Big and small operators disagree on the industry’s trajectory

Four main mobile operators and two fixed-line players cater to subscribers in a market that – like much of the emerging world – is seeing slowing subscriber growth and price cuts encourage a shift towards new value-added services. The country’s infrastructure remains among the most competitive on the continent, although operators are grappling with mobile termination rates and the growing role of over-the-top (OTT) players, as well as policy clarity on spectrum allocation and local loop unbundling (see analysis).

Regulation

The World Economic Forum’s “Global Information Technology Report 2014” scores South Africa highly for its legal system and regulatory environment. The Independent Communications Authority of South Africa (ICASA), the telecommunications sector regulator, provides consumer protection, competition oversight and works to improve retail access.

ICASA held public hearings in the autumn of 2014 to evaluate the competitiveness of the industry. Delays by government agencies were cited as the biggest problem facing mobile operators, particularly in terms of getting permission to build infrastructure – obtaining wayleaves can take up to a year in some parts of the country. Spectrum allocation delays were also cited as inhibiting industry progress (see analysis).

Two new laws were passed in early 2014 – the ICASA Amendment Act of 2014 and the Electronic Communications Amendment Act of 2014 – that clarify ICASA’s powers, duties and alignment with broad-based black economic empowerment initiatives; improve the governance provisions of a specialised telecoms agency; and refine licensing issues. The ICASA Amendment Act also substantially increases maximum sanction fines and expressly requires consideration of Ministry of Communications policy and directives.

Fixed Line Players

As with nearly every market in Africa, fixed-line activity tends to be fairly modest compared to mobile growth; however, targeted infrastructure programmes such as fibre-optic and broadband initiatives have helped to spur growth in some areas.

Telkom was the telecoms monopoly under the closed economy during the apartheid years. It continues to operate in the fixed-line segment, as well as in the mobile space. The company was wholly government owned until 1997, when Telekom Malaysia and the American company SBC Communications bought a 30% stake. Today, the South African government owns a combined total of over half of Telkom.

Competition in the fixed-line sector was introduced in 2006 when Neotel was licensed and began providing fibre broadband connections. India’s Tata Group held a 67% stake in Neotel prior to Vodacom’s bid for the company in May 2014.

Mobile Operators

On the mobile side, Vodacom, MTN, Cell C, Telkom’s subsidiary Telkom Mobile and Virgin Mobile compete for market share, with Business Tech calculating 2013 market share at 43%, 36.8%, 17.2%, 2.3% and 0.7%, respectively. Vodacom started as a joint venture between the UK’s Vodafone and Telkom, which unbundled its 50% share in 2008, subsequently paying it out to shareholders and reinvesting in starting a new standalone mobile subsidiary. Telkom sold 15% of its stake to Vodafone for R22.5bn ($2.13bn), with the remaining 35% unbundled to shareholders and listed on the Johannesburg Stock Exchange. Vodacom has a 47% market share by revenue, with 65% of the company held by Vodafone since 2009. Its large African footprint covers Tanzania, the Democratic Republic of Congo, Mozambique and Lesotho.

The second-largest operator, MTN, is a publicly listed South African company that operates across more than 20 countries. The firm’s international growth has historically been driven by cash from domestic operations. In recent years, however, MTN’s South African portfolio has been underperforming.

While the group’s revenues were up 12% in 2013, the increase was only 3.1% after discounting the boost received from the rand’s depreciation. MTN South Africa’s revenues fell 6.1% to R39.7bn ($3.76bn), but were offset by growth in other markets in Africa. In 2013 lower outgoing voice revenue was a factor in weaker South African operations, with sales for the segment down 8.3% over the year to R19.3bn ($1.83bn).

Cell C, which started operations in 2001, is the third largest of the four main players, with a market share by revenue of 10%. Saudi Oger has effective control of 75% of the shares of the privately held operator, with the remaining 25% held by South Africa’s Cell SAF. Cell C has taken an aggressive approach to gaining market share, with an ambitious pricing schedule. Officials told an ICASA commission in September 2014 that regulators should take a more proactive approach to improve the sector’s competitiveness, as its “business plan is not sustainable without urgent intervention”.

Following the sale of its share in Vodacom, Telkom joined the mobile market as 8ta (pronounced “heita” – a local greeting) in 2011 to offset a declining fixed-line business, but has since rebranded as Telkom Mobile.

Virgin Mobile is the only mobile virtual network operator in the country and acts as the fifth operator. However, Virgin has had limited success in South Africa, due in part to fees paid for using Cell C’s network infrastructure. As of 2013, Virgin had only amassed 500,000 customers in South Africa, relying on its international branding to target the upper-end youth market.

Penetration

Overall subscriber growth has mirrored many of the trends seen elsewhere on the continent, with a steep growth rate that has reached the point of saturation. Starting from zero in 1993, mobile penetration topped 100% by 2010. According to a national ICT green paper published for public comment in January 2014, the mobile penetration rate currently stands at 136%. Citing the 2011 census, the paper reports 89% of South Africa’s 14.5m households had mobile phones, while under 15% had fixed lines.

By comparison, Research ICT Africa, a policy and regulation research network, found a fixed-line penetration rate of 18% in 2012, with urban and rural levels at 24% and 5.8%, respectively. Exact penetration rate figures are hard to come by in the mobile segment given that many people have multiple SIM cards for their phones and other devices such as USB modems.

Falling Prices

Although price competition between operators – spurred in part by Cell C’s aggressive campaigns – has improved affordability, rates are still considered to be comparatively high. In 2014 the World Economic Forum’s “Global Information Technology Report” ranked South Africa 112th out of 148 countries in the affordability indicator of its Network Readiness Index. Average mobile cellular tariffs are $0.51 per minute, according to the report, compared to close to zero for the highest-ranked African country, Liberia, which placed 5th of 148 countries. Mobile operators are free to set their own prices, and although they inform ICASA of new retail tariffs, there is no approval process. South Africa’s mobile operators all offer dynamic price plans, which vary according to call traffic and the time of day. While they still may rank comparatively high, prices have in fact been falling as mobile operators compete for market share. Rates have come down considerably in the past four years, from R1.37 ($0.13) to R0.50 ($0.05). In 2013 new plans brought average rates per minute to R1.2 ($0.11) for Vodacom and MTN, R0.99 ($0.09) for Cell C and R0.95 ($0.09) for Telkom Mobile, which further lowered rates to R0.29 ($0.03) in the third quarter. Cell C also reduced prices in 2013 with a new R0.66 ($0.06) per minute pre-paid plan, as well as three new post-paid R0.79 ($0.07) products. “The initial reason prices were so high was because Telkom had a monopoly on international calls. The moment the undersea cables were connected, data costs dropped. However, fixed-line ADSL still remains expensive because it is in the hands of one company,” Arthur Goldstuck, managing director of South Africa-based World Wide Worx, told OBG.

ARPU 

With tariffs falling, average revenue per user (ARPU) has been declining slightly; however, lower prices are encouraging longer and more frequent calls. Deloitte’s 2014 report on the future of African telecoms cites South Africa as a market with high net revenue potential, thanks in part to the its relatively high ARPU compared to the rest of the continent.

Prepaiid VS Postpaid

As is common in most emerging markets, pre-paid customers are responsible for the majority of activity. Based on 2013 research from World Wide Worx, 80% of mobile users in urban areas have pre-paid accounts, compared to 94% in rural areas. Rural pre-paid customers spent an average of R165 ($15.63) per month on mobile services, compared to R387 ($36.65) for contract users. Vodacom gained 2.3m pre-paid customers in the year-to-March 2014, a 9.5% increase. Data revenue increased 23.6% to R10.9bn ($1.03bn) and represented 22.7% of service revenue, compared with 18.4% in the previous year, demonstrating the increasing importance of data.

Voice is declining because South Africans prefer messaging. The World Wide Worx “Mobility 2014” report found that data spending increased at the expense of voice, with growing smartphone penetration accelerating this trend. Though still dominant, voice spending has fallen from 77% of phone service budgets in 2010 to 65% in 2013, compared to a doubling of the data budget from 8% to 16%. The 19- to 24-year-old age bracket was switching away the fastest.

Over The Top

The move away from voice has been impacted in part by the rise of OTT providers, such as Skype and WhatsApp, which offer services like voice calls and messages at cheaper rates than service providers. According to a Telkom panel speaking at ICASA’s public hearings in October 2014, OTT players will cost the sector $479bn between 2012 and 2020.

WhatsApp’s South African penetration, which increased from 26% to 53% from mid-2012 to the end of 2013 according to World Wide Worx, demonstrates the growing clout of these players. Mxit, a domestic instant messenger, also plays a prominent role, but fell from 7.5m to 6.5m active users over the period.

Telkom’s head of regulatory affairs and public policy, Richard Majoor, was cited in local media suggesting an interconnection surcharge for OTTs providing voice over IP, in addition to the new 14% value-added tax on international providers of digital goods. Cell C has moved in the opposite direction, announcing that it would not charge certain subscribers for data consumed on WhatsApp. Cell C CEO Jose Dos Santos told press that mobile carriers need to embrace OTT players, even partnering with them as a means to seize opportunities to add more value for customers.

Hardware

As of the end of 2013, there were an estimated 16.1m smartphones in use in South Africa, and while still concentrated in urban areas and higher income demographics, devices priced around $50 are making smartphones more affordable for middle-to-lower-income consumers. Several models will cater to this price range, including the Steppa – the R499 ($47) smartphone released in February 2014 by MTN. Based on Qualcomm’s reference designs, the phone features a customised Android 2.3 Gingerbread operating system. China’s Huawei Ascend Y220 has likewise entered the market, also priced below R500 ($47).

The most common smartphone brands among South African internet users in 2014 were Samsung, Blackberry, Nokia and Apple, according to Effective Measure’s August 2014 “South African Mobile Report.”

PwC research published in 2014 predicts that 72% of mobile phone users in South Africa will be using internet on their devices by 2018, representing a doubling of mobile internet users from the end of 2013, to 35.2m. Thecla Mbongue, senior research analyst at Ovum, told OBG that prices must come down further to increase low-income consumer spending. “One way to do that would be reducing import duties on devices,” she suggested. To this end, Nokia and Samsung have been working on policies to reduce device prices.

Fiinalising Connection Rates

The mobile termination rate (MTR), the cost an operator pays for calls routed through another network, has been a contentious issue in recent years. The smaller two operators, Cell C and Telkom Mobile, have been voicing concerns that they pay a higher volume of fees due to the larger customer base of MTN and Vodacom. ICASA has been trying to bring down MTRs to promote competition and lower prices for customers, in line with a glide path it set three years ago to lower MTRs.

ICASA announced in January 2014 that termination rates were set to halve to R0.10 ($0.01) by March 2016, following an earlier decision to cut the MTR from R0.40 ($0.04) to R0.20 ($0.02) starting March 2014. The two big operators, Vodacom and MTN, viewed lower rates as subsidies to their competitors, taking legal action against ICASA in March 2014. Vodacom claimed the cuts would cost it R1bn ($94.7m) in 2015, with MTN forecasting R450m ($42.6m) in lost revenues in 2014. In March 2014 the South Gauteng High Court deemed the new MTR structure “invalid and unlawful”.

The court then enforced the first reduction in termination rates on the basis of equity, granting ICASA a period of six months to recalculate the cost of termination. The authority published the final reduced telephone network connection rates at the end of September 2014. Vodacom and MTN will charge calls to their networks at an MTR of R0.20 ($0.018) starting from October 2014, dropping to R0.16 ($0.015) in 2015 and R0.13 ($0.012) by 2016.

Asymmetry fees favour smaller companies with market shares below 25% by allowing them to charge more to the larger operators. Under the initial MTR glide path, the fee would have dropped to R0.10 ($0.01) by March 2017. After the adjustment in September, MTN and Vodacom will now be charged R0.31 ($0.03) by Telkom and Cell C, which will decrease to R0.24 ($0.02) in September 2015 and R0.19 ($0.02) one year later.

Anti-Trust

The year 2013 saw developments in ongoing efforts by regulators to ensure a more competitive sector, with two sizeable payouts for market abuse and discriminatory practices. In 2002, a collective complaint was filed against Telkom on the grounds of anti-competitive practices, alleging the firm charged unfair access prices to downstream competition.

The plaintiffs, who included internet service providers (ISPs) and other value-added network providers in the country, pushed for a R3.5bn ($331.5m) fine, whereas Telkom proposed R27.3m ($2.6m). After a decade-long legal battle, the Competition Tribunal found in favour of the plaintiffs in August 2012, imposing a R449m ($42.5m) fine in April 2013, which accounted for 5% of Telkom’s market capitalisation at the time.

Just two months later, Telkom was subject to another fine of R200m ($18.9m) from an anti-competitive suit lodged in 2009 by ISPs alleging margin squeezing from 2005 to 2007. Telkom was obliged to reduce prices charged to ISPs over the next three years, and not increase them for another two years after that. The firm has been given 18 months to settle the first fine and three years to pay the second one.

Dealmaking

Facing an increasingly competitive regulatory environment, South Africa’s telecoms operators have been looking for new acquisitions to help diversify and expand revenue streams, with three capital-intensive deals announced earlier in 2014. In May 2014, Telkom launched a R2.67bn ($252.8m) bid for Business Connexion (BCX), an ICT services provider with annual revenues in excess of R6bn ($568.2m). The deal was subsequently accepted by shareholders in August 2014. According to local press, the acquisition will help the firms develop and profit from synergies in the increasingly interrelated fields of IT and telecoms.

Also in May, Vodacom purchased Neotel from Tata for R7bn ($662.9m), with Vodacom gaining 15,000 km of fibre to serve its high-speed connectivity provision ambitions. The deal enables new services for Vodacom, including fibre-to-the-home and fibre-to-the-business. At the end of 2013, Vodacom said that it planned to increase capital spending as a percentage of revenues from 13% to 17%. The firm had been investing around R7bn ($662.9m) annually in South Africa.

In another deal affirming the continuing consolidation of the telecoms and ISP markets, mid-2014 saw telco MTN acquire 50% of South African ISP Afrihost. The two companies have partnered since 2012, and this deal will allow MTN to expand broadband services to the small and medium-sized enterprise market.

Outlook

The erosion of the fixed-line market will continue as mobile penetration keeps ticking upwards. There will, however, be convergence in some areas, such as termination rates. Data will continue to dominate growth as voice revenues fall and prices get even leaner. Given the benefits of fibre-optic cables, particularly their low latency, high capacity and better quality, they will be the preferred means of carrying voice.