Vodacom and MTN are aggressively competing for the crown of best mobile network in South Africa, while Telkom is busy playing catch up, and Cell C is getting left behind.
Capital expenditure (capex) indicates how much companies like network operators are investing in their networks.
Capex can include upgrades to a mobile operator’s radio access network and other infrastructure it uses to provide coverage.
In recent years, battery backup power at base stations has become a substantial component of operators’ capex.
Operators that out-invest their competitors tend to offer better network performance, provided they adopted the correct strategy for their capital expenditure.
South Africa’s biggest mobile network operator — Vodacom — recorded capital expenditure just shy of R11.15 billion for its South African operations during its 2021 financial year. That is an increase of 10.6% from the year before.
That is substantial when considering Vodacom South Africa’s service revenue increased by only 3.8% during the same period.
Vodacom’s aggressive capex increase could be a reaction to MTN’s continued dominance in mobile network quality in recent years.
For several years, MTN incurred a higher capex than Vodacom, but the red giant surpassed the country’s second-biggest operator in 2020.
MTN has repeatedly beaten Vodacom in MyBroadband’s Mobile Network Speed Test Reports.
It recently scored an average download speed of 73.39Mbps in the Q1 2022 report — far ahead of Vodacom’s average of 44.32Mbps.
MTN reported capital expenditure of R10.41 billion on its South African operations in 2021, compared to R7.54 billion in 2020.
Across MTN’s entire group, it spent more than 60% of capex on its radio access network and site infrastructure.
Only about 10% was used on its core and transmission networks.
MTN recently completed a R6.4-billion sale and lease-back deal of its towers. It would reinvest the proceeds in “strategic growth opportunities”, MTN said.
Although Telkom has competed aggressively in the mobile space, it has played catchup with Vodacom and MTN since it first launched 8ta in 2010.
As Telkom’s mobile network launched over 15 years after Vodacom and MTN, it is far behind the other two operators when it comes to coverage.
Telkom has entered into roaming agreements with Vodacom and MTN to extend its reach.
Although it is only due to report its latest annual results next week, Telkom’s 2020/2021 financials give an indication of its capex approach.
Last year, Telkom had capex of about R7.69 billion, with R4.5 billion going towards its mobile division. That represents an increase of 22.5% in capex.
These figures do not include expenses on the Telkom Group’s BCX, Gyro, or Yep! divisions, which don’t form part of its mobile business.
For the first six months of its latest financial year, capex was up 22.7%.
Cell C is actively decommissioning its radio access network and cutting expenditure due to severe financial challenges.
As a result, its capital expenditure was R195 million in 2020.
In its 2020 financial results presentation, Cell C estimated it would have to spend about R12.4 billion every year to try and compete with Vodacom and MTN.
It also estimated it would take around 18 years to achieve — assuming it builds 400 sites per year and its competitors build none.
Even ignoring the wholly impractical timeline, this would be an impossible endeavour.
Cell C’s net service revenue was around R13 billion in its 2020 financial year, and its outstanding debt has put it on the brink of bankruptcy.
For this reason, Cell C has chosen to stop investing in its own cellular infrastructure.
Its contract subscriber now roams on Vodacom’s network, and Cell C has struck a deal with MTN to build and manage its cellular network.
The graph below shows the capex and service revenue of South Africa’s three biggest mobile networks — Vodacom, MTN, and Telkom.
Viewing capex in relation to mobile revenue is a ratio called capital intensity.
It tells you what percentage of income an operator spends on their network, and illustrates the advantage big operators have over smaller ones.