Telecoms Battlefield

Published 8 years ago
Telecoms Battlefield

In a statement issued in September, the Independent Communications Authority of South Africa (Icasa) said: “The ICT sector has been and continues to undergo rapid technology changes with far reaching implications for the local and international industries.”

The regulator is right and some hard decisions need to be made. In May 2014, Vodacom and Neotel announced a $557-million deal for the transfer of license control from Neotel to Vodacom; public hearings were held by Icasa at the beginning of this year, revealing that not everyone is pleased.

The deal will be great for Vodacom, giving it the spectrum it needs, fiber infrastructure and a decent wedge of the enterprise market, where Neotel has placed its focus.


“The regulator has to do the right thing and take back the spectrum and allocate it to everyone. If they allow the deal to go through, then they are sending the message that they don’t want competition,” Cell C’s Chief Executive Officer, Jose Dos Santos, said.

The fact that Cell C uses Neotel’s infrastructure for its backhaul and the data center for billing probably provides plenty of motivation for the company to prevent the merger.

“One needs to be very careful because spectrum in itself doesn’t create success. Spectrum with investment is what assists you,” says Shameel Joosub, Vodacom’s Chief Executive Officer.

Joosub says Vodacom has the least amount of spectrum despite being the largest network.


The Competition Commission is the field marshal in this battlefield. It was therefore fitting that I sat down with the commissioner, Tembinkosi Bonakele, and Hardin Ratshisusu, the acting deputy commissioner and head of mergers and acquisitions, at the commission’s offices in Pretoria.

In making a decision on mergers, the Competition Commission investigates and analyses the impact the merger will have on competition and public interest issues.

“We are not here to clip wings. Mergers that will bring about innovation and efficiencies, but without reducing competition, are quite welcome,” says Ratshisusu.

In large mergers, such as the one proposed by Vodacom and Neotel, the commission makes a recommendation to the tribunal. The commission says it works on the current market structure and is unable to take into account the mere possibility of other mergers that may occur. It says it essentially tries to predict the future, post-merger, and what the consolidation of market share will do to price and product availability.


There has been a lot said about how long this process is taking. Joosub told CNBC Africa how extremely frustrating it is. He sees Neotel as an opportunity for his company to grow and the mix of mobile and fixed-line as very important for the company’s future.

“The question really is how long can Neotel cope without the requisite level of investment that is needed,” he adds.

The merger approval timeline varies based on the complexity of the issues and stakeholder engagement. There are plenty of stakeholders in the telecoms space. At the time of the interview, Ratshisusu said they were 80% of the way to a decision.

“If they [Competition Commission] do give the go ahead for the deal it’s going to have a list of conditions attached to it, particularly along the spectrum and wholesale,” says Richard Hurst, Senior Analyst at Ovum.


The commission says the market is evolving and it’s hard to say where it is going since it does not know future policies or technological advancements. It also says that it is not for them to deal with the issue of spectrum.

The reality is that it’s cheaper to buy spectrum than increase the number of base stations.

Will the Vodacom/Neotel deal benefit the man in the street? Hurst says there won’t be immediate tangible benefits to customers, but that they can expect greater quality of service. Vodacom customers were shocked to learn that the company was increasing contract prices.

“It’s been a tough two years for the industry in totality and obviously the whole mobile termination rate debacle didn’t help the situation,” says Joosub.


One of the issues the telecoms business is facing is the increase in data consumption – which requires investment in extra capacity. There are also exchange rate and inflationary pressures to deal with. Input costs are high, times are hard and everyone is working to come out on top. Vodacom is not the only one worrying about the future.

MTN has been under pressure at home for a while now, despite doing well in Nigeria. Last September, MTN sold its stake in the Nigeria towers business for $1.8 billion. The operator, along with Vodacom, also bought out their Nashua Mobile subscribers for $176.6 million.

In a cautionary announcement, Telkom said: “Shareholders are further advised that Telkom and MTN South Africa remain in discussions regarding the potential extension of their existing roaming agreement to include bilateral roaming and outsourcing of the operation of Telkom’s radio access network, which if successfully concluded may have a material effect on the price of Telkom’s securities.”

“A deal won’t happen unless something changes significantly,” says MTN Chief Executive Officer, Sifiso Dabengwa.


MTN already has a network sharing agreement with Telkom so it could be waiting to see how the Vodacom/Neotel deal shapes up. There are those that feel that the government’s decision about its Telkom stake is causing the holdup.

“The government will be very reluctant to let go of their shareholding in Telkom. They have plans for Telkom in terms of the national broadband plan,” says Hurst. He says it’s more likely for government to get rid of its 13.9% stake in Vodacom, although it won’t open up enough money to help failing power utility, Eskom.

“Telkom has embarked on a strategy to improve performance and one of the key considerations in respect of this strategy is to grow beyond its core business of connectivity by expanding into ICT services,” said Business Connexion (BCX) and Telkom in a joint announcement.

BCX and Telkom withdrew the application to transfer control of BCX licenses to Telkom for $211 million. The two companies say they did not need Icasa approval for the deal based on their review of the Electronic Communication Act. The Competition Commission recommended that the deal for a change in control of shareholding of BCX to Telkom be approved with conditions.

“Telkom, being the largest provider of wholesale leased lines to downstream customers, has the ability to foreclose its downstream rivals from access to these wholesale leased lines which are essential inputs for the provision of downstream services including managed network services (MNS), value-added network services (VANS), hosting and information technology services (ITS). The commission also found that the merger will result in the merged entity having the ability and incentives to engage in bundling strategies that may result in anticompetitive effects,” says the Competition Commission.

The Competition Tribunal determined Telkom’s $187.5 million offer for BCX, nine years ago, would adversely affect downstream competition.

“The mergers on the face of it look like they are going to reshape the entire sector, but we don’t know what that world will be like,” says Bonakele.

Hurst believes the ICT sector will focus on efficiency for a while to bring down costs, meaning the industry-wide restructuring we have seen will continue.

Vodacom’s strategy has been to invest heavily in its network, including the Nashua Mobile acquisition. Joosub says the company has spent close to $781.3 million in South Africa this year, with a further $1.3 billion earmarked for next year.

The South African power crisis has, according to Joosub, resulted in the company spending $6.2 million on diesel generators. He would like the industry to work together in powering through some of the issues and share input costs. He also calls for a better relationship between government and the industry.

Vodafone, the majority stakeholder in Vodacom, finds itself fighting a merger in Britain, with merits similar to those Cell C is bringing to the forefront in South Africa. It is not uncommon for global telecoms companies to find themselves on both sides of the fence, depending on what suits them.

Vodafone wants Britain’s Competition and Markets Authority to set tough conditions on the $17.2-billion BT/EE merger. EE is Britain’s biggest mobile operator, the company is owned jointly by Deutsche Telekom and Orange.

It’s still unclear what South Africa’s ICT picture will look like in a year’s time.

With a harsh operating environment impacting company performance, tight regulation and an ever growing demand for data, the Competition Commission, will have its work cut out for it. Whatever happens, there are likely to be casualties.