By Jevans Nyabiage

Nairobi, Kenya: South African fixed-line telecom operator, Telkom SA, last month made a dramatic retreat from the East African market, selling loss-making units iWayAfrica and Africa Online to Gondwana International Networks.

Telkom SA’s sale highlights the competitive and difficult environment facing many telecom companies and Internet service providers as new technologies and better-funded competitors dominate the market and influence the pricing of products and services.

Analysts expect the sale to set up the telecom market across Africa for mergers and acquisitions to consolidate market share. It also brings to the fore how a number of South African companies are struggling to penetrate the East African market.

The financial details of the Telkom SA transaction were not disclosed, but the operator termed the companies an “immaterial part of the group”.

“This transaction is one of many initiatives that will contribute to our own turnaround, allowing us to focus on our core South African fixed-line and mobile operations,” said Telkom SA CEO Sipho Maseko.

The future

The Johannesburg Stock Exchange-listed operator is reported to be in talks with some parties over the future of its mobile business in South Africa, which lags behind rivals MTN Group and Vodacom.

“Several years of poor performance of the iWay Group have resulted in continued negative EBITDA contribution to our group,” added Mr Maseko, referring to the way the firm was denting group results.

iWayAfrica’s EBITDA (earnings before interest, taxes depreciation and amortisation), which is a measure of how healthy a business is, was at negative Sh678 million for the year ended March 31, 2013.

The company (which is an integration of Africa Online and South Africa’s MWEB Africa) contributed Sh2.9 billion in revenue — about 1.1 per cent of Telkom SA’s total earnings — and returned a net loss of Sh883 million. Its operating expenses, however, dropped to Sh4 billion from Sh8.3 billion over a similar period in 2012.

Telkom SA said Gondwana has experience managing and owning ISPs on the African continent and believes the deal would take its business forward.

Gondwana CEO Mathew Welthagen said: “We intend to invest heavily in the business in the future.

“By applying sound business principles and focusing on skilled resources within the specific country territories, we are confident that we can positively turn around the iWay business in the short term and provide significant growth thereafter.”

When iWayAfrica merged with Africa Online, tens of employees in Kenya and other regional offices lost their jobs in 2011, and with a new owner, another restructuring looms.

Serious competition

iWayAfrica, a satellite-based ISP aimed at the corporate market in Africa, has faced serious competition from cheaper offerings in fixed and mobile broadband networks.

And as new technologies change the face of the telecom sector, it is believe more market consolidations are afoot.

Already, Dimension Data received the nod to buy AccessKenya, which was listed at the Nairobi Securities Exchange. It plans to merge AccessKenya with another ISP, Internet Solutions.

Telkom SA’s retreat from the market comes barely a year after another South African tech operator, Altech, quit the region, saying stiff competition was hurting its running of Kenya Data Networks.

Telkom SA and MTN have long tried to enter the Kenyan telecoms market, but the mobile phone segment has proved elusive. In 2007, the two firms were among those that bid to buy Telkom Kenya, but lost to France Telecom, which runs the Orange mobile brand.

The firms turned to ISPs to power their entry strategy into the market, but that appears to be yielding little.

iWayAfrica and Africa Online are the brainchild of entrepreneurs who changed the continent’s Internet scene in the early 90s.

Mr Salim Suleman formed Afsat Communications Ltd, which traded under the brand name iWayAfrica. At the time, Kenya was slowly going online.

Afsat provided high-end satellite data network solutions for corporates, banks and government departments in East and Central Africa. About five years after its formation, the company had a presence in more than 20 African countries and had tens of distributors, which attracted interest from investors. 

In 2007, MWEB Africa, the Internet solutions arm of Naspers (the company that owns Multichoice Africa and popular magazine arm, Media 24) acquired Afsat. By then, it was Africa’s largest satellite-based ISP and active in more than half the countries on the continent.

Telkom SA acquired 100 per cent of MWEB Africa in 2009, putting Afsat in the South African telecom’s hands.

Another group of entrepreneurs, Ayisi Makatiani, Karanja Gakio and Amolo Ng’weno, who met while studying in the US, formed Africa Online, which also made great inroads in advancing Internet connectivity across the continent.

Series of acquisitions

Mr Makatiani and Ms Ng’weno returned to Kenya to get the business off the ground in 1995 and started operations in February that year.

Through a series of acquisitions, Africa Online ended up being 100 per cent owned by Telkom SA. 

By then, the ISP’s geographic coverage extended from Kenya to Tanzania, Uganda, Ghana, Ivory Coast, Namibia, Swaziland and Zimbabwe.

Ng’weno, a graduate of Harvard and Princeton universities, is currently the managing director of Digital Divide Data (DDD) Kenya, while Makatiani runs Fanisi Capital, a venture capital firm.

Last month’s announcement that Telkom SA has sold the two firms — iWayAfrica and Africa Online — surprised many. Despite the market presence they enjoyed, Telkom SA said the firms had lost their grip on the continent, with iWayAfrica in the red.

But just what is the strategy South African firms have in the rest of Africa?

For instance, early last year, JSE-listed firm Altech quit East Africa after it failed to crack the region’s tech market. At the time of selling Kenya Data Networks to Liquid Telecom, the data carrier was almost on its deathbed.

When Altech bought 51 per cent of the data infrastructure firm KDN from businessman Naushad Merali in 2008, the fundamentals were all pointing up.

At the time, Kenya’s telecoms industry was experiencing a revolution in data uptake. The South Africans hoped to capitalise on the explosive growth of the industry, brought about by the growing data demand in the region.

When Altech bought KDN, the unit brought in profits of Sh245 million in the first year, which increased to Sh818 million the following year.

This was mostly attributed to strong growth in the Kenyan ICT sector and developments in the fibre industry.

With this profitability, the East African unit started out as a sound investment for Altech, contributing 20 per cent of the group’s total operating profit.

“We foresee that East Africa will be responsible for an even larger portion of profits in the near future. East Africa will remain our main focus. We are currently bedding down the investment before we potentially roll out the Altech business model elsewhere in Africa,” the group’s CEO Craig Venter said in April 2010.

However, “the wheels came off” in the third year. By the time KDN was being sold to Liquid in January last year, Altech East Africa’s operations were making losses.

Re-entry

Liquid, which operates fibre infrastructure in East, Southern and Central Africa, is majority owned by Econet Wireless, the company founded by Zimbabwean telecoms tycoon Strive Masiyiwa. Econet Wireless made its re-entry into the Kenyan market after it sold its stake in yuMobile to Essar Group.

The current management at Liquid says KDN has since been stabilised and is on the way to profitability.

“South African companies in general do not seem to understand the East African business environment. Remember, Castle Breweries failed to take off in Kenya, South African supermarket chain Cash n Carry failed in retail, and now the KDN and iWayAfrica cases,” says Peter Wanyonyi, a telecoms analyst.

“It is clearly a question of business culture and local dynamics. The South African model of importing middle and top managers from South Africa and expecting them to run the companies profitably is not workable here.”

But what seems to be affecting iWay is its reliance on satellite technology.

A few years ago, the company was making billions since satellite was the only viable way of accessing broadband. But as countries invested in superior technologies such as fibre, it lost its enviable position.

For instance, Kenya boasts four undersea fibre optic cables, which has seen Internet prices fall dramatically from as high as $3,500 per MB a month in 2007 to as low as $150 for the same quantity today.

“Satellite ISPs continue to face very stiff competition from other operators [mobile and fixed],” said Danson Njue, a telecoms analyst at research firm Informa Telecoms & Media.

“Satellite services are still very expensive in Africa and the technology itself does not evolve as fast when compared to other data technologies.”

As a result, services offered by satellite ISPs have had a low uptake.

In Mr Njue’s opinion, the problems affecting iWayAfrica and Altech have been strategy-based — mainly a result of changing business environments in their countries of operation.

Mr Wanyonyi points to three telecom market dynamics that could explain the disruption in the industry.

There are the highly developed markets, such as South Africa, Mauritius, Tunisia, Morocco and Seychelles. These are marked by high levels of private ownership, open competition and excellent market regulation.

Then there are the middle-tier markets like Kenya, Nigeria, Ghana, Uganda and Tanzania. These markets are just emerging from monopoly status and many are marked by light or poor regulation, few landline connections and an emphasis on value-added services (such as mobile money in banking or software applications in information delivery).

High prices, low penetration

Then there are the low-tier markets where monopolies still exist, regulation is tight, prices are high and mobile penetration is low, such as Ethiopia and South Sudan.

“In the upper tier, satellite is all but dead as a general telecommunications application, and is largely relegated to provision of subscription TV and similar services that don’t need very high bandwidth,” says Wanyonyi.

In middle-tier markets, he adds, telecom companies still have large markets that have not been tapped, particularly in remote areas that lack fibre. 

In the lower-tier markets, satellite frequently is the only option for transmitting data and voice, even in cities. But it is under increasing threat from the liberalisation of telecoms.

“Companies specialising in satellite ISP solutions, therefore, have to find new business models for the medium and long term,” Wanyonyi says.

jmiyungu@standardmedia.co.ke