INDEX

1. Public Hearings on cost of communications29 - 30 November 2012Manelisa Mavuso, MD: Consumer Services and Retail

2. INDEX Page Introduction 3 Context 5 Tarifica benchmarking graphs for voice calls 4th Quarter 2011 14 4. Telkom’s contribution to the process 25 5. Shortcomings of the current Call Termination regulations 36 6. Challenges 38 7. Summary 39 8. Conclusion 40

3. Introduction Telkom welcomes the opportunity to address the Committee on this very important matter Cost of communications impacts on all spheres of life and has a direct impact on economic growth and on South Africa’s competitiveness Call termination has a direct impact on the cost of communication The initial focus on, and attention to the cost of communications and the impact of termination rates on retail prices resulted from scrutiny by members of Parliament These Hearings should not be seen as a new process but rather as an evolutionary process

4. Introduction Cont….. Process started in 2009. The initial focus and scope was the impact of MTRs on high retail mobile prices The process involved, at one stage or another, the PCC, the Minister, Doc and ICASA Telkom believes that Parliament's Portfolio Committee on Communications (PPC), the Minister of Communications, Doc and ICASA all have critical roles to play to ensure the cost of communications is reduced Telkom supports this review process and the initiative taken by the PCC

5. TELKOM’S CONTEXT Current situation: highly challenging environment Trends Impact on Telkom • 60% of revenues are voice based & reducing (-3-5% CAGR 12’-17’) • Fixed mobile substitution will continue • Fixed data growth insufficient to offset decline in voice • 8.2% cost growth (inflation & wages) Challenges Economics • Mobile constitutes 80% of the market. Vodacom & MTN investing in fixed infrastructure to ‘cherry-pick’ Wholesale & Enterprise revenue opportunities • Competition has access to global R&D and capabilities • Disruptive threat of increasing OTT & VoIP (e.g. Vox) Competition Workforce & infrastructure • Ageing workforce with traditional incumbent culture • Skills not aligned to future mobile & IP needs • 22,000 employees with inflationary wage demands • Mobile infrastructure requires rapid scaling • Fixed infrastructure outdated requiring new NGN platform Regulatory pressures • Continued universal service obligations • New licensing & sub-1000 Mhz spectrum allocation favoring other players • Interconnect regime does not reflect cost recovery • Continued regulatory pressures (e.g. Bitstream)

6. TELKOM’S CONTEXT • Retail end-user prices are driven by a combination of factors, which operators may, or may not, have control of: • Internal cost structures • Staff & labour costs • Equipment & materials • Advertising, etc. • OLO input costs (e.g. call termination costs) • Regulatory imposed costs • Spectrum licence fees, licence fees • USAF contributions • Cost of compliance (Service Charters, etc) • Number of customers, type of customers and services consumed • Profit margins

7. TELKOM’S CONTEXT • Due to Telkom’s specific context, more than 45% of costs are ‘fixed’ and difficult to reduce further

8. TELKOM’S CONTEXT The mobile market is 3x the size of Telkom’s core revenue base and the future growth is in data Key: CAGR RSA telecommunications market forecast (ZAR BN) 2% 15% Mobile market of R90BN – 3x size of fixed -2% 10% -3% • Mobile data is the growth engine of the market, forecast to grow at 15% CAGR vs. 1% for total fixed Source: Pyramid, WCIS, operators, Delta Partners’ analysis

9. TELKOM’S CONTEXT Telkom is very much dependent on fixed voice yet this is declining, materially posing a serious future risk Revenue (2007 vs. 2011)(RB) Comments • 18% revenue reduction in fixed voice business • Strong growth in data business (43% including leased line) • Future fixed data growth threat from increasing mobile data competition • Competitor demand for COFL will also reduce as self-provisioning increases 32.1* 0.01 31.3* 3.2 0.04 Data △4.2 Inter-connection Voice

10. TELKOM’S CONTEXT Will the turnaround of Telkom be a success? 1 Force of competition • MTN and Vodacom have significantly more financial strength and scale (e.g. 25m customers) • No universal service obligation for many competitors • Severe self provision risk – building fibreto cherry-pick fixed line revenue (without USO of Telkom) 2 • No sub-1000 Mhz spectrum • FTR that does not recogniseaccess costs • Continued pressures re bit-stream Regulation 3 Inflexible cost base • Ageing workforce with traditional incumbent culture • Skills not aligned to future mobile & IP needs • 22,000 employees with inflationary wage demands 4 4th entrant mobile challenge • Sites are full, especially in geo 1 areas and competition reluctant to be fully cooperative • Channels not interested in promoting 8ta without disproportionate commissions • Extremely challenging to identify and attract required talent

11. TELKOM’S CONTEXT The competitive landscape Size compared to Telkom Holding company Market cap Aug 2012 OLO 100% Inter.Solutions NTT Japan R518bn x52 No Universal Service Obligations 100% MTN Group R293bn Verizon x30 65% R1,205bn x122 Vodafone Vodacom SA R194bn Naspers MWeb SA R655bn x20 100% 61.5% TATA Group x66 Neotel 100% Telkom Group R9bn Telkom SA Telkom competes against ISPs & MCOs which are part of much bigger conglomerates

12. TELKOM’S CONTEXT Telkom's sustainability in converged ICT industry

13. TELKOM’S CONTEXT Legacy regulatoryobligations • Telkom historically seen as monopoly and loaded with most regulatory obligations • Loss-making Public Payphone obligations • Loss-making Directory enquiries • Provider of services in last resort (basic service obligations inunprofitable areas) • Unfair regulatory obligations on Fixed vs Mobile operators • Service Charter obligations • Access to critical spectrum and impact of spectrum licence fees • Possible LLU obligations • Access Line Deficit difficulties Effects • Provision of unprofitable services in competitive environment is unsustainable • Regulatory burden puts Telkom’s sustainability at risk

14. Tarifica Benchmarking Graphs for Voice Calls 4th Quarter 2011

17. Lowering the cost of communication Reduction in nominal prices Keeping price increases below inflation – price reductions in real terms New products & services Product enhancements

18. Telkom’s contribution to the process • In 2009, Telkom could have increased its overall Basket services by 19.7% for the 2009/2010 period (due to carry over from previous year) However, Telkom filed an overall increase of only 1.7% which resulted in R3.2bn saving for customers • In 2010 Telkom could have increased its overall basket by  19.2% for the 2010/2011 period. However, Telkom filed an overall increase of only 2.4% which resulted in R2.7bn saving for customers • The combined effect of ADSL price decreases and CPI increases over the last 7 years mean that customers have experienced, in real terms, decreases of between 86% and 106% in ADSL prices! • Although not statutory obliged, Telkom has consistently reduced fixed-to-mobile call tariffs, thereby putting over R2.1bn back into the pockets of its customers

19. Telkom has kept price increases below inflation Trends • Since 2005, communications prices have risen more slowly compared to other inflationary indices (Education, Food, Medical & Health care, Housing, Transport) and the gap continues to widen • Whilst Telkom’s costs have increased in line with inflation, Telkom’s price increases have been kept below inflation which also resulted in profit squeeze • Telkom has consistently demonstrated prudence in its pricing practices to the detriment of its own profitability • Telkom’s tariffs for line rental is below costs and loss making Telkom has kept price increases below CPI and below Price Control allowances

20. Telkom’s contribution towards Broadband costs

21. Keeping the cost of broadband down Although Telkom’s costs have increased in line with inflation, Telkom has not increased DSL prices at the same ratio which effectively means that prices have come down in real terms.

22. Telkom has lowered the cost of communications:Wholesale business Telkom reduced the prices of wholesale products during 2012/2013: IPConnect -30% SAIX Dedicated Access -10% SAIX ADSL Usage -20% Metro Clear -57% Ethernet Express -57% IPLCs (legacy Half circuits) -20%

23. Telkom’s pass-through of MTR reductions Telkom’s Fixed-to-Mobile retail prices have come down!

24. Product enhancements & service offerings • Telkomoffersfree installations (e.g. 12 month contracts) • Different calling plans for business & residential customers • Telkom Biz Talk, SupremeCall, Cell Saver • ISDN PRA payment plans • Launched first FMC bundle in the form of Telkom-Mix • Retained 68% of customers that took on the free 3-month broadband trial • Launched uncapped broadband customer value propositions • Improve entry level broadband product proposition by increasing broadband speed from 384kbps to 1Mbps • Launched Telkom Business Mobile & TBIZ uncapped offering • Telkom has reduced prices of Fixed-to-Mobile calls

25. Telkom’s contribution to lowering cost of communications:DSL speeds In 2011, Telkom upgraded DSL Faster (512 KB/s) to 1 MB/s at no cost to customers Between August and November 2012, Telkom again upgraded 440 000 DSL Fast (384 KB/s) services to 1 MB/s speeds as well as 190 000 DSL Faster (1 MB/s) services to 2 MB/s These upgrades are equal to a price reduction of 45.8% since the current (before upgrade) DSL Faster at 1 MB/s costs R 299.00 VAT incl. while the new DSL Fast at 1 MB/s costsonlyR 165.00 VAT incl.

26. History: Telkom’s Fixed Termination Rate (FTR) In 1994 Telkom’s FTR was set at 21c in order to support the start-up of the mobile cellular industry The 21c was based on Telkom’s local call tariff It was assumed that MCOs would only have 500,000 subscribers over a 10 year period Currently, MCO have in excess of 50m subscribers Over a 16 year period, Telkom has managed to increase the FTR from 21c to 29c which has subsequently been reduced by ICASA’s glide-path

27. How MCOs have profited from Telkom through high MTRs • Telkom would pay approx 10x more to MCOs than it received from MCOs • Asymmetry and ICX revenue were used by MCOs to build networks and offer low on-net calls to increase fixed-mobile substitution • Over 2002/2010 period this ‘overpayment’ amounts to approx R34bn

28. Shortcoming of current Call Termination regulations • In respect of mobile operators, the MTRs include the cost of both access and transport segments of the network to the POI • However, Telkom’s FTRs do not include the cost associated with the access network • This is a result of differential treatment arising from the regulatory accounts • Telkom believes the levels of current FTRs are unfair and discriminatory • Such approach is backward looking and ignores the convergence of service offerings and the convergence of the underlying costs of networks

29. Shortcoming of current Call Termination regulations – cont. Telkomis already providing universal service and basic access at a price below cost Telkom has an Access Line Deficit that has been subject to an ICASA approved regulatory audit The existing FTRs also do not allow Telkom to recover its costs of operation and hence is not cost reflective Current FTRs do not allow for full recovery of call conveyance costs on a per call basis Any further downward glide paths for FTRs would therefore be inappropriate

30. Challenges confronting Telkom Fixed-line Declining voice revenue Access Line Deficit (Telkom subsidises line rentals) Inappropriate termination rate regime Asymmetry in termination rates Legacy regulatory obligations Extensive capital investment required to renew & expand network Cable theft

31. In summary . . . Telkom is of the view that termination rates have a huge impact on the competitiveness of operators and the overall cost of communications Telkom believes that the cost of communications has indeed reduced in real terms Telkom, however, believes that reduction of call termination rates has had limited success Telkom proposes that the current model should be reviewed and that a new call termination model is required which should rather focus on increasing the competitiveness of the sector

32. Conclusions Telkom is committed to continued reduction of the costs of communications Telkom supports the principle of cost-oriented termination rates Call termination rates must allow for full cost recovery Current MTRs mean that 8ta’ is already under-recovering costs New entrants (like 8ta) should be given higher asymmetrical MTRs to allow them to compete with incumbents Current FTRs are set at a wrong level and are discriminatory Propose simplified and converged MTR / FTR 32

33. Thank you