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CAPEX Challenge

South African Telecoms Operators: The CAPEX Challenge

Current total [1] CAPEX investment growth is outpacing retail telecoms revenue growth – and there are no signs that this will change over the short term.  Unless telecoms operators change their business model, their ability to sustain such investments will become increasingly squeezed.  In the future, we expect to see a range of innovative network sharing deals done between telecoms operators, as they strive to alleviate the increasing CAPEX pressure.

[1] CAPEX includes all categories (e.g. plant, property, intangibles) reported by the telecoms operators. It excludes investment in companies.

2018 Annual CAPEX Growth

The total annual CAPEX of telecommunications operators in South Africa grew by 4.6% YoY, to reach R35.10bn for the year ending March 2018.

In 2018, three telecoms operators – MTN SA, Telkom Group and Vodacom SA – accounted for 78.6% of the total annual CAPEX. MTN SA, with 32.6% CAPEX market share, continued to be the largest investor.

Three-year CAPEX Review

Over the past three years (2016-2018), a cumulative total of R100bn has been invested in the various networks by the telecoms operators. More specifically:

  • MTN SA has invested a total 9bn in its network;
  • Vodacom SA follows with a total investment of 1bn;
  • Telkom Group has invested 8bn; and
  • Cell C and Liquid Telecom SA (formerly Neotel) have invested a combined total of 6bn.

capex-challenge

Interestingly, over the same three-year period the new telecoms operators – Dark Fibre Africa, FibreCo, Vumatel, and the rest of fibre market operators – have invested an estimated total of R8.2bn in their respective networks.

The Challenge

Annual CAPEX growth is greater than the retail service revenue growth.

Over the past five years, retail revenue earned from telecoms services only grew at a CAGR of 2.2% (2013-2018). Over the same period, total CAPEX invested grew 3.4x faster, or with a CAGR of 7.5%.

The expected CAPEX investment in telecoms networks shows no sign of slowing down. Operators plan to continue to invest in their respective networks. For example, investment is planned for fibre deployment, 5G and the overall capacity to deal with the ever-growing data demand. This implies a continued strong annual CAPEX investment programme.

The growth in telecoms services revenue, however, is currently forecast to grow at around real GDP growth.  Thus, if telecoms operators do not grow profitability to generate larger free cashflows, then these operators will experience a growing decline in free cashflow to fund network investment.

New Approaches to Network Buildout Needed

This growing gap will require telecoms operators to seek out innovative approaches to fund CAPEX and/or seek out better network sharing deals.

Some telecoms operators have already acknowledged that the current level of CAPEX investment is not sustainable.

Lastly, the demand for CAPEX investment will likely see some of the smaller telecoms operators exit the market.

3Gvs4Gvs5GNew

3G vs 4G vs 5G – Analysis of Vodacom SA

Summary

Since the deployment of the first 3G base stations, Vodacom has led the market in expanding network coverage. An analysis of the network deployment and uptake of 3G and 4G services, shows the following interesting points:

Reviewing the Technology Investment:

Vodacom has aggressively accelerated the deployment of 4G coverage, reaching 80% population coverage after only 5 years.

By comparison, the 3G network reached 80% population coverage after 8 years.

However, the analysis of 3G and 4G adoption by their customers, shows significantly different technology adoption profiles.  After 5 years, 4G adoption is less than half of the 3G adoption.

What does this mean?

Vodacom has invested strongly in driving 4G coverage.

However, the 4G device adoption has not kept pace with network coverage expansion. The slower adoption has not hindered Vodacom in driving 4G network coverage.

Looking Ahead to 5G

The strategic capability of Vodacom to invest in 5G without a strong link to 5G customer adoption, will underpin and solidify its market leadership position.

Only MTN has the capability to match the above strategy. Cell C and Telkom Group will not be able to match such an investment strategy easily.

Vodacom Strives for Technology Leadership

Vodacom has striven to lead the market when it comes to new technology deployment.

They launched 3G services in December 2004 and 4G services in October 2012. By comparison, MTN SA launched 3G services 6 months later, in June 2005. However, MTN launched 4G services (November 2012) within 1 month of Vodacom announcing their 4G service launch.

3G vs 4G Population Coverage – Vodacom

The following exhibit shows the respective 3G and 4G network population coverage since deployment.

3Gvs4GPopulation

The exhibit shows that Vodacom drove 3G population coverage quite strongly from 2004 to 2012. Interestingly, the sharp rise from 24% to 74% corresponds to the introduction and growth of Dark Fibre Africa (DFA). The launch of DFA was built on the uptake of dark fibre by Vodacom.

Vodacom has aggressively expanded their 4G population coverage, In comparison with the 3G population coverage.

3G vs 4G Population Coverage Comparison – Vodacom

By tracking network deployment in years, from initial service launch, it clearly shows how aggressive 4G deployment was compared to 3G deployment. The following exhibit presents this analysis.

Population Coverage Comparison

There are significant underlying factors that impact the deployment of 3G and 4G networks:

  • Vodacom needed to build out and/or wait for the provisioning of high capacity backhaul to their 3G base stations. Vodacom also needed to adopt a Fibre-to-the-Site (FTTS) backhaul strategy.
    • The advantage of this strategy is that the backhaul was scalable to accommodate the high capacity demand required by the 4G network. Thus, there is a significantly lower waiting time for the provisioning of high capacity 4G base stations.
  • Vodacom re-farms 3G spectrum to offer 4G services. Thus, the underlying infrastructure is in place for the deployment of 4G services.

In support of Vodacom’s 4G network deployment, is the roaming agreement it has entered into with RAIN.

The roaming agreement enables Vodacom to achieve two key network deployment strategies:

  • Capacity (densification): The rollout of 4G coverage by Rain using the Vodacom sites ensures that the Vodacom customers benefit from the network rollout.
  • Coverage: Using the Rain network frees Vodacom to focus on network coverage growth.

3G vs 4G Customer Technology Adoption – Vodacom

The proxy used for technology adoption is the ratio of technology SIMs to total SIM base. The handset base excludes M2M, dongles and tablets.

Device Adoption

By comparison to 3G, the adoption of 4G significant lags the adoption of 3G (device adoption).

This has not hindered Vodacom in driving 4G network coverage.

Quite likely, the 4G national roaming agreement with Rain has enabled Vodacom to focus on driving network coverage rather than focus on both network coverage and network capacity (densification). This behaviour illustrates the strategic value of the roaming agreement.

3G vs 4G Network Coverage Adoption – Vodacom

The following exhibit shows the relationship between network coverage (%population) and the adoption of technology (%SIMS).

Technology Adoption

Based on the exhibit, we can see that Vodacom has strongly driven 4G network coverage with little regard to the adoption of 4G devices. The ability to drive network coverage speaks to the strategic financial capability of Vodacom to invest in their 4G network, without linking this investment to 4G service uptake.

Vodacom has reported that its 3G and 4G customers show significantly different behavior. 4G customers consume more data and represents a higher ARPU customer. Vodacom reports around a 20% uplift in ARPU. Thus, while the 4G adoption has not matched the 3G adoption, the 4G customer has shown to be a more valuable customer (based on ARPU).

What Does this Mean for Vodacom’s 5G Strategy and the Market Competitors?

Based on the 4G behavior, we would expect Vodacom to adopt a similar 5G strategy – that of driving population coverage ahead of 5G service adoption. Vodacom can sustain this strategy while it has the strategic capability to generate cash from its operations to invest in network coverage.

The strategic challenge to the competitors, is that Vodacom can afford an investment strategy that does not directly link to customer adoption. MTN SA may be able to match such a strategy, but it is unlikely that Cell C and Telkom Group would be able to.

The implication of this strategy is that Vodacom can drive 5G network coverage and thus maintain / sustain their technology leadership. This will underpin their market leadership position.