Telkom returns to South Africas mobile market facing challenges ahead

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South African fixed-line operator Telkom returned to the country’s mobile market this month amid signs that subscriber growth in the sector could be slowing. Telkom has unveiled a new mobile brand called ‘8ta’ offering “prepaid voice and data products from launch” and postpaid products from next month. Telkom has been looking to launch its own mobile service since divesting its 50 percent stake in South Africa’s number one mobile player, Vodacom, two years ago. It has set an ambitious target of capturing as much as 15 percent of South Africa’s mobile market within five years.

As the incumbent (and market-leading) fixed-line player, Telkom’s early efforts in mobile are set to focus on bundling 8ta with its existing fixed-line, broadband and data services. At the end of its latest financial year (31 March 2010), Telkom had 4.3 million fixed-line customers, though this was a decline of 4 percent year-on-year as the firm felt the effects of fixed-to-mobile substitution and heightened competition from the likes of Neotel (an alternative fixed-line player). Total fixed-line voice traffic fell by 7.2 percent over the year as a consequence, though weaknesses in fixed-line were slightly offset by rises in broadband customers and data revenue. Telkom has also operated a WCDMA-based fixed-wireless service called ‘mobi’ since 2008, which had 16,300 customers by end-March. At a group level, Telkom was also affected by problems at its international operations (notably MultiLinks in Nigeria), which led to it reporting a 15.2 percent drop in EBITDA for the year to ZAR9.8 billion (US$1.4 billion) on revenues of ZAR37 billion, up just 0.7 percent.

Despite these challenges, Telkom has managed to put aside ZAR6 billion (US$880 million) to invest in its new mobile network over the next five years – some of this raised via financing and leasing agreements with network suppliers. It plans to build-out a network that will comprise 2,000 base stations within the first year. The network boasts 40 percent population coverage at launch, with the remainder covered via a five-year roaming agreement with MTN. It has stated that the all-IP based transmission and backhaul network will be ‘LTE-ready’ for when the time comes.

Telkom’s entry into the mobile market means that South Africa now has four mobile operators competing in a market that is already showing signs of maturity. According to Wireless Intelligence data, mobile penetration remains above 90 percent, but the South African market has contracted over the last 12 months, slipping below the 50 million connections mark earlier in the year. This was due in part to new regulations introduced in July 2009 requiring compulsory SIM card registration for all new and existing subscribers.

These trends are most evident at market-leader Vodacom, which – according to our estimates – saw its connections base fall by 8 percent year-on-year in Q3 as it continued with a strategy focused on value rather than market share. At the end of Vodacom’s last fiscal year (31 March 2010), the operator reported an annual 14.5 percent rise in South African EBITDA to ZAR18.6 billion on revenues up 5.7 percent to ZAR50.4 billion – despite reporting a 5 percent decline in customer numbers. However, Vodacom managed to grow its more lucrative contract customer base year-on-year, which led to double-digit growth in smartphone penetration and mobile data usage. It now claims a mobile data revenue share of 58 percent. Vodacom’s subscriber decline has seen second-placed MTN increase its market share by around 5 percent year-on-year to an estimated 37 percent in Q3 – no doubt also helped by MTN’s high-profile sponsorship of the 2010 FIFA World Cup held in South Africa during the summer.

Meanwhile, third-placed Cell C finally announced in Q3 the rollout of its first 3G networks in a bid to keep pace with its two larger rivals. The operator is jumping straight to 21Mb/s HSPA+ using 900MHz spectrum, and has switched on the network in several major metro areas in the past two months, including in Port Elizabeth, Bloemfontein, East London and Cape Town. The operator expects to cover 34 percent of the South African population with HSPA+ by the end of 2010 and aims for 67 percent population coverage by mid-2011.

All three incumbent mobile operators have been hit by moves by the regulator (ICASA) to reduce mobile termination rates, reducing them from a high of ZAR1.25 (peak rate) in November 2009 to ZAR0.40 within two years. Although a mobile start-up, Telkom Mobile is deemed a significant market player because of its fixed-line sister business and is expected to be ordered to comply with the regulations.

Matt Ablott, Senior Editorial Analyst, Wireless Intelligence:

Telkom has stated it has no desire to spark a price war in the South African mobile market and its first prepaid tariffs will not radically disrupt the market: calling to fixed-lines is up to 40 percent cheaper than on rival networks (the company claims), but calls to other networks work out slightly higher in some cases. It has, however, wisely scrapped peak and off-peak periods in a bid to present a simple flat-rate prepay offering, which should appeal to the low end of the market. Meanwhile, its postpaid (contract) deals will be unveiled next month, where we should see the first evidence of how Telkom plans to bundle mobile alongside its existing fixed-line products. The success of these packages will be key to Telkom Mobile building market share in the short term. Unlike most start-ups, Telkom has the advantage of an established brand and an existing billing relationship with millions of customers but it must be wary that its new mobile offerings do not quicken the pace of its fixed-line customer losses. Moving forward, building a state-of-the-art network from scratch will mean Telkom will be well placed to support next-generation mobile data services, though this will be dependent on which high-profile smartphones it can bring to its network. But in a market that is showing signs of maturity, the operator’s target of capturing a 15 percent share of the market looks overly ambitious.

South Africa Mobile Connections Q3 2010
Source: Wireless Intelligence