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SA cellphones pass two affordability tests
ALAN KNOTT-CRAIG
There are really only two methods to determine whether cellular tariffs are relatively expensive or not. The first is merely to compare them with tariffs in other countries. The second is to determine whether tariffs are broadly affordable.
First, comparing South African prepaid cellular tariffs to those in other countries, the aggregate retail tariffs in Namibia, Egypt, Morocco, Kenya and many other African countries are more expensive than South Africa.
In Zambia, Uganda, Malawi and Botswana tariffs are cheaper than in South Africa. Looking further afield, we find that tariffs in Malaysia, Greece, the UK, New Zealand, Belgium and Australia are on average more expensive than in South Africa. Hungary`s, on the other hand, are cheaper than South Africa`s.
Local tariffs in Brazil are cheaper, but long-distance tariffs more expensive. SMS tariffs in South Africa are among the cheapest in the world, and roughly half of those in the UK and Germany.
But the most telling comparison of all is the South African community services telephone tariffs, which are probably the lowest in the world, providing an even more affordable service to those who need it most.
Vodacom carries no less than 80 million minutes of calls a month from these community service telephones. The fact is that cellular calls in South Africa cost about the same as the average cellular call worldwide where a competitive environment exists, and that community services calls in South Africa are probably the cheapest in the world.
Looking to the second measure of whether a cellphone call is too expensive, its affordability can be accurately established by considering what percentage of the population has a cellphone and uses it. This is called penetration.
High penetration reflects an affordable service. South Africa has by far the highest penetration of cellphones in Africa, distantly followed by Namibia, Kenya and Egypt, which nevertheless have relatively high penetration rates and slightly more expensive tariffs.
South Africa has more than 25 million cellphones in use, and every month an additional 1 million people connect to Vodacom, MTN or Cell C. This is one of the highest growth rates in the world and reflects one of the most impressive, if not the most impressive, increases in cellular telephone penetration in any developing country.
It is interesting to note that developing countries with very low cellular tariffs such as Zambia, Sierra Leone, Uganda and Malawi also have some of the lowest penetration rates. The reason for that is clear. If the cellular rates are so low that investors who build the cellular networks are receiving a mediocre return on their investment, they simply do not invest in very big cellular networks, with the result that the population cannot easily access telephones.
Very low cellular rates can therefore be as counterproductive to penetration as the very high cellular rates found in Niger, Chad and the Republic of Congo, for example.
In 1993, telephone penetration in South Africa was less than 10 percent. In 2000 penetration was about 15 percent. Today it stands at over 51 percent, and by 2008 it will have exceeded 75 percent - one of the most remarkable achievements in the world and a reflection of a broadly affordable service.
My view is that as penetration approaches 75 percent to 100 percent, prices will reduce to less than half of what they are today.
The past year has already seen reductions of between 10 percent and 90 percent for various cellular products. This continued reduction in tariffs will be driven by a combination of new and more efficient technologies and more competition, not through regulation.
Regulation of tariffs in a competitive and successful market where penetration is increasing rapidly is an intrusive contradiction, and a strong deterrent for investment. The vast majority of countries that have more than one cellular operator offer potential customers the option of entering into 12-month to 24-month contracts in return for free or subsidised handsets or reduced tariffs. These contracts are always associated with tariff plans that require minimum monthly spending.
The economics are clear. The higher your minimum monthly spending, the greater the subsidy (or discount) the network operator is prepared to offer. The lower the guaranteed minimum monthly spending, the lower the subsidy the operator is prepared to offer. The shorter the contract, the lower the subsidy. The longer the contract, the higher the subsidy.
In South Africa more than 90 percent of cellular customers do not have contracts. They can and do move between networks based on the best deal on offer, as is reflected in the prevalent churn of about 30 percent in the prepaid market. That means 30 percent of prepaid customers choose to either change their network or no longer have a cellphone every year.
Contract customers, on the other hand, display a churn of about 10 percent, even though they have entered contracts. What, then, is the real benefit of consumers entering a contract with a cellular network operator in return for subsidised handsets?
The cost of a handset has ranged from $100 (R650) to more than $1000 over the past 10 years.
These prices represent barriers to entry for the vast majority of consumers, especially in developing countries. Until 1997 all handsets in South Africa were subsidised. Today only about 100000 handsets are subsidised each month. These subsidised handsets facilitate entry by consumers into the cellular market.
Since subsidised handsets ultimately find their way into the prepaid market, prepaid customers also benefit from the removal of the barrier to entry, hence the astounding growth in the prepaid market.
There are 1.9 billion cellular users in the world today of whom the majority are prepaid. Ten years ago there were less than 100 million cellular users in the world.
Very few countries have halted the practice of subsidised telephones associated with contracts. Finland and South Korea are two countries that have. Finland now enjoys a cellular growth rate of 4 percent and South Korea enjoys a cellular growth rate of 9 percent, compared with South Africa`s growth rate of 33 percent.
Tariffs did not reduce in either of these countries. Cellular operators spent money that had previously been used to subsidise telephones on other marketing innovations to lure customers to their networks. But customers could no longer afford the newest cellphones due to lack of subsidisation. So the consumer did not benefit and, indeed, in my view, was prejudiced, in that most of the consumers were shut off from new technology.
Finland and South Korea are not considered examples of great innovation in telecommunications. Indeed, they are slightly dull. The two most compelling goals for any country in the field of telecommunications are, first, a high level of capital investment in extending, improving and maintaining its telecommunications infrastructure. Second, and equally important, is that a country strives to achieve a telephone penetration of 100 percent. If these two goals are achieved then it is fair to say that all of the population has access to a telephone and can afford such access.
Tariffs that are too low result in too little investment, which in turn results in too little infrastructure and low penetration. Tariffs that are too high also result in low penetration. This is part of what is called market failure. The market has failed to provide the population of a country with access to telephones.
More than 94 percent of the South African population lives and works within cellular coverage.
These cellular networks have required an investment of no less than R50 billion to date.
They will require a further investment over the next 10 years of another R100 billion.
The success of the South African cellular industry has been strong investment, strong competition and affordable prices. These three factors are inextricably linked, with strong continued investment being the clearest indicator of a healthy industry.
The market in South Africa has exceeded everyone`s expectations and will continue to do so. It has not failed. It was not regulation that created the success; it was the courage of those who believed in democratising the telephone and who invested and worked to achieve that dream.
SA cellphones pass two affordability tests
ALAN KNOTT-CRAIG
There are really only two methods to determine whether cellular tariffs are relatively expensive or not. The first is merely to compare them with tariffs in other countries. The second is to determine whether tariffs are broadly affordable.
First, comparing South African prepaid cellular tariffs to those in other countries, the aggregate retail tariffs in Namibia, Egypt, Morocco, Kenya and many other African countries are more expensive than South Africa.
In Zambia, Uganda, Malawi and Botswana tariffs are cheaper than in South Africa. Looking further afield, we find that tariffs in Malaysia, Greece, the UK, New Zealand, Belgium and Australia are on average more expensive than in South Africa. Hungary`s, on the other hand, are cheaper than South Africa`s.
Local tariffs in Brazil are cheaper, but long-distance tariffs more expensive. SMS tariffs in South Africa are among the cheapest in the world, and roughly half of those in the UK and Germany.
But the most telling comparison of all is the South African community services telephone tariffs, which are probably the lowest in the world, providing an even more affordable service to those who need it most.
Vodacom carries no less than 80 million minutes of calls a month from these community service telephones. The fact is that cellular calls in South Africa cost about the same as the average cellular call worldwide where a competitive environment exists, and that community services calls in South Africa are probably the cheapest in the world.
Looking to the second measure of whether a cellphone call is too expensive, its affordability can be accurately established by considering what percentage of the population has a cellphone and uses it. This is called penetration.
High penetration reflects an affordable service. South Africa has by far the highest penetration of cellphones in Africa, distantly followed by Namibia, Kenya and Egypt, which nevertheless have relatively high penetration rates and slightly more expensive tariffs.
South Africa has more than 25 million cellphones in use, and every month an additional 1 million people connect to Vodacom, MTN or Cell C. This is one of the highest growth rates in the world and reflects one of the most impressive, if not the most impressive, increases in cellular telephone penetration in any developing country.
It is interesting to note that developing countries with very low cellular tariffs such as Zambia, Sierra Leone, Uganda and Malawi also have some of the lowest penetration rates. The reason for that is clear. If the cellular rates are so low that investors who build the cellular networks are receiving a mediocre return on their investment, they simply do not invest in very big cellular networks, with the result that the population cannot easily access telephones.
Very low cellular rates can therefore be as counterproductive to penetration as the very high cellular rates found in Niger, Chad and the Republic of Congo, for example.
In 1993, telephone penetration in South Africa was less than 10 percent. In 2000 penetration was about 15 percent. Today it stands at over 51 percent, and by 2008 it will have exceeded 75 percent - one of the most remarkable achievements in the world and a reflection of a broadly affordable service.
My view is that as penetration approaches 75 percent to 100 percent, prices will reduce to less than half of what they are today.
The past year has already seen reductions of between 10 percent and 90 percent for various cellular products. This continued reduction in tariffs will be driven by a combination of new and more efficient technologies and more competition, not through regulation.
Regulation of tariffs in a competitive and successful market where penetration is increasing rapidly is an intrusive contradiction, and a strong deterrent for investment. The vast majority of countries that have more than one cellular operator offer potential customers the option of entering into 12-month to 24-month contracts in return for free or subsidised handsets or reduced tariffs. These contracts are always associated with tariff plans that require minimum monthly spending.
The economics are clear. The higher your minimum monthly spending, the greater the subsidy (or discount) the network operator is prepared to offer. The lower the guaranteed minimum monthly spending, the lower the subsidy the operator is prepared to offer. The shorter the contract, the lower the subsidy. The longer the contract, the higher the subsidy.
In South Africa more than 90 percent of cellular customers do not have contracts. They can and do move between networks based on the best deal on offer, as is reflected in the prevalent churn of about 30 percent in the prepaid market. That means 30 percent of prepaid customers choose to either change their network or no longer have a cellphone every year.
Contract customers, on the other hand, display a churn of about 10 percent, even though they have entered contracts. What, then, is the real benefit of consumers entering a contract with a cellular network operator in return for subsidised handsets?
The cost of a handset has ranged from $100 (R650) to more than $1000 over the past 10 years.
These prices represent barriers to entry for the vast majority of consumers, especially in developing countries. Until 1997 all handsets in South Africa were subsidised. Today only about 100000 handsets are subsidised each month. These subsidised handsets facilitate entry by consumers into the cellular market.
Since subsidised handsets ultimately find their way into the prepaid market, prepaid customers also benefit from the removal of the barrier to entry, hence the astounding growth in the prepaid market.
There are 1.9 billion cellular users in the world today of whom the majority are prepaid. Ten years ago there were less than 100 million cellular users in the world.
Very few countries have halted the practice of subsidised telephones associated with contracts. Finland and South Korea are two countries that have. Finland now enjoys a cellular growth rate of 4 percent and South Korea enjoys a cellular growth rate of 9 percent, compared with South Africa`s growth rate of 33 percent.
Tariffs did not reduce in either of these countries. Cellular operators spent money that had previously been used to subsidise telephones on other marketing innovations to lure customers to their networks. But customers could no longer afford the newest cellphones due to lack of subsidisation. So the consumer did not benefit and, indeed, in my view, was prejudiced, in that most of the consumers were shut off from new technology.
Finland and South Korea are not considered examples of great innovation in telecommunications. Indeed, they are slightly dull. The two most compelling goals for any country in the field of telecommunications are, first, a high level of capital investment in extending, improving and maintaining its telecommunications infrastructure. Second, and equally important, is that a country strives to achieve a telephone penetration of 100 percent. If these two goals are achieved then it is fair to say that all of the population has access to a telephone and can afford such access.
Tariffs that are too low result in too little investment, which in turn results in too little infrastructure and low penetration. Tariffs that are too high also result in low penetration. This is part of what is called market failure. The market has failed to provide the population of a country with access to telephones.
More than 94 percent of the South African population lives and works within cellular coverage.
These cellular networks have required an investment of no less than R50 billion to date.
They will require a further investment over the next 10 years of another R100 billion.
The success of the South African cellular industry has been strong investment, strong competition and affordable prices. These three factors are inextricably linked, with strong continued investment being the clearest indicator of a healthy industry.
The market in South Africa has exceeded everyone`s expectations and will continue to do so. It has not failed. It was not regulation that created the success; it was the courage of those who believed in democratising the telephone and who invested and worked to achieve that dream.
