Tighter regulation and increased competition may have trimmed the high margins enjoyed by MTN and Vodacom in the pioneering days of cellular telephones over a decade ago but the sector is hardly stagnating. New revenue streams – that don’t include voice calls – are popping up all the time. Even Telkom, the once moribund and still state-influenced ‘landline’ company, is being seen by investors as a potential data player.

In SA, Vodacom data traffic was up 80% in the year to March 2014 but data revenue growth lagged as the price per megabyte dropped by a quarter. Domestic data revenue was up by a more modest 24% as Vodacom consumers became more price conscious. This was due, in part, to competition from WiFi services, such as that of Telkom.

Vodacom’s data volume growth occurred as the mature voice market went ex-growth in SA. The bottom line is that existing customers are spending more time online and increasing data-heavy downloads, such as video, while they do so. In the US, internet-enabled mobile phones have led to adults spending more time online than watching television, according to research by eMarketer. For the first time, data makes up over one fifth of Vodacom’s SA service revenue, including calls but excluding handset sales.

In less mature African markets, where Vodacom has the rest of its business, data expansion was not limited to surging volume sales. Revenue from data sales more than doubled. Even the number of active data customers ‘increased 86% to 7.7 million, driven by our attractive data bundles’, the company reported. At a group level, total revenue (including handset sales) was up 7% to R75.71 billion while net profit was up 3% to R13.67 billion.

Rival MTN – a much larger firm than Vodacom in spite of a smaller SA market presence – displayed a similarly robust data trend. Group revenue was up a solid 12% to R72.76 billion in the first-half to June 2014, compared to the same period in the previous year. Due to once-off items, attributable profit was up only 4% to R13.39 billion. MTN has taken calculated bets that profits from Iran and Syria (two investment territories that carry high political risks) will one day be repatriated. The US is seeking a deal to stabilise relations with Iran, meaning repatriation is more likely to occur there than in Syria, where no end to the civil war is in sight.

MTN group revenue was pulled up by strong revenue growth in frontier markets such as Côte d’Ivoire and Cameroon but sales in SA plunged 7%. This was the third interim period (first-half) decline in a row for the company (MTN’s market share in months to June), according to a Bloomberg report. This prompted the company to consider retrench-ments. Trade union Solidarity said that up to 14% of its SA workforce could be cut, and that more than 840 managers would be retrenched. However, MTN did not put a number on the reductions.

Commenting on the scope to expand mobile data, World Wide Worx MD Arthur Goldstuck says MTN and Vodacom have moved to capture data sales in the mass market by pushing low-cost smartphone brands that retail for under R560. ‘The challenge is [whether they’ll] be able to generate enough new data volume to make up for the falling cost of data,’ he says.

Retrenchments are also planned at former state telecoms utility Telkom – partly accounting for the company’s unexpected appeal as a market darling. Telkom, which is still almost 40% owned by government, dropped a bombshell in an interview with Bloomberg early in 2014. The parastatal said it needed to slash costs, which included cutting thousands of jobs.

‘Chief executive officer Sipho Maseko may fire as many as 1 000 managers and says he needs to cut the approximately 21 000-strong workforce by almost a third over five years as he seeks to turn around Africa’s biggest fixed-line phone company,’ Bloomberg reported.

This established Maseko’s credibility as an independent executive in a country where govern-ment, as a shareholder, often intervenes in the operations of state-owned companies. Maseko has also built a reputation as a free market reformer of the once state-owned utility. However, his judgement in matters of corporate governance has been challenged. The Companies and Intellectual Property Commission ordered Maseko to attend a corporate governance course or face criminal prosecution for his role in an executive-share award.

‘The challenge is whether they’ll be able to generate enough new data volume to make up for the falling cost of data’

ARTHUR GOLDSTUCK, MD, WORLD WIDE WORX

Maseko’s plans for a dramatic reduction in staff may well have been an opening salvo in the lengthy retrenchment negotiation process in the country. Telkom has since put the retrenchment plans on ice ahead of further consultation with trade unions. 

Job cuts were only part of the story of how investors have bought into the Telkom turnaround story, resulting in the share price soaring 150% over the 52 weeks to end August 2014. In March this year, Telkom announced that it has been in negotiation with MTN regarding a network sharing deal. This, however, has prompted SA’s third largest cellular network, Cell C, to oppose the deal before the country’s Competition Commission.

Maseko has also revealed international talks with global leaders regarding delivering television via high-speed ‘telephone lines’. These included meetings with US video-on-demand firm Netflix and fixed-line group Comcast with regard to delivering content across Africa. The talks underline a new trend in telecommunications. This is the return to favour of the very same ‘old tech’ landline firms that had been cast aside in favour of mobile.

This analytical shift stands out even more in SA where MTN and Vodacom have always been run on commercial lines. Telkom continued to have a social development aspect to its business. The reason for the fresh view is that consumer expectations of what constitutes broadband have changed.

While watching an uninterrupted 30-second live streaming clip via cellular or satellite technology is feasible, it is technologically impossible to reliably watch a two-hour movie on demand without any interruption. The fastest speeds are delivered via fibre-optic cables to a neighbourhood, business or coffee shop, whether viewed on laptop or cellphone.

Telkom already services 600 000 residences with optical ‘fibre to the kerb’ cables, replacing slower copper lines, TechCentral quoted Maseko as saying. The group also has plans to supply homes directly with fibre optics too, for even faster speeds.

Importantly, the parastatal is also considering allowing internet service provider rivals to compete with it on the ‘last mile’ into homes. This open-access model would mark a major policy shift towards freeing up the market. Telkom had previously steadfastly opposed its rivals providing services on the last mile.

Telkom’s fibre-optic plans are vital to the sector because it’s the player with the most advanced national network and the majority of fibre-optic cables. Referring to Telkom’s new initiative to get fibre-optic cables into homes, Goldstuck says Telkom had ‘woken up’ after the Johannesburg suburb of Parkhurst had given a broadband contract to a smaller private player.

‘It was a key moment in the history of telecoms in SA and showed that Telkom has the technical ability to deliver a high-speed service but had not been strategically capable,’ he says.

Telkom net income saw a profit of R3.9 billion in the year to March 2014 from a loss of R11.6 billion the year before, Bloomberg reported. Revenue was up marginally from R32.1 billion to R32.5 billion.

The smallest player in the sector is Blue Label Telecoms. The company, which earns 94% of its R19.4 billion revenue from the supply of prepaid airtime, plans to benefit as SA mobile firms sell more data. To help achieve this, Blue Label has been on an acquisition spree to add new distribution channels, BDlive reported. Suppliers of airtime such as Blue Label are in a race to get ever closer to consumers and also need to increase volumes to negotiate better financial terms with providers like MTN and Vodacom.

MTN and Vodacom have the resources to compete against the biggest banks in sub-Saharan Africa

With voice revenue growth stalling – declining, even – MTN and Vodacom have also concentrated on growing data revenue beyond traditional websites and video. Much of this focus is on financial services, given that only 20% of Africans have bank accounts (according to African Development Bank).

With far more people having cellular phones, the potential is obvious. M-Pesa, the leading money transfer service developed by Kenya’s Safaricom, an associate of Vodacom, is well known.

In next door Tanzania, the M-Pesa service operated by Vodacom contributed as much as 19% to service revenue, up from 14% in 2014. Vodacom has also relaunched M-Pesa in SA with new partner Bidvest Bank, aiming to attract 10 million subscribers in five years after it failed to take off with Nedbank.

This year, MTN has also seen the fast growth of its African mobile money transfer service business, Mobile Money, beyond SA and Nigeria. Mobile Money subscribers were up 21% to 12.2 million in Ghana, Cameroon, Côte d’Ivoire and Uganda combined, according an MTN report.

More recently in June 2014, MTN partnered with retailer Pick n Pay in SA to provide low-cost bank accounts to add to its Mobile Money service. The banking licence of the relatively small South African Bank of Athens is used. Mobile banking adds another data revenue stream. Furthermore, there is no need for expensive branches as the banking services use Pick n Pay’s store network.

With MTN and Vodacom’s combined market cap of close to R650 billion, the two firms have the resources to compete against the biggest banks in sub-Saharan Africa. Mobile firms dwarf traditional banks when it comes to customer numbers, making them well placed to offer financial services to the millions of unbanked and uninsured.

Mobile technology also offers low-cost options to both consumer and financial services providers. However, big banks won’t sit idly by as they lose existing and potential customers to mobile banking.

As the global telecoms sector has matured, firms have been chasing bulk through mergers as a means to defend profit margins. SA is no exception, with Vodacom’s purchase of fixed-line entrant Neotel for R7 billion. Meanwhile, Telkom is in the process of acquiring data services firm Business Connexion with the aim of integrating services with its telecoms infrastructure business.

For MTN and Vodacom, the next five years do not promise the explosive growth they offered at the start of the African cellphone revolution. With a lot of the most expensive capital expenditure out of the way for now, such as building mobile network towers, they have started to perform like the steadier US dividend paying utility telephone companies of old.

The main difference is that they remain at the cutting edge of technological innovation and can grow data sales – whether in terms of video or convenience banking.

While the potential upside of the data revolution is impossible to predict, it is underpinned by reliable and attractive dividend yields generated from the older mobile services. As of September 2014, MTN’s dividend yield is over 3.8%, while Vodacom’s is over 5.4%.

Fixed-line technology has come full circle and has given Telkom an unexpected second chance that may not be repeated.

Management resolve could see the state-influenced parastatal complete its turnaround. With Telkom, however, there is more at stake than only the fortunes of investors and efficient telecoms infrastructure. It is a massive test of the state’s ability to ease its grip on trying to control economic outcomes. To date, the state has struggled to build dynamic state-influenced corporates when it has sought to micromanage them.

The success of companies such as Transnet, and the failure of those such as Eskom, reverberate across the economy. A continuation of the state’s current ‘arm’s length’ relationship with Telkom will not only please private investors but may also be the best shot at increasing state revenue.

That revenue pays for the social development that government and citizens hold so dear.

By Tom Robbins
Image: Mr.Xerty © www.nomastaprod.com