Is there still easy money to be made in South Africa’s cellular industry? For more than 15 years, the sun shone on the country’s two big mobile operators, Vodacom and MTN. The companies enjoyed an effective duopoly – despite the launch in 2001 of Cell C. Their shareholders reaped the dividends.
But about five years ago, the market began changing. Consumers started using their phones more to access the internet and data services, and proportionally less for making calls. Smartphone sales began to boom, and a new breed of over the top (OTT) providers – companies like Skype, owned by Microsoft, and WhatsApp, owned by Facebook – began providing (often free) alternatives to the network operators’ historic profit centers of voice telephony and text messaging.
They did this by leveraging the operators’ data networks. WhatsApp has decimated person-to-person SMS messaging; Skype, Viber and similar voice dialing services that route calls over the mobile operators’ data networks promise to do the same as next-generation 4G/LTE networks expand and as supported handsets proliferate.
The operators have found themselves in a quandary. By building these next-generation, high-speed data networks, they are effectively erecting the infrastructure on top of which the dreaded OTT providers can compete with them head-on in their most profitable business areas.
Industry bosses, like MTN South Africa CEO Ahmad Farroukh – who has warned that operators and OTT providers have to reach some sort of agreement if the former are to continue investing billions each year in network infrastructure – are adamant they won’t become ‘dumb pipes’. This is industry jargon for operators that provide low-margin telecommunications infrastructure in a utility-type model without profiting from the value-added services that flow across this infrastructure.
Operators want to retain their historically high profit margins by tapping into this value-added services business as voice margins decline. They’re looking to provide services like streaming media and mobile banking and e-commerce – taking them into competition with media companies and financial services institutions.
Both MTN and Vodacom have launched mobile banking solutions – the former recently concluded a deal with Pick n Pay, while the latter has relaunched M-Pesa – and both are looking at video-on-demand (VOD) services similar to America’s Netflix. But neither company has experience in the media industry or financial services and profitable success is far from guaranteed.
While all this has been happening, competition from more traditional competitors — the smaller network operators — has hotted up dramatically.
Cell C has taken advantage of falling termination rates — the fees the operators charge each other to carry calls between their networks — to slash call prices. Vodacom has been quick to respond to the challenge; MTN followed later, but only after it lost significant market share to its smaller rival.
Voice tariffs have probably now fallen as far as they will. Cell C, the instigator of the price war in mobile voice, seems to be back-pedaling a little on previous aggressive price cuts, especially in data, where it’s recently hiked out-of-bundle charges. Vodacom, although reacting to Cell C’s aggressive moves, has been able to hang on to higher prices than its rivals in voice and data services, perhaps because it has a superior network.
Cell C, burdened by debt that some industry insiders say runs into well over $850 million, is in a difficult position. Although it’s won market share in recent years, it is still short of the 25% target its former CEO, Alan Knott-Craig, said it needed to ensure its future success.
Telkom, meanwhile, has effectively given up on the idea of being an infrastructure competitor in the mobile market, with its plans to outsource management of its radio access network to MTN. Unless something spectacular goes wrong, that deal should be wrapped in early 2015.
The future of Cell C is what will determine the shape of the industry for the rest of the decade. Are its shareholders prepared to continue fighting a war of attrition against Vodacom and MTN? Or will they look to sell the business? And who would buy it? France’s Orange, perhaps? Or India’s Bharti Airtel? A sale to a well-funded foreign investor keen to shake up the South African market could up the stakes dramatically.