Keeping the Line

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South Africa's leading mobile phone network operator Vodacom announced it intends to move into the fixed-line sector, a step that will put it into direct competition with its own major shareholder, landline operator Telkom.

The announcement, made by chief executive officer Alan Knott-Craig on June 13, caps a busy few weeks for the company. It also underscores the independent position Vodacom takes from its two joint shareholders, Telkom and Vodafone.

Knott-Craig revealed Vodacom's plans to establish a presence in the fixed line sector when presenting the company's annual results, which saw an increase in both profits and subscribers.

"We have established a new company called Vodacom Converged Solutions, which will start by building six or seven pilot optic fibre rings in metropolitan areas to create additional capacity for data growth," Knott-Craig said. "Converged Solutions will initially focus on the corporate market and offer a full range of services on one integrated electronic communications network, including Virtual Private Networks, WiMax and an ISP (Internet Solutions Provider)."

Vodacom is also considering buying a company to speed up the provision of ISP services.

Responding to a question as to whether the move would put Vodacom in direct competition with Telkom, Knott-Craig said his company had been competing with Telkom for more than a decade. He added that customers were mainly interested in getting the service rather than knowing how it was being delivered.

Only days before, Vodacom announced it had inked an agreement with MultiChoice for digital satellite pay television services, another area that Telkom is investigating. However, Knott-Craig said that Telkom management had approved the deal, announced on June 10.

The company also had to scotch reports that it was intending to launch a $480m bid for Nigerian mobile phone company MTel, with Nku Nyembezi-Heita, Vodacom's chief officer for mergers and acquisitions, saying on June 13 the speculation was based on nothing more than a rumour.

On June 13, parent company Telkom also released its financial year end figures, which showed an operating revenue of $7.3bn, a 8.4% increase on the previous year, but a fall in operating profit of 1.4% to $2bn, due to a 12.3% increase in expenses. However, the figures look a touch bleaker if Vodacom's contribution is not taken into account.

One of the big growth areas that Telkom recorded in the past year was in ADSL subscribers, which shot up by 78.1% to just over 255,000, in contrast to its fixed line connections, which fell to 4.64m, a drop of 1.4%. With Vodacom planning to go head to head with Telkom, the landline operator could well see stiff competition in the one sector it is strong in.

Vodacom's increasing tendency to go it alone has fuelled rumours that Telkom may be considering selling its 50% stake in the company to Vodafone and acquire or establish a new mobile phone operator. However, on June 12, Arun Sarin, Vodafone's chief executive officer, said his firm was happy with the level of its stake in Vodacom, though he did not definitely rule out a bid.

By all accounts, Vodacom has had an impressive year, with total customer numbers increasing to 30.2m, a rise of 28.2% and operations profits of $1.5bn, up by 22.5%.

Vodacom's operations outside of South Africa also showed a handy profit, up by 81.5% to $72.3m, with a customer base of 7.1m. It enjoyed a 55.3% increase in subscribers in Tanzania and 67.5% in the Democratic Republic of Congo.

However, it is the operations outside South Africa that are something of a bone of contention between Vodacom and its other shareholder, Vodafone. Under the agreement setting up the joint venture, Vodacom was required to restrict its activities to south of the equator, ruling out half a continent's worth of expansion possibilities. This is also a sore point with Telkom, which sees the limitations on Vodacom's growth hitting at its own bottom line, and could serve as another incentive for Telkom to sell off its stake.

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