A competitive environment: As the sector matures, increased data usage and expansion of broadband services offer a path to growth

Competitive as it is, South Africa’s telecoms sector continues to see growth and attract the attention of foreign investors. Meanwhile, falling prices are driving increasing volumes – contributing, with rising data usage, to a stabilisation of average revenue per user (ARPU). Operators are seeking growth from greater use of value-added services (VAS) and through offering competitive packages to subscribers. The market’s dynamism has been increased by better management of some key players, and could be further enhanced by a possible entrance by a new foreign investor. “The telecoms sector, and the mobile segment in particular, is a well-developed market,” Zaid Gardner, a telecoms expert and senior associate at Edward Nathan Sonnenbergs, a law firm, told OBG. “It is comparable to international standards in terms of breadth of services.”

Players

The South African telecoms market is a competitive one, with a select number of major players traditionally dominating the fixed-line and mobile markets, alongside a strong showing of smaller companies making a play for market share and continued interest from outsiders. The mobile market is led by Vodacom, which was launched as a joint venture by the UK’s Vodafone; Telkom, South Africa’s majority-state-owned legacy operator; and MTN. In 2009 Vodafone increased its stake to 65%, with the remainder floated on the Johannesburg Stock Exchange (JSE). Vodacom also has mobile operations in Tanzania, the Democratic Republic of Congo, Lesotho and Mozambique. MTN is a homegrown company publicly listed on the JSE, and is a major player in markets across Africa and the Middle East with a presence in 21 countries. Ranking third in the market is Cell C, in which Riyadh-based Saudi Oger has an effective 75% share, 60% directly held. The remaining 25% is owned by CellSAF, a South African company.

Next in the mobile market is mobile operator, 8ta ( pronounced “heita” – a Southern African greeting), which is wholly owned by Telkom. 8ta’s services recently began being rebranded as Telekom Mobile, which is being implemented progressively. Telekom launched 8ta in 2010 as a move to diversify and gain a foothold in the growing mobile segment to offset declining fixed-line business; thus far it has met with only modest success.

The fixed-line side is largely divided between incumbent Telekom and six-year-old competitor Neotoel, which is majority-owned by India’s Tata Communications and launched in 2006. Neotoel has had success targeting the corporate market, which tends to demand higher connection quality and service standards than many other market segments.

Market Share & Arpu

Vodacom was the market leader at the end of 2012, with 30.6m subscribers and a mobile market share of 45%. The next three top mobile operators were MTN, with 25.5m subscribers and 37.4% market share, Cell C (10.4m, 14.8%) and 8ta (1.5m, 1.5%). Absolute market positions had thus not shifted radically from a year previously, when Vodacom had 27.4m subscribers and a 45.4% market share, followed by MTN (22m, 36.6%), Cell C (8.8m, 14.6%) and 8ta (1.4m, 2.3%). Newcomer 8ta saw the highest year-on-year (y-o-y) subscriber growth, at 31.3%, followed by Vodacom at 21.9%, MTN at 16.8% and Cell C at 14.4%.

Vodacom generated the highest ARPU (blended – including pre- and postpaid) in the final quarter of 2012, at R129 ($15.73), followed by MTN at R123 ($14.99), Cell C with R91 ($11.09) and 8ta at R70 ($8.53).

Blended ARPU was R119.7 ($14.59). ARPU fell overall from the end of 2011, when Vodacom’s stood at R140 ($17.07), MTN’s at R98 ($11.95), Cell C’s at R98 ($11.95), 8ta’s at R64 ($7.80) and blended ARPU at R134.5 ($16.40). This continued a decline from blended ARPU across the whole market of R156.4 ($19.07) in Q4 2010.

Stable Ground

However, the trend in the second half of 2012 and early 2013 has been towards ARPU stabilisation. Every player saw their ARPU rise in the final quarter of 2012, pushing the blended figure up to R116.6 ($14.21). There are three main reasons for this: increased call volumes due to the low prices and discounts offered by the operators, growing take-up of value-added services (VAS, and rising data volumes.

ARPU figures imply overall service revenue in the final quarter of 2012 was R23.7bn ($2.89bn). Of this, Vodacom had a share of 49.1%, MTN 38.1%, Cell C 11.6% and 8ta 1.3%. The “big two” lost a little ground to the upstarts in 2012 – at the end of 2011, Vodacom’s share of service revenue stood at 51.9% and MTN’s at 37.4%, while Cell C’s was 10.3% and 8ta’s 0.4%.

Some see further potential for ARPU growth in the prepaid market. "Many customers opt for prepaid packages purely for flexibility rather than spending constraints, and top prepaid customers can generate as much ARPU as post-paid customers while requiring the same level of support and after-sales services," Mark Taylor, managing director of Nashua Mobile, told OBG.

Penetration

Industry reports imply that penetration broke 130% in the middle of 2012, but measuring true penetration is an extremely inexact science, and rates could actually be anywhere between 60% and 100%.

Thecla Mbongue, senior research analyst at Informa Telecoms & Media, an analysis firm, pointed out that the figures are skewed by the tendency of subscribers to have two or more SIM cards to take advantage of special offers and low on-network rates – a common practice in emerging markets.

For example, a customer may use an MTN SIM to call friends on that network, switching to a Vodacom card when speaking to other Vodacom subscribers. Figures are further swelled by those using USB internet devices, or “dongles”. But Mbongue estimates that the proportion of South Africans without any SIM card at all is quite low – at only around 5-10% of adults, largely the very poor and the elderly. Even in these categories, many will have access to a mobile phone owned by other members of their household.

While some assert that the market is close to saturation, Gardner says that operators are keen to increase mobile usage in rural areas, including both voice and data, seeing these as the places where penetration and volume growth can still be generated. “Data has a lot more price elasticity than voice, and as data prices settle to reasonable levels, this will open up endless opportunities for IT solutions providers,” Jacques du Toit, CEO of VOX Telecom, told OBG.

Relaunch Challenges Incumbents

For around a decade from the late 1990s to the late 2000s, the South African mobile market was largely dominated by MTN and Vodacom, which were both fairly comfortable with that situation. Competition was not as intense as it might have been, a scenario that is common to many markets with two or three big players able to sustain market share. MTN was able to use the cash generated in its domestic market to support its international expansion. The launch of Cell C in 2001 created a stir, but the incumbents were able to bolster their position by pushing up mobile termination rates (MTRs) – the cost of connecting to another network.

Competition

Competition is currently being fought on three main fronts: pricing, distribution and lobbying for regulatory changes. Cell C’s policy of rate cuts has seen its headline tariff fall to R0.99 ($0.12) per minute, significantly below that of Vodacom (R1.20, $0.15), MTN (R1.59, $0.19) and 8ta (R1.90, $0.23). Yet promotional rates fall as low as R0.06 ($0.01) on Vodacom, R0.50 ($0.06) on Cell C and R0.95 ($0.12) on 8ta. MTN, meanwhile, has introduced a “dynamic tariff system”, which determines pricing on demand at the place and time a subscriber makes a call – with free calls available when volumes are particularly thin. Crucially, operators have been able to stall ARPU decline caused by lower tariffs driving higher volumes.

An equally important field of competition is distribution. The prepaid airtime distributor Blue Label noted that October 2012 saw the biggest bulk inventory order in the history of the company, indicating that the operator or operators in question were looking to incentivise Blue Label to take more of their airtime, as competition on the channel rises.

The third main element of competition, regulation, is seeing Cell C lobbying for a further reduction in MTRs, as well as a reintroduction of asymmetrical MTRs, which expired in the last glide path reduction earlier in 2013. MTRs tend to benefit the two big incumbents, with their larger subscriber bases, simply because there are more fellow customers one can call without paying MTRs. Should a glide path of MTR reduction continue, this would benefit Cell C and indeed 8ta, as well as any potential new entrant to the market.

New Leadership

Cell C’s reinvigoration was accelerated after the appointment of Alan Knott-Craig as CEO in 2012, previously the founder and CEO of Vodacom. His hiring is almost certainly in part due to a focus on improving its previously poor network distribution. Cell C has managed to gain around 14% of market share, but its overall primary focus has been on getting its house in order internally, improving its network quality, handsets, products and distribution, before it launches a more aggressive push into the market, which is expected to begin in 2013.

Upping Its Game

But while Cell C’s recovery has been impressive, arguably the bigger story since mid-2011 has been MTN’s improvements, growing its market share in terms of both revenue and subscriptions at the expense of Vodacom. One of its most successful innovations has been MTN Zone, a dynamic tariff system which offers users immediate discounts of between 10% and 100% depending on usage levels in the area where they are at that time. For example, a call in the middle of the night in a remote area where usage is thin could be free. At times, MTN, which has a headline rate of R1.59 ($0.19) per minute, can undercut Cell C, for which the figure is R0.90 ($0.11).

The level of the discount is displayed on the handset’s screen, giving the customer a very tangible price reduction. Users will often wait for prices to drop before making calls, indicating the price sensitivity of the market. Vodacom also has its own dynamic pricing plan, Vodacom 4 Less. In March 2013 Vodacom launched a new prepaid tariff plan charging per second rather than minute. Anytime Per Second is apparently intended to compete directly with MTN’s One Rate; both offer an effective rate of R1.20 ($0.15) per minute, with One Rate having been cut from R1.75 ($0.21) per minute earlier. Vodacom’s Daily Free Rate already offered calls for R1.20 ($0.15), but charged per minute, meaning that subscribers were charged R1.20 ($0.15) as soon as the connection was made, even if they only spoke for a few seconds. Anytime Per Second also gives 60 minutes of free airtime between midnight and 5am for every top-up of R12 ($1.46), while Daily Free Calls, which will be continued, provides 57 minutes of free time for on-network connections of more than three minutes.

Data & Infrastructure

While the operators continue to compete on voice pricing, they are increasingly looking to expand data usage, both on existing 3G networks and on long-term evolution (LTE), which is often called fourth-generation (4G) technology. Certainly, in other African markets with even tighter profit margins, data is playing an ever-increasing role in boosting both market share and profits.

While all operators are committing resources to LTE network equipment, Gardner questions whether income levels – and income growth – will justify substantial investments in infrastructure outside the main population centres in the near future. He suggests that operators could look to use existing infrastructure more efficiently, rather than engaging in capital-intensive expansion of cable and base station networks.

For some years, competition and mutual wariness limited the sharing of infrastructure, but this is changing. MTN and Vodacom already share some network infrastructure, but do not openly disclose the extent of this sharing. MTN is able to cover most of the country while having 30% fewer base stations than Vodacom, which gives an idea of the extent of network cooperation.

American Towers, a communications infrastructure company, has enjoyed considerable success since acquiring Cell C’s towers in 2010. The company is providing use of these towers to all four main operators, effectively creating a system of shared infrastructure.

Icasa

The telecoms sector falls under the regulatory oversight of the Independent Communications Authority of South Africa (ICASA). While Mbongue says that the regulatory environment is broadly favourable, ICASA has been caught in some high-profile conflicts with iBurst, Cell C and Vodacom over licensing fees.

Telkom Travails

Telkom, as the national telecoms company, comes from a position of considerable incumbent strength. But it has lost ground in recent years. To be sure, subscriber erosion is common in the fixed-line segment worldwide. But the company’s private competitors have caught up quickly, and it has moved too slowly. Fixed-line voice growth is only occurring in the corporate segment, while the residential market is stagnating. Because LTE services are able to offer internet speeds of 10 Mbps, (the current limit of ADSL is around 4 Mbps), fixed-line operators such as Telkom risk rapidly losing subscribers unless they can either increase speed or substantially reduce cost.

Telkom’s launch of 8ta was intended to support diversification as well as allow the company to compete with its strongest rivals directly. However, progress so far has been modest, with 8ta taking a small market share and not yet repaying significant investments.

The Future

It is widely acknowledged that Telkom would benefit from extensive restructuring, but that an overhaul would be politically difficult given the substantial public interest in the firm. The company’s headcount of 21,000 is higher than it needs to, reflecting that the company’s importance as a generator of employment, and its labour costs are equivalent to 27% of revenue. The company’s investment policy in the past focused capital in areas like fixed-line service that have not show growth, while somewhat overlooking segments with recognised potential. Telkom’s management has been subject to changes after clashes with the Department of Communication. Furthermore, the company’s statutes force it to serve the whole market. While commercial competitors including Neotel are able to cherry-pick high-revenue niches – like gated communities, business parks and high-rise office blocks – Telkom risks losing these high-ARPU customers while still having to provide services in rural areas that make thin margins or even experience losses.

But the government may be content to keep Telkom ticking for the time being, treating it as an important Mobile subscribers by operator, end-2012 public service that provides essential infrastructure (as well as employment) for the country. The calculation is that the social goods that Telkom delivers justify the costs. This is particularly the case as the government looks to roll-out countrywide “universal” broadband by 2020. Now it is difficult to envisage this task without the participation of Telkom. Telkom is not cash-rich enough to implement universal broadband without extra financial support from the government (and perhaps other sources), but its extensive existing infrastructure, expertise and nationwide reach can be leveraged in broadband expansion. The Ministry of Communications is in the process of drawing up a plan to develop Telkom as a “national asset”, which may include more on the company’s broadband role – and provide some more clarity on its long-term ownership.

Failed Bid

In 2011-12, Telkom attracted interest from KT Corporation, South Korea’s second-largest mobile operator, which expressed interest in acquiring 20% of the company. However, in June 2012, KT put the acquisition plan on ice due to opposition from the South African government. Telkom had announced that the ARPU by provider, 2011-12 Cabinet opposed the sale; the company’s shares fell to an eight-year low on the news, reflecting the market’s enthusiasm for the sale and investor disappointment that the deal fell through. KT had dropped its offer from R36.06 ($4.40) to R25.60 ($3.12) per share, which probably affected the government’s decision. While the Korean firm said that it would consider another bid in the future, this now seems unlikely in the short term.

Alternatives

A sale or part-sale of Telkom could reinvigorate the legacy company, bringing in technical expertise – as well as capital – on both the fixed-line and mobile branches. The bid may have failed to make progress both because it was somewhat exploratory, and due to the government’s reluctance to see its capital in an important strategic asset diluted. The prospect of the company being merged or acquired has receded for the immediate future.

With involvement in Telkom seemingly on the back burner, other options have emerged for potential entrants, such as launching a mobile virtual network operator (MVNO) or acquiring an existing operator. Cell C is the obvious choice at the current time, given the size of the two big incumbents. A third possibility, launching a separate new traditional network, would be very capital-intensive, though the trend towards greater infrastructure sharing would reduce the burden of upfront investment.

Reports of overtures made by France Telecom to Cell C, and the company’s launch of its Orange Horizons unit in South Africa in January 2013, as well as opening a shop linked to the Africa Cup of Nations international football tournament, suggests that it is showing serious interest. Orange Horizons is a subsidiary of France Telecom’s mobile unit, Orange, which seeks out new business opportunities in countries in which Orange is not already a mass-market operator. A bidder for Cell C could potentially pursue a strategy of aggressive market-share growth, aiming to challenge for the second spot in the market. But this would be quite expensive and risky, given the firepower of MTN and Vodacom. A more realistic policy would target steady growth.

While Cell C is seen as the most likely acquisition target, a bid for 8ta or Neotel might also be on the cards, according to Pyramid Research, a US-based telecoms research company. “Each of these possible acquisitions would clearly require different levels of engagement and different strategies, with Cell C being closest to France Telecom’s core business and comfort zone,” the company said in a report. This view is widely shared by analysts interviewed by OBG, including Dobek Pater, the director of Johannesburg-based Africa Analysis, which focuses on the ICT sector.

Outlook

Despite high levels of penetration, operators continue to see subscriber numbers rise as they offer more attractive packages, leading to greater service usage. As prices cannot fall indefinitely, packages offering other benefits are becoming increasingly important. Operators are strongly pushing for greater take-up of data services to bolster ARPU and margins. The market’s size, solid ARPU and data growth are expected to attract a foreign entrant looking for stable returns.