telkom - 38% owned by government - will "continue to focus on and invest in opportunities to provide the full spectrum of ICT solutions to customers, including voice, data, video and Internet services, increasingly through broadband penetration."

As part of its strategic plan, the company will continue to invest in its network, he says. "Telkom`s strategy also signals its acknowledgement that Telkom needs to move faster to put the enablers in place to stay competitive over the long-term."

It will begin deploying a wireless broadband network to complement the ADSL roll-out. It currently has 143 509 ADSL customers.

Telkom also continues to explore opportunities outside its borders, particularly in other African markets. "A number of options, each with its own advantages and disadvantages, are available in the form of acquisitions, privatisations, joint ventures and management contracts," Molotsane says.

According to Letlape, Telkom has responded to the changing local environment by converging its products and services jointly with mobile products and services, and creating fixed-mobile convergence.

"This allows Telkom to move forward alongside the mobile businesses and find ways for the two industries to complement each other to provide the best service to our increasingly sophisticated customer base."

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