History

Before 1994 and the end of the apartheid era in South Africa, Telkom was the only telecommunications company for the country of South Africa, and like all of the other utility companies, it was government owned. In those days, this was not a major problem - costs were high, but the political upheavals of the time far exceeded the outcry over expense. The ANC government, who had come to power largely due to international pressure and its own promise of homes for people, found itself in a difficult situation. They needed money for housing, but this money could only be gained by overseas investment, which could only happen if the utility companies, including Telkom, were privatised. However the government was under pressure from the SACP (South African Communist Party), who had supplied nearly 40% of the votes, not to do so. In the end, the government made a compromise - the government would introduce a S.N.O (Second National Operator), but only after a number of years - the number being determined by Telkom reaching certain performance goals.

On the 4th of October, 2002, Telkom lost a court case against its US-based software supplier, Telecordia. Telkom terminated its Telecordia contract in 2001, and was sued by Telecordia for $130 million (about R1.35 billion). Telkom filed counter claims of up to three times the original sum, which were dismissed. Telkom had cancelled the contract by refusing to take shipment of a December 2000 software release, even though the software was contractually correct. This method of repudiation was a crucial point in the final ruling in Telecordia's favour.

The Privatisation of Telkom

Telkom, which is already 30% owned by SBC in the US and Telekom Malaysia, was planning to go public a little later in the year. This move was delayed, partly due to the now serious cash-flow problems which Telkom is experiencing, and also due to investor uncertainty - with a S.N.O constantly on the horizon, most people feared that Telkom would be poorly equipped to deal with competition. Further speculation led many to believe that US interests inside Telkom were intentionally destabilising the company, so as to make entry by an American company that much easier. Telkom's much delayed and negative reaction to ADSL was a sign to many - the S.N.O would offer ADSL, and until then, forces inside Telkom were working to delay Telkom's own launch.

The arrival of the S.N.O seems to be constantly fraught with difficulties, with government discarding every proposal so far. This is logical, as the South African government still owns the controlling share in Telkom, and is still under strong pressure from the SACP and at least one of the two cellular providers, MTN, to keep Telkom as a monopoly. In addition, Thintana, the Malaysian based company that owns shares in Telkom, threatened to sell its own shares at the same time as the government if the government introduced competition. This would have rendered Telkom's shares worthless, and negated the profit that the government was hoping to make with such a move.

The Introduction of ADSL

The cries for high-speed internet access were answered when ADSL was finally launched earlier this year, but ADSL was not nearly as fast as expected, and only worked at any reasonable speeds with mail and http (ports 25, 110 and 80). Any traffic on any other ports was severely limited in terms of overseas bandwidth, although local sites were very quick. This proved what many people had been suspecting for years - in terms of overseas bandwidth, Telkom is sorely limited. Furthermore, Telkom's manner of implementation left very little room open to other service providers - one of the main sticking points was the need for an authentication server on the premises at Telkom, a major security risk, and a very difficult thing to set up. Internet Solutions attempted a pilot program, but was finally forced to shut it down, citing problems with Telkom (www.idsl.net). On top of the arcane requirements and utter lack of information from Telkom, the bandwidth required to support any ADSL users was far too high for any ISP besides Telkom, who paid almost nothing for their bandwidth, at least locally. Telkom's artificial inflation of bandwidth prices meant that any ISP would have to charge their ADSL customers at least five times the going rate from Telkom.

Unfortunately, these problems were almost completely ignored in the wake of the 3gb cap that Telkom put onto every ADSL user. The outcry about the cap, which is in fact a commonly accepted practice in other countries, drowned out most protests about the system as a whole.

The Current Situation

Telkom appears to be perpetuating the myth that bandwidth is always expensive. This is not the case - once you have laid a standard cable, or better yet a fiber-optic cable, and installed the relevant equipment, then the line costs very little to maintain - and the ADSL that Telkom offers actually requires very little effort on Telkom's part - the connectors at the exchange that would normally limit the line to voice-grade simply need to be rerouted. The same applies to standard copper cable pairs, as used for any normal phone - if the frequency allowed on the line is not limited at the exchange, then it is very simple to put as powerful a modem as you like on both ends, and transmit information as fast as the modems will allow. This is common in the US, where competition between the phone companies has meant that every phone company will do whatever they can to keep customers.

Furthermore, Telkom seems to get most of its money through call charges, which would explain its incredible resistance to Voice over IP technology, which allows telephone calls to be routed over the internet. If this technology were not illegal in South Africa except in very special cases, then a host of companies would very quickly spring up to exploit the gap in the market - the ability to call almost anyone in the world for a fixed dial-in fee is no small bonus to consumers, particularly with the current drive towards ISDN for internet access, which would in theory provide the necessary bandwidth. This would, however, reduce Telkom to little more than a nationwide cabling company, with too many costs and not nearly enough profit or business acumen to compete.

Into the Future

South Africa as it stands is in an excellent position to compete globally in the software market. Its low rate of exchange (7.865 rands to the dollar at the time of writing) allows it to compete very effectively against the established players in the US and Europe. However, because of the constant bandwidth/price limitations, it is very difficult to make a profit, even with the favourable exchange rate. As a result, many of the best programmers are leaving for greener pastures overseas, contributing to the chronic "brain-drain".

The answer would appear to be clear - allow outside competition, while still requiring that any competitors do sufficient work in rural areas (despite the goals that Telkom has met, a large portion of communication in rural areas is through cellular providers, as fixed lines are not available).

However, with the existing ANC government now well entrenched, this is unlikely to happen - because all applications for a license as the S.N.O must go through government, it is easy for the application to be thrown out due to any irregularity. When a S.N.O is finally allowed onto the market, it is most likely that it and Telkom will form a duopoly - resulting in prices only a fraction lower than those we already have.

Overseas bandwidth will continue to be a problem. This can be alleviated by more competition among the bandwidth providers already present in the country, but the highest cost of the external links continues to lie with Telkom. Telkom charges for these links, and even with the exchange rate taken into consideration, these links can be up to six times higher than the other side, overseas. Because of this, I believe that satellite internet providers will continue to invade the market, digging deeper and deeper into Telkom's territory. This is one case where new technology may overcome traditional limitations, as more and more alternatives to standard phone lines are found.
Until then, all we can do is wait.

Update - 8 July 2005 - Telkom still offers ADSL at about two-thirds of the price of the cheapest ISP, although its customer service is such that people are choosing to pay the ISP slightly higher fees for better service. The S.N.O is still a distant spot on the horizon, although recent deregulation means that it is now legal to use VOIP in the country. This technology is slowly beginning to take hold.

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