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End of the line for fixed line?

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Telkom’s new tariff structure, announced Friday, reveals that it is not focused on protecting its fixed line customer base, writes ARTHUR GOLDSTUCK.

On Friday Telkom announced that it was reducing its overall voice and tariffs by 1.7% from 1 August 2011. But lurking within that apparently generous decree was a single tariff that speaks most eloquently of the flaw in its strategic thinking.

‚Amidst the reduction in call tariffs,‚ it announced, ‚Telkom revealed an increase of only 5% in the monthly rental for a Telkom line.‚

When independent researchers World Wide Worx (publishers of Gadget) first pointed out, around five years ago, that Telkom’s fixed line customer base had declined every single year since 2000, it pinned the blame partly on the cost of local calls, which had never been reduced, but mainly on the cost of fixed line rental, which had been increased every single year of the decade up to then.

Rueben September

Shortly after former CEO Rueben September took over in 2007, he announced a ‚defend-and-grow‚ strategy, referring to defence of its monopoly positions and growing its other positions in the market. However, he utterly failed in addressing the most obvious defensive weakness of all, namely the high cost of fixed line rentals. He presided over two consecutive increases in this tariff. Last year the tariff was increased yet again, during the period after September left and before acting CEO Jeffrey Hedberg took over ‚suggesting that it was part of an institutionalised tactic rather than clear vision or strategy.

The new tariff announcement comes three months into the reign of new CEO Pinky Moholi, so one could give her the benefit of the doubt of listening to the insiders at Telkom ‚ whom, it is clear, have been driving this particular tariff up for the past decade or more.

It also comes three weeks after the announcement of Telkom’s March 2011 year-end results, when it reported that its fixed line customer base stood at 4,152,000 ‚ a 2.8% decline over the previous year. It was also the 11th straight year in a row of decline in its fixed line base.

Let’s unpack that a little more: In 2010, fixed line rentals also increased by about 5% on average, with the cost of residential lines rising by about 2% and business lines by about 8%. The consequence is direct and immediate, as it has been for the past decade: a 2.8% decline in the number of fixed lines in use.

It is easy to blame the growth of mobile, but the mobile subscriber base has been at saturation levels for the past three years, and the cost of mobile calls have always been a lot higher than that of fixed line. Using a fixed line for local calls appears to be a no-brainer, and should be Telkom’s biggest competitive advantage. But it has destroyed that advantage with the line rental cost.

Consider this: the average revenue per user for pre-paid customers at MTN is R101, and at Vodacom R85. Telkom’s residential line rental alone, before a single call is made, is now almost 40% higher than what the average MTN pre-paid customer spends a month on phone calls, and more than 60% higher for Vodacom pre-paid customers.

At that price, how on earth does Telkom imagine it can not only defend its fixed line customer base but even grow it?

Jeffrey Hedberg

Look at this statement from the Operational Overview of its 2011 Annual Results:

‚We continue to focus on improving customer churn, increasing customer loyalty and promoting the value offered by fixed line converged services through many initiatives and new product launches such as Telkom Simple. Products of this nature have begun to slow down the rate of decline in the number of lines. We continue to offer volume based discounts, offering better value in exchange for extended contracts and migration to shared services.‚

Notice the fundamental disconnect? There is a genuine desire and wish to improve churn and keep customers, but there is no acknowledgement of what causes churn and the shedding of customers. It is assumed that clever bundles will keep them or bring them back. Maybe it will provide that illusion, but it takes little more than basic arithmetic to show where the problem lies.

‚Telkom residential customers will pay R139.97 a month and business customers R191.84,‚ ran Friday’s announcement, and then, in the same breath, ‚Enterprise customers will benefit from no increase in the tariffs for primary rate ISDN services.‚

IS… what services? Enterprise customers must be lining the roads cheering the Telkom trucks heading out to look after the ever-declining customer base for THAT prehistoric service.

As has become customary in the annual tariff adjustments ‚ but always treated as a great surprise and reward ‚ international and long-distance tariffs are also to be decreased. The advent of Voice over IP and callback services makes such decreases inevitable, though, and these have never had an impact on the decline in the fixed line user base.

The good news is that Telkom has acknowledged the growing importance of its data services to consumers:

‚Telkom’s Faster DSL customers can expect an 11.3% decrease in the monthly rental fee from R326 to R289 from 1 July. This price reduction comes after Telkom has already increased the speed for its Faster DSL customers from up to 512kbp/s to up to 1024 kbp/s on 1 May 2011.

‚Telkom will not be increasing the monthly subscription for the Do Broadband bundles ‚Ķ from 1 September Telkom will be offering Do Broadband 2&3 customers more value ‚ for the same price. These customers will receive an additional 1GB for the existing monthly price, R258 for Do 2 and R554 for Do 3 customers.‚

Telkom says it is also filling a gap in the Do Broadband by introducing an enhanced offer which will consist of a faster DSL (now up to 1Mb/s) service bundled with a 5GB Internet account for R395 a month.

In the case of the CLOSER calling plans, CLOSER 1 will increase from R150 to R158 a month and CLOSER 2 from R170 to R177 a month from 1 August. CLOSER 3 will remain unchanged at R333.

There is little doubt that Telkom’s ADSL service remains the most reliable consumer broadband service in the South African market. However, it is a service built entirely on the fixed line customer base. If Telkom has no intention of bolstering that customer base at its weakest point ‚ the cost of line rental ‚ then it is ultimately also undermining the future health of its ADSL business.

* Arthur Goldstuck heads up the World Wide Worx market research organisation and is editor-in-chief of Gadget. You can follow him on Twitter on @art2gee

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I live on a plot, and our entire area has not had working landlines for more than a year. Telkom has informed us that our service will not be re-instated. We are not the only area with this problem. How does this factor into their declining landline userbase?

When i still had a shop, the business phone line was once out of order for an entire year! This left me to seek alternatives for my fax and creditcard facilities. Once we found reliable alternatives, we did not go back to a Telkom fixed line when the service was running again.”,”body-href”:””}]

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