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Capturing corporate

Neotel celebrates its fourth anniversary in operation this year. The company has its own network and some serious backing, but is it really bringing the competition it was intended to?

BY  Simon Dingle , 1 November 20100 comments

Ajay Pandey, Neotel, believes having Indian telecommunications giant Tata on board affords the company a massive advantage.| Photo by: Suzanne GellPhoto by: Suzanne GellAjay Pandey, Neotel, believes having Indian telecommunications giant Tata on board affords the company a massive advantage.

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For South Africans, Neotel was more than just a telecommunications operator. It encapsulated the hope that we would finally be free of incumbent network Telkom’s stranglehold on the market. At the time Neotel was licensed it was mandated to tackle said monopoly with full force and transform telecoms in South Africa.

This year marks Neotel’s fourth anniversary since the company changed its name from SNO Telecommunications – the original licensee that was given the paperwork needed to provision a network, seek investment and introduce competition for parastatal Telkom. Since then, the shareholding, direction and market have changed.


Rapid scale


...Telcos have forgotten that the intention of revitalising and transforming telecoms in this country was to change the consumer environment.
Arthur Goldstuck, World Wide Worx
The company was kickstarted with R7.4 billion in funding from the Development Bank of Southern Africa, Nedbank Capital, Investec Bank, the Industrial Development Corporation and the Infrastructure Finance Corporation – it’s the kind of punt that most new providers can only dream of.

Part of the capital was used to acquire Transtel from Transnet, to give Neotel scale, and it has been focusing on growth in the wholesale and corporate markets ever since.

Shareholding in Neotel, as it currently stands, is constituted of a 25 percent stake belonging to a SEPCo – a strategic equity partner – with BEE partner Nexus Connexion owning 19 percent and the remaining 56 percent belonging to Indian telecommunications giant Tata Communications.

So it started with a serious capital boost and is now backed by a giant in the Indian market. Having Tata behind Neotel is something Neotel head Ajay Pandey touts as a massive advantage.

For one, he says that lessons from Tata’s operations in India can be ‘cut and pasted’ into Neotel.

“We can also customise products and bring in global scale and partners to the local market,” he says.

To date, R3.5 billion has been spent on infrastructure and Pandey claims that Neotel is South Africa’s first “fully converged communications service provider” with its next-generation IP-based network.

Neotel announced its enterprise services in 2007. Pandey says that things really started happening last year when the Seacom undersea cable went live, bringing competition to the international bandwidth space for the first time, with Neotel in a prime position to benefit from it.

“We [Neotel] have a leading position in terms of international bandwidth,” he says. “We were the first operator to have access to the SAT3 cable after Telkom and now we have Seacom, and the West African Cable System [WACS] on the way.

“We are the only company that has a leg in each submarine cable coming to South Africa. This is a strategic position we have taken to provide services to enterprise customers,” he adds.


Cool on consumer

Pandey says the company has also invested heavily in data centres to leverage its planned managed services business and further provide for its customers. According to him, the Neotel data centre in Johannesburg is sold out and Cape Town recently went live too.

“The landscape has been changing and we have been playing the game,” Pandey says.

But the inroads Neotel has been making have been in the corporate and mostly enterprise market. Pandey says that 60 percent of Neotel’s revenue comes from enterprise customers, with 30 percent coming from its retail business.

Consumer services only represent ten percent of revenue and Neotel actively plays down its focus on this market segment.

“Our focus is on enterprise,” says Pandey. “This is where we leverage our strength and expertise. The consumer play is small for us.”

He describes Neotel’s consumer play as ‘young’, suggesting that it might grow in the future, but also says it’s a ‘small business consciously’.

Critics have slammed Neotel for being behind on its strategy of meeting the consumer market, but Pandey insists this isn’t true.

“It just isn’t a priority for us,” he says.

So then why do it at all?

According to MD of World Wide Worx, Arthur Goldstuck, the reason Neotel has consumer services in the first place is because it is morally compelled to.

“Neotel was given the SNO (second network operator) licence on the premise of competing with Telkom and that included rolling out consumer services,” he says.

“The only reason it has a semblance of consumer services is because that is what is expected. But it has a pittance of consumer services. If Neotel could, it would abandon them altogether. It’s clear from the haphazard and half-hearted way they’ve researched the needs of consumers and attempted to meet them that they don’t care,” he says.

Of course, the market has changed substantially since the introduction of the SNO licence and the 2008 court case between Altech and the Department of Communications, which led to hundreds of value-added network service providers gaining licences to self-provide their own infrastructure.

Goldstuck insists, however, that the SNO licence is more substantial than the iECNS version that other operators have.

“The way SNO licensing happened gave Neotel far greater resources than ISPs with VANS licences [which have since converted to iECNS],” explains Goldstuck.

“iECNS licences do not fully allow smaller players to compete directly with large telcos,” he adds. “But, that aside, the core intention of all licences offered in recent years was to benefit the people of South Africa. Instead, what we are seeing is a gold rush for the corporate wallet.”

Goldstuck laments this situation, saying that telecommunications providers are going for the lowest hanging fruit without realising the opportunities that exist in the consumer market.

In Kenya, for example, operators such as Wananchi have embraced the consumer market. In fact, said operator is rolling out the continent’s first affordable, triple-play fibre to the home solution with its Zuku offering.

In South Africa, however, consumer connectivity is falling behind even other developing African markets.

“Low-hanging fruit, that’s the bottom line for all the telcos in this country, and their contentment for that matter,” says Goldstuck. “There is a lucrative corporate market with no ownership outside of Telkom’s monopoly, but with that monopoly vanishing, it’s like a gold rush.

“And there are two major issues here,” he continues. “One is ‘profit for the sake of profit’, which has become a rising ethos for corporate SA; the other is that telcos have forgotten that the intention of revitalising and transforming telecoms in this country was to change the consumer environment,” insists Goldstuck.

“If you consider Neotel with its licensing and shareholding – it was basically handed a market on a plate. Instead of giving meat to consumers, it went for the easy pickings,” says Goldstuck, “… to the extent that it has done no better than Sentech did in terms of addressing consumer needs,” he adds.

Forging ahead

Irrespective of the criticism, Neotel continues to address the enterprise market and says that the middle market is next in its sights.

“The middle market is key this year,” says Pandey. “We have wired up 300 buildings already in metro areas. We will continue to focus on the specific needs of our customers,” he adds.

“In terms of the consumer market, we have 300 CDMA base stations up already and have added more in Port Elizabeth and Pietermaritzburg this year.”

These are used to provide Neotel’s NeoConnect and NeoFlex products – and the company added prepaid services this year in the form of NeoGo, with top-up vouchers available for purchase through existing sales points and Sasol forecourts in certain areas.

It might not be the abundance of consumer services and bandwidth that South Africans had hoped the Second Network Operator would bring to market and you won’t have to look far to find customers who have fallen prey to billing problems either, but, according to Pandey, it is enough and his company is on track in terms of its consumer strategy.

Neotel’s focus is on enterprise – and that’s the bottom line.