The outlook is becoming less rosy for SA's two listed telecom giants, cellular provider MTN and fixed-line operator Telkom (which also holds a noncontrolling 50% stake in MTN rival Vodacom). The cellphone market may be reaching saturation, at least in SA, and genuine competition is looming in the fixed-line market for the first time.
The question on investors' minds is whether these two companies can continue delivering the phenomenal growth in profits of recent years. In its interim results for the six months to September 2004, Telkom reported a net profit of R2,8bn, a 62% improvement on the year-ago six-month figure. MTN's net profit for six months to September 2004 rose equally spectacularly, up 60% to R2,9bn.
The market has rewarded the companies for their strong performances. In 2004, MTN's share price rose almost 60% and Telkom's climbed about 40%. Both shares have been treading water this year, though this is not surprising, given their rapid ascent in 2004.
Can the two operators maintain this level of growth and keep investors smiling? To answer that question, one needs to consider the competitive and environmental factors that are likely to affect them in the next few years.
Let's take a look at Telkom, this year's top telecom company, first.
The biggest unknown for the fixed-line provider is the level of competition it will face from the second network operator, which, bar any unforeseen problems, should soon be licensed by the Independent Communications Authority of SA (Icasa) to begin offering services to clients. At the time of writing in May, the members of the SNO consortium were still negotiating a shareholder agreement. Icasa requires this document before it can license the operator.
It is difficult to forecast the impact the SNO will have. If other markets are any indication, though, the company will have a tough time making inroads against the incumbent. It could either enter the market with a bang by significantly undercutting Telkom's prices and forcing Telkom to respond by slashing its prices; or it could choose not to be as aggressive - it would need to avoid making its prices unrealistic - but risk not making big advances.
William Hahn, principal analyst at research firm Gartner, says the SNO is likely to have a big impact only if it works closely with other players in the market and forms a powerful alliance. Centred on the SNO, this alliance's fibre network will give it a head start and it will be able to offer everything Telkom does (with the possible exception of cheap access to international bandwidth) at competitive prices, and to reach customers Telkom argues it cannot. Still, this is all a big "if", Hahn points out.
Telkom's other big challenge, besides competition, is more regulatory and political in nature. The company's tariffs have come under intense scrutiny in recent months. President Thabo Mbeki, in his state of the nation address in February, described as "unacceptable" the high cost of fixed-line telecoms in SA, which he said were up to 10 times higher than rates in developed markets.
Research by Genesis Analytics, commissioned by the SA Foundation, appears to bear this out. It says Telkom's:
- Business broadband digital subscriber lines are the most expensive of 15 countries sampled and more than nine times as expensive as the cheapest country;
- Domestic leased lines are the most expensive of 12 countries surveyed, 102% more expensive than the average price and almost 15 times more expensive than the cheapest country;
- International leased lines are three times more expensive than the next most expensive country sampled and 31 times more expensive than the cheapest;
- Peak-time local calls are the most expensive of 15 countries sampled and 199% more expensive than the average price; and
- Off-peak local calls are the second most expensive of 14 countries surveyed and 79% more expensive than the average.
Increasing competitive pressure is likely to force Telkom to revise its tariffs downwards. It has already admitted that some of the prices it charges for its data services are too high and has said it will lower these. Telkom is expected to announce further broadband price cuts in the next few months. However, any cuts will be done incrementally and not all at once, it says.
Telkom will be hoping it can offset price cuts with an increase in Internet subscriber numbers and, in the case of voice services, in call volumes.
The company also faces pressure from government over its prices, arguably for the first time. Mbeki's recent speech may have prompted the announcement by the communications department that it would ask Icasa to consider declaring the submarine cables that link SA with Europe and Asia an essential service, thereby enabling other companies to have access to international Internet connectivity at much cheaper rates.
Telkom's challenge, then, will be in growing its margins and earnings in what is becoming a more hostile environment. One way of doing this may be to expand into Africa, where cellular operators have demonstrated the existence of an almost insatiable demand for communications. Together with Vodacom, Telkom has expressed an interest in Nigeria's fixed-line operator, NiTel, which is state owned.
MTN, which already has a successful business in Nigeria and in other parts of Africa, is facing a different set of challenges to Telkom.
Its home base, SA, is probably no more than a few years away from saturation. Though the cellphone companies are still signing new SA clients at an impressive clip, this growth is expected to slow in the next few years. Already, cellular teledensity is more than 50% and there are about five times as many cellphone users as there are fixed-line subscribers.
Saturation is not likely to be reached as quickly in countries to SA's north, though. MTN's Nigeria business has been a spectacular profit machine and is the envy of Vodacom, which is keen to enter that market after its first attempt had to be aborted last year when Telkom (and its then-shareholder SBC of the US) became concerned about corruption allegations.
Vodacom Group chief operating officer Pieter Uys says Vodacom is considering its options in Nigeria and is determined to re-enter the market. "We have now appointed dedicated people to look at governance to ensure we comply 100%. It's not that we did anything wrong the first time, but paying a policeman for protection could be seen as corruption. You have to do it in a certain way," Uys says.
Vodacom is keen to expand into other African countries too, Uys says. It already has operations in Mozambique, Tanzania, the Democratic Republic of Congo and Lesotho.
MTN is also looking for opportunities. It has designs on the Middle East, where it hopes soon to secure a licence to begin operating in Iran. It is also pursuing further opportunities in Africa. Other than SA and Nigeria, which are its biggest markets, it operates networks in Swaziland, Cameroon, Rwanda and Uganda.
There is something of a land grab taking place on the continent between MTN, Vodacom and Celtel International, the third-largest operator in Africa, with 6m subscribers in 13 countries.
Rivalry between the operators boiled over last month when MTN brought an application to the British courts seeking documents that it hopes will help overturn a planned US$3,4bn cash acquisition by Kuwait's Mobile Telecommunications Company (MTC) of Celtel. MTN, which had itself tendered a $2,7bn offer for Celtel, has accused the company of reneging on legally binding undertakings by agreeing to the MTC deal.
At the time of writing, it was not clear what MTN's chances were of reversing the MTC transaction. But analysts say Celtel's footprint is complementary to MTN's and that an acquisition makes sense. They also say MTN has failed to win licences in a number of countries in North Africa and the Middle East, crimping revenue expansion opportunities, and that if the company doesn't become more predatory it could become the target for a takeover.
