Analysts say Telkom problems self-inflicted, as job cuts begin

As Telkom begins retrenchment consultations today, analysts have reached a general consensus that the challenges at the company are self-inflicted.

They believe Telkom has been protecting legacy technologies at the cost of falling behind with what the market wants and needs.

This morning, the telco announced it is commencing the consultation process with organised labour as part of the Section 189 process.

In a statement, it said: “Rapid changes in technology remain a key challenge for the group. While Telkom has made the necessary investments in new technologies and revenue streams, particularly in the fast-growing mobile business, this has taken its toll on profitability.

“The company launched a Section 189 process on 17 January, as part of the group’s efforts to ensure its stability and sustainability into the future as it contends with an increasingly tough operating environment.”

However, analysts say Telkom’s ongoing problem has been its inability to change its fixed-line incumbent mindset and envision a more open-ended future.

Telkom is looking to cut up to 3 000 jobs as it is faced with dwindling fixed-line revenues.

It has endured challenges with declining revenues in fixed voice and fixed data services over several years and analysts believe this could have been avoided.

Speaking to ITWeb, analysts say Telkom was the incumbent operator with the most fixed-line infrastructure and even Neotel couldn't challenge it in the fixed-line business until it got bought out by Liquid Telecom.

However, Telkom failed to quickly transition from fixed voice and fixed broadband towards fibre. As such, it lagged other operators despite a solid existing customer base.

Independent telecoms analyst Dr Charley Lewis says when telecoms reforms in SA began in 1996, Telkom failed to capitalise on the turning tide.

“Hindsight always provides a far clearer vision. But Telkom’s ongoing problem has been its inability to change its fixed-line incumbent mindset and envision a more open-ended future, drawing on its historical strengths and exploiting the opportunities offered by technological advances.”

Lewis says today, some 25 years on, Telkom’s fixed customer base has fallen below two million (having peaked at 5.5 million in 2000) and its workforce has plummeted to a mere 15 000, with a further 20% cut now on the cards.

“Telkom seems now to be focusing on establishing itself as a serious mobile player, hence its attempt to acquire the ailing Cell C, and its decision to kill off ADSL. Telkom’s recent substantial capital expenditure also reflects this, and along with the need to have sufficient financial reserves to participate in the coming spectrum auction, it has created the straitened financial position that in part underlies the move to cut jobs – always the softest of bottom line targets.”

Arthur Goldstuck, MD of World Wide Worx, says Telkom has a long tradition of protecting legacy technologies at the cost of falling behind with what the market wants and needs.

“It held back on ADSL to protect ISDN, a clearly inferior technology, but one that represented a strong centre of power within Telkom.

“Then it held back on fibre, in order to entrench its fixed broadband monopoly represented by ADSL. Only once Vumatel gave them a wake-up call with the fibre rollout of Parkhurst was Telkom roused from the slumber of its archaic traditions.

“In between, it failed to see it was destroying the underlying base of its ADSL business by increasing the line rental of its fixed-line service every single year of this century. In consequence, its subscriber base declined every single year from 2000 to the present day. Telkom blamed mobile substitution for this decline, but it did an excellent job of hurrying it along.”

Analysts are of the view that after moving into fibre, Telkom was not aggressive enough to the level of Vumatel and others.

They say it sat back thinking that as the incumbent, all the customers would naturally select it, but that wouldn't be the case as fibre is a targeted product meant for middle- to high-income earners.

As such, it needed to be pushed to the market, according to analysts.

They say despite initially having a high connection rate (number of homes connected), the growth started to taper off as competition intensified. As such, the company started getting less returns on investment and has invested less in fibre over the last two years.

“Telkom's entry into the fibre market was a knee-jerk reaction to Vumatel opening the market. As such, it didn't have a clear enough strategy aside from targeting affluent suburbs. The very fact that Parkhurst was one of the original 20 suburbs targeted, despite Vumatel very publicly having tied it up, tells you it was activating a strategy that was not adequately thought through, or that had been devised previously and was outdated,” Goldstuck observes.

Lewis believes Telkom failed in its attempt in 1996 to monopolise the Internet and crush the nascent ISP market, exacerbating its problems.

“It was only latterly that it sought to enter the mobile market, branded then as 8ta. And it seems to have largely missed the FTTH boat, with its ADSL customers leaving in droves for better bandwidth and faster speeds, and its fibre product line struggling to grow,” he argues.

Even its attempt to take fibre to Soweto, Lewis notes, follows on the heels of similar moves by Vumatel in Alexandra and Mitchells Plain.

Its reputation has been another sticky point for Telkom, the analyst says.

Some commentators believe most customers would rather go with alternative ISPs than Telkom because of its poor service reputation and the time it takes to repair service disruptions.

“The problem with a poor customer service reputation – something that incumbents worldwide share with Telkom – is how much it costs to repair the damage and reverse the perception. I don’t think this has affected Telkom’s business model per se, but it has surely undermined its ability to convert ADSL customers to FTTH clients,” says Lewis.

Sabelo Dlamini, senior research and consulting manager at International Data Corporation (IDC), comments: “Telkom lagged in both fixed and mobile. The transition to fibre was slow for the company. Although it may have started the initiatives earlier, it could not compete with smaller ISPs in developing and expanding the footprint, in the process seeing most of their clients moving to smaller ISPs. Also, on mobile, the company got in late and it was difficult for it to gain the market share in an already established market.

”Telkom was not aggressive enough on its fibre expansion plans, as it saw itself as the leader on the fixed-line services. The company also saw ISPs as resellers of their wholesale product. Telkom’s customer support has not been the best for years, and the company struggled to resolve this both at human level and adoption of advanced systems to provide better customer experience,” notes Dlamini.

“Most ISPs do not have much overheads compared to a big company like Telkom. In addition to this, they are relatively new and were able to embrace new technologies and online channels to interact with customers, reducing the cost of providing the services.”