Looking to connect: Paving the way for greater access

With plans under way for some of the most sophisticated wireless infrastructure on the continent, a sizeable network backbone, high mobile data usage and encouraging corporate demand, South Africa is bursting with opportunities for growth in information and communications technology (ICT).

This encouraging forecast is driven by the country’s steady economic expansion, as South Africa remains a large and developing middle-income market. The country’s ICT needs will grow as small and medium-sized enterprises (SMEs) mature, middle-class consumption increases, broadband networks expand, and the public and private sectors continue to digitise their activities. The current market for hardware, software and services is expected to double within the next five years, implying plenty of opportunity in the country.

GROWTH AREAS: Although South Africa boasts a number of home-grown entrepreneurial IT successes, such as the Ubuntu operating system, services and hardware are still greater sources of revenue than innovation and intellectual property (IP). The actual size of the technology sector in South Africa varies depending on how calculations are made, but the industry is valued at roughly R50bn ($6.1bn), an amount that is expected to double in the next four to five years, said Zaid Gardner, an attorney with the law firm ENS and a specialist in telecommunications and technology law.

Innovation, commonly expressed as a function of IP created, is not considered a huge part of the market. This is due in large part to uneven implementation of copyright and IP regulations, although South African regulation is stronger than in other regional markets. According to Eric Proudfoot, a director at WorldsView Consulting, some 35% of software in use in the country is pirated. In most African countries, he told OBG, that percentage is typically at least 85%.

ACCESS INCREASING: A fundamental determinant of IT usage in emerging markets is the level of access, and South Africa ranks higher in internet access than most countries on the continent, thanks to its comparatively developed telecommunications infrastructure (see analysis). South Africa has about 6m internet users, according to a study by global market research firm Nielsen. Meanwhile, a study by mobile network provider Vodacom states that the country has the fourth-largest number of internet users on the continent after Egypt, Morocco and Nigeria. And there is substantial room for growth: studies conducted by Research ICT Africa show that 15% of South African households have a working computer and that 5% have an internet connection.

A number of internet service providers (ISP) exist in the market. The major contender is Telkom, a publicly owned telecommunications provider, the incumbent fixed-line company and former monopoly. Other ISPs include MW eb, FibreCo., Web Africa and about 150 others that are members of the ISP Association.

CONNECTIVITY: Technology providers are able to benefit from greater rates of internet access because of improved speed and bandwidth quality. Prices for broadband internet connectivity have fallen in recent years, and the landing of multiple international cables on South African shores in 2012 will likely lower prices further. Falling rates for international access will help turn broadband into a common method of getting online by adding supply to the market and incentives for the industry to develop more domestic fibre networks.

According to the Independent Communications Authority of South Africa (ICASA), which regulates telecommunications, the goal is to achieve a broadband penetration rate of 10% by 2014, up from 2% in 2011. The body aims to ensure access for all citizens by 2020. ICASA has been developing the project, and the process is expected to continue throughout 2012, according to the organisation’s 2011-14 strategy document.

Internet access through broadband has been low; there are fewer than 800,000 ADSL subscribers in South Africa. This is in part a case of leapfrogging technology as South African and populations elsewhere on the continent are expected to access the internet via wireless devices. However, this does not mean that broadband’s scope is small, explains Richard Hurst, a local telecommunications analyst at Ovum, a UK-based market research firm. Demand for broadband, particularly at affordable prices, is significant, and take-up rates will likely rise as cost falls and access increases.

“International capacity is no longer a problem,” Hurst said. “The cables are landing, but going off that landing point and going inland is the issue. The real opportunity lies in network operators pushing their fibre into the hinterland to bring high-speed services.”

NEW PRICE TAG: Increasing broadband’s scope requires cheaper access. In a study of broadband prices, Hurst found that Telkom, the incumbent and largest telecoms provider in South Africa, had the highest rates worldwide for its range of services. Costs fell with the arrival of the Seacom cable in 2009, according to Bernard Laferla, a tech-sector analyst for Vunani Technology Ventures, a South African technology consultancy. As of March 2012, the cost of basic monthly services started at about R300 ($37). Prices are likely to drop again with the next wave of connectivity. The West Africa Cable System, which runs from the UK to Yzerfontein in Western Cape, was on the verge of operation with a capacity of 5.1 TB ps in early 2012. A cable from France to South Africa will take a similar route and deliver the same amount of capacity along Africa’s Atlantic coast. Construction is expected to finish by late 2012. The South Atlantic Express cable, connecting South Africa and Angola with Brazil, will bring 12.8 TB ps of connectivity by June 2013. Prior to Seacom’s arrival there was one international cable servicing the country, the South Atlantic 3/West Africa Submarine Cable (SAT-3). Several South African firms have invested in these cable projects, including two state-owned firms, Telkom and Broadband Infraco, and Neotel, a private enterprise that was licensed in 2006 as a second provider of fixed-line services to compete with Telkom.

The impact that these new sources will have on price and access is still unclear. The ambiguity is in part due to what could end up being a mismatch of international capacity landing in the country and the ability of the domestic network to distribute it. “It would be difficult to deny that this is a positive development,” said Gardner. “But what happens after the landing point and how efficiently the system connects to the terrestrial network backbone may provide some challenges.” A crucial step will be improving the speed and efficiency of two key actors, Telkom and Broadband Infraco, which are partially and 100% state owned, respectively.

RECONFIGURATION: Of greater import to the sector’s growth has been the evolution of Telkom, which has the largest network in the country and retains access to the last-mile connections between homes and businesses and the national network. A plan to unbundle this local loop was scheduled to be completed by 2011. However, progress has been pushed back due to a policy change that requires ICASA to study potential impacts and survey stakeholders, and then report its findings to the Department of Communications.

As of early 2012, Telkom was facing multiple allegations in the national Competition Tribunal for charges of anti-competitive behaviour. The country’s Competition Commission asked the tribunal’s judge to levy a fine of R3.5bn ($428.4m), an amount that Telkom said could be crippling. The company has also said it would fight to protect the monopoly it has over the local loop.

Although Telkom has negotiated access to its infrastructure with Neotel, wider access or a complete unbundling of the company would be a greater boost to overall broadband access, Gardner explains. This is because private sector companies that might otherwise consider making plans for domestic network building perceive the timeline for unbundling as an unknown variable, which, along with other regulatory issues, creates a disincentive for innovation in the ISP sector.

There were calls for the breakup of Telkom in early 2012 and for the network ownership in South Africa to belong to a company that does not provide services and simply sells access on a wholesale basis to providers. However, some of the benefits Telkom offers the sector are being obscured amid the criticism, said Ovum’s Hurst. “Telkom has been very good in rolling out network infrastructure to secondary cities and towns, and it has 10 times more fibre than all others,” he said.

For entrepreneurs like Craig Venter, chief executive of local telecoms, media and technology firm Altech, Telkom’s focus on anti-competitive practices instead of improving services hampers the market, enabled by ICASA’s failure to fulfil the mandate of a competitive environment. “This is a result of a regulator that allowed Telkom to charge excessive fees for broadband connectivity,” Venter told OBG. “This resulted in the mobile operators seizing an opportunity to provide cheaper wireless broadband. In any other country in the world, fixed-line broadband services are cheaper than wireless due to the nature of the technology.”

RETAIL TECHNOLOGY: Although South Africa’s economy falls in the upper-middle-income range, due to sizeable disparities in development, it retains plenty of the characteristics of a conventional emerging market, including the potential for a leapfrog effect. Already there are more people with cell phones than computers, radios and TVs, according to research from the Development Bank of South Africa. A December 2011 study by the OECD found that more than 21m South Africans access the internet via a smartphone, dongle, tablet or other wireless device rather than broadband. This shows a ratio of 1.6 broadband connections per 100 citizens, compared with 42.5 wireless connections.

A price war for broadband began in 2010 when the country’s third-largest wireless carrier, Cell C, introduced an internet access package for consumers priced at R199 ($24) per month, with a download limit capped at 5 GB. That was about five times cheaper than what was available from Telkom and Broadband Infraco. The move was facilitated in part by Cell C’s completion of a new network and its efforts to increase its penetration rate in the mobile-phone segment of the market.

At the consumer level, this means that like elsewhere in Africa, the future of IT is driven in large part by the mobile sector. Smartphone handsets costing less than $100 are hitting the market, and South Africa could be among the first countries to prove the technology-leapfrog theory. One clear indication of the country’s dramatic technological uptake is found in mobile banking. Roughly 2.5m South Africans access bank services through mobile phones, and the suite of products and services on offer via mobiles is among the world’s most sophisticated, Hannes van Rensburg, the CEO of Fundamo, a mobile-payments technology firm, said.

Retail-level IT services, such as e-commerce or online banking, have expanded dramatically in developed markets over the past decade. As internet access expands globally, the trend is being replicated in emerging economies as well. Localised services, such as online shopping portal esouq.com in the Middle East, or mobile banking service Yoban’tel in Senegal, have helped drive IT usage amongst the broader population.

South Africans are similarly adopting online retail and services. First National Bank, for example, sells tablets and smartphones at discounted rates in the hopes of gaining loyalty and enrolling customers into online banking programmes. Between the start of the initiative in October 2011 and March 2012, it sold more than 50,000 devices. In 2011 online retail sales reached a record of R2bn ($244.8m), according to advertising firm AdMarula. This indicates that as ICT and internet connectivity expand, so will the industry. Of the total of 6m internet users in South Africa, about 71% reported shopping online, the Nielsen study found.

CORPORATE & GOVERNMENT SEGMENTS: The main South African banks and corporations are major ICT customers. “The current focus of big corporations, which are already heavily digitised, is on data security risks, but SMEs are a different market altogether and still dependent on non-computerised procedures,” Richard Buttle, CFO of Metrofile, an information and records management firm, told OBG.

The government is also an important customer for ICT services. “For the largest listed technology firms, government services are massive,” said Vunani’s Laferla. “That’s where the large contracts are at the moment, along with a few banks and large financials.” The State Information Technology Agency (SITA) is charged with procuring all of the government’s technology needs. However, it has struggled in fulfilling its mandate and is now in the midst of a turnaround. SITA was founded in 1999 with the idea that having a single buyer to coordinate government purchases would cut down costs through large-scale ordering. Corruption has been an issue, however, as was the case when a contract was awarded to the provider of national ID cards with data chips even though the deal went beyond the set budget. In 2010 SITA’s board members were replaced, and a new CEO, Blake Mosley-Lefatola, arrived in 2011. The agency’s new organisational strategy includes tighter inventory control and procurement procedures.

STRATEGIC PLANNING: The National Planning Commission (NPC) is charged with determining ICT’s role in South Africa’s future. In late 2011 the organisation released a master plan for ICT development. The document acknowledged that current government efforts to support ICT uptake and infrastructure have not been working and that a new approach should be adopted for the future. “The state's primary role in the ICT sector will be to facilitate competition and private investment and to ensure effective regulation where market failure is apparent,” the plan states. “Direct involvement will be limited to interventions needed to ensure universal access, such as the introduction of smart subsidies, and to help marginalised communities.”

The NPC master plan lays out a three-phase strategy, with the first phase running from 2012-15. During this phase, the body will mobilise to identify the optimal means for developing skills among citizens, regulators, educators and other system actors; to reform telecommunications by ending monopoly-impacted services, overhauling management of the radio-frequency spectrum and building networks; and to reduce the overall costs of accessing ICT.

The second phase, from 2015-20, will include the implementation of the methods identified in phase one. The NPC aims to ensure internet access via broadband connection for all South Africans by 2020. This includes widespread access to internet in schools, hospitals and public institutions. By the end of the third phase in 2030, the goal is to have ICT in extensive use by both the public and private sectors.

Execution of the plan may be its chief challenge. Two early-stage reforms – local-loop unbundling and the building of 4G/LTE phone networks – are mandated in the first phase. Yet since the unveiling of the plan in late 2011, both procedures have been delayed. In the case of local-loop unbundling, change is not expected for at least several years, according to ENS’s Gardner.

Confusion between government departments, a common problem in South Africa – ironically, one that ICT is meant to alleviate – has pushed back 4G/LTE spectrum licensing. The delay was caused by the publishing of ICASA’s guidelines regarding the use of relevant spectrum before the Department of Communications could weigh in. ICASA withdrew the guidelines in March 2012, and a timeline for a new licensing round had not yet been set at time of press.

EMPLOYMENT & EFFICIENCY: Some industry representatives feel that the government is deliberately reluctant to increase or encourage technological uptake among its agencies and public firms because of the potential impact increased automation can have on employment. The size and extent of the labour participation rate remains one of South Africa’s thorniest macroeconomic issues. The adoption of technological systems that reduce the need of manual labour also has knock-on effects on the business environment for the private sector, where rigid labour regulations limit the ability of start-up employers to hire and fire. “The government’s mandate is to its electorate, and its electorate is asking for jobs,” said Laferla, of Vunani Technology Ventures. “When the number one priority is job creation, that can create a problem for entrepreneurs. What we have found is that there is a massive skills shortage and very little government support.”

Adding urgency to the matter is the fact that many South Africans feel the need to increase innovation, access and usage as quickly as possible. With double-digit growth rates in middle-income countries like Ghana and African heavyweights like Nigeria ready to surpass South Africa as the largest economy on the continent, the country will need to boost its economic indicators to maintain its edge over the rest of Africa.

OUTLOOK: Though planned reforms had a rocky start in 2012, other catalysts could boost the ICT market in the country, at least in the private sector. Continued expansion of South African firms, such as logistics companies, retailers and distributors could strengthen demand for inventory management software, cloud-computing services and other technological solutions.

South Africa’s ability to innovate and continue expanding its strong economic base is dependent, among other things, on the improved enforcement of IP laws and a flexible business environment. However, the government’s backing of the sector, as outlined in the NPC’s 2011 development plan, may get a second look in June 2012 at the African National Congress’ national policy conference, where it is expected that the party will announce plans for new policies to support ICT growth and the intention to overhaul previous methods and a number of the agencies responsible for the sector.

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The Report: South Africa 2012

Telecoms & IT chapter from The Report: South Africa 2012

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