Telkom CEO is giving the little guys a shot at gold

CEO accuses regulator of bungling allocation of internet spectrum in favour of top mobile operators

South Africa's communications regulator is biased in favour of mobile operators Vodacom and MTN and seems to want to further entrench their domination of the broadband market, says Telkom CEO Sipho Maseko.

He says the recent attempt by the Independent Communications Authority of South Africa to auction off R12-billion worth of mobile internet spectrum was against its own rules, anti-competitive and detrimental to consumer interests.

The High Court in Pretoria blocked Icasa in September after telecommunications minister Siyabonga Cwele took legal action to stop the auction.

Vodacom and MTN share 90% of current mobile revenue and Maseko, who was MD of Vodacom South Africa before being appointed to head Telkom three years ago, is desperate to increase its share.

After losing billions since trying to break into the mobile space six years ago, Telkom Mobile, according to results released last month for the six months ended September 30, has finally turned a small profit.

But with revenue from fixed-line voice continuing to fall, it has embarked on a massive drive to increase its data and broadband offering. For this it needs more spectrum.

"Spectrum allocation needs to be done within a policy framework that ensures we build an industry that is competitive, enables broadband access and generates the right returns," says Maseko.

He suggests a weak Icasa incapacitated by the poaching of its best people is vulnerable to pressure from giant operators.

"The notion of auctioning spectrum because of pressure is not right. Those who have should not get more of what they have. You have to equalise the playing field."

Those who support allocating spectrum by auction say it ensures that it goes to those with the capacity to maximise value on the spectrum.

Maseko agrees that whoever gets the spectrum must have the capacity to add maximum value.

Doesn't this mean the big players?

"We need to check if the big mobile players are using their current spectrum efficiently. If it's being used to carry mostly voice, then it's being used inefficiently. It should be used to carry more data. And bring down voice prices."

Auctioning spectrum the way Icasa intends would result in a continuation of a duopoly in the market, and prices would not come down.

"The strong will just get stronger. The way Icasa went about this was not informed by what sort of competitive environment you want to see in the future, but by seeking to reinforce current uncompetitive positions."

The argument is that Icasa got tired of waiting for the government to come up with a policy framework for allocation and decided to act on its own.

"Rules are very important, even when they're not in your favour," says Maseko. "The rules are clear. Icasa cannot issue a regulatory edict outside of a policy environment because then they make it up as they go.

"I hold no brief for the government, but it doesn't mean you can take the law into your own hands. Icasa doesn't even follow its own rules, which is why they are taken to court so often.

"If you have a regulator that is always having to be corrected by courts, you have a problem."

Since leaving Vodacom, Maseko has accused the regulator of favouring it.

Relations between him and the regulator were not improved when Icasa ordered him to undergo corporate governance training after he approved a R6-million interest-free loan to former Telkom chief financial officer Jacques Schindehütte, apparently - although Maseko denies it - without board approval.

The government, a 39% shareholder of Telkom, recently released an information and communications technology white paper that has stunned the market by proposing to nationalise privately owned spectrum.

"I don't like that, but also don't support the view that more should be given to those who have," says Maseko.

Maseko concedes that it is a bit rich for him to complain about Icasa's lack of capacity when Telkom itself was guilty of poaching some of its best talent.

"But the bigger players are guiltier than I am," he says.

Does he believe that they influence Icasa improperly? "There may be a default where the regulator tends to listen to the big guys a lot more than everybody else. The regulator is a lot more seduced by the big guy than the smaller guy."

He says he does not think the big players exert improper influence to get their way.

"Maybe they lobby hard."

After six years Telkom Mobile has 3.2million subscribers, which Maseko agrees is a horribly long way off Vodacom's 33million-plus and MTN's 29million-plus.

"But we've added one million in the last financial year."

Much of this growth is owing to its hugely popular FreeMe package. He says FreeMe is "the recognition that voice ought to be free. Data is the new voice."

Others say FreeMe is a disruptor. Maseko makes no apologies for this.

"Ultimately the best man must win in getting new customers. But I don't want him to win simply because he's large and therefore should get spectrum advantage over me. Let's all have the same amount of spectrum and then win or lose on our product offering."

Maseko considered buying Cell C last year. This would have given him around 19million subscribers and taken him within striking distance of Vodacom and MTN, but he walked away.

"I could not afford what they may have been looking for." He reportedly offered R14-billion and was willing to go up to R18-billion, but won't confirm this.

A big opportunity lost?

"We've made a number of mistakes in the past. We've bought things we should not have bought," he says, referring to Telkom's disastrous acquisition of Multi-Links in Nigeria which cost it R10-billion, which "almost lost us the firm".

He adds: "And we've sold things we should not have sold." Most damagingly, its 50% share in Vodacom.

The last thing it needed was to flirt with another potential disaster in the form of Cell C, which reportedly has R15-billion debt on its books.

In addition to growth and scale, another "major challenge" for Telkom is skills.

Does this mean Telkom is thinking of another acquisition, after its so far successful R2.7-billion purchase of Business Connexion, which now, he says, provides 60% of his revenue?

"Part of our responsibility as a leadership team is to think about how we can make this place better, slightly bigger, more profitable, organically and inorganically. We constantly think about it."

Are they in talks?

"We're looking in different areas locally and internationally. Any partner will need to share in the risk, bring something we don't have, especially the capability, skills and knowledge. There are areas in the sector where we just don't have the skills and knowledge."

He won't give anything away, but says that partnership would be "a very sensible step".

Stand by for an announcement next year.

Telkom got R7-billion from fixed voice in the last financial year out of revenue of R42-billion. There was a time not long ago when fixed voice accounted for all its revenue. So it's going down fast.

Maseko is hoping to fill the gap with fibre to the home and fibre to the business. But considering its vast infrastructure - ("South Africa has 185,000km of fibre," he said exultantly two years ago. "We own 147,000km of that.") - economies of scale progress has been slow.

There have been 150,000 fibre to the home connections and 1.8 million where the fibre reaches a small blue box in the street, but the last bit to the house is still copper.

In terms of speed the difference is negligible, he says. "It's like comparing a Ferrari with a BMW." But it's still only a 13% connectivity rate.

He blames a late start: "We should have done this five, 10 years ago, but this management team is working with the hand it has been dealt. The roll-out can't happen faster than it is."

Maseko, 48, says the key to Telkom's good results is a lack of government interference with his management team.

He has been luckier than his predecessors, he says.

He also credits a good relationship with his chairman, Jabu Mabuza. He has known him since he was a 15-year-old student activist in the Azanian People's Organisation and Mabuza was a businessman he used to canvass for funds. "He never donated much," he says.