Fighting fibre with fibre

Telkom released its mid-year financial results on Wednesday — and it wasn’t pretty.

Revenue was down 0.7% to R21 billion, mobile service revenue was down 0.7% to R8.78 billion, fixed service revenue was down 9.8% to R6.28 billion, and headline earnings per share was down 52%.

Although the company’s earnings took a hammering compared to last year’s April–September period, its subscriber numbers and network growth were solid.

Mobile subscribers increased by almost 10%, fixed broadband subscribers stabilised at around 562,000, and its fibre-to-the-home network grew by well over 30%.

Telkom’s wholesale and networks subsidiary Openserve increased the number of homes passed by its fibre network by 35.8% to 960,801, and the number of homes connected by 33.7% to 443,469.

With these latest numbers, Openserve is breathing down Vumatel’s neck in terms of homes connected.

During its last update, Vumatel reported connecting 450,000 homes from 1.6 million passed.

“The plan to stabilise Openserve, South Africa’s leading wholesale infrastructure connectivity provider, continues positively, with 65% of revenue now coming from next-generation products and services,” said Telkom CEO Serame Taukobong.

“The growth in high-capacity links for carriers, an increase in demand for fibre services and growth in enterprise connectivity is also pleasing.”

However, it’s important to remember that South Africa’s fibre market was Telkom’s to lose.

When Vumatel launched in 2014, Openserve (then just “Telkom”) seemed untouchable.

It already had over 140,000km of fibre in the ground, and a massive head start in fixed-line broadband thanks to its decade-long DSL monopoly.

It seemed obvious that Telkom would simply convert its DSL subscriber base to fibre over a reasonable period, giving it a massive advantage over any would-be upstarts.

However, rather than press its fixed-line advantage, Telkom diverted its capital expenditure (capex) budget from fibre-to-the-home (FTTH) to other areas — mainly mobile.

As the chart below shows, the last time Telkom spent more on its fibre network than on mobile was September 2017.

In 2021, Telkom changed tack and significantly increased its fibre capex, but it remained — and remains — lower than its mobile spend.

Then, in its September 2022 midyear results, it appears Telkom shifted its capex strategy again.

Group chief financial officer Dirk Reyneke told MyBroadband that this was to curtail increased roaming costs caused by higher levels of load-shedding.

Telkom has roaming agreements with Vodacom and MTN to provide coverage where its own mobile network doesn’t reach.

Increased load-shedding causes many of Telkom’s towers to go offline, pushing more subscribers to its roaming partners.

Load-shedding problems notwithstanding, Telkom’s lack of focus on fibre between 2018 and 2020 is evident in its operational data.

As the charts below show, after it cut spending on FTTH, Telkom’s fixed broadband subscribers plummeted.

The decline also coincided with the operator informing its existing DSL subscribers that it was shutting down its copper network and that they should migrate to newer technologies — LTE and fibre.

Telkom recommended its own products, but there was a big problem — Vumatel had shown other fibre network operators and banks the business case for FTTH in suburban South Africa.

It kicked off a gold rush, with Telkom deciding to hang back while everyone else staked their claims.

As a result, many Telkom DSL subscribers ended up switching to one of Openserve’s fibre competitors, like Vumatel, Frogfoot, Metrofibre, Octotel, and Herotel.

Telkom was also up against the very well-established Vodacom and MTN in 4G/LTE.

Therefore, the loss in fixed broadband subscribers and revenue was not offset by its mobile division’s gains — despite its relatively rapid growth.

Serame Taukobong, Telkom Group CEO

In an interview on Wednesday, MyBroadband asked Taukobong, who took over from Sipho Maseko on 1 January 2022, about Telkom’s decision to change its capex strategy in 2018.

Taukobong said the decision wasn’t a mistake, but about striking a balance between investing in its fibre and mobile networks.

Their substantial investment in mobile is yielding results, he said.

“What’s key for us with Openserve was to make sure we increase our connectivity rate. At our peak, we were actually at 50%,” said Taukobong.

“We [also] saw an increase in our carrier business [at the same time]. Openserve’s biggest customers are actually Vodacom, MTN, and Telkom Mobile — in that order,” he said.

“It is a balance of making sure that what we did — front-load the mobile business — helped. And also remember the mobile business had to use the temporary spectrum allocated [during the Covid–19 lockdown].”

Telkom group chief financial officer Dirk Reyneke also said it is important to consider capex on their core network between 2018 and 2020.

“We spent significantly on our core to enable the fibre [rollout]. I think that did us well during Covid when we really monetised as a result of that,” said Reyneke.

“We’ve built that core now. Where we’re currently spending is what I call SOD — service-on-demand — that’s your fibre-to-the-curb and fibre-to-the-basestation. There we build on-demand. It’s not speculative,” he explained.

“We’ve by and large completed the backbone to enable the fibre-to-the-home, and we intentionally did that first.”

Reyneke said their decision had given them a lot of headroom to enable the fibre-to-the-home rollout, which Telkom is prioritising and accelerating.

Now read: Telkom reports strong mobile subscriber growth