Africa Telecoms

NG Telecoms Africa Summit 2017 – Africa Analysis Feedback

Africa Analysis recently attended the GDS NG Telecoms Africa Summit 2017, held at the Raidsson Blu Hotel in Lusaka Zambia, over the period 26 to 28th of April 2017. The Summit saw the gathering of commercial, operational, marketing and technical executives from telecommunications operators and service providers across Africa. The event provided a platform to discuss the various challenges that telecoms operators face in their respective local and regional markets.

The three key challenges identified by the delegates were:

  1. The network and infrastructure related issues;
  2. The customer and how to improve service and experience quality; and
  3. The future development and trends that African operators are likely to face.

In addition, the keynote address delivered by Lucy Quist, CEO of Airtel Ghana focussed on the concept of “rethinking” telecommunications in Africa and the ability to create and deliver African solutions for the African telecommunications opportunities and challenges. The presentation highlighted the need to adopt fresh approaches to content, data services, infrastructure and devices as network operators across the region begin to look at evolving revenue streams and customer expectations.

The network and infrastructure challenge

The network and infrastructure related challenges emphasized the growing reliance on offshore data centres, cloud security, and a perceived lack of vendor support.

Other key infrastructure challenges identified included:

  • 4G LTE
  • Data centres
  • Cloud
  • Offshore data centres
  • Cloud and IoT relevance given the infrastructure challenges

The main points of concern were:

  • Why are these solutions not manufactured on the African Continent?
  • Do the equipment and solutions vendors have the African operators’ best interests at heart?
  • Operators maintain the status quo and new technologies and services such as 4G/5G will be irrelevant if it is constructed on a broken system implying that it will not be sustainable.
  • Services such as cloud and IoT will require operators to fix current problems and challenges.

Operators also highlighted the fact that operators also faced challenges as to political and regulatory stability noting that in certain instances network roll out projects were derailed by government or competitor intervention.

The customer experience challenge

The central theme of the discussion was the ability of network operators to be able to better understand their customers to deliver a better service. At the heart of this was the ability to leverage technology and services such as cloud and data analytics to get to know the customer better. However, operators will need to first develop a brand and loyalty before being able to implement cloud and big data services.

The future

Discussions concerning the future of the network operators in Africa focussed on:

  • Partnership and monetization potential of the over the top (OTT) players
  • Internet of Things (IoT) – the revenue potential and expected growth
  • Bandwidth demand and its growth
  • LTE – the upgrade path and the business case

The OTT services across Africa present operators with a threat and an opportunity. Many operators have sought to embrace the OTT players and have zero rated the data services of these players to entice additional customers and demonstrate value add for their customers. Others have attempted to offer OTT like services in the form of their own platforms. However, the real challenge for the operators has been the ability to monetize or grow their revenue from these services.

The IoT market presents another revenue growth opportunity. However, operators will need to ensure that they have the right platforms and ecosystems in place for these services to gain traction.

A key concern has been the massive growth of bandwidth consumption across the region. Operators find themselves caught between a rock and a hard place as they face pressure from consumers and regulators to reduce the cost of data services while costs of bandwidth decline, forcing them to offer more bandwidth at the same rates with a resultant growth in data consumption.
The development of 4G/LTE in Africa will depend on the ability of operators to develop a solid base and business case for their existing 3G networks.

Africa Analysis Assessment

The NG Telecoms Summit brought many challenges being faced by network operators to light. However, it appears that these challenges and opportunities are viewed as being separate from each other. Operators need to view the evolution in the communications services as part and parcel of the growth of services in Africa.

End users will become more sophisticated and demanding in services being consumed and the associated costs. This presents operators an opportunity to push more advanced services into the market and begin to re-align their roles from being the mere pipe or conduit for services to being the enabler of application and content. It is at the application and content point of the services stack that Africa can begin to create unique and tailored services to meet local demand.

In addition, the development of future platform and technologies such as 4G/LTE and 5G will depend on the operators and their ability to develop sound business cases for 3G to use as a foundation for these technologies.

 

Mobile VoIP

2016 Adoption of Mobile VoIP

A leading indicator that signals the adoption of mobile VoIP is the adoption by mobile subscribers of social networking/instant messaging OTT services. The precursor to OTT service adoption is the strategic drive by mobile operators to increase smartphone penetration combined with an effective data pricing strategy. Mobile VoIP OTT usage leads to traditional mobile revenue disruption along with disruption of the national interconnect market. Mobile operators can choose to either defend against this trend, or embrace this trend and build products that incorporate mobile VoIP.

Introduction

Analysis of information published in Deloitte’s Global Mobile Consumer Survey 2016 provides insight into the adoption of various OTT services across different markets, and over different time periods. We have extracted information pertaining to the adoption of mobile VoIP, social network (SN) usage and instant messaging (IM) for 13 countries located in Europe (EU), Latin America (LATAM) and Sub-Sahara Africa (SSA).

From this data we created the following two charts that provide useful market observations.

Chart 1: Relationship between mobile VoIP and social networking / instant messaging services

The following country (and region grouping) chart provides some interesting insights into the adoption of mobile VoIP and the adoption of social networking / instant messaging. The chart shows the plot of mobile subscriber adoption of social networking / instant messaging plotted against the adoption of mobile VoIP.

From this chart, the following observations can be made:

  • In all countries, there is a higher adoption of social networking / instant messaging when compared to mobile VoIP; and
  • Based on the country groups, we see a different adoption across the regions. Surprisingly, the EU countries show a much lower mobile VoIP adoption.

2016 Mobile VoIP AdoptionThe difference in developed (EU) vs developing country (LATAM, SSA) adoption of mobile VoIP OTT service can be driven by the following factors:

  • From a disposable income level perspective, the lower price of VoIP (to circuit switched) may not be as attractive / make much difference in developed markets vs developing markets;
  • The price differential between mobile VoIP (using mobile data) and circuit switched calls may be much smaller in developed markets vs developing markets therefore there is less economic incentive to use mobile VoIP; and
  • There are other factors such as (1) the difference in age distribution between developed and developing countries, younger mobile users adopt new services at a faster rate, (2) the difference in prepaid vs postpaid mobile services in developed vs developing countries, postpaid will have less incentive to use mobile VoIP given the bundling of minutes in postpaid plans, that can play a role in the markets.

Chart 2: 2013 to 2016 Adoption trend of mobile VoIP service

The following country chart shows the mobile subscriber adoption of mobile VoIP plotted over the period 2013 to 2016 for four countries.

The following observations can be made:

  • There was significant growth in mobile VoIP adoption in Brazil and Mexico over a single year. Brazil grew by 343% from 2013 to 2014 while Mexico grew by 294% from 2014 to 2015; and
  • This large jump was not seen in the two EU countries: Sweden and the UK.

2016 Adoption Trend in Mobile VoIPIt is quite possible that Sweden and the UK have not reached a critical market tipping point with the social network / instant messaging adoption that, once passed, would drive rapid adoption of mobile VoIP.

Drawing out market observations

While the base is small, the data does suggest the following interesting market observations:

#1: The 2016 adoption of mobile VoIP varies significantly between the EU countries (low) and Latin America countries (high adoption), with Sub-Sahara Africa (SSA) countries found between the two regional groupings.

  • Therefore, developed country adoption of mobile VoIP cannot readily be used as a proxy for the adoption in developing countries.

#2: Social network / instant messaging adoption is a leading indicator and a proxy for mobile VoIP adoption.

  • Therefore, the higher the adoption of these services, the higher the adoption of mobile VoIP can be expected.

#3: Over a three year period, the rate of adoption of mobile VoIP in Latin America (Brazil and Mexico) is significantly higher than that seen in Sweden and the UK. Various reasons can exist that drive this adoption. For example, this is possibly driven by the perception of higher prices in developing markets, or that the adoption of social networking/instant messaging has reached a critical market tipping point that accelerates mobile VoIP adoption.

  • Therefore, based on the data mobile VoIP will see faster adoption in developing countries.

So what does this mean?

The market drive to lower mobile data pricing coupled with the aggressive growth in smartphone adoption will see wider uptake of OTT services. Within the OTT bouquet, the growing adoption of social networking/instant messaging services, as shown, will lead to higher mobile VoIP adoption.

We ascribe this linked adoption to social networking/instant messaging OTT services driving the following behaviour:

  1. Grow greater awareness of mobile VoIP availability among social networking/instant messaging users, thus educating users on the use of mobile VoIP; and
  2. Grow usage of mobile VoIP on the social networking/instant messaging platforms where such a service is offered.

Intuitively mobile operators recognise the competitive threat posed by mobile VoIP to traditional mobile services. Through the analysis presented here, we are now beginning to understand the complexity of the OTT threat to traditional mobile services.

IoT Pic

South African IoT/M2M Market Opportunity for Network Operators

The global IoT/M2M installed base is expected to reach between 12.5 and 13.3 billion by 2020, and show a CAGR of over 20% over the period 2015 to 2020. In South Africa, we forecast that the IoT/M2M installed base will reach 35 million by 2020, showing a CAGR of 32% over the same period. While these numbers grab many headlines, network operators need to recognise that their revenue opportunity will come from managed connectivity, which accounts for roughly 20% of the IoT/M2M service revenue, and not the connectivity itself. Revenue earned from connectivity itself, only accounts for around 11% of the service revenue.

Global Outlook

Network operators (mobile, fixed and wholesale) have started to turn their attention to the rising Internet of Things (IoT) and machine-to-machine (M2M) opportunity. Global predictions vary, with some reports such as the IHS Markit showing that the number of IoT/M2M connections is expected to rise to 12 billion while IDC have reported that IoT/M2M connection will rise to 28 billion by 2020. This range illustrates the challenge in forecasting a rapidly growing market.

 

For example, the following chart shows a comparison of the various global forecasts of the installed base:

2017 Global IoT Installed Base Forecast

Forecasts made in 2016 and 2017 for the 2020 global installed IoT base, show that the installed base is expected to reach between 12.5 and 13.3 billion. Most forecasts show a CAGR of over 20% over the period 2015 to 2020.

The South African IoT Connectivity Development

In South Africa, as in the rest of the world we can expect to see the Low Power Wide Area Networks (LPWA) IoT battle lines drawn along technology. The LPWA platforms include Extended Coverage GSM for IoT (EC-GSM-IoT), Long Term Evolution Machine Type Communications Category M1 (LTE MTC Cat M1, also referred to as LTE-M) and Narrowband IoT (NB-IoT).  In the first camp the main protagonists will be the mobile network operators, such as MTN and Vodacom, both of which have announced IoT plans based on LTE narrow band technology, using licensed spectrum.  On the other side, will be the LPWA platforms such as Sigfox, backed by Dark Fibre Africa subsidiary SqwidNet, using unlicensed ISM bands.

The mobile network operators will position their services based on service quality as their ability to manage the spectrum will ensure a quality service for the enterprise. The mobility factor will see applications such as the “connected car” and vehicle tracking being among the major drivers of IoT/M2M uptake for the mobile operators. Providers using platforms such as Sigfox will opt to focus on volumes, low power and short transmission distances to offer services and solutions for more static applications such as smart metering and utility services.

Forecast of the South African IoT Installed Base

Africa Analysis forecast that the installed base of IoT/M2M connections will rise from 8.8 million in 2015 to 35 million by the end of 2020, showing a CAGR of 32%.

  • A large slice of the market will be found in the LPWA technology, rising from around 290 thousand in 2017 to over 19 million by the end of 2020.
  • Other technologies such as mobile cellular, Wi-Fi will retain a steady growth of 14% and 11% respectively over the forecast period. Mobile cellular will rise to 8.7 million connections and Wi-Fi will rise to 7.4 million.
  • Satellite services will retain some importance in the local IoT/M2M market but the applications will be restricted to a niche market such as aviation and rural areas.

Network Operators and the IoT Service Revenue Stack

The forecast of the large installed base of IoT/M2M connections sounds very attractive, and these big numbers grab a lot of attention. But the sad reality is that the connectivity revenue opportunity for just proving network connectivity is limited. In 2016, the connectivity portion of the IoT revenue stack accounted for around 11% of total revenues. The lower cost of connection and the associated downward pressure on data tariffs will continue to keep this contribution under pressure.

The attractive revenue for network operators is found in the stack of services associated with connectivity. For example, managed connectivity accounts for roughly 20% of the IoT/M2M revenue.

Given this, we expect that IoT deals will likely to be driven by volumes that will see network operators sacrificing some of their connectivity margin to secure contracts.  However, this basic element of the stack will see operators use connectivity as a foundation to offer managed connectivity services. This way, the MNOs will be able to take advantage of both the basic and the managed connectivity services, thus increasing the portion of total revenue they will be able to access in the IoT environment.

Those network operators with the necessary resources are able to push themselves further up the value chain and possibly offer more complex services such as integration, which accounts for around 47% of total revenues while application development will account for around 22% of total revenues.

Contact Richard Hurst, Africa Analysis, for more information on this topic.

EOH M&A Pic

EOH, The Most Prolific M&A Company in the SA ICT Sector

EOH Holdings Limited (EOH) is the most prolific M&A company in the SA ICT sector. Analysis of the revenue streams over the period 2011 to 2016 shows that by FY2016, EOH had earned 63% of its revenues from the cumulative acquisitions it had made over this period. The EOH challenge, however, is how to continue to deliver such impressive revenue growth over the coming years.

The Competition Commission Announcements in November 2016

The Competition Commission recommended to the Competition Tribunal that two proposed transactions by EOH, be approved without conditions. These transaction are the acquisitions by EOH of PIA Solar South Africa (Pty) Ltd (PIA) and Scan RF Projects (Pty) Ltd (Scan RF).

These announcements caught our attention as they highlighted EOH’s ongoing and relentless M&A strategy, a strategy that has been part of the EOH “DNA” going back to the year 2000.  This commentary provides an assessment of the EOH M&A activity over the period 2011 to 2016.

EOH Revenue Analysis

EOH reported revenues of R12.76 billion for its financial year ending July 2016. The 2015/2016 annual revenue growth was 31%, while the five-year compound annual growth (CAGR) was 39%. The following graph shows the EOH revenue reported from 2000 to 2016.

EOH Revenue 22.11.2016

Source: EOH Annual Reports 2004 to 2016

Revenue earned from M&A

A cautionary note –  EOH does not provide a detailed revenue breakdown of its individual subsidiaries, therefore we needed to make some assumptions. The value of this analysis serves to illustrate the revenue impact of the M&A strategy, as compared to accurately accounting for the different revenue streams.

We set-up the following revenue model to estimate the acquisition revenue contribution over the period 2011 to 2016:

  • We modelled the 2011 organic revenue per year from 2011 to 2016, this is defined as the “Core Revenue”;
  • We modelled the 2011 acquisition revenue per year from 2011 to 2016 + incremental acquisition revenue per year, with each year projected to 2016, this is defined as the “Cumulative Acquisition Revenue”; and
  • For simplicity, we assumed all revenue streams grew at the same annual growth rate per year.

Using this modelling approach, we calculated that in 2016, EOH had earned 63% of its revenue from cumulative acquisitions made over this period. The balance of 37% was earned from the growth of the 2011 organic revenue.

The following graph shows the two revenue streams.

EOH Revenue Analysis 22.11.2016

Source: Africa Analysis modelling of revenue streams

The CAGRs over the period 2011 to 2016 are as follows:

  • 2011 organic revenue          19%
  • 2011 acquisition revenue   77%

As shown, EOH’s revenue has enormously benefitted from its M&A strategy.

Two Year EOH M&A Track Record

The following diagram shows the M&A activity over the past 24 months. The M&A activity is shown in the quarter that the transaction was completed (as compared to the date when the transaction was announced). The M&A activity underlines EOH’s position as the most prolific M&A-driven ICT company operating in the SA market.

EOH Two Year M&A 22.11.2016

Source: Africa Analysis assessment of the M&A reported by EOH (2015 and 2016)

Shown in the M&A timeline are the transactions undertaken outside of South Africa. International M&A is to be expected as it is unlikely that EOH can continue to grow revenue, through M&A undertaken in the South African IT sector, at the rate that it has grown its revenue. There are just not enough companies that EOH can buy to continue to demonstrate the impressive annual revenue growth that it has shown.

The following figure shows a high-level application of the Africa Analysis M&A diagnostic model. This model determines the strategic intent of the acquisition regarding scale, customers, revenue and markets.

EOH M&A Analysis 22.11.2016

Source: ©Africa Analysis M&A Diagnostic Analysis 2016

Overall, EOH has driven the growth in finding new customers either in existing markets or new markets. EOH has also driven the acquisition of new capabilities that can be used to serve new and existing customers. The analysis also shows the drive to expand into adjacent markets.

Diversification Strategy

These acquisitions demonstrate the ongoing EOH diversification strategy. A review of some of the acquisitions made over the past 24 months shows the scope of diversification:

  • SCAN RF                          : Wireless infrastructure
  • PIA Solar                          : Alternative energy
  • JOAT Group                   : Civil engineering – water infrastructure
  • Mehleketo                       : Rail infrastructure
  • Paterson Candy           : Civil engineering – water infrastructure
  • Grid Control                  : Energy management services

EOH is building capacity in infrastructure technology – water, electricity and transportation.

Can EOH Sustain such revenue growth?

The key question is whether EOH can sustain such aggressive revenue growth? First, let’s explore possible revenue growth and M&A scenarios:

Scenario 1: If we assume the same CAGR of 39% for the next five years, and FY2016 core revenue grows at 19% per annum, then:

  • By 2021, EOH would reach R67 billion, or 5.3x its FY2016 revenue.
  • EOH will need to buy companies that contribute R27 billion in new revenue over this period
  • On average, EOH will need to add the equivalent of 15% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

Scenario 2: If we assume the average 2016 revenue growth of 31% for the next five years, and FY2016 core revenue grows at 19% per annum, then:

  • By 2021, EOH would reach R49 billion, or 3.9x its FY2016 revenue.
  • EOH will need to buy companies that contribute R14 billion in new revenue over this five-year period.
  • On average, EOH will need to add the equivalent of 9% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

Scenario 3: If we assume the FY2016 revenue growth of 10% for the next five years, and FY2016 core revenue grows at 10% per annum, then:

  • By 2021, EOH would reach R35 billion, or 2.7x its FY2016 revenue.
  • EOH will need to buy companies that contribute R12 billion in new revenue over this five-year period.
  • The assumption is that EOH adds the equivalent of 10% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

These scenarios show the outcome of revenue and M&A activity assumptions. Based on the scenarios, EOH will need to maintain an aggressive M&A strategy over the next five years to deliver similar revenue growth as it has shown over the past five years. Depending on how aggressive EOH sees its growth, it will need to add new revenue derived from M&A of between R12 and R27 billion of the next five years.

This is quite a challenge, and we expect that EOH will need to either seek international M&A targets and/or diversify into adjacent markets in the SA market.

Conclusion

The revenue analysis shows that EOH has successfully grown its revenue through an M&A strategy. Indexing revenues to FY2011, shows that by FY2016, EOH had earned 63% of its revenues from the cumulative acquisitions it had made over this period.

The EOH challenge, however, is how to continue to deliver such impressive revenue growth over the coming years.

 

M&A Pic 1

Vumatel/Fibrehoods deal underlines the FTTH Economics of Scale Factor

Summary

Economics of scale is a critical success factor for open access fibre networks. Achieving scale gives open access network providers a strong competitive advantage. Mergers and acquisitions (M&A) is a critical tool used by fibre network operators in achieving scale. The Vumatel acquisition of Fibrehoods represents the latest M&A deal in the open access fibre market. This deal continues the fibre M&A trend seen in 2016.

Vumatel buys Fibrehoods

In 2014, Vumatel entered the Fibre To The Home (FTTH) market. While there were existing fibre network operators, the entry of Vumatel kick started the entry of many new operators to the market. This in turn triggered a rapid fibre land grab. By March 2016, we estimate there were 196 thousand houses passed. Note this number excludes VDSL subscribers, as in some markets VDSL, who use FTTC, are included in the reported FTTH numbers. The figure below shows the rapid growth in FTTH houses passed over the last two years.

FFTH Market Oct 2016

Scale is critical for an open access fibre network operator

Fibre network scale is a critical success factor for an open access network provider, with scale being measured by the size of its FTTH network. The network operator’s expanding network footprint drives sales momentum among retail service providers using its network. In effect, the open access network operator offers more opportunities for the retail service providers to sell retail services.
The key benefit is that FTTH scale also translates into economic scale in that the operators balance sheet grows stronger. Economic scale means that the operator can access cheaper capital with better terms than smaller operators. This is a strategic competitive advantage as building out FTTH networks is a capital-intensive business.

Open access operators can gain scale through a combination of a build and/or buy strategy:

  • Build strategy: In terms of building out FTTH networks, we foresee a total of R12 billion being invested in open access FTTH networks over the next three to four years. This estimate is based on market announcements and our assessment of capital required to deploy the announced fibre networks. This strategy works well when an operator deploys fibre in areas where there is no existing fibre network to compete against.
  • Buy strategy: We have seen the buy strategy exercised over the past two years, with a significant ramp-up in 2016 MA activity.

M&A is part of the fibre network strategy

“M&A is a key tool used by fibre network operators to expand their networks”

Fibre network operators typically start out as niche operators, who focus on a specific high-income geographical residential area. As the operator gains market traction, it seeks new areas to deploy fibre thus driving the scale of its business.
In doing so, it faces two challenges: (1) funding the network expansion, and/or (2) deploying fibre in an area where there is an existing competing network.

  • Funding: Network operators either sell equity or take on long term debt to fund network expansion. We have seen both options exercised in South Africa. For example, Investec acquired an equity stake in Vumatel and Rainbow Capital acquired an equity stake in Metrofibre Networx.
  • Competitive: The operator can choose to (1) buy the existing network operator, (2) reach a network sharing agreement, or (3) decide to not enter that geographical market. Typically, we see options (1) and (3) being taken. Network sharing and co-build strategies are seen on long-haul fibre routes.

In SA, we have yet to see a new FTTH entrant build FTTH infrastructure in areas where another new entrant has already built out their FTTH network. We have seen new entrants build-out in competition to Telkom’s DSL network. Part of the reason is that there are enough attractive geographic areas for new entrants to choose from. This has led to an explosion in new FTTH players over the last two years that in turn has resulted in a fibre land grab.

There are a limited number of early win attractive areas wherein to deploy fibre. To gain scale and to enter these attractive markets means that the SA fibre operators must move into the M&A phase, and the market has done just that.

The following table (as at 25 Oct 2016) lists the M&A activity in the FTTH market. As can be seen, we have moved aggressively into an M&A phase. Note that the table excludes the establishment of fibre network operators and only focuses on M&A.

FTTH M&A Deals

Source: Company press releases 2015 to 2016, the Date column represents the year in which the deal was completed. It is not the deal announcement date. The Not Complete comment implies that the deal is still awaiting final regulatory/competition approval.

Here are noteworthy fibre deals that were terminated:

  • Vodacom offered to buy Neotel, the deal was terminated in Q1 2016 given the regulatory hurdles that the deal encountered.

The table shows that the year 2016 will be remembered as the year that FTTH M&A commenced.

The FTTH M&A activity seen in SA is reflective of global trends. Global market observations show that consolidation is a natural part of the FTTH market. Examples of such country markets are the UK and USA.

Fibre Network M&A Outlook

Long term sustainability in the open access FTTH network market is defined by one key word “scale”. Scale is generated through network expansion. Operators drive scale through a combination of a build/buy strategy. To date, we see little evidence of operators building competitive fibre networks in the same geographical area.

Furthermore, the South African National Integrated ICT Policy White paper (Oct 2016) promotes open access networks with the objective of limiting duplicate infrastructure build. We therefore expect that M&A will continue to be an important tool to grow network scale. In addition, we expect that more private capital will be attracted to the fibre market.

In 2017 and 2018, we expect further consolidation in the FTTH market. Small open access network operators, who cannot generate enough scale, will ultimately close or be acquired.

The M&A fibre market theme for network operators will be: buy or be bought.

Cell C Subscriber Analysis

Interrogating the Cell C Subscriber Numbers

The Blue Label Telecoms Circular (18/10/2016) shows that Cell C subscriber numbers are significantly lower when reported against the industry standard of a 90 day active subscriber definition. Using this new information and applying the 90 day definition to the historically published subscriber numbers shows that Cell C has not performed as well as it has claimed. Over the last five years, the mobile operator’s SIM market share has hovered around the 15% mark. This despite the various subscriber acquisition strategies undertaken by it.

Subscriber Reporting Overview

Mobile operators have settled on a 90-day revenue-generating subscriber definition for reporting active mobile subscriber numbers. The 90-day says that a subscriber is defined as active, if on that SIM there is a revenue generating event over a continuous 90-day window. The 120-day definition extends the 90-day window to 120 days. Cell C has reported their subscribers on a 120-day definition, whereas the rest of the mobile operators have reported their subscribers against a 90-day definition.

The 90-day is defined as the 90RGS subscriber, while the 120-day is defined as the 120RGS subscriber.

Why is reporting subscriber numbers against a common definition important?

The analysis of the market and individual operator performances relies upon using subscriber numbers reported against a standard definition (or as close to a such a definition as possible). For example, the reported subscriber numbers are one of the KPI’s used to assess the market and individual operator performance over time. The analysis, however, requires that the information used is based on a standard definition. When an operator does not adhere to this principle, then that KPI analysis can lead to the wrong assessment of that operator’s performance, and can provide the wrong view about the market dynamics.

Cell C Historical Subscriber Reporting

Historically, there was always a suspicion that Cell C reported their subscriber numbers on a 120RGS basis while the rest of the mobile operators used the 90RGS definition. In the Blue Label Telecoms Circular (BLT-Circular), Cell C was reported to have over 25 million subscribers (page 11). However, on page 14 of the BLT-Circular, Cell C was reported to have 12.7 million subscribers. This large difference in subscriber numbers triggered an investigation into these numbers. It emerged that the 25 million was based on a 120RGS definition, whereas the 12.7 million was based on the 90RGS definition.

Cell C is not the only operator to have used a different subscriber definition.

From 2005 to 2012, Vodacom reported its prepaid subscriber base on a 210-day RGS. This was changed to a 90RGS in March 2012. The percentage difference between the 90RGS and 210RGS increased from around 9.6% (March 2005) to 21% by March 2012.

It was expected that Cell C would have a similar overstate factor when comparing the 90RGS and 120RGS subscriber bases. The information revealed in the BLT-Circular showed that there is a large difference between the two sets of Cell C subscriber numbers (90RGS vs 120RGS).

Reviewing Cell C Historical Subscriber Numbers

The large difference in the 90RGS and 120RGS subscribers required a comprehensive review and reassessment of Cell C’s historical subscriber numbers. Given that Cell C has not declared its historical numbers against the 90RGS definition, we needed to revisit all of the previously published Cell C subscriber numbers, in order to better understand the operator’s performance.

We analysed the published numbers and drew out the following observations:

  • The large overstatement of Cell C subscribers is found in their reported prepaid subscriber base:
    • At June 2016, the 120RGS subscriber base is overstated by 115%, when the base is compared against a 90RGS subscriber definition.
    • Analysing the reported Cell C numbers shows that the impact of the overstatement becomes more apparent from March 2012 onward. Based on a 90RGS definition, the Cell C subscriber numbers were overstated by around 80%. This is similar to our estimate of Cell C’s churn over this period.
  • The postpaid base (postpaid+hybrid) reported subscriber numbers are consistent with historically reported numbers:
    • Therefore, we conclude that there is most likely a very small overstatement of the postpaid base.

SA Network SIM Market Share

The challenge in undertaking a historical correction of the published Cell C subscriber numbers, is deciding on the correction factor to align the 120RGS subscriber base to the 90RGS subscriber base. The following chart shows the network SIM market share trend over the past five years.

2016 A Mobile Operator Network SIMs Market Share

Source: SA Telecoms Model, Sep 2016

Cell C has remained at around 15% market share. It has not achieved the subscriber growth that it has claimed, and the actual subscriber numbers now indicate that Cell C has not grown its market share as previously thought. The new data throws doubt on the success of Cell C’s strategy to grow its subscriber base.

What the chart does show is that Telkom Mobile is the only operator to have consistently grown its market share of SIMS.

Analysis Summary

  • Analysis of the newly revealed Cell C subscriber numbers, shows that Cell C’s 90-day defined subscriber base (for June 2016) is only 12.7 million and not the 25 million that it had communicated to the market. This is an overstatement by 95%.
  • Using the 25 million, 120-day definition, has enabled Cell C to claim that it has performed remarkably well over the past few years. Our view is that Cell C has used these subscriber numbers to validate its strategy.
  • However, the operator had not reported its subscriber base against the industry standard of 90RGS. Correcting the historical subscriber numbers to a 90RGS definition shows that Cell C has not been successful. Over the past five years, its SIM market share has remained at round 15%.
  • The significantly overstated Cell C subscriber numbers have hidden from the market the true challenges that Cell C has faced. The 90RGS numbers indicate that Cell C’s strategy has not been as successful as the operator would have the market believe.
  • What the overstatement has done, is to hide and obscure insight into the real winner in the market in terms of subscriber market share growth – namely, Telkom Mobile. Over the past five years, Telkom Mobile has been the only mobile operator to have grown its subscriber base, albeit off a low base.

Source:

This analyst note drew upon the information published in the Blue Label Telecoms Circular issued on 19 October 2016. This information was used to guide the rebasing of the historical subscriber numbers published by Cell C, to a 90-day subscriber definition (90RGS).

Cell-C

Blue Label Telecoms – Cell C Deal Update

In October 2016, Blue Label Telecoms announced that it had increased its offer to R5.5 bn for 45% equity in Cell C. In December 2015, the company offered R4 bn for 30% equity. The new offer does not change the fundamentals of the refinancing deal. We expect that the new deal will not bring any new added benefit to Cell C.

October 2016 Announcement

 In a SENS note (5/10/2016), Blue Label Telecoms announced that it had increased its proposed equity purchase in Cell C, and now offers to buy 45% for R5.5 billion. The acquisition will be made through its wholly owned subsidiary The Prepaid Company Proprietary Limited (“TPC”).  The R5.5 billion will be made up from the following cash sources:

  • R2.0 billion via a vendor consideration placement with NET1 UEPS Technologies Inc, through its South African subsidiary Net1 Applied Technologies South Africa Proprietary Limited, at a price of R16.96 per share, which represents a 10% discount to the 30 business day weighted average traded price; and
  • R3.5 billion from available cash and funding facilities.

New Refinancing Structure

Under the new deal, the equity structure will look as follows:

  • the subscription by TPC (The Prepaid Company Proprietary Limited) for shares comprising 45% of Cell C’s total issued share capital for a subscription consideration of R5.5 billion;
  • the subscription by MS10 (senior management of Cell C) for shares comprising 10% of Cell C’s total issued share capital;
  • the subscription by MS15 (Albanta Trading 109 Proprietary Limited) for shares comprising 15% of Cell C’s total issued share capital; and
  • the subscription by 3C (3C Telecommunications Proprietary Limited) for shares comprising 30% of Cell C’s total issued share capital, for a subscription consideration equal to an amount which will result in Cell C’s net borrowings being reduced to a maximum of R8.0 billion at the time of receipt by Cell C of the respective subscription considerations.

In the December 2015 deal announcement, Cell C staff were going to buy 29.42% equity, split in two tranches of 11.77% and 17.65%. Under the current deal, we assume that MS10 and MS15 refer to these two tranches of equity purchases for the Cell C Staff. The Cell staff will now own 25% equity in the operator.

Similarly, according to the December deal announcement, 3C was going to retain 35% equity. Under the new deal announcement, 3C will only retain 30% equity in Cell C.

The following diagram sets out the proposed new shareholding of Cell C:

Blue Label Telecoms - Cell C - October 2016.jpg

Source: Blue Label Telecoms SENS 5/10/2016

Deal impact on Cell C

This deal is about refinancing Cell C, reducing its long term borrowings to a maximum of R8 billion, while providing a strategy for the 3C Telecoms shareholders to reduce their risk and exposure through Cell C. The deal offers the opportunity for Cell C management and staff to participate at an equity level, while it provides Blue Label Telecoms an investment opportunity in an industry they understand.

The deal will improve Cell C’s profit after tax (PAT) margin by reducing interest payments. However, it will have no significant impact on the operator’s operational performance. The deal gives Cell C better access to future funding through Blue Label Telecoms.

Deal impact on the market

We don’t expect the deal to radically change Cell C’s strategy. Cell C has already embarked on an aggressive subscriber acquisition strategy.

The challenge for Cell C is that it has not translated its successful subscriber acquisition into revenue market share. Cell C has grown its market share, but its share of the mobile revenue has not grown in proportion to its subscriber growth.

Over the coming year, we expect Cell C to focus on growing its revenue market share by attracting the higher value customers to its network. Cell C is using new product innovation and pricing to draw in high value customers.

Broadband-Infracto

Broadband Infraco – Treading water

In summary, Broadband Infraco (BBI), a wholesale telecommunications operator, is in a concerning financial position. Failure by BBI to grow its revenue, outside of the top four customers, coupled with its current net burn rate (operating costs less revenue), will most likely see the operator run out of cash to fund its operations by March 2017. Should this happen, the government will be forced to reconsider its strategy regarding BBI. Unpacking the latest Broadband Infraco report shows that it’s key challenge remains it’s poor financial position.

On the 23rd August 2016, BBI presented its FY2017 Q1 report to the Parliamentary Portfolio Committee on Telecommunications and Postal Services. This note presents a brief review of the operator’s financial outlook.

Broadband Infraco Revenue: FY2016 Results and FY2017 Forecast

The following chart and table presents BBI’s historical and forecast revenue:

Broadband Infraco - Pic 1

Source: Broadband Infraco Annual Reports (FY2012 to FY2015), FY2017 Q1 Performance Report submitted to the Portfolio Committee on Telecommunications and Postal Services

Historically, BBI has benefited from South African government support. It concluded a multi-year contract with SITA (the State IT Agency) and sold 70% of the international submarine capacity (on WACS), that it had purchased, to the Department of Science and Technology (DST).

Analysis of the presented FY2016 information shows the following:

  • BBI earned 90% of its FY2016 revenue from four customers: Cell C, Neotel, SITA, WACS (DST, the sale of the international submarine capacity).
  • SITA is BBI’s single largest customer, who accounted for 33% of the revenue.
  • The combined SA government revenue, DST and SITA, accounted for 43% of this revenue.

Analysis of the forecast FY2017 revenue information shows the following:

  • SITA will remain BBI’s single largest customer, representing 27% of the forecast FY2017 revenue.
  • BBI plans to significantly grow the revenue earned from the rest of its customer base (and from new customers) by 219%, from R47 to R150 million.
  • BBI will remain dependent of the top four customers, given that the operator forecasts to earn 81% of its future revenue from this group. On paper, BBI’s revenue is at risk, given the high revenue concentration in the top four customers. However, it is unlikely that the revenue from this group is under threat. If there was any risk, it would arise from the pending sale of Neotel to Liquid Telecom. Following the completion of this sale, Neotel’s spend with BBI will likely decline.

The BBI challenge is its financial position. The following charts show the historical and forecast EBITDA margin and retained earnings trends:

Broadband Infraco - Pic 2

Source: Broadband Infraco Annual Reports (FY2012 to FY2015), FY2017 Q1 Performance Report submitted to the Portfolio Committee on Telecommunications and Postal Services

  • By March 2017, BBI expects its accumulated loss (or negative retail earnings) to surpass R1 billion.
  • The 7% EBITDA margin was achieved through a combination of revenue growth and cost reduction. BBI plans to continue these initiatives in FY2017.

So what are Broadband Infraco’s Strategic Initiatives?

A study of the top ten strategic risks, that BBI has presented in its FY2017 Q1 report, provides some insights into the company’s strategic intentions. The risks associated with the issues raised in this post are presented here (not all the risks are presented):

Risk #1 – Likelihood not to continue as a going concern – actions taken:

(a) Continue with key focus and drive on sales by all executives and KAMS, and (b) Enter into long term tenure with customers
(a) Continue cost optimisation of Cost of Sales and Operational costs – by renegotiating fibre maintenance and leases with the suppliers, (b) Continue with cash management initiatives, through daily bank reconciliations and working capital management
(a) Continue with renewed intensity to source funding from commercial banks, developmental institutions and specific vendors

Risk #6 – Difficulty to raise funds – actions taken:

Continue interactions with suppliers, commercial banks and developmental institutions to source funding for working capital, ring-fenced projects and selective maintenance projects.
Continue with renewed intensity to source funding from commercial banks, developmental institutions and specific vendors.

Risk #7 – Damage to the reputation of Broadband Infraco – actions taken:

Pro-active relationships are being put in place with IT Web, Tech Central, Money Web and Business Day to source inputs from BBI before publication.
Pro-active integrated PR & Marketing strategy to be activated to convey BBI‘s positive success stories.
High brand visibility is being maintained through all stakeholder – related events and programmes.

These actions show that BBI is embarking upon a reputation management campaign to ensure that the market does not perceive BBI as a supply risk in its capacity as a supplier.

Broadband Infraco Financial Challenge – Revenue and Net Burn Rate

BBI’s FY2017 revenue forecast is premised on growing the revenue contribution from customers, other than the top four, by 219%. Failure to grow the customer base will see further pressure placed on BBI’s ability to fund its operations and invest in network capex. Failure to invest will result in the operator becoming more constrained in its ability to generate new revenue.

The inability to invest will result in the operator losing the opportunity to win new customers. Furthermore, the inability to fund replacement capex will see the BBI network deteriorate, leading to poor service delivery. This in turn will cause customers to move away from BBI.

BBI will require financial assistance within this year from the government to continue as a going concern if it (1) fails to grow revenue, outside of its top four customers, and/or (2) is unable to reduce its burn rate.

Overall, Broadband Infraco operates in a competitive market where the slightest slip-up results in lost business. Quite likely, the SA government will need to review its plans regarding this operator.

The current FY2017 financial forecast sees this company treading water.

In closing, what are the SA Government options?

The strategic options that the SA government could consider, are presented in the following table:

Broadband Infraco - Pic 3

As shown, the SA government has a key decision to make over the coming year. What to do with Broadband Infraco!


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The Role of WiFi Header Pic

The Role of WiFi and Mobile Broadband

The WiFi relationships uncovered through preliminary analysis would suggest that mobile subscriber WiFi usage is far more prevalent than may at first appear. In the higher income countries, the greater use of WiFi by mobile subscribers would indicate that their per unit cost of broadband would be lower than that of their counterparts residing in lower income countries.

Introduction

In this post, we uncover relationships between mobile broadband, WiFi usage and fixed broadband adoption.

The information used in this analysis is sourced from OpenSignal (with permission), International Telecommunications Union (ITU, fixed broadband household penetration) and the World Bank (GDP per Capita, PPP). Specifically the data used in this post are taken from the following sources:

  • Global State of Mobile Networks (August 2016) Report, OpenSignal
  • 2015 ICT Statistics, ITU
  • World DataBank, dataset from World Bank

We typically use this type of analysis to draw inferences about market behaviour. They provide good departure points for robust discussion about what market factors drive consumer behaviour.

Fixed Broadband Household Penetration (2015) vs. GDP per Capita (2015)

This chart shows the country adoption of fixed broadband per household versus the GDP per Capita (PPP).

Over the years, we have seen this classical plot presented where we have explored the relationship between GDP per Capita (as a proxy for income) and the various telecommunications indicators. While we can raise various arguments for and against this type of a plot, it nevertheless does provide an indication of whether your country is inline, above or below your peer countries.

The Role of WiFi - Pic 1

Source: ITU 2015 Indicators, World Bank 2015 GDP per Capita (PPP), Africa Analysis, data plotted for the 93 countries presented in the OpenSignal report

Fixed Broadband Household Penetration vs. Average 3G/LTE Speed

The graphic shows the plot of the fixed broadband household penetration and the average 3G/LTE speeds.

The Role of WiFi - Pic 2

Source: Africa Analysis, OpenSignal (2016, data plotted for the 93 countries presented in the OpenSignal report), ITU 2015 Indicators

While there is some data scatter, we can make some interesting observations:

The higher the fixed broadband penetration, the higher the 3G/LTE speeds. The trend suggests that in the more broadband abundant markets, mobile operators have needed to increase the average speeds in order to compete against their fixed broadband counterparts.

In countries with lower fixed broadband penetration, the following reasons can be put forward to explain the observations:

  • Mobile operators are not under strong competitive pressure to increase the average 3G/LTE speeds. Perhaps mobile operators believe that consumers have very little broadband choice and, therefore, there is less pressure on the mobile operators to invest in their networks.
  • There is a lack of spectrum for LTE, thus mobile operators are limited to 3G.
  • In developing markets, where the mobile operators are deploying 3G, they may have the licence requirement to achieve a certain population coverage, and therefore, focus on extending reach before focusing on increasing the capacity to offer higher 3G/LTE speeds.

Fixed Broadband Household Penetration vs. Time Spent on WiFi

Intuitively, it makes sense that as the country’s fixed broadband penetration rises, so does the time spent by mobile subscribers on using WiFi.

The Role of WiFi - Pic 3

Source: Africa Analysis, ITU 2015 Indicators, OpenSignal (2016, data plotted for the 93 countries presented in the OpenSignal report)

Given that there is some data scatter, we can still make some interesting observations:

  • In the higher fixed broadband markets, more mobile subscribers will have access to WiFi at their homes, thus they would switch from mobile to fixed broadband when they are at home.
  • In addition, the availability of WiFi is driven by the greater availability of fixed broadband to serve as backhaul to the WiFi sites. Thus, we see the rise of more public WiFi sites.
    This observation can serve as a strong motivator for decisive mobile operator WiFi strategy.
  • At a country level, we would put forward that the greater use of WiFi will, in general, lower your cost of broadband access as WiFi is either used at rates ranging from no charge to at most price parity with fixed broadband.

This trend shows that as fixed broadband is deployed, mobile operators will experience more competition.

GDP per Capita vs. Average 3G/LTE Speed (Mbps)

The plot of GDP per Capita vs average 3G/LTE speed shows that the average speed increases as the country’s GDP per Capita increases.

The Role of WiFi - Pic 4

Source: Africa Analysis, ITU 2015 Indicators, OpenSignal (2016, data plotted for the 93 countries presented in the OpenSignal report ), World Bank (2015)

While there is some data scatter, we can make some interesting observations:

  • There is a wider spread of data points for the higher GDP per Capita (PPP) countries. Inspection of the data shows that there are fewer higher GDP per Capita countries where the average 3G/LTE speed was measured on the low side. Rather, these countries would be deemed to be poorly performing.
  • In the lower income countries, under GDP per Capita of USD20,000 (PPP), we can see a much less scattered and, more likely, a stronger relationship between GDP per Capita and the 3G/LTE average speed. This observation can be ascribed to various factors, but what it does show is that these countries are placed at a strategic competitive disadvantage regarding strategic capabilities to grow the country. This is based on the observation that broadband is critical to a country’s development.

In Summary

Analysis of the OpenSignal data does highlight interesting subscriber behaviour. When this data is combined with other 3rd party data (ITU and World Bank), we uncover interesting relationships.

  • In higher fixed broadband countries, mobile operators offer higher average 3G/LTE speeds. This is most likely driven by the need to compete against the higher fixed broadband speeds.
  • In the high income countries (as measured by GDP per Capita), subscribers have more broadband choice (mobile and fixed) regarding speed and availability. There is wider availability of good quality WiFi networks, both in and outside of the home. Therefore, subscribers spend more time on WiFi.

These relationships would suggest that WiFi usage is far more important than operators may want to admit to. The data does suggest that a more clearly articulated and executed WiFi strategy is called for.

 


OpenSignal is the leading source of insight into the coverage and performance of Mobile Operators worldwide. OpenSignal data is directly measured from consumer devices as opposed to traditional methods of simulating or approximating mobile experience. With over 15M downloads, the OpenSignal app represents the largest crowdsourced measurement of Mobile Networks. Operators across the globe use OpenSignal data for competitor benchmarking, network spend optimization, understanding true customer experience and more. OpenSignal also works with regulators and analysts globally and is backed by top tier investors including Qualcomm, Inc.


 

Ruling imposed on the MTN  Smart Village

Ruling imposed on the MTN / Smart Village acquisition

The MTN acquisition of Smart Village led to an interesting competition condition imposed by the Competition Commission – namely that MTN needed to introduce an open access model for Smart Village. The ruling does raise an interesting question about access to telecommunications infrastructure in gated communities. This note explores the Competition Commission ruling, looks at the issue of competition in gated communities, and considers possible future operator strategies.

The Challenge of Consumer Choice in Gated Communities

Consumer choice can be completely eliminated in gated communities through the establishment of a monopoly provider in these communities. These localised pockets of monopoly come into existence either through the home owners’ association providing an exclusive mandate to an infrastructure provider or by the behaviour of the telecommunications infrastructure provider. The creation of such monopolies results in the gated community consumers being denied choice. Furthermore, the MTN acquisition of Smart Village highlighted this competition issue.

What is the Competition Commission Ruling?

The following text is extracted from the Competition Commission news letter dated July 2016.

On 29 January 2016, the Competition Commission approved with conditions a merger whereby Mobile Telephone Networks (Pty) Ltd (“MTN”) acquired Smart Village (Pty) Ltd (“Smart Village”). MTN is a global communications partner and cellular network operator. Smart Village is mainly active in providing fixed line fibre broadband access to the residential market.

The merger presented a horizontal overlap in relation to the provision of fixed-line broadband fibre optic access network as both parties deploy fibre in gated residential estates. Both parties also operate as Internet Service Providers and offer internet connectivity services to residential estates where fibre is deployed. The Commission found that each gated residential estate constitutes a distinct separate geographic market as gated residential estates generally do not permit the duplication of fibre infrastructure in the respective gated estates. In that regard, there was no geographic overlap arising in the assessed markets. Smart Village holds 100% of the market in each of the gated residential estates wherein it has laid the fibre, thus the merged entity would have monopoly power over each of the gated residential estates.

The Commission found that the vertical relationships arising from the merger would result in a substantial lessening and prevention of competition. The merged entity would acquire a position that would allow it the ability to exercise market power. This could be exercised through foreclosure strategies over its fibre infrastructure in the gated residential estates. In addition, the Commission found that the merged entity would have the incentives to do so as MTN is also able and intends to expand its downstream services offerings in the gated residential estates. Such foreclosure conduct would ultimately harm consumers in those estates where such conduct would be perpetuated and prices are unlikely to decline when there are no viable competitive choices. MTN would also be in a prime position to leverage market power on its fibre into downstream services such as internet connectivity, TV on demand services and security services through bundling strategies.

The Commission found that the input foreclosure strategy could be remedied through the imposition of conditions relating to open access model to the fibre infrastructure on fair, reasonable and nondiscriminatory terms and having transparent and market related pricing. With an open access model, customers in gated residential estates would be afforded choice in terms of product and price offerings. The Commission was further of the view that as long as MTN’s ability to leverage its market power over fibre is curtailed by the adoption of an open access model on a non-discriminatory basis, other potential exclusionary strategies such as bundling are also unlikely to be achieved.

A Brief Global Review

The issue of access of telecommunications infrastructure within buildings or private estates has been dealt with in other jurisdictions. The key themes that run through the regulations are the protection of consumer choice and the encouragement of broadband growth.

Here are a few country examples:

  • Portugal
    • Decree-Law 123/2009 was published, setting out the legal regime applicable to the construction of infrastructures to lodge and install electronic communication networks and to the construction of telecommunications infrastructures in housing developments, urban settlements, concentrations of buildings and buildings. The essence of this law is that it obligates infrastructure sharing within the abovementioned settlements and buildings.
  • Qatar
    • In 2013 ictQATAR (the national regulatory authority) issued a set of instructions to service providers, developers and building owners that specially stated that exclusive telecoms infrastructure usage was prohibited. ictQATAR stated that end-users must have the possibility to choose between the offers of all and any service provider to the public licensed in Qatar and the arrangements which have a negative impact on competition, i.e. exclusionary or exploitative effects, between service providers and/or developers and/or building owners are forbidden.
  • Singapore
    • The telecom riser ducts (or simply risers) in buildings are administered by Infocomm Development Authority (IDA) under the provision of the Telecommunications Act, 1999. IDA’s policy is to reserve the risers for use by fixed-service facilities based operators (FBOs). Any other person or enterprise intending to use the risers shall seek permission from IDA.

In other jurisdictions, different methods of access to in-building or estate infrastructure exists. Where these regulations exist, they serve to promote fair competition.

Gated Communities in South Africa

A key characteristic of South Africa is the number and growth in gated communities.

These gates communities represent concentrated pockets of high-income households who are the prime target segment for the uptake of FTTH services. The challenge, however, is that the home owners’ associations typically sign exclusive contracts that give a single telecoms service provider or infrastructure provider exclusivity in the provision of services to that estate. Alternatively, the exclusivity relationship may arise when the telecommunications infrastructure provider deploys infrastructure and binds the gated community to an exclusive contract that excludes other competitors.

In either approach, the exclusivity behaviour serves to entrench a localised monopoly in a gated estate. Once such a monopoly exists, there exists the conditions for both horizontal and vertical closing out of other competitors. Consumers are thus deprived of freedom of choice.

In their ruling on the MTN/Smart Village acquisition, the Competition Commission ruling recognised this market behaviour and imposed open access conditions on the MTN acquisition.

Operator Strategies to Gain Access to Gated Community Infrastructure

As FTTH retail competition increases, these pockets of high-income households located in gated communities will become the focus of operators. Operators, however, will not gain access – given the monopoly that exists in these gated communities. We thus expect that there will be a rise in operators seeking mechanisms to break the monopoly in order to gain access.

The challenge is – how to gain access to infrastructure on a fair and equitable basis?

  • Given that there are very few open access networks operating in gated communities suggests that the owners of such infrastructure are employing practices to restrict access. Therefore, the likely route an operator will follow would be to approach a regulatory body to mandate such access.
  • It can be argued that these operators can make a case for being granted some form of access to the telecommunications infrastructure within gated communities. Furthermore, there are likely enough global case studies to illustrate how other national regulatory authorities have dealt with this challenge.
  • Approaching ICASA, to grant access to infrastructure, may not be the most expedient strategy to follow.
  • Rather, we would suggest that an approach to the Competition Commission would be the more economical route to follow. Based on the Competition Commission MTN/Smart Village ruling, we would expect that the operators, who challenge this monopoly situation, would receive a favourable ruling from the Commission.

Pre-emptive Strategies – Developing Wholesale Product Offerings

Operators who hold monopolies in gated communities for the provision of infrastructure should seek to develop open access or wholesale product offerings that offer access to other competing operators. This move can pre-empt the imposition of remedies that can end up being more onerous than what the operator would have developed.