Instant operator, just add money
By the end of August, Sentech hopes to have a pile of proposals from which it can mix and match a telecommunications network which will have consumers jigging for joy and SNO investors worried.Sentech was a sleepy little parastatal not so long ago, distributing the broadcast signals for the likes of the SABC in a market that was well protected but had little hope of growth. Then, overnight it seemed, it became one of the biggest beneficiaries of the telecommunications liberalisation process.The South African government policy process, that now allows for competition in local telecommunications, is already the stuff of legend, having undergone changes and abrupt reversals that saw many sniggering references to circus acts. Yet throughout the process the politicians never wavered from one principle: Sentech would be turned into a phone company, not least of all to up its potential value before the slow privatisation programme got around to it.At first, it was to form part of a second national telecommunications operator (SNO), along with parts of its fellow state enterprises Eskom and Transnet. Then it was to become an international operator offering foreign phone calls directly to consumers. Finally, after intense lobbying from the likes of Telkom, it was decided that Sentech would operate an international gateway and be allowed to carry the international voice traffic of other operators.Somewhere along the line it was also decided to grant it a “multimedia licence”, the purpose of which is still not quite clear despite vague mutterings of “convergence” from government quarters.Players such as Telkom, that managed to have the international gateway licence toned down, were furious at the sudden appearance of the multimedia licence. An international gateway, they argued, would allow Sentech to skim profits in one of the most profitable areas of telecommunications. But the multimedia licence would also allow it to do pretty much anything else, turning it into a profit leech for Telkom, a disincentive for investment in the upcoming second operator and either bane or saviour (or both) for Internet service providers (ISPs).They were right. Wireless broadband“We are pitching at everyone and we are pitching everything at everyone,” says a confident Angelo Roussos, new head of Sentech`s multimedia division. “The only thing I see a restriction on in terms of what Sentech can do is that it can`t provide circuit-switched pure voice services.” Plain old telephone calls, that is.He sees nothing in the way of the company offering video conferencing, digging trenches to lay its own fibre optic cable, building broadband wireless networks for consumers and even the nearly mythical voice-over Internet protocol carries a “watch this space” sign.Much of this may happen gradually, and be hampered by a lack of cash, established players and a relatively small market, but within six months Roussos promises to have a “not insignificant chunk” of such services operational.The biggest stir will probably be created by broadband services based on digital terrestrial broadcasting technology already in testing. Digital broadcasting has brought better quality television where it has been slowly introduced elsewhere in the world. But the two-way version can carry any type of data, bringing the Internet to any home in broadcast range.Sentech has transmission towers blanketing nearly the entire country and certainly all metropolitan areas, with signals. One such tower in Johannesburg is already equipped to transmit digitally.How consumers will see broadband materialise is uncertain, at least until the window for proposals has closed and Sentech has decided on what is viable. Likewise, where exactly Internet service providers will fit into the picture and who else will get a piece of the action remains undecided.The company has asked for proposals to construct much of the network it envisages, help to provide services on it and even for back-end requirements such as a billing system. But it is not willing to give even an indication of the potential value of contracts, using only terms such as “significant” in referring to them.According to Roussos`s interpretation of the multimedia licence, the company is also able to construct most of its own infrastructure, as well as infrastructure for others, something ISPs with an adversarial relationship with Telkom have been looking forward to for a long time.“If you ask me whether Sentech can provide services directly to ISPs and VANS [value added network service providers], then the answer is yes. And if you ask whether we are going to, the answer is yes.”He also believes it is possible to build certain elements of ISP networks.“As far as we are concerned, the limitation on the provision of facilities for VANS relates specifically to the services that flow between VANS and clients,” he says. In other words, Telkom and its competitor will have the sole right to install data lines between customers and their internet providers, but beyond that the field is open to Sentech. International voiceBeing an international voice gateway, or a carrier-of-carriers, as the licence describes it, is a lot less sexy than the multimedia services side of things. Sentech`s role will be invisible to the end user and it has only four potential clients, with a fifth to join the ranks next year.Yet it also carries less risk, significantly lower start-up costs and it could be operational a lot sooner.In fact, Sentech is already carrying international traffic for cellular phone network MTN, says Roger Chuime, who left Telkom to start and head up the international carrier business. It is testing an international satellite link with MTN and expects to have its first customer sign on the dotted line by mid-August.What is more, the link with MTN was established using no Telkom infrastructure and the international leg is carried on spare satellite capacity.“MTN, Vodacom, Cell C and any other operator will have choice and they do not have to put all their eggs in one basket,” Chuime says. Choice is a selling point, as is the blank slate that is the mobile operators` relationship with Sentech. Both MTN and Vodacom have had legal trouble with Telkom in the past. And, of course, lower prices will play a role, although not too big a one.“Sentech is quite a small company – it is emerging. Our entry level strategy is to go for price first. But we don`t want to get into a price war with Telkom,” he says. “A price war is a failing strategy.”Not that size is a major issue, he contends. Sentech can plug directly into a global operator, with no need for it to directly pursue interconnection with the hundreds of operators around the world. And Chuime estimates that new technology means his unit can start up at about a fifth of the price a similar business would have spent only a few years ago.Carrying South African traffic can be a fairly lucrative pursuit. And while the market consists of five potential clients next year, two of those will be competitors, as the second fixed-line operator will have licence conditions similar to those of Telkom. The hubbing or transit of international voice traffic from the rest of Africa could also turn a nice profit, but it is an area with low volumes and both Telkom and North African operators are already moving in on it.Chuime has other ideas, again based on a licence interpretation broader than many may have expected. When carrier pre-selection comes around, he expects Sentech to get its own number.Pre-selection allows the user to dial an access code to select a specific carrier before making an international phone call, or to choose a supplier on a semi-permanent basis.So, while Sentech will be wooing the mobile providers, and even Telkom, to carry all the traffic users do not choose to send elsewhere, it could also target customers directly. All it needs is a pre-select code and a clever advertising campaign.Intense lobbying saw the carrier-of-carriers licence trimmed down to prevent Sentech from offering services directly to consumers. Yet it says it can do so as long as it uses another operator to make the final link to the user, and it was unlikely to have initially used its own infrastructure to do so in any event.“Customers should have choice,” says Chuime simply. The politicsThe plans the two Sentech men have will carry quite a price tag; and although it is not yet clear how much they will be spending, both are confident the money will be found. It seems very unlikely government will sell the company before both lines of business are established, leaving it to amass debt as befits any telco.Perhaps more on their minds are the nearly certain legal and regulatory challenges they will face from competitors, another hallmark of a true telco.“We plan to utilise and deliver services that we believe are patently within our rights to deliver,” says Roussos, but he acknowledges the threat. “We are going to be faced with challenges, whether they come from Telkom or the SNO, and we are going to meet those challenges. We believe Sentech`s scope extends in this way and we will defend that.”Both executives say they have had no interference in their plans from the sole shareholder – the government – and neither expect any. But the Department of Communications could come under pressure to intervene.The plans have implications for the new entrant, the SNO, and these will be hardly missed by the international investors expected to take up a 51 percent stake in it. Possible bidders are now deciding if they should go ahead with the investment at a time when telecoms stocks are in the doldrums and few companies have spare cash. Some potential shareholders have already expressed reservations about the entrenched position Telkom enjoys.Yet both Roussos and Chiume confess concern about the limitations on their licences and the difficulty they will have competing in the market.“There are serious limitations in our licence and we are addressing those issues,” Roussos says, blaming problems on an “almost conspiratorial” approach some other operators took during the run-up to liberalisation.“The telecoms policy issue was confounded to a very large degree by some of the larger significant players, intentionally. They have done a disservice to this industry.”He also frets that the one restriction on the multimedia licence, the denial of good old telephony, could be an Achilles heel.“Sure we are dealing with stuff that is funky and good and there are nice opportunities, but the bottom line is that without circuit-switched voice we are going to face significant hurdles in dealing with the likes of Telkom and the SNO,” he says. “We have to take voice out and make our service look a lot better without it.”If Sentech wins the battles ahead, it will emerge as an important force on the local communications scene. If it loses, it will be a lot poorer. But the risk is worth it, Chuime says.“Sentech, as it is right now, fully government owned, is not as viable as if you diversify its operations. I think government made the right choice.”
30 July 2002
By the end of August, Sentech hopes to have a pile of proposals from which it can mix and match a telecommunications network which will have consumers jigging for joy and SNO investors worried.
The South African government policy process, that now allows for competition in local telecommunications, is already the stuff of legend, having undergone changes and abrupt reversals that saw many sniggering references to circus acts. Yet throughout the process the politicians never wavered from one principle: Sentech would be turned into a phone company, not least of all to up its potential value before the slow privatisation programme got around to it.
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