Cellular experience
At the turn of the century, European telecoms firms splurged about $250bn on 3G licences that promised to allow them to offer various new applications, including internet access. It was arguably the biggest spending spree any industry has undertaken in such a short space of time. And it led, after a while, to a bloodbath.
Heavily indebted and unable to implement the new technology speedily enough, the share prices of companies plunged and profits followed. Then 3G failed to catch on with consumers as predicted, and newer forms of technology such as wireless broadband started to overtake it. Some companies went under; others are still paying off debts.
The European 3G experiment is a key lesson for the local telecommunications market. Knott-Craig believes we are undergoing a similar situation in Africa as cellular operators scramble to get a foothold. There’s some evidence to back this up — for example, MTN paid a staggering $5,5bn to buy pan-African and Middle East player Investcom, and Celtel bid $1bn bid for a majority stake in Nigeria’s V-Mobile.
There is a strategy behind this buying spree — Africa is seen to be one of the world’s last big untapped markets. The mobile market, which is more flexible, accessible and has easier billing systems than fixed line telephony, has taken off in Africa.
Two years ago, mobile subscribers outstripped fixed-line subscribers by two to one, despite charges for cellphones being far higher than those for fixed lines. Granted, the growth has come off a low base, but it’s still impressive. Africa’s penetration levels are also a lure for foreign cellphone groups — the continent has the lowest overall mobile penetration rate of any region globally, at roughly 9%.
But there is a downside for cellular investors. The spectacular growth has a natural limit, that being the ability of Africa’s people to afford phones. The upper, richer segment of the market is already starting to approach saturation point. Cellular operators will only be able to grow as fast as African countries are willing and able to implement policies to develop their economies and uplift the poor. That includes opening up telecommunications markets to competition.
High prices and finite growth potential in Africa are clearly part of the reason Vodacom has been forced to accept that it may not be able to expand further into Africa, but let us not forget that it is also barred from moving north of the equator by 50% shareholder Vodafone.
The restriction, part of the original shareholder agreement, is unfortunate. While Vodacom may have little choice but to sit back for now, particularly as most of the bigger deals have been sewn up by other operators, new opportunities may open up in future which it won’t be able to take advantage of.
Any future growth for Vodacom will thus have to come largely from the domestic market, and there is certainly potential here. But the operator may find itself up against stiff competition in its attempt to add a wider range of services such as mobile television. Telkom, Sentech and several other players already plan to take advantage of the convergence trend by offering a “triple play” package of fixed-line services, broadband internet and television.
This has been made possible by the increasingly purposeful steps government is taking to open the telecoms market to competition. Already there are positive signs emerging, the most recent being Telkom’s decision to slash internet and international call prices.
There’s life yet in cellular operators but the comparatively easy run they’ve had in recent years may be coming to an end. The really hard part — competing — starts now.
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