Wanted: ICT Disruptor

Comment on Broadband by Alec Hogg

Over the past couple of weeks, I've been immersed in the recent history of our company ahead of my September labour of love - the 3 000 or so words that make up the CEO's letter in Moneyweb's annual report.

Reflecting on the past couple of years, it struck me how disappointed we South Africans should feel after being promised so much by the Johann Rupert/Aga Khan-controlled broadband wholesaler Seacom.

In the last couple of annual reports, I've relayed to shareholders how the undersea cable had the potential to transform South Africa's internet sector. Prices, we were told, would drop 90% as a flood of more than 100 times the current bandwidth would hit our country - transforming the online experience of everything from downloading emails through to watching videos on our laptops.

OK, it's only been a couple of months since Seacom landed at Mtunzini. But as a transforming force, its impact has been akin to those early BEE deals. A privileged few are surfing at the speed of sound. But for the vast majority, the impact has been underwhelming at best. The price reduction has been modest. Download speeds have hardly budged. Once again, the middle man - Telkom (JSE:TKG)- seems to have triumphed over public interest.

Sitting in on the Seacom/Altech (JSE:ALT) press conference last week made me wonder, not for the first time, why South Africans accept being gouged in the name of "market stability." Only now that the Competition Commission has highlighted a few of the worst examples are we looking differently at those who supply our steel, bread, cement pipes and airline tickets. But what about broadband? Does Telkom's part-Government ownership put a leash on our monopolies watchdog?

Seacom's CEO Brian Herlihy, a New Yorker who is clearly not used to operating in a market sewn up by colluding distributors, had to visibly restrain himself at that press conference. Seacom, he inferred, has delivered on its promise. But it is a wholesaler. It can only bring cheap and plentiful broadband to the beach. Seacom needs those next in the chain, the distributors, to come to the party. They control the channel to end-users. But so far, none of the distributors has broken ranks. Gouging out the last little bit of extra profit for as long as the informal cartel holds.

Herlihy is not an idiot. Those self-same distributors are his customers. So he attacks them publicly at his peril. But he did some gentle prodding of Altech's CEO Craig Venter, his company's key partner in East Africa where Seacom bandwidth - and targeted legislation - is transforming the ICT sector.

"Seacom's and Altech's mentality is completely aligned," Herlihy suggested, "Altech is not one of those companies who are determined to keep its profit margins as high as possible for as long as possible. We're going to see big things happening together in East Africa and hope to see that kind of thing in South Africa as well."

With a glance at his partner, Herlihy added: "What we need in South Africa is a disruptor......"

Venter, mindful perhaps of his conservative directorate, didn't bite. He steered the conversation back to his group's East African broadband distributor where, Venter said, Altech expects to generate almost half its earnings within two years. He calls broadband distribution "the next big growth engine of the Altech group". So with the focus to the North, any battle with the comfortable South African incumbents, Venter intimated, will have to wait. For now.

More's the pity. Not just for South African internet users who continue to pay excessive prices despite having cheap and plentiful bandwidth on their doorstep. But, perhaps, for Altech itself.

The road of the corporate disruptor is difficult, lonely and treacherous. But the rewards for shareholders can be enormous. Witness Richard Branson, whose Virgin Atlantic has overcome enormous odds to best the massive British Airways. Or, locally, Adrian Gore's Discovery Holdings which after being the disruptive force in medical aids has since done the same to life assurance.

Craig Venter is not a man to run from a fight. He took on and beat government's regulator when all others in his sector kept their heads down. He personally engineered his company's hefty bet in Kenya which many thought was foolhardy at the time. Now it's looking like the inspired brilliance of MTN's (JSE:MTN) investment into Nigeria.

But the Altech CEO's natural competitive instinct tendency is being tempered at home. By a bullying competitor? Or an over-conservative board? So South Africa's best bet of ending its starved and expensive broadband is being tethered. So the country falls further behind, not the more progressive nations to the West and East, but even Kenya, Rwanda, Tanzania and Uganda.

Colleague Hilton Tarrant and I discuss this and related issues in this week's Boardroom Talk podcast. Take a listen (or read the transcript) at http://tinyurl.com/kwvhvs. We need to up the level of the conversation. In the National Interest.

Until next week,

Best,

Alec

Why Telecoms Expense Management fails or succeeds

I found this summary on “Telecoms Expense Management” [TEM] – written by Anthony Cone from Tangoe Inc. in New York to be succinct.

For more on his public profile see http://www.linkedin.com/pub/anthony-cone/4/80a/a86.

How TEM solutions succeed?

There's a lot of great TEM success stories out there. But why did they succeed? Was it the process, the technology, the people a procure-to-pay solution?

1. Mutually agreed upon expectations from the beginning of the project
2. Clear goals and objectives
3. Requirements defined
4. Clear ownership of tasks & deliverables
5. TEM augmented by audit and sourcing at beginning
6. Unified solution for Fixed / Wireless for Admin and end-user?

Why TEM solutions fail?

Whether we like to admit it or not somewhere along the way we've seen failed TEM relationships. What are some of the root causes of this?

1. Under management of time and resources
2. No designated project manager from both the vendor and customer
3. Vague goals and objectives
4. Poorly defined requirements
5. Underestimated complexity
6. Lack of ownership
7. Vendor "bought" the business and is trying to recover margin

Cellular firms face chorus for fee cut

by LINDA ENSOR and LESLEY STONES - www.businessday.co.za

Big drop in interconnection charges likely as MPs criticise ‘exorbitant and excessive’ costs

DRASTIC reductions in the cost of calling one cellphone network from another could finally be on the way, with politicians demanding that fees are slashed from R1,25 a minute to just 60c on November 1.

The interconnection fee may fall by another 15c each year until it costs just 15c by 2012 — an enormous plunge of 88% that will directly benefit consumers.

The cellular operators will be given a chance to object to the proposals when they are called before Parliament’s communications committee next month.

But the African National Congress (ANC) made it clear that if operators did not willingly co-operate, legal amendments would be pushed through so they had no choice, said Jacques du Toit, MD of telecoms operator Vox Orion.

Du Toit was in Parliament yesterday when the committee tore into the Independent Communications Authority of SA (Icasa), condemning it for failing to curb the “exorbitant and excessive” fees charged by mobile operators for switching a call between rival networks.

“The network operators have to explain why the fee shouldn’t be 15c by 2012,” said Du Toit. “They will be given an opportunity to present their costs. But if they don’t come up with a number the ANC likes, the law will be amended so that the government can set the fees.”

Icasa estimates that the cost of linking a call is 40c a minute. Yet it has failed to force the fees down, and yesterday it still argued that it must conduct more research before it could intervene.

“When Icasa told the committee it had to investigate properly, the ANC said it would not tolerate that any more,” Du Toit said.

“There was a major fight. Icasa proposed the fees should come down by February next year and the ANC ripped into them and said that was unacceptable.”

The committee signed a resolution proposing that the operators must slash the interconnection fees almost immediately, and must pass on the savings to consumers.

It blamed the “shockingly high” fees on “apparent historical collusion between dominant mobile operators in the country — which has placed profits and greed above people — and the incapacity of Icasa to effectively regulate this matter”.

The resulting expensive call fees had harmed the economy and citizens and were “socially indefensible and economically unjustifiable”.

Icasa was urged to “act professionally, effectively and boldly to regulate interconnection rates”.

Du Toit said the operators would probably tell the committee that if the rates were slashed too dramatically, they would be unable to invest much more in network infrastructure. They might also argue that cost savings would have to be found elsewhere, and may involve job losses.

A charge too far

by Lesley Stones - www.businessday.co.za

Government is right to intervene on cell charges

THERE are very few occasions where governments should be encouraged to enter the telecoms and technology sectors. In these fast-moving industries, state intervention usually turns into interference, and stifles the progress and change the private sector is striving for.

However, a glaringly obvious place where intervention is needed is the extremely high interconnection fees that operators charge for placing a call to a rival network.

Anyone who examines their bill will see that a cross-network call is far dearer than an on-network call, as the operators are adding R1,25 a minute at peak times.

Why do they do that? Well, because they can. The fee was initially introduced to cover the cost incurred in linking a call from another network, to make sure an operator did not lose money when connecting a call from a rival network.

It only became a profit-gouging exercise when MTN and Vodacom dramatically raised their fee when Cell C launched, so Cell C also had to charge its customers a high fee for the calls they made.

Years later those prices remain, although it’s well known that the cost of providing the service is no more than 40c, and probably a lot less.

But why must consumers and businesses still pay those massive fees? The simple answer is that the operators will not voluntarily slash their profits, and the Independent Communications Authority of SA (Icasa) has proven endlessly inept at forcing them to do so.

This week Parliament’s communication committee did two laudable things. First, it proposed that the interconnection fee be cut to 60c from November 1. Second, it tore into Icasa, branded it as inept, and called for performance assessments for its councillors. About time.

For once, business should applaud this planned intervention in an otherwise privately owned industry. But it is not a done deal yet. The operators will be summoned to Parliament next month to “discuss” the issue.

The operators will probably argue that if the fees are cut too drastically, they will not make enough profit to invest in more much-needed network infrastructure, so the quality of service will suffer. They will point out that state intervention in the pricing practices of businesses is dangerous, and will deter companies in every sector of the economy from investing.

Both arguments are valid, yet both are easily solved. Setting a cap of 60c on the fee easily covers their costs, and still allows a decent profit. The committee’s plan to whittle the fee down in future years is reasonable, but the ultimate target of just 15c is too harsh.

Crucially, the committee must force this swift, sharp action in this one isolated instance, then butt out again.

As for performance measurements for Icasa, it must leave them in place forever.

The debate hots up on InterConnect Rates

Whilst certain industry players have been calling for a drop in the interconnect rates for years now, it remains to be seen if this will affect the consumer directly. History has shown [in countries that have lowered interconnect rates] that the service providers do not necessarily follow the interconnect rate reductions, with rate reductions in call costs. If they do it is only after a period of time and normally a gradual process.

However, in the last few months the public debate has really become robust. The VANS and LCR companies all are adding in their 2 cents worth and making promises of call costs reductions as and when the interconnect rates drop. And so they should, as they have the most to gain from this bun fight for market share.

However for me it is what the service providers who have nothing to say at this time are thinking that really interests me / large networks like MTN, Vodacom, CellC, Telkom and Neotel. I would dearly love to hear what they have to say about dropping call costs along with the proposed interconnect rate cuts – which at this time are just discussions with no agreement in place.

Here are a few links that will give you insight into what the various players have to say for themselves. Please bear in mind that everyone is spinning the angle that perhaps suits themselves the most.

http://www.techcentral.co.za/?tag=huge-group
http://www.techcentral.co.za/?tag=alan-knott-craig
http://www.techcentral.co.za/?tag=john-holdsworth
http://www.techcentral.co.za/?tag=voxorion
http://www.techcentral.co.za/?p=911
http://www.techcentral.co.za/?p=1052

At the moment we can all only speculate and if you ask me for my opinion, I see a gradual reduction of rates over a period of years. A big bang approach will not be good for the market and the big players will protect that market vigorously.

To give you an idea of what the InterConnect is worth to the big guys - read these stats from MyBroadband -

What Vodacom and MTN earn through interconnect

For the financial year ending 31 March 2009 Vodacom generated R 8 632 000 000 through interconnection in South Africa, up from R 7 945 000 000 a year ago. This is the company’s second largest revenue stream after ‘airtime and access’, and is far higher than the R 5 973 000 000 generated through data services (SMS, MMS & broadband) or the R 5 190 000 000 from equipment sales.

MTN generated R 6 951 000 000 in interconnect revenue for the financial year which ended December 2008, up from R 6 346 000 000 for the previous twelve months. As is the case with Vodacom it is also the second largest revenue generator for the MTN behind airtime and subscription revenue.

MTN’s interconnect revenue is in fact more than its data and SMS revenue (R 3 596 000 000) and cellular telephone and accessories sales (R 3 122 000 000) put together.

So if InterConnect Rates are to drop, the big players will have to give up some serious revenue. And if they lose revenue will their shareholders still be so happy to be financing those network upgrades. I think that there is a double edged sword to dropping the InterConnect Rate.

I will add more information into the mix as and when more information becomes available.

Peter Walsh
JHB – 13th Sept. 2009