AT&T PURSUES STRATEGIC PARTNERSHIP WITH TELKOM SOUTH AFRICA

UNCLAS SECTION 01 OF 03 PRETORIA 000981

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E.O. 12958: N/A
TAGS: ECPS EIND EINV EINT ECIP PGOV USTR SF
SUBJECT: AT&T PURSUES STRATEGIC PARTNERSHIP WITH TELKOM SOUTH AFRICA

REF: A. PRETORIA 271 B. PRETORIA 1976 C. PRETORIA 1278

This cable contains company proprietary information.


1. (SBU) Summary. AT&T officials met with post to discuss a new
strategic partnership with Telkom South Africa on April 16. The
officials noted that increasing numbers of international
corporations were finding opportunities for investment in Africa and
agreed that improvements in bandwidth capacity would boost
investments on the continent. The officials were optimistic about
the impending partnership with Telkom because of its experience on
the continent, but expressed frustrations at the slow pace of
decision-making at Telkom. They inquired about the impact of the
change in government in May and the influence of labor unions on the
investment climate in South Africa. A long-awaited leadership
change has occurred at the Department of Communications, but the
appointment of a former military general at the top position has
left industry analysts perplexed about the future of the sector.
End Summary.

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AFRICA IS BELIEVED TO HAVE MOST
POTENTIAL FOR ICT MARKET GROWTH
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2. (SBU) AT&T Business Solutions President Ron Spears and AT&T
External and International Regulatory Affairs Vice President met
with post Economic Counselor, Commercial Counselor, and ICT Officer
to discuss a proposed strategic partnership with state-controlled
Telkom South Africa on April 16. Spears explained that South Africa
was an important entry-point for AT&T's business on the continent.
He noted that AT&T's strategy in South Africa would be to find good
partners to grow its business and it would also look for partnership
opportunities outside of Telkom.


3. (SBU) Spears noted that increasing numbers of U.S. and other
multinational corporations were finding opportunities for investment
and economic growth in Africa. These customers already expect to
pay higher ICT fees for their operations in Africa, but look to AT&T
to coordinate their services and networks across their entire
African operations. Spears said AT&T was expanding its presence
outside of South Africa to meet this customer demand and to provide
improved interconnectivity on the continent for South-African
companies looking to expand. The company is currently in the
process of obtaining a license in Morocco, and had plans to obtain
licenses in Egypt, Tunisia, and Libya. Spears explained that AT&T
did not have a direct presence in Nigeria because of the "messy"
regulatory conditions there. Shell is a large AT&T client in
Nigeria and AT&T handles their business in Nigeria through Nitel.


4. (SBU) AT&T is also interested in the Kenyan market, but Loeb
noted that corruption levels in Kenya had deteriorated in the past
year and half following the establishment of a coalition government.
Asked why corruption had deteriorated in Kenya under the coalition
government, Loeb explained that there were now twice as many
opportunities for corruption.

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NEW CABLE PROJECTS TO REDUCE
ICT COSTS IN AFRICA
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5. (SBU) Improvements in undersea, fiber-optic capacity will be
important for investments on the continent. Post noted that the
local ICT industry was excited about increased bandwidth capacity
and cost declines that would accompany the new SEACOM cable project
Qand cost declines that would accompany the new SEACOM cable project
that would connect the East Coast of Africa to Europe and India.
The officials agreed and explained that South African cable traffic
accounted for three percent of their business traffic, but 25
percent of their costs. They also noted that high value-added
products and services require higher bandwidth than is usually
available on the continent and welcomed the changes the SEACOM cable
would bring. In the past, the only options in Africa were expensive
satellite connectivity or undersea cable links controlled by Telkom.
The SEACOM cable is expected to become operational on June 17,

2009.


6. (SBU) Post also noted that a maintenance agreement was signed on
April 8 to launch the West African Cable System (WACS) project. The
WACS Consortium consists of Angola Telecom, South African
government-owned Broadband Infraco, Cable & Wireless, MTN Group,
Telecom Namibia, Portugal Telecom, Sotelco, Tata Communications
(Neotel),Telkom South Africa, Togo Telecom, and Vodacom. The

PRETORIA 00000981 002 OF 003


Commercial Counselor said the WACS cable was expected to be
operational in 18 months. Loeb added that new cables are now
designed and launched with extra spur joints in case demand
increases (from socio-economic improvements or changes in political
regimes as might be the case someday in Zimbabwe) and additional
countries need to be included.


7. (SBU) The officials cautioned that increased availability of
under-sea cable alone would not alleviate high ICT costs on the
continent. Loeb emphasized that it would be equally important to
increase competition for the cable landing stations. Only select
groups such as Telkom currently control landing station rights,
which allows them to charge higher prices. SEACOM is building
landing stations and the new fixed-line operator Neotel and MTN
South Africa are joining forces to roll-out fiber to develop a 5,000
kilometer terrestrial network in South Africa. The new WACS project
also has a more liberal landing rights structure than existing
Telkom stuctures. These new developments should improve the quality
of access and reduce costs.

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HIGH EXPECTATIONS FOR PARTNERSHIP
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8. (SBU) Spears said AT&T decided to revive its partnership with
Telkom because of Telkom's breadth and depth of experience in
Africa. The officials thought the timing was good as Telkom had to
begin adjusting to a more liberalized ICT market in South Africa.
Telkom has had to begin changing its market strategy because
implementation of the Electronic Communications Act (ECA) of 2005
has begun to erode its monopoly. Telkom is in the process of ending
its restrictive relationship with mobile operator Vodacom and is
seeking a buyer for its ill-fated Telkom Media subsidiary. Proceeds
from the Vodacom sale would allow Telkom to pursue its strategy of
further expansion into sub-Saharan Africa, which would increase its
value as a partner for AT&T. U.K.-based Vodafone would retain its
50 percent stake in Vodacom.

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AT&T AND TELKOM SIGN MOU TO
PURSUE PARTNERSHIP, WITH
OPERATIONAL DETAILS TO FOLLOW
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9. (SBU) Spears and Telkom CEO Ruben September signed a memorandum
of understanding (MOU) later that afternoon to pursue a partnership,
but noted that operational details of the partnership still needed
to be finalized. The MOU would allow companies based in Sub-Saharan
Africa to connect to other global markets more effectively and
permit U.S. companies to connect more easily with their subsidiaries
and clients in South Africa. The partnership was lauded as a
win-win for both companies. Telkom recently expanded its presence
in Africa to 35 countries with the acquisition of Africa Online.
Telkom already has cable capacity on the African coastline and
limited nodes connecting to London and Asia. Partnering with AT&T
would allow Telkom to leverage AT&T's network, which has a 97
percent global reach. This partnership would also allow Telkom to
meet the infrastructure requirements it has agreed to provide FIFA
for the 2010 World Cup.

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AT&T FRUSTRATED AT PACE OF
TELKOM DECISION-MAKING
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10. (SBU) Spears expressed frustration at the slow pace of Telkom
decision-making. Spears was optimistic about the renewed
Qdecision-making. Spears was optimistic about the renewed
partnership, but told post he would have to pressure September to
begin finalizing the details of the arrangement. Spears noted that
AT&T had hoped to have more concrete plans for the partnership
finalized by the time of the April MOU signing, but had been
thwarted by the delays in Telkom decision-making. Media
representatives at the signing also bombarded both officials for
additional details regarding the partnership.


11. (SBU) Spears and Loeb both expressed concern about upcoming
changes in the South African government and the role of labor unions
in the South African market. They inquired about the impact of
leadership changes on the investment climate and wondered whether
September would retain his position at Telkom. Post explained that
there was a leadership vacuum at the Department of Communications
with the death of the Minister and the ousting of the Director
General for supporting the COPE opposition party. Changes would
definitely occur in the ICT sector following the election, but most

PRETORIA 00000981 003 OF 003


industry analysts had difficulty predicting the nature of those
changes.


12. (SBU) Meanwhile, labor actions have delayed the desired
dissolution of the Telkom-Vodacom partnership. The Congress of
South African Trade Unions (COSATU) has sought an unusual and costly
legal action against the Independent Communications Authority of
South Africa (ICASA),Telkom, and Vodacom to impede the pending
sale. The union raised concern that the sale would threaten jobs at
Vodafone and staunchly insists that all phone service have a degree
of national control. Union officials have also expressed
frustration that they were not consulted during the sale. They
believe that winning a case against Telkom would set a precedent
that gives COSATU a seat at the table during future corporate merger
negotiations throughout South Africa. Further protests from the
trade unions could impede Telkom's ability to seek new partnerships
and pursue an expansion strategy into Africa.

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NEXT STEPS
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13. (SBU) Spears noted that his team would need to continue
negotiations with Telkom to determine the operational framework of
the partnership. Spears said AT&T was ready to move forward with
implementation, but felt frustrated at Telkom's inability to
finalize decisions. He said a follow-up trip was planned for June
and hoped to finalize details before the trip. Spears thought
Telkom's willingness to engage AT&T in a new partnership is
reflective of the pressure Telkom is beginning to face under an
increasingly liberalized ICT market. However, the prolonged
negotiations reflect Telkom's slowness in embracing this change.

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COMMENT
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14. (SBU). The proposed AT&T and Telkom partnership would benefit
ICT consumers based in Africa. The partnership would complement
other developments in the ICT sector including the addition of new
fiber-optic bandwidth capacity. However, trade union activism and
the slow pace of ICT liberalization could hamper final
decision-making on the partnership and potential areas of
cooperation. COSATU is also unlikely to win its court battle
against the impending Vodacom sale, but it is unlikely to give up
without a fight. Previous leadership at the Department of
Communications has thwarted independence at the national regulator
ICASA and has slowed down the implementation of projects that would
increase competition in the ICT sector. Implementation of the 2005
ECA has been slow, due partially to interventions from the former
Minister of Communications. Industry analysts had high hopes for
the incoming Minister of Communications, but were perplexed by the
appointment of Siphiwe Nyanda, a former army general with no ICT
background. Analysts fear that his appointment would further
complicate efforts to improve ICT infrastructure and service
delivery (Septel). End Comment.

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