Cell C must ring up a target market
Meiki Maripane, a 28-year-old single mother of one, has been a Cell C prepaid subscriber for three years. Maripane, a sales representative, opted for Cell C because it's "cheap" and she gets to spend less than R100 a month.
Maripane and others like her have become a crucial part of Cell C's business strategy. The company entered the local cellphone market with a bang in 2001. It invited journalists and telecoms industry players to a swanky launch, where everyone who attended walked away with a cellphone and SIM card. It pumped millions of rands into its marketing and advertising budget, treating the public to some of the funniest ads on TV.
But six years down the line, those witty adverts are still to yield results. Cell C remains the sickly baby of the cellphone industry, unable to attract lucrative contract customers or make large forays into the prepaid market. Efforts to convert prepaid subscribers into post-paid have not been very successful.
Its 3 million subscribers are only 8 percent of the cellular market, dominated by Vodacom and MTN with 23 million and 13 million, respectively.
Cell C has not divulged its average revenue per user (ARPU); the only amount it has released is the R159 spent monthly by its prepaid subscribers and public phone users. Its ARPU is estimated to be quite low compared with Vodacom's R63 a month from its 19.9 million prepaid customers. MTN's prepaid customers spend R94 monthly.
The next few months are going to be a testing time for Cell C. The market was recently awash with speculation that majority shareholder Saudi Oger had received offers from various players, including Celtel, Africa's second-biggest cellular group. Apparently, Celtel balked at the price and Saudi Oger reconsidered selling.
So what went wrong? The most popular explanation is that Cell C was the last in the market. This meant that for a long time it had to rely on Vodacom's network. In addition, its incomes were weighed down by high interconnection fees it had to pay to Vodacom and MTN. Each time a Cell C user makes a call to another network the company pays its competitors R1.25 during peak times.
Cell C has lambasted telecoms regulator Icasa for not compelling the other established companies to reduce the interconnection fees – a move which would have enabled it to turn in profits.
Another explanation is that, unlike its competitors, Cell C does not provide advanced technology such as 3G or high-speed downlink packet access (HSDPA). Hence analysts expect some of its contract customers to switch to MTN or Vodacom.
Kgoitse Maphunye, an engineer at Siemens, has been with Cell C for about four years. He switched from MTN because his employer had a working relationship with Vodacom and Cell C. Now he plans to switch Vodacom because he needs 3G and HSDPA for work. The only upside on Cell C is a lower monthly phone bill: R500 compared with R800 when he was with MTN. "I save a lot of money … but I need more than that."
Cell C is yet to turn a profit and the balance sheet is weighed down by debt amounting to $850 million (R5.9 billion). Its first-quarter net loss widened from R186.5 million last year to R369.5 million this year. Last month ratings agencies Moody's and Standard & Poor's said Cell C was likely to default on its debt repayments.
Predictably, Cell C has dismissed the ratings, saying it will be able to service its debt with part of a R500 million loan from Nedbank as well as cash resources. It pays about R600 million a year on its euro- and dollar-denominated debt interests.
Industry observers say the strategy under Talaat Laham – the former chief executive who left last year – was deeply flawed. They say Cell C tried to be "everything to everyone" by targeting the high-end and low-end markets simultaneously, instead of picking a core market and focusing on it.
A former company executive, who spoke on condition of anonymity, says Cell C injected a lot of money into advertising to attract high-end users, who were already taken by Vodacom and MTN. This, the executive says, came in the face of telecoms experts' recommendations that Cell C should initially aim for subscribers earning less than R3 000 a month while it entrenched its position.
But the former employee cautions against laying all the blame at Laham's door. "The board took those decisions. The problem was that they thought they would be able to operate like Vodacom and MTN."
Khulekani Dlamini, a portfolio manager at Renaissance Asset Management, attributes Cell C's troubles to its late-entrant status and a high turnover in managers.
Key people who left include a "very knowledgeable" head of strategy, Paul Doany, who quit shortly after its launch. He was replaced by Jonathan Newman, who then left after Laham's departure. Dlamini says management changes typically lead to strategy reviews, and in most cases to new strategies that take time to show results.
In a bid to reverse its fortunes, Cell C brought in former Deutsche Telekom executive Jeffrey Hedberg as chief executive last year. He has been at the helm for more than a year and has rung up a few changes, appointing a turnaround team. It consists of chief technical officer Pierre Obeid, chief human resources manager Mike Campbell, chief strategy officer Harri Rauhala and chief corporate communications officer Zeona Motshabi.
Hedberg plans to double the subscriber base to 6 million by 2010. He wants to double revenue from the current R6.5 billion and break even by then.
The company has launched the Hola7 starter pack, branded by popular musician Zola. It has introduced free weekend calls between subscribers, a strategy it hopes will boost revenue by 25 percent.
In addition, it has formed a partnership with Virgin Mobile. Virgin Mobile South Africa operates as a service provider, piggybacking on Cell C's network.
Mobile number portability – switching between networks without changing cellphone numbers – had also been touted as a potential growth strategy. The company says it has gained 40 percent of subscribers who switched from MTN and Vodacom.
Under Hedberg's stewardship, Cell C targets living standards measures (LSMs) 3 to 7 – people with household income of less than R3 000. "The needs of LSMs 3 to 7 are just voice and simpler data services," Hedberg says.
The problem is that many in the targeted group don't spend a lot of money on their phones. Dlamini says the strategy is unlikely to translate into high profit unless Cell C increases its subscriber base to levels comparable to Vodacom and MTN.
Cell C will have to spend heavily to acquire and retain these subscribers – thereby squeezing margins. "Success hinges on being able to uniquely and innovatively access and expand the prepaid market while managing costs," says Dlamini.
So what does the future hold? Telecoms players, including the former executive who spoke to Business Report, point out that Hedberg is not growing the company but cutting costs, fuelling speculation that it will be sold once its books improve.
The big question is whether Hedberg can nurse the company to financial health. Rajay Ambekar, a portfolio manager at Cadiz African Harvest, says Cell C has a chance of being profitable even with an ARPU of less than R100, because LSMs 3 to 7 are the fastest growing market. "If you look at Vodacom and MTN's growth over the past few years, it comes from that market."
It may have taken a while, but its seems that Cell C can finally see for itself that to survive in the cut-throat cellular market, it has to aim low. The likes of Maripane are the market to go for, rather than high-end users who will place even bigger demands.
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