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South African Phone Monopoly Battles
Government and Customers
by DONALD G. McNEIL Jr.
JOHANNESBURG, South Africa -- Monopoly and government control have long been the way of doing business in South Africa, and for years, the national phone company was perhaps the worst offender. The hallmarks of the company, Telkom SA, were high prices, slow service, an aloof bureaucracy, a bloated work force and a network engineered for white neighbourhoods.
Suddenly, everything is changing. In the eyes of some South Africans, it's a miracle: the company is now being run by Americans, people famous for technical skill. In the eyes of others, it's a disaster: the company is now being run by Americans, people famous for arrogance.
To be fair, the South Africans invited this on themselves. They put 30 percent of the government-owned company up for sale last year. In March, it went for $1.2 billion to a joint bid by SBC Communications International -- a subsidiary of SBC Communications Inc., the American local phone company that was once Southwestern Bell -- and Telekom Malaysia.
Before that, there were two years of debate: was it better to let Telkom maintain its monopoly and try to change its attitude or to open the whole country to competition, hoping new entrants to the market would wire neglected black areas? Ultimately, said Jay Naidoo, Minister of Posts and Telecommunications, it seemed wiser to fortify Telkom with private investors but to emulate the 100-year AT&T monopoly that brought affordable phones to all of America.
To attract buyers, Parliament passed the Telecommunications Act of 1996, which preserves Telkom's monopoly for five years on the condition that it installs 2.8 million new lines and greatly improves service. Any buyer was taking a gamble. If Telkom reaches the government's goals, it gets a sixth year of monopoly as a reward. If it fails, it pays large fines.
But there was also a cultural risk: the buyer would step into a business arena that has been isolated and defensive, more used to government regulation than to free competition and politely resentful of outsiders bearing cash, expertise and do-it-my-way plans.
SBC and Telekom Malaysia accepted the challenge. And, although SBC owns only 18 percent of the company, it has become clear in the last few weeks that a team of Americans, led by the chief operating officer, Mac Geschwind, is running the state telephone company.
They are spending so much to upgrade the system that Telkom, which had a pretax operating profit of nearly $1 billion last year, will have none in 1997-98. Under new management, the company is in virtually daily battles in the headlines. Telkom is fighting simultaneously with its biggest customers, with the new regulatory agency, and with would-be competitors like call-back services and Internet providers. Paradoxically, on the two fronts where industry analysts expected trouble -- from the unions and government -- all is quiet.
In an interview in his office in Pretoria, Geschwind said he had never thought entry would be easy. "There were no surprises," he said. "We came in with our eyes open." Still, the task is huge. Decades of apartheid have left downtown office buildings and white suburbs with plenty of lines, but in rural black areas, one household in 200 has a phone line. Some people walk miles to a pay phone.
On top of that, decades of government control -- Telkom was created by the post office -- meant sluggish, indifferent service for all. Waiting six months for a phone was routine. One journalist who built a home office three years ago said that when the Telkom installer finally arrived at her home, he apparently decided running a new wire was too much trouble and quietly switched one from the golf club next door. For days she was awakened by irate golfers demanding tee times.
Geschwind said there was no doubt in his mind that Telkom would meet the five-year goals. In six months, the company seems to have made huge strides. It says it installed 171,000 new lines, nearly triple the pace of the year before, with 115,000 of them going into "previously neglected areas." Telkom now fixes 57 percent of all home phone problems within 24 hours, up from 42 percent in April, company officials said. It plans to have the whole network digital by 1999. It promises to have 35 percent black managers within five years. It just introduced voice mail.
The company agreed to lay off no one, and to spend $100 million a year on training. There have been none of the wildcat strikes South African labour is known for. "We've had normal job disputes, but nothing of an unusual nature," Geschwind said. Work quotas have increased, but paperwork has been cut, and some shop stewards say workers are relieved to finally have clear goals.
But as for competition, the company is acting every bit the classic monopolistic bully: it demands that the government outlaw its rivals. High-tech enterprises are snapping at the edges of the empire, trying to redefine exactly what "being the only phone company" means. Consultants say the hastily written 1996 law has big holes in it.
The act also created the South African Telecommunications Regulatory Authority, or Satra. The first ruling by the new regulator agreed with Telkom that overseas call-back services violated the monopoly. Call-back services, most of them based in the United States, let a South African call an American computer, hang up, wait for the computer to call back and connect him to a third party. Since the call is charged at United States rates -- as much as 65 percent below Telkom's -- many big companies and even the the Ministry of Foreign Affairs use call back.
In response, Telkom recently cut its overseas rates, but only by about 13 percent. The call-back operators took the issue to court.
In October, surprising critics who had called it a lap dog, Satra dismissed Telkom's demand that 75 small Internet-access companies be shut down. It said Internet access was a "value added" service and wide access was in the public interest. Telkom said Satra had misunderstood the Internet and violated its monopoly. It sued the regulators.
Then, on Nov. 3, Telkom raised local rates by 26 percent. A leading newspaper, Business Day, applauded the decision, saying long-distance calls had subsidized local ones too long. But Satra rejected the increases. Telkom promptly said it would go ahead anyway. It also defied Satra's rejection of higher cellular-call charges. And the company effectively undermined Satra's Internet decision by refusing to sell lines to Internet providers while the issue is in court.
The Competition Board, the closest thing this country has to the Justice Department's antitrust division, said it would investigate Telkom's behaviour if it lost the case. But the board, too, has little power to enforce its orders. To improve its public image, Telkom bought full-page ads in several newspapers to publish a letter from Geschwind. It said the company was "being neither high-handed, bullying or in any way unprofessional." It said the company was only exercising its guaranteed right "to be the exclusive provider of communication by telephone" in return for its huge investment.
"We needed to be more assertive," Geschwind said. "We let others define us. The public was hearing that we're interested in a monopoly and against competition. But we entered a bargain, a deal. We're not getting away with anything. Yes, we're going to defend our exclusivity -- but let's look at what we're going to do for the citizens of South Africa."
All this has not gone over terribly well with South Africans. Journalists who cover telecommunications here said the company had offended many of their sources. Internet companies, meanwhile, said their request for a meeting had been ignored. David A. Ingram, chairman of the South African Telephony Managers Association, said Telkom had been "high handed" with his association, which represents banks, brokerage firms, insurers, car rental companies and other big phone users. In April, he said, the association asked to be consulted before Telkom raised any rates. "Promises were given but not kept," he said. "We got a phone call on a Friday telling us to come over on Monday, and on Monday they just announced the 26 percent increase."
Ingram said his letter to Geschwind asking for a meeting afterward had been ignored and he called the open letter "an extremely large faux pas." A telecommunications consultant who spoke on condition of anonymity was even harsher. "These new Americans are arrogant, parochial and unwilling to listen," he said. "They eat together, work together and live together, and you have to get down on bended knee to meet them. They're making a lot of enemies."
Asked about this, Geschwind seemed stunned. "Whoever said that has got no idea what they're talking about," he said. "It's just not true. We don't eat together, or hang together, and we've been very well received both inside and outside the company. I think we're recognized as maybe being impatient -- a 'let's get to it' approach. But that's exactly what South Africa wanted us to do with Telkom."
The battle is still going on, and Telkom may still refine its tactics. Meanwhile, the African National Congress government is carefully staying out of the fray. Naidoo, the Minister of Posts and Telecommunications, said Telkom and Satra had channels for working out disputes and pronounced himself "philosophically very satisfied" with the monopoly-for-investment deal.
And even the consultant who is Telkom's harshest critic said he admired the new management's effectiveness. "If they did a public offering now," he said, "I'd be the first in line for it. They're going to make a lot of money."
