Interview: Alan Knott-Craig, Karel Pienaar, Pieter Uys
In what areas do you expect to see growth within the mobile segment in the future?
ALAN KNOTT-CRAIG: Voice in South Africa is still growing, but it will become saturated at some point as there are only so many people and only so much they can say to each other. The great thing about data is that its growth is not related to population, and is instead a factor of volume, speed and price. If the price is low enough and the speed high enough, the possibility for growth is infinite. Voice also offers less opportunity for players to come in and do new things, whereas with data there are almost limitless opportunities with applications. Social networks are particularly interesting. Mobiles are just carriers. For young people today, the carriers themselves are of minimal importance and it is the social networks they choose that will determine which networks they are using.
KAREL PIENAAR: The market is experiencing huge growth in mobile space, and many mobile operators are moving beyond voice and data to evolve into full information and communications technology (ICT) providers. There are plenty of opportunities for new innovative players to grow within the sector. Data traffic and revenue increased three-fold during 2011. Although some perceive voice as having neared saturation, we are seeing double-digit revenue growth. In addition, the value proposition for lower living standards measure (LSM) segments – for whom penetration is only at 30-40% – is becoming more affordable through investments in rural base stations.
Cloud and shared computing services that can be offered in conjunction with connectivity – such as email server applications, hosting and storing – also offer huge growth prospects, especially for small firms. In the past, the speed and reliability of domestic connectivity was not good enough to provide affordable first-world ICT services, but with the arrival of more undersea cables, this is changing dramatically.
PIETER UYS: In the mobile segment, particularly in voice, there is currently healthy competition between four large competitors. In the 17 years since South Africa introduced mobile phone services, which coincidentally was at a time when fixed-line penetration stood at just 10%, SIM card penetration has topped 100% and availability of mobile coverage has reached 99.9%.
The next big drive is to provide everyone in the country with affordable internet access. Studies show that for African countries, a 10% increase in telecoms penetration results in a 0.9% jump in GDP. Taking this a step further, for every 10% increase in mobile internet penetration a country stands to realise GDP growth of 1.4%. In South Africa, not everyone needs or can afford a PC to access the internet, so smartphones will play a big role in bringing internet to the masses. With prices below the $100 barrier, we envision every South African having a smartphone within the next four to five years. To get the most out of this development, we need the whole ICT sector working together – no one company can do it alone. It requires an entire system, from the setting up of infrastructure to making the content and applications available. In the future, applications will drive the internet, as most of the population will access the internet through smartphones and tablets rather than computers. In this space, there are plenty of opportunities and we encourage new participants.
To what extent is there potential for further downward pressure on prices for mobile services?
UYS: South African tariffs are in line with many markets around the world. Over the past 12 months the effective price per minute on our network has dropped by 25%. This will not necessarily be reflected in our headline pricing, as the effective rate has been driven down by people taking advantage of promotional activity and off-peak discounts.
One must also remember that quality and price have to balance. For example, in the Democratic Republic of Congo recently, price competition was so intense and out of proportion, and led to such a bad service offering, that usage ceased and the government had to intervene and impose a price floor.
Competition is healthy, but prices need to come down in an orderly fashion. There is no point paying very little as a customer for something that you cannot actually use and benefit from.
PIENAAR: Branding South Africa’s prices as uncompetitive is unfounded – they are still relatively cheap by world standards. In a country where 40% of the population lives below the breadline, you would not see penetration over 100% if services were unaffordable. This country is recognised as a pioneer when it comes to establishing the prepaid market, which has allowed access to mobile services for all income levels.
We are also one of the few countries that offers uncapped data. Some of our customers are paying as little as R60 ($7.34) per month and using in excess of 8 GB a day; this must rate among the most affordable data offerings in the world. As Pieter mentions, judging voice pricing based on headline tariffs is irrelevant given the huge discounts available and the fact that outside peak hours calling is virtually free. In the 17 years since the industry began offering mobile services, we have not increased prices once. This is certainly not the case for other commodities.
KNOTT-CRAIG: In the 1970s South Africa was in the world’s top 10 in terms of telecoms capability. We are now rated 73rd and dropping fast. The reason is not penetration, where we are doing well, but poor pricing, quality and speed of data. Prices are not falling at the rates they should be. This is partly the fault of operators, but also results from cost structures that are not conducive to lower prices. As the fixed-line operator, Telkom should have been liberalised when the mobile operators came into being.
A common misconception is that competition alone will solve the problem. It can play a big part, but, when resources are limited, too much competition will drive prices up as companies are unable to achieve the economies of scale needed. At one stage, we had around 20 operators just in telecoms, and 17 have since gone bankrupt. This was completely unproductive and did not help the consumer at all. Companies lost their investments and those that survived could not get their costs down because of inefficient allocation of resources. To think that competition is the saviour is not always true. For national operators, unlike niche operators, telecoms is a numbers game. You cannot run a business with thousands of customers. You need millions – especially in a country with a smallish population spread over a large space. This partially explains why the US, Europe, India and China all do better on prices. You need at least three operators to avoid duopolies, but with more than that someone is going to lose their investment. The country cannot afford to have investments continually go sour.
Data is not growing as fast as it could because the government and the private sector are failing to realise that at the core, you need more fibre in the ground. You have to dig a trench, and the longer it takes the government to allow people to dig trenches, or if too many people are trying to dig the same trench, the further behind the rest of the world we will be. As a country we have not yet realised where we should cooperate to ensure more efficient allocation of resources, and where healthy competition is needed.
Is the growth of smartphone uptake sustainable?
PIENAAR: South Africans tend to adopt technology incredibly quickly. Even those in the lower LSM segments have become increasingly sophisticated with how they use their phones to do complex tasks.
Some 70-80% of our retail channels sell smartphones, for which South Africa is one of the world’s fastest growth markets. For the poorer segments of society, their first internet experience is often through their phone browser. With the price falling below the $100 barrier, an increasing number of prepaid customers are purchasing smartphones and actively operating data packages. As Pieter previously alluded to, there are direct correlations between a country’s GDP and its internet penetration rate, which means increasing internet access becomes an incredibly important criterion for future development. As an industry, we envision 100% internet penetration by 2020, and this will be driven primarily through an increased affordability and adoption of smartphones.
UYS: Accessibility is a major factor in smartphone uptake. Today one can buy a full touchscreen android for less than $100 with no contract commitment and a pre-paid data package of R60 ($7.34) per month. If you look at the country’s demographics, over half of the population is below 25, and they understand social media and the internet. This is why it is important to lower prices and increase smartphone ownership among students. Curriculum and course content can be loaded onto them, which will have far better results than supplying schools with outdated textbooks.
KNOTT-CRAIG: I do not think smartphones will ever fully take over from computers, but they might fill a gap for people who cannot afford computers. However, they do not have sole domain over what might fill that gap. Mobile phones are game-changers, but the increasing smartness of the mobile is part and parcel of technology moving ahead.
What approach do you think should be taken for the distribution of access to spectrum?
KNOTT-CRAIG: Data has become the platform for all innovation. We are all working hard to get the infrastructure in the ground to improve data volumes, pricing and speed, but it is challenging when spectrum is not allocated properly. It goes against the rules of natural economics for prices to come down while demand continues to exceed supply. Fibre-to-the-home is not realistic or optimal for an emerging country. Over the air is the best way to the consumer, and it is crucial that spectrum be used properly and not wasted. Prices for data should be at half the level they are. Inefficient allocation of spectrum is hampering attempts to get the cost down, and is a critical detriment to getting higher quality for lower prices.
UYS: Legislation in South Africa’s telecoms industry, which was very rigid concerning who receives licences for fixed, mobile and other bands, is now completely open for anyone to get a licence to do anything. There are currently over 300 licensed operators with the same licence that Vodacom has, though Vodacom has made significant investments and has the resources to commit more. If each of these operators were allocated 1 MHz of spectrum, nothing would happen because they lack the resources and knowhow to utilise it. Competition is welcome, but you cannot create competition just for the sake of it.
In data, penetration is still low and there is an urgent need to speed up coverage and affordability. Spectrum must be used in such a manner that it covers the most area as quickly as possible. Leading operators have the ambition and resources to speed up access, but they need more regulatory certainty around their investments. Access to spectrum, which has been on the table but has seen no movement over the past four years, would be the critical enabler.
PIENAAR: The issue is not about spectrum, but who is going to take that spectrum and invest. For years, many operators have been provided spectrum and have not invested or been successful in utilising it.
Competition is great, but simply issuing new licences is not going to get new operators to compete if they lack the scale to invest. Whatever firms the regulators provides spectrum to, they must be confident that they will have the scale to invest in arterial network infrastructure, as well as value chain infrastructure like undersea cables, fibre and switching centres. We are eager for more access and can assure everyone that if we receive it today, or are promised more in the future, we will start investing in it immediately. A free trading or auction process for spectrum would be beneficial to state coffers, and it would also ensure that spectrum is invested in and is quick to market.
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