Neotel was licensed as a direct competitor to Telkom, intended to provide services in the fixed line telephony space and open up the market to competition as part of the Department of Communications’ Managed Liberalisation Policy.
The process to license the second network operator kicked off in 2002. A combination of factors (not least of which was interference in the process by the DoC and a court case) resulted in the licence eventually being awarded in December 2005.
Telkom and Neotel were guaranteed exclusive rights to fixed line voice licences in the Telecommunications Act. This expired in 2005.
Neotel, incidentally, was also granted the right to use Telkom’s infrastructure from the time it was licensed until 7 May 2004. The extensive delays in issuing this licence meant that Neotel never had the opportunity to do so.
The company officially launched in August 2006. Since then, it has run at a loss, although how much of a loss is unclear as it doesn’t report its financials separately to its parent Tata Communications. According to reports from ITWeb and TechCentral, it lost an estimated R1.9 billion in the year ended March 2011, and R1 billion the year before. Figures on its total losses since inception aren’t available.
After a less than ideal start, the company launched its first services into the market in March 2007, and managed to annoy consumers across the country as it made it clear it had no intention of going head to head with Telkom in the last mile space.
MD Sunil Joshi says it’s not that the company hasn’t made consumers a priority, but rather it has chosen to offer fixed wireless communications solutions to home and SME users and that this context of service limits it to an addressable market of around 2.5 million people.
Investing in backbone
Speaking at the company’s recent annual performance announcement, Joshi said the company has spent R4.5 billion on infrastructure in South Africa so far and plans to spend another R500 million this year.
This investment has mainly been into its national fibre network (80 percent) and IT, the latter in a bid to automate and drive efficiencies using technology.
“We won’t build if we can buy at a competitive price,” Joshi notes. “And we build where our customers need infrastructure. We’re lighting up another 2 000km of fibre this year, mainly in our national backbone.
“South Africa needs infrastructure,” he continues. “If LLU happened, for example, we could leverage that infrastructure and rather invest in areas where there is no infrastructure. We are engaging with Icasa and pressing to ensure LLU does happen. We believe it is the right thing for South Africa, and it will let us leverage assets that are already in the ground and let service providers provide services on that infrastructure.”
The company’s strategy is to continue to build out its fibre footprint. “We believe that’s where IP solutions will be provided. Access to copper will enable us to deliver innovative services to consumers and business faster,” he comments.
Joshi says the company’s core access strategy is in fibre, and that it has rolled out to 40 CBDs so far, on both sides of the road, he notes.
In addition to its fibre network, Neotel has deployed CDMA to five major cities. It plans to extend the networks in each of those cities this year.
In addition to fibre and CDMA, it has satellite capability that enables it to deliver VSAT services in SA and SADC.
Where it can buy more cheaply than it can build, it does so, Joshi states, commenting that at the core of Neotel’s business is its ability to partner to deliver solutions to its customers.
The company has 12 000km of national fibre backbone, access to five submarine cables, and 6 500km of fibre in metropolitan networks in Durban, Cape Town and Johannesburg. It also has access to Tata Communications’ 365 000km of submarine cable assets that connect 300 cities, 200 countries and six continents.
It has built datacentres in Cape Town and Johannesburg and has access to a further 42 Tata datacentres around the world. This network is one of Neotel’s biggest differentiators, says Joshi. “Neotel has integrated its infrastructure into Tata’s so we can connect our clients to where they need to be. We can off er South African businesses infrastructure and connectivity to emerging and mature markets, reducing the complexity they have to deal with and driving solutions to them through the relationships they have locally. This enables us to drive rich solutions and service levels.”
Despite not being obliged to report numbers as it is not listed here, Neotel has released an annual performance update to the market every year for the past few years. Its latest announcement reveals that it has broken the EBITDA profitably barrier, and is on track to EBIT profitability in the next financial year.
While it won’t give absolute numbers, Joshi announced that the company has improved across a number of metrics. It recorded a 50 percent increase in mean time to respond (MTTR) to customer queries – down from 12 hours to just under five. It increased its business customer base by 50 percent from 1 300 to 2 600, and increased its consumer customers from 50 000 to 100 000 (roughly estimated).
Its revenue is up 25 percent and its EBITDA margin up 113 percent. Neotel has been EBITDA-positive for the past four quarters in a row, says Joshi, and the company is hugely proud of that fact.
Next year it has five objectives, says Joshi: to improve its MTTR by a further 25 percent, to grow enterprise and carrier market share by two percent, become EBIT-positive, improve the growth opportunities it offers its people, and to be ‘disruptively innovative’.
Its biggest challenge, he says, is for businesses to understand what Neotel can offer. “We need to reach out and share information about our offerings from the basics to the complex network services we can deliver,” Joshi says.
Whether it succeeds or not should be apparent in about a year from now, when the next set of figures comes out. Watch this space.