Southern Africa Mobile Operators: Overview of Vodacom and Virgin

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Vodacom - a major force in Southern Africa: feast followed by famine...

Vodacom is a success story for Vodafone, but not an unqualified one. It is the first and still the biggest MNO in South Africa but its past looks brighter than it future would seem to be.

Vodacom started out in the early 1990s as a 50/50 partnership between the South African state-owned telecoms monopoly Telkom and Vodafone. It launched the first GSM services and pioneered innovative approaches such as free voicemail and affordable text messaging.

It was a time of great optimism: socially, politically and economically. The company was a runaway success, far outstripping projected adoption figures and returning better than expected ARPU results. Those were the days of massive uptake and positive consumer attitudes that were focused on novelty, personal communications and finding an alternative to the less attractive - if at all available - fixed line services.

While the launch of MTN a few years later had an impact, Vodacom's position as first to market and market leader was scarcely challenged. Its business model basically became the template for subsequent MNOs - first MTN and later Cell C - and the pricing regime might have shifted somewhat but did not change in major ways. Churn was an issue but to a much lesser extent, especially since number portability was only introduced much later.

Vodacom had the distinct advantage of being first to market and has generally maintained that momentum in its later offerings, being first in South Africa with 3G, iPhone and a number of business packages that targeted individual professionals and/or corporate customers.

It also had the benefit of being a cash cow for the state, half owned by Telkom, which was wholly owned by government. Necessarily, there were always rumours of private deals with the country's regulator (ICASA), the Department of Communications and even price-fixing agreements between Vodacom and its competitors.

Even if all those rumours were utterly false, it held a privileged position as the first MNO in the country. It has also been a responsible corporate citizen, putting vast amounts of money into high-profile sports sponsorships, education and training and other social upliftment programmes. Not that having the brand on the national football teams (men and women), famous national stadiums (Bloemfontein and Pretoria) and sponsoring leading football and rugby clubs (Kaizer Chiefs, Orlando Pirates, the Blue Bulls and the Cheetahs) is entirely altruistic - it is effective marketing. So was its original marketing catch-phrase of 'yebo gogo' ('yes, grandma') which is still very much alive today, almost 20 years after its launch.

Vodacom South Africa Mobile Subscribers and Quarter-on-Quarter (Q-o-Q) % change (growth) Q1 2006 - Q4 2011 (1Q06 - 4Q11)


Source: Vodacom c. Blycroft 2012

NB: Vodacom has historically reported all connected subscribers, irrespctive of whether there has been activity in the past 90-days. 'Africa & Middle East Telecom-Week' has now provided the 90-day historical data in its weekly issues.

What has changed since then has been more a matter of politics and regulatory issues than a seismic shift in the market. Apart from MTN, there never has been a serious challenger for Vodacom, which still claims 50 percent of the arguably saturated South African market. Any new company or foreign invader really only has a chance to pick up the crumbs that fall from the table - a lesson that Cell C, Virgin and Telkom's mobile initiative 8ta have learnt one after the other.

Successive legislatures - all ANC but different in focus - have pushed in different ways for free market competition. The national regulator ICASA has kept to these policies, although hampered by constraints on its finances and independence, as it is largely dependent on the direction given by the Minister of Communications to whom it reports.

The major change was privatisation of Telkom under the government policy of 'managed liberalisation'. This resulted in Vodafone's share increasing to 65 percent and the remainder being spun off into a company listing on the Johannesburg Stock Exchange. Simultaneously, Vodacom adopted the red colours of its parent company to replace its original green and blue branding. Like New Coke vs Classic Coke, the outcomes of such tweaking are unpredictable.

Vodacom faces more serious challenges than just its branding. A significant part of MNO revenue in South Africa is based on interconnect fees and ICASA has been slowly increasing the pressure on carriers to reduce these. There is then the more remote concern that South Africa will move from voice to data services just as developed markets do. It is not clear whether the company can maintain its technology advantage in such a crowded market. It has explored Wi-Fi and WiMAX offerings but there are other companies already established in those areas, as well as its own former parent, Telkom. The move to data services cannot either be compared to the original introduction of mobile telephony. It is an evolution, not a revolution - and Vodacom is no longer the sole player.

Moving outside home territory, the company risks falling between two chairs. Obviously, with a saturated market at home, South African MNOs look to the rest of Africa for new opportunities. MTN seems to be winning against adversity in African and even Middle East markets but Vodacom has the unique disadvantage of its Vodafone links. If an African market is really promising, Vodafone would probably be there already.

The countries where Vodacom has established operations are a mixed bag: Nigeria, Tanzania, Lesotho, Mozambique and the Democratic Republic of Congo (DRC). Only Tanzania stands out among these and, interestingly enough, Vodacom Tanzania used many of the strategies of its parent in achieving success: leading technology roll-outs and marketing using colloquial catch-phrases. Nigeria is in many ways simply over-traded and Lesotho is a small country with a small economy, while Mozambique and DRC are still battling the lack of infrastructure - and economic consequences - of the decades of civil war that they endured.

Finally, there is the matter of the celebrity CEO phenomenon. Alan Knott-Craig had a reputation for being somewhat dictatorial but he was a good fit for the times during which he ran the company. The current CEO, Pieter Uys, faces different challenges and does not have the toolkit of government connections that his predecessor had at his disposal. And indeed he is to step down at the end of March 2013 after a near 20-year career with the operator, of which four were as its CEO. He is to be replaced by Shameel Joosub.

More to the point - and, possibly, in keeping with his slightly cavalier reputation - Knott-Craig himself is now an issue, taking over as CEO at Cell C and recently bringing on board three former Vodacom executives (from the Nigeria and Mozambique operations). Cell C may be small but its business offerings - such as LCR services at below ZAR 1 per minute - could shake up the market even if they don?t win armies of converts.

For all that, a victory is still a victory even when it is not a rout and obliteration of the opponents. Vodacom is a success story and will remain a significant factor in South Africa and, to a lesser degree, the rest of Africa for the foreseeable future.

It is not likely, however, to scale the same heights it did in the 1990s. The problem to being on top is, as always, that the only way from there is down.

Virgin Mobile South Africa - qualified success?

Six years since its entry into the South African market, the present position of Virgin Mobile could be a case study on the topic of whether MVNO models and Virgin's own business model travel well.

Firstly, some context and history is needed.

Virgin Mobile entered the South African market as a joint venture involving Virgin Group and Cell C, the country's third MNO, in 2006.

Cell C itself was in the odd position of being something of an MNO/MVNO hybrid, since it was then using network infrastructure provided by Vodacom until its own towers were established on a national basis. Both Virgin and Cell C had major backing from overseas companies and investors, as well as the support of the South African government and regulators who were keen to increase competition in a market dominated by the duopoly of Vodacom and MTN. Figures stated publicly at the time indicated that Virgin could launch for just ZAR 700 million, as opposed to the roughly ZAR 10 billion needed to launch Cell C.

This launch could have been a win for both companies and consumers, with Virgin picking up brand-conscious consumers who did not switch to Cell C and Cell C getting better revenues from its network, which was under-utilised at that time as a result of lower uptake than anticipated.

The original public declaration was that Virgin aimed to achieve 10 percent market penetration within five years. It was also a declared goal to get high-spending, upmarket consumers on board. To this end, a small chain of Virgin outlets was established at leading shopping malls and there was a very creative, amusing and, occasionally, controversial TV ad campaign running on South African satellite channels.

Within a few years, the target of 10 percent penetration was downsized to just one percent, although it was stressed again that the real goal was not numbers but high-quality consumers.

As of a year ago, Cell C has pulled out. Its 50 percent share was sold off to Virgin Group (5 percent) and Calico Investments of the Bahamas (the remaining 45 percent). Calico is a reasonably faceless, offshore investment entity that is focused on emerging markets, including Africa.

Virgin has been rated worst for customer service in surveys of two years ago, just slightly below the much-berated national fixed-line incumbent, Telkom. In six years, the company has had a series of CEOs, not the ideal situation for inspiring shareholder confidence, had it been publicly listed.

What Virgin has achieved in positive results, however, is in becoming the first MVNO in the country. It has championed the MVNO cause, with one of its former CEOs stating that it hoped for more such operators to enter the market. It has also challenged the local regulator (ICASA) to move faster in forcing reductions of interconnect fees.

This is not to suggest that Virgin is altruistic. A larger number of MVNOs would have validated the concept for both consumers and, more importantly, the national regulator. Achieving credibility with the regulator was key to Virgin?s drive to get interconnect fees reduced, that being the largest obstacle in the way of its achieving better subscriber figures in a relatively saturated market.

Commentators have often noted that a primary factor in MVNO success is having a strong brand. That is, of course, exactly what Virgin has. However, that becomes only a sufficient, as opposed to necessary, condition when the market pricing regime is unfavourable.

At the time of its launch, Virgin also had a favourable reputation with the top ANC leadership. Branson and Mandela had a very cordial relationship and Virgin had an established track record of being the first international carrier to bring in low-price flights on the London to Johannesburg route, as well as credit gained for rescuing an ailing national gym group and preserving jobs as well as protecting the consumers who had invested in long-term contracts.

It is not the case that Virgin Mobile is a failure, comparable to the setbacks the group has seen in Singapore and Qatar. But it is not the success it was meant to be or could have been.

There are basically three, related reasons why Virgin has not become a major player in the South African market, outside of its unique position as the first MVNO.

In order of priority, these are: slow progress in removing the primary obstacle of high interconnect fees; a failure to capture or possible overestimation of the youth market potential; and a slightly uncomfortable fit between Virgin's disruptive business approach and the local conditions of consumer and regulatory attitudes.

It is not Virgin's fault that ICASA is under-funded, under-staffed and not as authoritative as a regulator should be, subject as it is in terms of the relevant legislation to control from the minister of the very department it is supposed to regulate. Not to mention that Telkom was until recently a major cash cow for the government and deregulation has proceeded at a slower pace, being influenced by that factor and international deals involving other BRICS bloc interests.

Nevertheless, without timely and assertive support from regulators, an MVNO model is disadvantaged.

The question of the youth market is of practically equal importance. This was essential to Virgin's success in the UK and the company has sought the same opportunities in other world markets with mixed results. In South Africa, there is certainly an affluent youth market but it is very niche in size. Much of the optimism regarding that market was based on assumptions about the developing middle-class segment that have not been validated in practice, thanks to global recession, despite the reasonably healthy GDP growth figures typical of developing economies.

While this youth market in South Africa is at least as brand-aware as elsewhere, its loyalties are capricious and US or Far Eastern names are better supported than those with former colonial connotations. Whether or not that is a significant factor, there appears to have been a miscalculation of quite how much purchasing power the youth market in the country has anyway.

This leads pretty much directly to the final factor, which is a common element in both the others. South Africa is not a mature market where Virgin's 'shake up the market' approach yields a unique advantage.

On the regulatory side, Virgin holds less influence than other overseas interests - especially India and China - whose relations with South Africa are based on mutual goals and involve far more than just telecoms. Among consumers, Virgin had little to offer that had not already been seen from Cell C or which could not be negated in impact by reactive price-cutting or new service offerings from the incumbent MNOs. An MVNO?s success depends on beating prices. Constrained by the interconnect fee regime and up against well-entrenched brands capable of making a loss-leader offer when needed, the purely cost-based advantage of an MVNO was not going to be compelling enough to get large numbers of consumers to switch.

As noted, none of this predicts failure for Virgin in South Africa. It is, however, a telling example of how the MVNO model can fail in its anticipated outcomes thanks to a mix of market variables.