Telkom is feeling the double effects of the recession and increased competition. After years of enjoying a comfortable position on top of South Africa's telecommunications food-chain, the group is having to re-evaluate its service offerings to ensure continued profitability.

Telkom released half-year results yesterday, revealing a 4% growth in operating revenue to R18,7-billion, but a 141,2% drop in basic earnings per share to a loss of 150,2 cents per share. This was mainly due to the impairment of the goodwill of Nigerian acquisition Multi-Links. The sale of its stake in Vodacom led to Telkom reporting profit of R40,4-billion.
Telkom South Africa showed a 22,6% increase in ADSL subscribers, a 24,9% increase in calling plan subscribers and a 51,1% increase in Do Broadband subscribers. Although there was a slight decline in the number of Telkom's fixed access lines, revenue per line increased by 1,7%.
"Telkom continues to dominate the wholesale telecoms segment and the retail broadband markets in South Africa," notes Frost & Sullivan ICT industry analyst Spiwe Chireka. "However, this position is increasingly coming under threat as we have seen Vodacom and MTN both emphasise data services driven strategies in the country. Furthermore, legislation that allows Telkom's competitors to self provision is likely to exacerbate the situation."
Chireka, however, adds that Neotel is yet to emerge as a significant competitor and that Telkom will therefore continue to enjoy its dominant position in the fixed-line segment. The group's revenue streams will suffer from the cut in interconnection rates though, and this will impact on its operations just as it will on those of the country's mobile operators.
"The R3-billion fine for anti-competitive behaviour in the wholesale internet segment is another key issue," Chireka warns. "If this payment is enforced, Telkom may have a massive mountain to climb to recover. Since the group is aiming significant spending towards its mobile network, having to part with this sort of cash will have a huge impact on those plans."
She says that mobile services could be a real growth area for the group if it is able to go ahead with this initiative though. Its success in this area will however require an innovative strategy that will enable it to penetrate a market that is dominated by the incumbent mobile operators Vodacom and MTN.
"In addition, Telkom is the first company in South Africa to deploy a Next Generation Network and this could give it first mover advantage in capturing the high end data segment, especially in the corporate sector," Chireka adds.
Outside of South Africa, Chireka believes that the group's presence in Nigeria, through Multi-Links, will become increasingly important. The Multi-Links operation reported an EBITDA loss of R164 million for the half year period. However, second quarter revenues for Multi-Links increased by 41% over the first quarter.
"This is still the fastest growing market in the region for both fixed and mobile services," she says. "Frost & Sullivan expects Multi-Links to contribute an increasingly significant proportion of the company's revenue, despite the initial hefty losses."
Chireka emphasises that Multi-Links has become a key component in Telkom's future strategy.
"Telkom needs to make sure it gets things right with Multi-Links, because Multi-Links is the one company in its current portfolio that holds the largest potential to make the group's pan-African strategy successful," she notes. "Africa Online has failed to impress on the company's books, and while MWEB Africa was an interesting acquisition, I don't expect it to be a significant boost to Telkom's operations."
She says that this is because, for the most part, internet service providers in the rest of Africa have not emerged as formidable challengers to the mobile and fixed line incumbents.
This is due to their inherent disadvantage of not being able to own their own networks," Chireka explains. "As a result, while they are growing, the revenue and subscriber contributions remain relatively poor."