How Telkom lost to Vumatel

Telkom has squandered its competitive advantage in the fibre-to-the-home market after several strategic blunders which allowed Vumatel to become the premier provider of fibre-to-the-home in South Africa.

To understand the significance of Vumatel’s achievement, you have to turn back the clock to 2014 when Telkom ADSL was the only fixed-line broadband game in town.

Telkom had conduits and copper lines into millions of homes and points of presence in neighbourhoods nationwide. It could, therefore, roll out fibre using its existing network infrastructure at a fraction of the cost of any competitor.

To replicate Telkom’s infrastructure would require a huge investment, and with the threat of Telkom competing against any new fibre operator, it was challenging to sell the business case.

However, a new company – Vumatel – took the fight to Telkom in 2014 when it rolled out a fibre network in Parkhurst.

Its fibre-to-the-home model rapidly gained momentum and soon covered many neighbourhoods in South Africa’s major cities.

Through its wholesale network arm Openserve, Telkom was jolted into action by Vumatel’s appearance on the scene.

Openserve launched its residential fibre broadband products on 1 December 2014 and quickly overtook Vumatel in the number of homes passed.

However, it scaled back on its fibre rollouts in 2018 and 2019 after a strategic decision by Telkom to focus its investments on its mobile network.

Telkom cut its fibre capital expenditure from R2.3 billion in 2017 to R0.7 billion in 2020 in line with this strategy. 

These cutbacks allowed Vumatel to overtake Openserve as the top fibre-to-the-home network in South Africa.

Telkom realised its strategic blunder, but it was too late. It has lost significant ground to Vumatel and is now trying to catch up.

In 2022, Telkom doubled its fibre capex in line with its strategy to accelerate its fibre to the home footprint.

However, in 2023, it once again cut its fibre capex. Compared to 2023, its capex declined by 24.6% to R1.79 billion from R2.4 billion in 2022. 

Telkom still has an industry-leading connectivity rate of 47.4%. This means that nearly half of all houses that are passed by its fibre network are connected.

It has also increased the number of homes its fibre passed by 23.9% year-on-year, breaching the 1 million homes passed milestone. The number of homes connected also increased by 26.7% to 492,812.

Vumatel capitalising on Telkom’s blunders

Remgro’s interim results for the six months to 31 December 2022 showed that CIVH, which owns Vumatel and Dark Fibre Africa (DFA), showed strong growth over the reporting period.

CIVH is majority-owned by Remgro and is the holding company of Maziv, which in turn owns DFA and Vumatel.

DFA specialises in long-distance fibre infrastructure and has total fibre assets spanning 13,600km. DFA leases its assets to telecommunications companies.

Vumatel focuses on fibre-to-the-home networks, with its fibre assets spanning 31,000km. It leases its fibre assets to internet service providers.

Vumatel is rapidly expanding its network coverage and, by the end of 2022, passed 1,805,000 homes with over 600,000 homes connected.

In the six months which ended on 30 September 2022, Vumatel grew its revenue by 14.2% to R1.6 billion. DFA increased its revenue by 10.5% to R1.2 billion.

Maziv is not slowing down its network investment. It already passed over 1 million homes in high LSM areas and is now moving to less affluent areas.

Maziv CEO Dietlof Mare said they have reduced the cost of connecting a home from R18,000 to under R4,000.

To compete against an established fibre player in a neighbourhood is very difficult as the capital requirements are high without a guaranteed return.

It has, therefore, created small fibre monopolies across South Africa and continues to do so through its aggressive network rollout.