Tuesday, June 10, 2008

South Africa - industry shake-up

SA telecommunications's shake-up

There has been lots of buzz in the SA telecommunications sector but is anything changing, asks Frost & Sullivan.

Developments in South Africa's telecommunications sector have much hype in recent weeks with some key players targeted for investment and the promise of changes on the horizon. But are these changes positive? Will the consumer enjoy the most benefit at the end of day?

Despite the sudden onset of activity, especially investment activity, in this key sector, it should come as no surprise that the industry is going to go through significant scale changes. Events have been leading up to this development for some time. Perhaps the first indication was the ruling of the Independent Communications Association of South Africa (ICASA) that effectively ended Telkom's monopoly in the fixed line sector. Since then players have quietly crafted their positions in the market to take advantage of the type of developments we are currently seeing. As a result, not only are we likely to see new entrants such as Neotel making their presence felt in the market, but also the entrance of new roleplayers previously uninvolved in this sector.

The current players though, are perhaps the most interesting. In the space of three weeks MTN has been approached by two separate companies seeking take over talks. Both of these evolved into MTN wanting; rather to take the reign of their would-be buyers. In addition, Telkom's Vodacom stake is a central point in negotiations with two separate entities. Vodafone wants to increase its stake in Vodacom and Mvelaphanda wants to make sure that Telkom divests all of it. As if this weren't enough, Naspers shocked many with the announcement that it is to auction its ISP subsidiary MWeb. The concurrent timing of these events is perhaps the biggest surprise to the market, but the fact that they have occurred should not be astonishing.

MTN is a strong African mobile operator. Its forays into the continent while perceived by some as risky, were well timed and have paid off handsomely. The acquisition of Investcom and the resulting overnight establishment of a significant presence in the Middle East cannot go unmentioned. The company has proved itself to be an emerging market expert and it is therefore no surprise that Indian operators are eager to collaborate with it. It is perhaps surprising that we have not seen advances from Latin American operators such as the Mexican giant American Movil.

While Telkom has enjoyed a favoured position in South Africa's fixed line arena, this has already begun to change. A noticeable difference occurred well before the recent introduction of services by Neotel, the country's second national operator. The deregulation of the market and the effective legalisation of Voice over Internet Protocol (VoIP) have resulted in a number of service providers extending their portfolios into the telecommunications space. Neotel's establishment in the market as a respected force will only serve to improve this situation for businesses and consumers alike.

Telkom therefore needs to align its strategy and ensure that it is ready to face the challenge of heightened competition. Frost & Sullivan believes that the divestiture of its Vodacom stake would allow the company to focus on its core competency as a fixed line provider. There are already indications that a strategic change of tack is apparent with Telkom opting to outsource some of its business processes. A streamlined organisation is a more effective competitor in today's tough market conditions. By the way fixed broadband is far from dead looking at recent technologies such as bonded ADSL rings.

The decision by Naspers to auction off MWeb goes against the prediction that the roles of telecommunications companies and content providers, will become increasingly blurred in the new media landscape. The media group is effectively stating that it wants to focus on its core competency of content generation. This effectively means that MWeb will also be allowed to focus on its core business of being a pure internet service provider. The auction is likely to be contested by top operators in the market as MWeb's sizeable consumer subscriber base and well the established VSAT infrastructure in Africa make it a valuable asset.

Despite the market flurry, there is a common theme. Companies are realising that they have to stick to what they know. MTN has to ensure that it is able to consolidate on its previous success and continue to deliver value to shareholders. Telkom needs to refocus on the provision of high standard fixed line services as it faces elevated competition. Lastly, MWeb and Naspers' future strength lies in their ability to continue with what they are good at.

So what does this mean for the consumer and the telecommunications sector in general? At the most basic level, consumers can look forward to high-quality, cost-effective products and services that are well designed with effective competition. They can expect more variety, greater flexibility and higher levels of service. Businesses can look forward to service providers that are out to impress as greater competition forces them to focus on retaining clients. Most importantly, the telecommunications sector is likely to be a hive of activity with new entrants in the market. The introduction of undersea cables will only fuel this positive fire.

In short, Frost & Sullivan believes that the future looks very promising for the South African telecommunications sector with consumers and investors alike able to reap the benefits. By focusing on their core competencies and ensuring that their services are well positioned, new and existing market players can only enjoy success in this exciting market.

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