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The Worst Is Now Behind Us

It is tough becoming the second operator in a competitive South African market against an entrenched competitor. Neotel bears the scars.

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When Sunil Joshi took over as Neotel MD and CEO on April 1, 2011, misery was written all over South Africa’s second national fixed line telecommunications operator. Five years after its establishment—amid fanfare and incredibly high hopes—the experiment looked destined for the doldrums, facing one public relations and marketing nightmare after another.

Neotel CEO Sunil Joshi in the corporation’s Telepresence Suite, Midrand, South Africa; 1 December 2011 – Photo by Brett Eloff.

A couple of months earlier, auditing firm, Deloitte, had declared that “the company’s recurring losses from operations and shareholders’ deficit raise substantial doubt about its ability to continue as a going concern”. This after Neotel had reported losses of $188 million and announced to staff that some of them faced retrenchments.

The revelations were a big blow—not only to the government’s concerted effort to liberalize a sector long held to ransom by the previously state-owned monopoly operator, Telkom—but also to the country’s 48 million people. Expectations had been high that the new provider would help bring down the costs of telecommunications, offer a much better service than the complacent incumbent operator, create employment, as well as facilitate numerous business opportunities.

Although analysts blasted Neotel management and shareholders for, among other things, lacking vision and leadership, they sympathized with the new entrant in instances where they felt it was a victim of circumstance. For example, two years after Neotel got its operating licence, a technology group challenged the government’s “managed liberalization” process in court, and won. This meant that privileges initially reserved for Neotel would now also be enjoyed by the country’s mobile phone giants, as well as by numerous other players.

On the day the FORBES AFRICA team is visiting Neotel’s Johannesburg headquarters, it’s exactly seven months since Joshi took over after a big management shake-up that saw founding CEO Ajay Pandey return to India.

Joshi quietly asserts that numerous realities were ignored when the story of Neotel’s perceived failure was being told—though he maintains “that’s no excuse”. One such reality, he says, is the cardinal truth that a business has to make an investment before it can reap rewards.

He points out that five years ago, Neotel started from a zero base—with no infrastructure, no employees and no customers—in an industry that grows at about 4% annually.

Neotel has had to invest over R4 billion ($485 million) in the business, he says, most of it spent laying out about 7,000 kilometers of optic fiber. The company has had to employ more than 1,000 people and build more than 400 base stations.

Joshi has spent the past seven months “integrating” the business—something he believes will result in much better offerings. He has called on his parent company, the India-based Tata Group, who are 68.5% owners of Neotel. The other shareholders are South African consortium Nexus (19%) and Namibia’s CommuniTel (12.5%).

“Tata Communications are the world’s largest owner and operator of submarine cable systems. They have about 207,000 kilometers of submarine cable assets on the sea bed,” Joshi boasts, with a lot of glee, “so as we integrate our domestic capability and our submarine cable into Tata infrastructure, we now have the unique capability to enable customers to expand at any geography across the Pacific or Atlantic, on primary or secondary parts on our own infrastructure, giving us the ability to provide resilience,” he says.

What that means for Neotel business clients is that one public room in Midrand, Johannesburg, is connected to 36 others across the world. The facility enables local customers to hold meetings with other people who are based in other parts of the world, without having to travel. Two new data centers that Neotel has built in Cape Town and Johannesburg are now seamlessly connected to 42 other data centers across the world. So if, for example, a business in South Africa wants to expand into Asia, and wants Singapore as a hub but also wants a single point of service for network and data services, Neotel can provide that with ease.

Joshi says Neotel is also serving its consumer portfolio with competitive voice and internet solutions.

The biggest news came in November when, for the first time, the company announced that in the previous quarter it had reached positive earnings before interest, tax, depreciation and amortization (Ebidta).

Last year, Neotel raked in R2.3 billion ($279 million) in revenue, which Joshi reckons is “significant in such a short time”. But was it the best Neotel could do? “There’s always room for improvement,” Joshi quips, before adding: “Revenue streams will only come once critical mass has been achieved. Our revenue streams are growing 30-35%, year on year, enabling us to grow between six and seven times industry growth rate, albeit off a small base.”

Market share stands at 5%, while business customers grew by 23% and consumers by 40%. Neotel now has more than 50,000 retail customers.

Joshi believes the worst is now behind. He is turning his attention to four “strategic imperatives” he’ll be pursuing this new year: profitability, increasing market share, improving customer experience, and training and empowering his “ambassadors” (staff).

But, he says, he will also do with a little bit of help from the country’s national regulator, the Independent Communications Authority of South Africa (ICASA).

Decades ago, South Africa’s then state-owned telephone company laid out copper wires throughout many parts of the country so that it could be easy for telephony to reach homes and offices. For now, only formerly government-owned Telkom can use the infrastructure. Others have to rent from Telkom at significantly high rates. For years now industry players have been trying to convince ICASA to regulate the use of underground copper infrastructure so that other service providers can use it too—not just Telkom. The industry players’ argument is that by making the local loop available to all service providers, telecommunications will reach more people and bring down costs.

“What we are asking for is a fair, competitive and affordable price that industry can bear. We are certainly not asking for it to be free. The investment was made decades ago,” says Joshi.

The second area Neotel would also like to see government paying attention to is the pace and rate of approval in local municipalities. Companies have to get municipal approval for their fiber footprint layout plans, and Joshi says the process is often fraught with delays.

If the relevant South African authorities could attend to those two obstacles, Joshi reckons, there would be no stopping Neotel.

And how does he think history will judge him when his contract ends in three years’ time? “We will all look back and say we made history—by bringing a second operator to  South Africans, and making it successful.”

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