Rising to become a larger economic contributor than agriculture in recent years, South Africa’s ICT sector has shown rapid expansion over the past two decades. The government has increasingly sought to provide support for nationwide development of internet connectivity through the National Broadband Plan, while rising data demand and the burgeoning e-commerce and mobile payment segments will further underpin ICT development.
At the same time, a shift away from traditional voice and SMS services into the realm of data services is prompting telecoms operators to invest heavily in new fibre-optic and next-generation infrastructure, although the country’s delayed digital TV migration and lack of available frequency spectrum, which is critical for the roll-out of 4G long-term evolution (LTE) mobile broadband services, has slowed progress.
Sector Structure
South Africa’s ICT sector is regulated by the Independent Communications Authority of South Africa (ICASA). The authority now falls under the purview of the newly created Department of Communications (DoC) following a 2014 decision to split various government ICT responsibilities into two bodies: the DoC and the Department of Telecoms and Postal Services (DTPS). In addition to ICASA, the DoC also oversees a number of other entities, including the South Africa Broadcasting Corporation, Brand South Africa, the Media Development and Diversity Agency, and the Film and Publication Board.
The DTPS, meanwhile, has a mandate to develop ICT policies and legislation under the framework of South Africa’s National Development Plan. The plan, which runs until 2030, includes calls for the development of a coordinated ICT strategy cutting across government departments, as well as improving e-literacy within the country. The DTPS has prioritised a number of critical policy initiatives in recent years, including an ICT policy review, released in January 2014; forthcoming amendments to the Electronic Communications Bill of 2005; and the advancement of the national broadband policy, South Africa Connect, which was finalised in December 2013. The DTPS is also tasked with overseeing South Africa’s Broadcast Digital Migration Policy, improving schools’ connectivity and advancing rural ICT development.
South Africa Connect’s ambitious targets include achieving 50% internet coverage with speeds of 5 Mbps by 2016, 90% coverage at the same speeds by 2020, 50% coverage with speeds of 100 Mbps by 2020 and universal 100 Mbps coverage by 2030. On top of this, the policy also targets enhanced connectivity at schools, medical facilities and public institutions, emphasising public-private partnerships such as the Broadband for All initiative to achieve these targets. Under the plan, 5m new jobs will be created by 2020.
Internet Surge
South Africa has witnessed phenomenal growth in its number of internet users over the last two decades. According to South Africa-based digital consultancy World Wide Worx, the total number of internet users in the country grew from just 100,000 in 1994 to 3.5m in 2004. Growth accelerated in the 2000s, with total internet users expanding to 6.8m in 2010, 11.2m in 2013 and 16.2m in 2014. World Wide Worx forecasts the country’s population of internet users will rise by 14.2% to hit 18.5m in 2015 and continue increasing, to hit 20.1m in 2016, 21.5m in 2017 and 24.6m by 2020. This uptick in connectivity has been supported by strong growth in undersea cable connectivity, with sub-Saharan Africa’s undersea cable capacity rising from just 80 Gbps in 2008 to 55 Tbps in 2014.
Economic Impact
According to an ICT account for South Africa for 2012, published by Statistics SA in March 2015, ICT accounted for R94.72bn ($8.18bn), or 2.9% of GDP in 2012, making the sector a larger economic contributor than agriculture. Total domestic output at basic prices stood at R241.32bn ($20.85bn) and the sector generated R8.84bn ($763m) in taxes. ICT imports reached R105.68bn ($9.13bn) in 2012 and exports hit R26.83bn ($2.32bn). Household final consumption expenditure on ICT products was R91.65bn ($7.92bn) for the year, equivalent to 4.6% of total household expenditure.
Internet Trends
The fixed-line broadband segment has shown considerable growth in recent years. South Africa’s majority state-owned incumbent operator Telkom, which owns and operates most of the country’s fibre and copper wire infrastructure, recorded 7.4% growth in digital subscriber lines during the 2014/15 financial year ending in March. There was corresponding growth in fixed-line data revenues, while the total number of internet subscribers rose by 9%.
The company’s strategy going forward emphasises service convergence, in which customers purchase one package offering voice, data, mobile and fixed line services. This is expected to mitigate voice usage deterioration and leverage shared resources, including call centres and retail outlets, offering end-to-end solutions on one network.
Mobile Broadband
However, in spite of recent robust growth in fixed-line broadband services, surging data demand has largely been driven by a rapidly expanding cohort of mobile broadband users on 3G, 4G and 4G LTE networks. The number of broadband subscriptions in South Africa increased significantly between 2010 and 2012, rising 128% to reach 8.2m (up from 3.6m), while the number of individual broadband users rose from 2.8m to 6.7m over the same period, with only 3.89m accounted for by fixed-line subscriptions.
South Africa’s largest mobile operators have all reported rising data demand and revenues as low-cost smartphones become more widely adopted (see Telecoms overview). Smartphones now account for more than half of all mobile users in the country, rising from just under 5m active devices in 2010 to nearly 24m in 2015.
“Connectivity and broadband infrastructure is significantly better than it was a few years ago but it isn’t anywhere near where it should be to support development,” Derek Wilcocks, the group chief information officer for Dimension Data, told OBG. “The only thing holding mobile operators back is a lack of new spectrum, which is yet to be allocated.”
Digital Migration
Expansion of the country’s 4G LTE services, currently limited to wealthy suburbs in major urban areas, is expected to drive mobile broadband growth over the longer term. Telkom reported in its 2014/15 annual report that customers migrating from 3G to 4G LTE services use an average of 36% more data on an LTE network, although future roll-out of next-generation services remains dependent on new spectrum allocation. This is unlikely to occur until the country’s planned digital TV migration is finalised.
Although digital migration – which entails a shift from analogue to digital TV broadcasting in order to free up spectrum for increased telecoms usage – was originally scheduled to occur in South Africa in November 2011, it was postponed several times. The DoC announced in February this year that the process may be again delayed until 2017. The International Telecommunication Union’s deadline for analogue switch-off is June 17, 2015, after which it will no longer protect countries from cross-border radio spectrum interference from countries that have completed their digital migration process. The delay is also problematic for operators because analogue televisions use much-needed spectrum critical to 4G LTE roll-out.
“Operators are now re-farming spectrum, apart from Telkom which uses the 2.3-GHz band,” Thecla Mbongue, a senior research analyst at ICT consultancy Ovum, told OBG. “The others are re-farming spectrum that they had been allocated earlier in the 1800-MHz band. The 700-MHz band, which belongs to the broadcast industry, is identified as one of the most suitable for 4G and 4G LTE services, but auctions in the band are pending on the completion of the digital migration. There is another set of spectrum in 2.6 GHz which would also be suitable, but the government has postponed the auction process several times.”
Rising Investment
Telecoms operators, recognising the extremely high potential of data services in terms of revenues, have increasingly moved to invest in new fibre-optic internet infrastructure and to acquire companies already holding significant internet infrastructure. South Africa holds an estimated 180,000 km of fibre cable, with the majority of it being owned by Telkom, although private operators have increasingly moved to establish their own fibre networks, both for end-users and backbone activity.
At present the market remains highly fragmented, with fibre-to-the-home (FTTH) services limited to wealthier suburbs in major urban centres. In April 2015, MetroFibre Networx (MFN) launched FTTH in the Glenferness area of Midrand through its internet service provider (ISP) Greencom, offering uncapped fibre services ranging from 10-100Mbps per month. Meanwhile, Octotel, a recent market entrant, began rolling out FTTH services in the Cape Town suburbs of Sea Point, Bantry Bay, Moille Point, Three Anchor Bay, Green Point and Fresnay in June 2015.
National Fibre Coverage
Nationwide fibre backbone networks are also a priority, although FTTH services are unlikely to be rolled out in underserved, remote and low-income areas, as companies cannot be assured of long-term post-paid customer revenues in these areas. Nonetheless, a number of companies have moved to expand fibre services beyond suburbs and high-density commercial areas in recent months.
“Roughly 5% of businesses are connected by fibre networks. There is massive opportunity here; however, it is capital intensive,” Willem Marais, the CEO of Liquid Telecom South Africa, a data, voice and IP provider, told OBG. “Today, the majority of wholesale shared fibre infrastructure is very much intended to support mobile operators in terms of transmission connectivity to base stations.”
In February 2015, for example, Vox Telecom announced plans to build its own national fibre-optic network, which will connect business subscribers to its core infrastructure. The fibre deployment is part of the company’s five-year strategy and will see initial deployment of 100-Mbps fibre circuits in Johannesburg, Durban and Cape Town, later extending to the secondary cities of Bloemfontein, Port Elizabeth and Polokwane, and afterward to regional centres, including Mmabatho, Upington and Kimberley. Vox will not be deploying FTTH services, however, noting a preference to work with open-access infrastructure companies such as Vumatel and Dark Fibre Access.
Neotel Acquisition
In another important fibre development, mobile operator Vodacom is currently in the final stages of acquiring fibre provider Neotel, which will significantly expand Vodacom’s fibre footprint in the country.
“In 2008 mobile producers were allowed to provide their own cell infrastructure, but before that, they had to lease copper infrastructure from Telkom,” Richard Boorman, the executive head of corporate communications at Vodacom, told OBG. “We now have between 6000 and 8000 km of fibre connecting our base stations and Neotel has 22,000 km of fibre, so overlaying those two networks would provide a great base from which to offer fibre services.” Vox and Vodacom, like other ISPs and telecoms operators in the country, have also been vocal in their desire to bid on new frequency spectrum when it becomes available. This is perhaps the most challenging obstacle to future expansion of high-speed mobile broadband in the country (see analysis).
Challenges
South Africa’s ICT market is characterised by a high number of ISPs, with ICASA issuing 700 electronic communication licences in 2008 alone. The regulator is now taking steps to reduce congestion in the market, announcing in April 2015 that it plans to cancel any electronic communications network services or licences that are untraceable or inactive. These include licences belonging to Inburru Technologies, Primetel, Netralink and Serram Systems.
The market is also facing challenges in terms of affordability and quality of service, with the South African Institute of Race Relations reporting in April 2015 that, although the average monthly cost of broadband in South Africa is more than ten times that of the UK, internet speeds in the UK are still five times faster than in South Africa. According to the “South Africa Survey 2014/2015”, the average monthly cost of broadband in South Africa and the UK are $28 and $3, respectively, while average broadband speeds in the UK are 24Mbps, compared to South Africa’s 4.8 Mbps.
e-Commerce
Perhaps the most high-potential growth segment within South Africa’s ICT segment is e-commerce, which remains in its nascent stages, but looks poised for considerable growth over the medium term. World Wide Worx reports that the e-commerce industry reached R4.4bn ($380m) in 2013. The number of customers on South African online payment gateway PayGate, meanwhile, doubled in 2014.
In February 2015 Luke Mckend, country director for Google SA, told delegates at the eCommerce Africa Confex in Cape Town that Google recorded a 37% increase in South African queries in 2014. “Commercial intent” queries showed a 55% increase over the same period, he said.
“There are segments of the population that are very comfortable using e-commerce or m-commerce, which is more relevant to South Africa as the vast majority of people in this country access digital services by mobile,” Adrian Dunsby, a partner at PwC, told OBG. “Furthermore, there have been significant developments between our two largest online retailers, Takealot and Kalahari; the two companies merged in January 2015 and that is indicative of the significant potential that exists.”
More recently, South African media giant Naspers, the country’s largest company by value, identified e-commerce as one of the most promising segments in its business portfolio in June 2015. This followed the closing of a deal in NovemSchibsted to expand its e-commerce reach into more markets. Naspers operates web-based marketplaces, including South Africa’s OLX, Eastern Europe’s Allegro, Flipcart in India and Souq in the Middle East. The company reported that its e-commerce business rose by 36% in the 2014/15 financial year and it is hoping to continue this trend. Naspers plans to allocate R8bn ($691m) of a total of R10.7bn ($924m) in development spending on e-commerce businesses through March 2016.
Online Banking
Mobile banking platforms represent another high-potential ICT segment, although South Africa has yet to replicate the tremendous growth in Kenya, where the m-Pesa mobile wallet has risen to become the most widely used mobile application in the country.
Although Vodacom rolled out m-Pesa services in South Africa in 2010, it later re-launched the product in 2014 as a result of difficulties with the registration process. In April 2015 the company reported that total subscriber numbers had increased by just 72,000 since the re-launch. Nonetheless, the company still expects the platform will attract up to 10m subscribers in the coming years, giving the mobile banking sector considerable long-term potential for ICT investors.
Outlook
In spite of the challenges and delays in its digital migration, South Africa’s ICT sector continues to benefit from soaring data demand, rising investment in new fibre-optic connections and mobile broadband infrastructure and robust growth in internet usage, which will benefit its burgeoning e-commerce and mobile banking segments. Even as the country faces near-term obstacles and delays related to the roll-out of next-generation networks, rising recognition of ICT’s importance to holistic economic growth will allow the South African IT sector to remain at the forefront of digital innovation on the continent.
