Major African Mobile Markets: Future Growth Prospects 2006-2011  

Telecom Industry Overview

South Africa's mobile subscriber base is thirteen times the size of its fixed-line subscriber base at the end of 2010.

South Africa's telecom sector is the most developed and advanced in Africa. The growth in telecom services has been primarily driven by the mobile sector, and South Africa's mobile penetration rate grew to 105 percent in 2010, a total of 51.6 million subscribers. Fixed-line access has been falling since 2004, and now accounts for less than 7 percent of the market, while ADSL subscribers grew by 15 percent in 2009 from 4.59 million in 2008 to 5.3 million, according to Worldwideworx.

The fixed-line market was monopolised by Telkom, former State owned incumbent who had a 50 percent stake in mobile operator Vodacom which was re-assigned in early 2009, but was joined in August 2006 by Neotel, owned by a group consisting of Tata Communications, Nexus Connexion, Comunitel and Two Consortium. This has brought competition to the broadband market, though bandwidth prices remain high. Telkom has also now entered the mobile arena with its own 8ta offering.

South Africa has a vibrant mobile market that has seen rapid uptake since competition was introduced to the sector in the 1990s. With market penetration around 100% in 2010, the network operators - Vodacom, MTN, Cell C and Telkom SA - are increasingly forced to find innovative ways of distinguishing themselves from the competition in order to gain and retain customers. In addition, Virgin has entered the market as a MVNO. 3G/HSPA mobile broadband services now rival available DSL fixed-line offerings in terms of both speed and price, and consequently subscriber numbers. 2010 also saw the first trials of the next generation of mobile technology, LTE (also referred to as 4G) in South Africa.

While emerging as the country's leading broadband providers, the major mobile operators are also branching out into fixed-lines, fibre backbone networks, international fibre connectivity, mobile banking and entertainment in a rapidly converging environment. Fixed-line incumbent Telkom SA has reacted by launching its own 3G mobile network.

Market Size

The total number of mobile subscribers in South Africa at the end of June 2005 was 25.18 million, with a corresponding penetration rate of 56.7 percent. Pre-paid customers constituted approximately 85 percent of the total subscriber base.

The number of mobile subscribers in South Africa increased from 17.17 million at the end of 2003 to 51 million at the end of 2010. This growth is expected to increase approximately over 67.6 million by the end of 2014. Moreover, the number of 3G subscribers, which accounted for only 5 percent of the subscribers in 2005, is expected to constitute more than 42 percent of the total subscribers in 2011.

Table 3 shows the forecasts for mobile subscribers in South Africa for the 10-year period from 2002 to 2011.

Figure 1 illustrates the trends and forecasts for mobile subscribers and penetration rate in South Africa for the 10-year period from 2002 to 2011.

Mobile Network Operators

South Africa's mobile market has three major operators - Vodacom, MTN and Cell C, with Vodacom holding more than 43 percent of the market share, Virgin Mobile (MVNO, uses Cell C) is 10 percent.

Figure 2, below, provides the break-up of market share of the operators, in terms of subscribers, in 2010.

Figure 2: South Africa - Market Share of Mobile Network Operators (2010)

The three lead operators currently providing mobile services in South Africa are discussed below:

Vodacom

Vodacom obtained its licence to provide GSM cellular services in South Africa in 1993, but launched its commercial services in the country on 1st June 1994. It further launched its GPRS services in 2002 and also pioneered 3G services in the country in 2004. The various value-added services offered by the operator include SMS, MMS, video messaging, mobile TV, Internet access, content downloads, information alerts, such as news and sports, and Blackberry email.

Vodacom was a 50:50 JV between Telkom and Vodafone, and is the largest mobile phone carrier (in terms of the number of subscribers) in South Africa, Tanzania, Lesotho and the Democratic Republic of Congo.

In March 2009 shareholders approved the sale of a 15 percent stake in Vodacom to UK-based Vodafone Group. Vodafone signed a definitive agreement with Telkom for acquiring the stake for ZAR 22.5 billion (USD 2.22 billion) in mid-November 2008. However, the deal faced opposition from the Communications Workers Union as workers were against a foreign company holding a majority stake in Vodacom.

Telkom decided to sell its stake in Vodacom, as it wanted to focus on the development of mobile phone services and form a fresh partnership with another mobile player to extend its offerings in more African countries. The remaining 35 percent stake held by Telkom in Vodacom was listed on the stock exchange and sold to the former’s shareholders.

In March 2011 Vodacom re-brand, adopting Vodafone's familiar red, white and grey of parent. A full rebrand - adopting the Vodafone name - was opposed by local shareholders; although it was also felt the Vodacom name had a strong identity and value.

Now in the driving seat, Vodafone has said that it intends to rotate executives among its foreign units and allow Vodacom to leverage its global supply chain as well as introducing new services pioneered by Vodafone elsewhere.

Figure 3 shows the ownership structure of the company as on April 2010.

Table 4, below, provides an overview of the operator's key performance indicators.

Source: Company Reports.

MTN

MTN obtained a licence to provide mobile services in the country in 1993 and commercially launched its network in 1994. MTN provides mobile services in the country through MTN Network Operator, MTN Service Provider and MTN Network Solutions.

The operator provides 2.5G (GPRS and EDGE) services and has also started its 3G (UMTS) services since June 2005. MTN also provides value-added services, such as SMS and MMS messaging, Internet access and content downloads, BlackBerry, etc. MTN reported that data services constituted 5.9 percent of total service revenues in the year ending March 2005 as compared to 5.1 percent in the previous financial year. The bulk of data revenue was contributed primarily by SMS.

In 2005, MTN launched BlackBerry services for its subscribers and also began trials for High Speed Download Link Access (HSDPA) to provide services such as video telephony, multiplayer games, interactive TV, etc.

MTN's operations in South Africa are completely held by MTN Group Limited, which is headquartered in South Africa. Figure 26 illustrates the shareholding structure of MTN group.

Source: Company Reports

Cell C

Cell C launched its GSM network in South Africa in 2001. The operator also launched EDGE-based services in 2005 enabling it to offer value-added services such as MMS, Internet access and content downloads, etc. The entry of Cell C has incited competition in the mobile market, which was previously dominated by the duopoly of Vodacom and MTN. Cell C had around 8 million mobile subscribers in the first quarter of 2011.

Cell C is completely held by 3C Telecommunications, whose shareholders included Oger Telecom South Africa (60 percent), CellSAf (25 percent) and Lanun Securities SA (15 percent).

Cell C launched its 42Mbps DC-HSPA+ 900MHz commercial network in Port Elisabeth from June 2011. In July 2010 ZTE and Cell C jointly announced the HSPA+ 900MHz network, which was upgraded to 42M DC-HSPA+ in less than a year. The GSM/UMTS 900M network deployed has advanced SDR base-stations, which not only simultaneously supports both GSM and UMTS, but also evolves towards HSPA+/LTE. Compared with the 2100MHz network, the 900MHz network offers better coverage. The download rate and the indoor penetration rate can be effectively increased.

The 42Mbps HSPA+ ZTE modems have been available in Port Elizabeth from April, and will be made available in other areas as the higher speeds are activated. Existing modems will work on Cell C’s 42Mbps HSPA+ network, and although they will be limited to their maximum modem speed, there should be a benefit for users from the higher network capacity.

The new technology was branded intially '4G', but complaints from customers and competitors saw it rebranded as '4Gs' but the Advertising Standards Authority has still called for it to be dropped. The new service is now branded 'Whooosh'.

Recent Developments

The following are some of the recent developments that have influenced South Africa's mobile market:

Mergers and Acquisitions

• Cell C at the start of 2011 sold its 50 percent stake in Virgin Mobile, resulting in Virgin Group increasing its stake from 50 to 55 percent, and Calico Investments of the Bahamas (Calico) acquiring the remaining 45 percent. Calico plans to develop a strategic relationship with Virgin, and will invest additional capital to fund growth. Cell C is to continue as Virgin Mobile's network partner.
• In February 2011 Cell C launched mobile services under the Red Bull brand with two post-paid services. The Red Bull offering includes access to the Red Bull Mobile portal with several features. Red Bull Mobile users will also receive invites and first right to tickets for Red Bull events such as Red Bull Racing.

Technology Innovations and New Services

• A pilot network using long-term evolution (LTE) is being set-up by MTN with 100 base stations planned to be active in Gauteng by the end of 2011. MTN is also stepping-up the deployment of its high-speed fibre-optic cables to its base stations, with plans to have as many as 1, 600 connected to fibre by the end of the year, from 600 now. Contracts have been awarded to five new suppliers to extend the network.
• Vodacom announced on 16 April 2011 its enhanced network now offering speeds of up to 43.2Mbps. Some 1,000 plus base stations in metropolitan areas have been enabled, and it is working to double the number to 2,000 during May. The operator is expecting to see a 20 percent increase in system capacity on each upgraded base station.
• MTN South Africa enhanced its seamless roaming services in March 2011 with free incoming calls and SMS for both post- and pre-paid users travelling in the South and East Africa (SEA) region. Countries affected were Botswana, Rwanda, Uganda, Swaziland and Zambia.

South Africa's mobile market is the most advanced market in the region with the penetration rate exceeding 105 percent at end-Mar 2011. The market has shown strong growth in the recent past, with its subscriber base increasing by more than 20 percent at an annual average since 2002. Moreover, the market has also shown a trend towards the growth of value-added services in the recent past, and compared to the great majority of African nations, non-voice value added services in South Africa are leading the way by a very wide margin.

Value-added services are expected to play an important role in the future growth of the mobile market, particularly in bolstering revenues as the market grows towards saturation. Churn and saturation are clearly areas of concern for South African operators, and the market seems to be focussing on adding value, increasing ARPU, controlling churn and improving customer loyalty. The launch of value-added services such as Mobile TV, BlackBerry, etc., and the recent moves by Vodafone and Cell C all support this conclusion.

The country's stable economic conditions are also expected to complement the developments in the telecom sector, in order to drive the growth of the mobile sector in terms of subscribers as well as revenue.

In April 2011 American Tower acquired approximately 960 towers from Cell C. American Tower expects to acquire from Cell C a further 440 additional towers during 2011. The transaction, which was announced in November 2010, may see American Tower acquire an additional 1,800 towers that are either currently under construction or will be constructed over the next two to three years for an additional consideration of some USD 230 million. Cell C will be the anchor tenant on each of the towers being purchased. This trend is not unique to South Africa, and with the arrival of Airtel in other markets, the process is expected to accelerate.

In early 2011 MTN Group was reported to be making a third effort to enter the Indian market. Previously it has been courted by both Bharti Airtel and Reliance Communications; neither series of talks leading to a successful outcome. Aditya Birla Group, the majority shareholder in Indian mobile network Idea Cellular is reported to be in talks with MTN to sell its stake in Idea.

As in developed markets elsewhere, the mobile operators continue to suffer from a degree of reputational damage when it comes to providing customers with acceptable service and grievance resolution. A market survey published in early 2011 found that disappointing customer service was one the prime reasons for switching operators. with women being 18 percent more likely to switch than men. This perception was at odds with what was seen as highly innovative marketing, the survey finding a direct correlation between company success and marketing. The top telcos were perceived as having excellent marketing, skillfully identifying target audiences with specific reference to language and mind set used in relating to people. The conclusion is that operators collectively are spending heavily on sophisticated market to win new customers, whilst failing to deal with poor customer service issues, resulting in migration of hard-won clients to competing networks.