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Public Hearings on cost of communications 29 - 30 November 2012 Manelisa Mavuso, MD: Consumer Services and Retail. INDEX. Page. Introduction 3 Context 5 Tarifica benchmarking graphs for voice c alls 4 th Quarter 2011 14 4. Telkom’s contribution to the process 25

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slide1

Public Hearings on cost of communications29 - 30 November 2012Manelisa Mavuso, MD: Consumer Services and Retail

index
INDEX

Page

Introduction 3

Context 5

Tarifica benchmarking graphs for voice calls

4th Quarter 2011 14

4. Telkom’s contribution to the process 25

5. Shortcomings of the current Call Termination regulations 36

6. Challenges 38

7. Summary 39

8. Conclusion 40

introduction
Introduction

Telkom welcomes the opportunity to address the Committee on this very important matter

Cost of communications impacts on all spheres of life and has a direct impact on economic growth and on South Africa’s competitiveness

Call termination has a direct impact on the cost of communication

The initial focus on, and attention to the cost of communications and the impact of termination rates on retail prices resulted from scrutiny by members of Parliament

These Hearings should not be seen as a new process but rather as an evolutionary process

introduction cont
Introduction Cont…..

Process started in 2009. The initial focus and scope was the impact of MTRs on high retail mobile prices

The process involved, at one stage or another, the PCC, the Minister, Doc and ICASA

Telkom believes that Parliament's Portfolio Committee on Communications (PPC), the Minister of Communications, Doc and ICASA all have critical roles to play to ensure the cost of communications is reduced

Telkom supports this review process and the initiative taken by the PCC

slide5

TELKOM’S CONTEXT

Current situation: highly challenging environment

Trends

Impact on Telkom

  • 60% of revenues are voice based & reducing (-3-5% CAGR 12’-17’)
  • Fixed mobile substitution will continue
  • Fixed data growth insufficient to offset decline in voice
  • 8.2% cost growth (inflation & wages)

Challenges

Economics

  • Mobile constitutes 80% of the market. Vodacom & MTN investing in fixed infrastructure to ‘cherry-pick’ Wholesale & Enterprise revenue opportunities
  • Competition has access to global R&D and capabilities
  • Disruptive threat of increasing OTT & VoIP (e.g. Vox)

Competition

Workforce & infrastructure

  • Ageing workforce with traditional incumbent culture
  • Skills not aligned to future mobile & IP needs
  • 22,000 employees with inflationary wage demands
  • Mobile infrastructure requires rapid scaling
  • Fixed infrastructure outdated requiring new NGN platform

Regulatory pressures

  • Continued universal service obligations
  • New licensing & sub-1000 Mhz spectrum allocation favoring other players
  • Interconnect regime does not reflect cost recovery
  • Continued regulatory pressures (e.g. Bitstream)
slide6

TELKOM’S CONTEXT

  • Retail end-user prices are driven by a combination of factors, which operators may, or may not, have control of:
  • Internal cost structures
    • Staff & labour costs
    • Equipment & materials
    • Advertising, etc.
  • OLO input costs (e.g. call termination costs)
  • Regulatory imposed costs
    • Spectrum licence fees, licence fees
    • USAF contributions
    • Cost of compliance (Service Charters, etc)
  • Number of customers, type of customers and services consumed
  • Profit margins
slide7

TELKOM’S CONTEXT

  • Due to Telkom’s specific context, more than 45% of costs are ‘fixed’ and difficult to reduce further
the mobile market is 3x the size of telkom s core revenue base and the future growth is in data

TELKOM’S CONTEXT

The mobile market is 3x the size of Telkom’s core revenue base and the future growth is in data

Key:

CAGR

RSA telecommunications market forecast

(ZAR BN)

2%

15%

Mobile market of R90BN – 3x size of fixed

-2%

10%

-3%

  • Mobile data is the growth engine of the market, forecast to grow at 15% CAGR vs. 1% for total fixed

Source: Pyramid, WCIS, operators, Delta Partners’ analysis

slide9

TELKOM’S CONTEXT

Telkom is very much dependent on fixed voice yet this is declining, materially posing a serious future risk

Revenue (2007 vs. 2011)(RB)

Comments

  • 18% revenue reduction in fixed voice business
  • Strong growth in data business (43% including leased line)
  • Future fixed data growth threat from increasing mobile data competition
  • Competitor demand for COFL will also reduce as self-provisioning increases

32.1*

0.01

31.3*

3.2

0.04

Data

△4.2

Inter-connection

Voice

slide10

TELKOM’S CONTEXT

Will the turnaround of Telkom be a success?

1

Force of competition

  • MTN and Vodacom have significantly more financial strength and scale (e.g. 25m customers)
  • No universal service obligation for many competitors
  • Severe self provision risk – building fibreto cherry-pick fixed line revenue (without USO of Telkom)

2

  • No sub-1000 Mhz spectrum
  • FTR that does not recogniseaccess costs
  • Continued pressures re bit-stream

Regulation

3

Inflexible cost base

  • Ageing workforce with traditional incumbent culture
  • Skills not aligned to future mobile & IP needs
  • 22,000 employees with inflationary wage demands

4

4th entrant mobile challenge

  • Sites are full, especially in geo 1 areas and competition reluctant to be fully cooperative
  • Channels not interested in promoting 8ta without disproportionate commissions
  • Extremely challenging to identify and attract required talent
the competitive landscape

TELKOM’S CONTEXT

The competitive landscape

Size compared to Telkom

Holding company

Market cap

Aug 2012

OLO

100%

Inter.Solutions

NTT Japan

R518bn

x52

No Universal Service Obligations

100%

MTN Group

R293bn

Verizon

x30

65%

R1,205bn

x122

Vodafone

Vodacom SA

R194bn

Naspers

MWeb SA

R655bn

x20

100%

61.5%

TATA Group

x66

Neotel

100%

Telkom Group

R9bn

Telkom SA

Telkom competes against ISPs & MCOs which are part of much bigger conglomerates

legacy regulatory obligations

TELKOM’S CONTEXT

Legacy regulatoryobligations
  • Telkom historically seen as monopoly and loaded with most regulatory obligations
    • Loss-making Public Payphone obligations
    • Loss-making Directory enquiries
    • Provider of services in last resort (basic service obligations inunprofitable areas)
  • Unfair regulatory obligations on Fixed vs Mobile operators
    • Service Charter obligations
    • Access to critical spectrum and impact of spectrum licence fees
    • Possible LLU obligations
    • Access Line Deficit difficulties

Effects

          • Provision of unprofitable services in competitive environment is unsustainable
          • Regulatory burden puts Telkom’s sustainability at risk
slide14

Tarifica

Benchmarking

Graphs for Voice Calls

4th Quarter 2011

lowering the cost of communication
Lowering the cost of communication

Reduction in nominal prices

Keeping price increases below inflation – price reductions in real terms

New products & services

Product enhancements

telkom s contribution to the process
Telkom’s contribution to the process
  • In 2009, Telkom could have increased its overall Basket services by 19.7% for the 2009/2010 period (due to carry over from previous year) However, Telkom filed an overall increase of only 1.7% which resulted in R3.2bn saving for customers
  • In 2010 Telkom could have increased its overall basket by  19.2% for the 2010/2011 period. However, Telkom filed an overall increase of only 2.4% which resulted in R2.7bn saving for customers
  • The combined effect of ADSL price decreases and CPI increases over the last 7 years mean that customers have experienced, in real terms, decreases of between 86% and 106% in ADSL prices!
  • Although not statutory obliged, Telkom has consistently reduced fixed-to-mobile call tariffs, thereby putting over R2.1bn back into the pockets of its customers
telkom has kept price increases below inflation
Telkom has kept price increases below inflation

Trends

  • Since 2005, communications prices have risen more slowly compared to other inflationary indices (Education, Food, Medical & Health care, Housing, Transport) and the gap continues to widen
  • Whilst Telkom’s costs have increased in line with inflation, Telkom’s price increases have been kept below inflation which also resulted in profit squeeze
  • Telkom has consistently demonstrated prudence in its pricing practices to the detriment of its own profitability
  • Telkom’s tariffs for line rental is below costs and loss making

Telkom has kept price increases below CPI and below Price Control allowances

keeping the cost of broadband down
Keeping the cost of broadband down

Although Telkom’s costs have increased in line with inflation, Telkom has not increased DSL prices at the same ratio which effectively means that prices have come down in real terms.

telkom has lowered the cost of communications wholesale business
Telkom has lowered the cost of communications:Wholesale business

Telkom reduced the prices of wholesale products during 2012/2013:

IPConnect -30%

SAIX Dedicated Access -10%

SAIX ADSL Usage -20%

Metro Clear -57%

Ethernet Express -57%

IPLCs (legacy Half circuits) -20%

telkom s pass through of mtr reductions
Telkom’s pass-through of MTR reductions

Telkom’s Fixed-to-Mobile retail prices have come down!

product enhancements service offerings
Product enhancements & service offerings
  • Telkomoffersfree installations (e.g. 12 month contracts)
  • Different calling plans for business & residential customers
    • Telkom Biz Talk, SupremeCall, Cell Saver
  • ISDN PRA payment plans
  • Launched first FMC bundle in the form of Telkom-Mix
  • Retained 68% of customers that took on the free 3-month broadband trial
  • Launched uncapped broadband customer value propositions
  • Improve entry level broadband product proposition by increasing broadband speed from 384kbps to 1Mbps
  • Launched Telkom Business Mobile & TBIZ uncapped offering
  • Telkom has reduced prices of Fixed-to-Mobile calls
telkom s contribution to lowering cost of communications dsl speeds
Telkom’s contribution to lowering cost of communications:DSL speeds

In 2011, Telkom upgraded DSL Faster (512 KB/s) to 1 MB/s at no cost to customers

Between August and November 2012, Telkom again upgraded 440 000 DSL Fast (384 KB/s) services to 1 MB/s speeds as well as 190 000 DSL Faster (1 MB/s) services to 2 MB/s

These upgrades are equal to a price reduction of 45.8% since the current (before upgrade) DSL Faster at 1 MB/s costs R 299.00 VAT incl. while the new DSL Fast at 1 MB/s costsonlyR 165.00 VAT incl.

history telkom s fixed termination rate ftr
History: Telkom’s Fixed Termination Rate (FTR)

In 1994 Telkom’s FTR was set at 21c in order to support the start-up of the mobile cellular industry

The 21c was based on Telkom’s local call tariff

It was assumed that MCOs would only have 500,000 subscribers over a 10 year period

Currently, MCO have in excess of 50m subscribers

Over a 16 year period, Telkom has managed to increase the FTR from 21c to 29c which has subsequently been reduced by ICASA’s glide-path

how mcos have profited from telkom through high mtrs
How MCOs have profited from Telkom through high MTRs
  • Telkom would pay approx 10x more to MCOs than it received from MCOs
  • Asymmetry and ICX revenue were used by MCOs to build networks and offer low on-net calls to increase fixed-mobile substitution
  • Over 2002/2010 period this ‘overpayment’ amounts to approx R34bn
shortcoming of current call termination regulations
Shortcoming of current Call Termination regulations
  • In respect of mobile operators, the MTRs include the cost of both access and transport segments of the network to the POI
  • However, Telkom’s FTRs do not include the cost associated with the access network
    • This is a result of differential treatment arising from the regulatory accounts
  • Telkom believes the levels of current FTRs are unfair and discriminatory
  • Such approach is backward looking and ignores the convergence of service offerings and the convergence of the underlying costs of networks
slide29

Shortcoming of current Call Termination regulations – cont.

Telkomis already providing universal service and basic access at a price below cost

Telkom has an Access Line Deficit that has been subject to an ICASA approved regulatory audit

The existing FTRs also do not allow Telkom to recover its costs of operation and hence is not cost reflective

Current FTRs do not allow for full recovery of call conveyance costs on a per call basis

Any further downward glide paths for FTRs would therefore be inappropriate

challenges confronting telkom fixed line
Challenges confronting Telkom Fixed-line

Declining voice revenue

Access Line Deficit (Telkom subsidises line rentals)

Inappropriate termination rate regime

Asymmetry in termination rates

Legacy regulatory obligations

Extensive capital investment required to renew & expand network

Cable theft

in summary
In summary . . .

Telkom is of the view that termination rates have a huge impact on the competitiveness of operators and the overall cost of communications

Telkom believes that the cost of communications has indeed reduced in real terms

Telkom, however, believes that reduction of call termination rates has had limited success

Telkom proposes that the current model should be reviewed and that a new call termination model is required which should rather focus on increasing the competitiveness of the sector

conclusions
Conclusions

Telkom is committed to continued reduction of the costs of communications

Telkom supports the principle of cost-oriented termination rates

Call termination rates must allow for full cost recovery

Current MTRs mean that 8ta’ is already under-recovering costs

New entrants (like 8ta) should be given higher asymmetrical MTRs to allow them to compete with incumbents

Current FTRs are set at a wrong level and are discriminatory

Propose simplified and converged MTR / FTR

32