Vodacom is facing a big challenge: it needs to make data more affordable and increase its network investment, but a lack of data revenue growth is forcing the company to make tough decisions.
Vodacom’s trading update for the quarter ended 31 December 2018 showed a decline in mobile voice (0.5%), mobile data (0.4%), and mobile messaging (10.9%) revenue in South Africa.
While voice and messaging declines were expected, mobile data revenue has been a big growth driver for the company in recent years.
The decline in data revenue came despite a 41.4% increase in data traffic on its South African network.
Active smart devices on Vodacom’s network also increased by 13.3% to 20.2 million, with average monthly usage per smart device increasing by 31.9% to 1.1GB.
The demand for mobile data therefore remains strong, but the lack of data revenue growth must be keeping Vodacom executives up at night.
Data is seen as the main growth driver for mobile operators, and Vodacom will have to find ways to kick-start its data revenue growth again.
The chart below shows the decline in Vodacom’s data revenue growth in recent years.
Vodacom’s decisions explained
Several of Vodacom’s announcements in recent months have also raised eyebrows, as they were not expected from the largest mobile operator in the country.
- In February, Vodacom announced that it will implement price increases on selected packages on 1 April 2019 – which included higher prices for many of its data products.
- Vodacom is also the only mobile operator charging customers to transfer data, which is required under ICASA’s End-User and Subscriber Service Charter.
- After years of claiming to have the best mobile network in South Africa based on objective network performance measurements, it is now using other metrics to substantiate this claim.
These decisions may seem unrelated, but they are all caused by the same thing: money.
There is pressure on Vodacom to show revenue and profit growth, and its latest results show that this is not easy to achieve.
ICASA’s new data regulations have also put additional pressure on the company’s data revenue, and Vodacom’s decisions to increase prices and charge for data transfers are measures to reverse declining revenues.
Best network fight
One of Vodacom’s biggest expenses is its continued network investment, which exceeds R7 billion per year.
Despite this large annual investment, Vodacom has been lagging behind MTN – which has pumped over R43.6 billion into its network in South Africa over the last four years.
The result of MTN’s huge network investment means it has overtaken Vodacom as the leader in network quality, as shown in MyBroadband and P3’s recent network test results.
Vodacom has always prided itself in having the best network in South Africa and it is aware that it needs to act to catch up with MTN.
However, without strong revenue growth it is difficult to convince shareholders to spend more on network improvements.
This explains why Vodacom is now using measures like customer satisfaction and brand awareness for its “South Africa’s best network” claim, instead of objective network performance metrics.
Share price pressure
Vodacom’s challenges are clearly shown in its share price over the last year, which declined from R150 per share to around R113 per share.
A great company with world-class executives
Vodacom is facing a challenging road ahead with continued pressure on data prices and increased competition from MTN, Telkom, Rain, and Cell C.
The smaller operators’ only hope to compete against Vodacom and MTN is offering a better value proposition to consumers.
Recent roaming agreements which give Telkom and Cell C access to Vodacom and MTN’s LTE networks will further stimulate competition.
These pressures may seem like insurmountable obstacles for Vodacom, but it would be foolish to write off the company.
It remains the dominant telecoms player in South Africa, with strong backing from its parent Vodafone, and has a valuable asset: its strong leadership team.
This includes South African telecoms veterans Shameel Joosub as CEO and Andries Delport as CTO.
These executives have been through similar challenges before and have found ways to continue to grow. This time around it should be no different.