How to cut mobile data prices by 50%

A recent agreement between President Cyril Ramaphosa and Communications Minister Stella Ndabeni-Abrahams requires her to ensure mobile data prices are reduced by 50%.

This is a positive development. Lower data prices will result in more people going online and help to grow the economy.

What is important, though, is that the target is achieved through market forces and not a price-cut instruction to mobile operators.

To instruct mobile operators to cut data prices is tempting because it is easy and will gain a lot of political and public support.

Such an instruction is, however, similar to the late Zimbabwean President Robert Mugabe’s 2007 order to cut the price of basic goods and services by half to fight the high inflation rate.

Anyone with a basic economic understanding knew it would not achieve anything constructive and will cause more harm than good. They were proven right.

Instead of going the populist route, Ndabeni-Abrahams should focus on enabling operators to reduce prices through competitive forces.

The easiest way to achieve this is to give them more spectrum and make it easier to roll out infrastructure.

These interventions will lower the input costs to offer mobile data and encourage retail price cuts.

If you are sceptical about this strategy, you just have to look at the ADSL market to see the result.

ADSL prices remained stubbornly high for years because of high local and international transit prices.

The moment SEACOM landed and free and open peering took off, transit prices plummeted, which lowered input costs.

What followed was a revolution in the ADSL market, with capped and uncapped prices reducing rapidly.

The same can happen in the mobile data market if mobile operators are supported through more spectrum and other interventions.

Intentions versus results

Millions of South Africans who have been paying high prices for prepaid and out-of-bundle data see things differently.

They want the government to intervene by forcing Vodacom and MTN to cut prices and even give away free data.

So pervasive is this view that the Competition Commission ordered Vodacom and MTN to reduce data prices in 2019.

Consumers celebrated this intervention, but for the Competition Commission and the government to interfere in retail pricing in a competitive market is dangerous.

The intention may be noble, but the consequences of ill-informed policies can cause damage which is felt for years or even decades.

A good example is Telkom. The ANC government gave the company a five-year monopoly in the fixed-line market in exchange for Telkom improving telecoms infrastructure in South Africa.

Telkom had to roll out 2.8 million new fixed lines, of which 1.7 million were earmarked for historically under-serviced areas.

The intention behind the Telkom monopoly was mainly to improve access to communications services in underserved areas. Noble indeed.

The outcome, however, looked quite different. The new fixed lines disappeared soon after they were rolled out and telecoms prices in South Africa rocketed to unaffordable levels.

South Africa’s fixed-line and broadband prices were so high that only the wealthy could afford them.

Telkom’s monopoly resulted in the exclusion of poor people from the fixed telecoms market – the exact opposite of what was planned.

The country also lagged in broadband access for years because of Telkom’s poor ADSL rollout and its high data prices.

One would have expected the government to acknowledge that it had failed and roll back this disastrous decision. This did not happen.

When the DG of Communications was confronted with the fact that Telkom’s services were unaffordable, he dismissed it as “out of context”.

He said that people should look at the history and the big picture as regard to the development of infrastructure and service delivery of telecommunications in South Africa.

“The Telecommunications Act 103 of 1996 states that Telkom should offer affordable services and Telkom and feels that they are delivering affordable services,” he said.

And this illustrates the problem. Telkom’s monopoly resulted in high prices and poor service delivery, but politicians happily defended their decision.

In fact, the government decided to extend Telkom’s monopoly despite overwhelming evidence of the damage it did to the local telecoms market and the economy.

The damage done by the government’s decision to double down on its failed ideology is still felt in the local telecoms market two decades later.

The chart below shows the decline of fixed lines in South Africa. The decline after 2000 happened despite the strong demand for ADSL after its launch in 2002.

Telkom fixed lines

Competition to the rescue

The latest data from StatsSA shows that 90% of South African households rely solely on mobile services to stay connected.

Fixed lines are a luxury in South Africa, with only 7.2% of households having a landline in their dwelling.

In poor provinces like Limpopo, Mpumalanga, North West, and the Eastern Cape, landlines are nearly non-existent.

This raises the question of why the mobile industry was so successful in covering South Africa while Telkom failed spectacularly.

One reason is that wireless networks are much easier and more affordable to roll out than fixed lines.

There is another equally important reason – competition.

Unlike the fixed-line market which only had one player – Telkom – the mobile market initially had two players – Vodacom and MTN.

They were fierce competitors who pushed billions into their networks to try to outdo each other in coverage and network quality.

When Cell C launched in 2001, the race heated up even further, which resulted in nearly 100% population coverage.

The rivalry between Vodacom and MTN continues to this day and as a result, South Africans have access to world-class mobile networks.

The chart below shows the percentage of households who have a functional landline and cellular telephone in their dwellings by province.

Landlines and mobiles

Ideology nearly trumped common sense

Most people take it for granted that they have country-wide 3G and 4G coverage with excellent speeds. This is mainly a result of a competitive mobile environment.

What few people know is that competition was nearly blocked by the ANC.

In early 1993 cabinet ministers authorized two cellular licences, and the licences were put out to tender in April 1993.

Telkom was awarded half of one license. It then partnered with Vodafone and the Rembrandt Group to form Vodacom.

In September 1993 Mobile Telephone Network (MTN) was announced as the winner of the second cellular licence.

The table was set for the rollout of cellular services in South Africa, but this did not happen without significant battles to achieve this favourable outcome.

The ANC alliance was not happy with the proposed cellular regime, saying that it represented a unilateral restructuring of the telecoms industry – “a form of privatization through the back door”.

The ANC was opposed to privatising the public telecommunications network and wanted cellular to be a separate, autonomous parastatal service offered by Telkom.

A lot of political wrangling and compromises on both sides ultimately resulted in the issuing of two mobile licences.

Vodacom and MTN subsequently became two of the most successful companies in Africa and provide millions of South African citizens with communications services.

This success was mainly based on creating a competitive cellular environment, selecting the GSM standard, and the speedy licensing of the mobile operators.

Let competition do the work

The government should learn from its previous mistakes and trust in competition to achieve lower mobile data prices.

It should give spectrum to operators and make it as easy as possible for them to compete without any restrictions.

While government interventions like forced price cuts may have noble intentions, the long-term effects can be disastrous.

Overly regulated industries, especially when accompanied by uncertainty, suffer from a lack of investment, innovation, and competition.

This should be avoided to ensure South Africa remains at the forefront of mobile telecoms in Africa.

This is an opinion piece.

Now read: The truth about mobile data prices in South Africa

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How to cut mobile data prices by 50%