AT&T PURSUES STRATEGIC PARTNERSHIP WITH TELKOM SOUTH AFRICA

UNCLAS SECTION 01 OF 03 PRETORIA 000981 SENSITIVE BUT UNCLASSIFIED SIPDIS DEPT FOR EEB/CIP DEPT FOR EEB ALAN GIBBS ABUJA FOR ROBERT TANSEY LAGOS FOR LARRY PARRIS NAIROBI FOR GENE YOUNG 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. -------------- AFRICA IS BELIEVED TO HAVE MOST POTENTIAL FOR ICT MARKET GROWTH -------------- ¶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. -------------- NEW CABLE PROJECTS TO REDUCE ICT COSTS IN AFRICA -------------- ¶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. -------------- HIGH EXPECTATIONS FOR PARTNERSHIP -------------- ¶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. -------------- AT&T AND TELKOM SIGN MOU TO PURSUE PARTNERSHIP, WITH OPERATIONAL DETAILS TO FOLLOW -------------- ¶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. -------------- AT&T FRUSTRATED AT PACE OF TELKOM DECISION-MAKING -------------- ¶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. -------------- NEXT STEPS -------------- ¶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. -------------- COMMENT -------------- ¶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. LA LIME