Time to toll the information highway?

South Africa’s telecoms industry could be headed for a shake-up, with a new minister in charge — and a DA minister at that.

On the last day of June, President Cyril Ramaphosa appointed Solly Malatsi as minister of communications & digital technologies. He replaced the ANC’s Mondli Gungubele, who has become Malatsi’s deputy.

There is already positive sentiment around young blood being injected into the ministry. At 39, Malatsi will oversee the nation’s ICT sector — and organisations such as the State IT Agency, the Independent Communications Authority of South Africa (Icasa), the South African Post Office and the SABC.

It’s no small matter. The communications department is a key economic portfolio that has suffered mismanagement for decades, and has the dubious record of having a high turnover of ministers — 14 since 1994 — and reconfigurations.

It could now see something of a turnaround.

“The ANC has expanded control over the ICT industry, believing that only the expansion of state-owned enterprises [SOEs] within the sector can expand ICT networks, increase affordability and improve access,” says DA head of policy Mat Cuthbert. “Our policy is a market-driven approach to expanding ICT networks and infrastructure, prioritising lowering market-entry barriers and streamlining regulations and SOEs to curb inefficiencies.”

Direction for the now DA-led ministry could come from the party’s ICT policy, a 72-page manifesto that preaches greater private sector participation as a means to spur growth. Among a laundry list of items that include possible dissolution of the SABC, finally signing off on South Africa’s digital migration project and stamping out corruption, is a push to increase sharing of telecoms infrastructure between operators and to open the market to new players to increase competition.

The cost of development

The local sector has already been moving in the direction of infrastructure development, with the current gold rush being around fibreoptic cabling.

While fibre is widely accepted as being the connective tissue for the world’s communications systems, a debate is raging about who should pay, or at least contribute to the building and maintenance of this infrastructure. Should large internet players, in other words, have to pay “toll fees” on the information highway that they’ve benefited from for decades?

In Europe, there is mounting pressure for the likes of Google, Facebook and Netflix to share the costs of building and maintaining networks. 

The issue has garnered attention from policymakers and regulators globally.

In 2023, the CEOs of 20 of Europe’s largest mobile network operators, including Vodacom parent Vodafone, wrote to the EU calling for rules and regulations that would force large tech companies to pay a type of “network tax”, or at least contribute to the costs of the traffic that flows to their systems.

The operators argued that a “fair and proportionate contribution from the largest traffic generators towards the costs of network infrastructure should form the basis of a new approach”.

Then there’s South Korea. It’s credited with having the world’s highest fibre-to-home adoption rate and 5G technology. Part of this success is down to a fair-share distribution model that sees large traffic-generating companies contributing to network maintenance.

Locally, Telkom CEO Serame Taukobong believes over-the-top (OTT) players “have taken advantage of the infrastructure that we’ve built”. “We would appreciate it if they were to chip in or contribute to the development of infrastructure,” he tells the FM.

And South Africa’s biggest operators, Vodacom and MTN, have been vocal about the issue over the years, given the billions they spend on network expansion and maintenance each year.

As MTN group CEO Ralph Mupita explains it, from the time the iPhone came into existence, “most, if not all, of the value went to the OTT players, such as streaming services and instant messaging apps that used the digital infrastructure without contributing in any material way to the cost of that infrastructure”.

“Governments and regulators need to think about a different framework so that all participants in, or beneficiaries of, the digital infrastructure are paying their fair share towards digital investment and regulatory fees and taxes. Operators are bearing too big a burden on investment and fiscal contributions.”

It’s not as if the model is completely novel; it’s already in use elsewhere in the sector. Internet service providers, for example, offer internet access to businesses and homes by leasing infrastructure from network providers such as Telkom’s Openserve, Remgro-backed Vumatel and Dark Fibre Africa.

As to how this can be done, Vodacom boss Shameel Joosub tells the FM incentives need to be in place for network operators to keep ploughing capital into such projects.

“You need to look at the overall viability of the industry, because it’s a continuous investment in this industry. If you don’t have the telecoms companies making enough money, they can’t continue to invest into the network.”

In addition to using existing networks to grow their businesses, internet platforms have eaten up certain revenue streams from telecoms operators, Joosub says.

“What’s happening with the OTTs is that certain revenue streams that the telecoms companies would have traditionally enjoyed — [like] SMS or voice — start to diminish. Which then means we’ve got less revenue opportunities,” he says.

Consider, for example, platforms such as Meta-owned WhatsApp or Apple’s iMessage and FaceTime. These services allow for calling and texting over the internet at a much cheaper rate than traditional SMS and voice, previous cash cows for operators.

The impact on the market is clear. Mobile data revenue now contributes more than half of the revenue from mobile services, Icasa notes in its 2024 “State of the ICT Sector” report. “This is a clear increase from the same position in 2019 when it only made up just about 40%. The shift to a data-driven world and adoption of OTT services that have replaced traditional voice and texting is clearly visible in the data.”

According to Arun Varughese, RMB’s co-head of technology, media and telecommunications, mobile network operators “will continue to seek diversification of their revenue streams as the old business paradigm shifts. Voice and SMS will continue to decline as a means of communication, and we are shifting into a lower-margin, data-driven world.”

As a possible avenue to reduce the impact of OTT outfits, Taukobong points to countries such as Saudi Arabia and Dubai, where restrictions have been placed on WhatsApp. There, WhatsApp users are unable to make calls on the platform as a way to protect the voice revenues of local telecoms providers.

Even so, Joosub is quick to highlight the perils of overregulation.

“Regulation has to be encouraging investment and not putting additional pressure onto telecoms companies,” he says. “What we’ve seen around the world is that it’s an industry that has become overregulated ... To such a degree, in some environments, that it has affected the ability of the industry, and a number of players, [to invest].

“Where I would encourage regulators is to look at sustaining a certain level of pricing ... On the one side, you need competition to bring down pricing. On the other, when reaching a very competitive pricing path, the regulators need to ensure that prices are maintained within a certain level to ensure that investment cycles continue to happen.”

Governments and regulators need to think about a different framework so that all participants in, or beneficiaries of, the digital infrastructure are paying their fair share towards digital investment and regulatory fees and taxes

—  Ralph Mupita

Already investing

If the case for an internet traffic tax seems sound, there is a counterargument that the same internet players from which mobile providers want compensation are a big part of the reason for the growth in data and internet-driven revenues across the telecoms sector.

A 2022 paper by the Body of European Regulators for Electronic Communications expressed some scepticism. “There is no evidence that operators’ network costs are already not fully covered and paid for in the internet value chain,” it said.

Internet players also appear well aware that they need to be seen as contributors to infrastructure. In addition to land-based installations that large internet companies have been working to provide in Africa, they have also ploughed substantial amounts of capital into subsea cables and satellite networks.

In 2022, the Google-funded Equiano cable landed in South Africa. It’s the continent’s highest-capacity subsea internet cable yet, running from Portugal along the west coast of Africa to Cape Town. Its arrival in South Africa was in partnership with Openserve. 

That cable system competes against 2Africa, a huge development led by Facebook parent Meta. 

Amazon has been building satellite infrastructure through its Project Kuiper, inking a deal with Vodacom and Vodafone recently to provide better communications in remote areas. And perhaps the biggest example of this trend is Elon Musk’s satellite network Starlink, now providing connectivity to many parts of the world previously underserved by the traditional operators.

Google and Meta are estimated to have each spent $1bn on such projects. But mobile operators still think these players could be contributing more.

To make that happen, one obvious hurdle is getting different regulators to take the issue seriously enough to create and implement effective policy around it. European operators benefit from their ability to lobby a central body in the form of the EU.

“It’s a multitude of different engagements,” says Joosub. “The one thing that Europe does have is the EU. We have the AU but it doesn’t reach as far. It has to come down to localised regulators. I think it is much more difficult in Africa than it is in Europe to have this consensus. But it’s a conversation that needs to happen. The essence of the conversation is creating a sustainable telecoms sector.”

It’s a point Mupita echoes when he talks of “a lack of harmonisation of regulatory frameworks as you move from country to country”.

“It’s very challenging for us as a multinational operator in 18 markets where the regulations differ from country to country.”

MVNO growth

A more widely adopted form of infrastructure-sharing is mobile virtual network operators (MVNOs).

MVNOs are usually non-telecoms businesses, such as FNB, Standard Bank, Capitec, Mr Price Mobile and Pick n Pay, which lease network infrastructure from mobile operators to sell data and voice services to customers. Banks, in particular, have launched mobile networks as a way to increase consumption of their digital banking services. 

In South Africa, MVNOs constitute about 2% of total mobile subscribers. But Cell C sees enough room in the market to have up to 10-million MVNO customers on its network alone.

For years, that company was the only game in town in providing MVNO services; it was home to almost all MVNOs. But licensing reforms by the regulator and expectations of market growth have encouraged MTN to take the market more seriously. Now the second-largest operator, it lured Standard Bank away from Cell C as an MVNO client in June.

If Capitec dominated the MVNO-provider market, FNB was for years the largest MVNO player. Now, ICT research and consulting company Africa Analysis shows Capitec Connect has emerged as South Africa’s largest MVNO, followed by FNB Connect. Both players have more than 1-million SIM cards in the market, far outpacing Standard Bank’s reach of about 300,000 users.

Vodacom is yet to secure an MVNO client.

I’d argue that we are the only ones who are deliberate about it and really intentional [about] growing MVNOs in a significant way, as opposed to ticking a box that may look like competition

—  Cell C CEO Jorge Mendes

Still, there’s a dynamic in it all that irks Cell C CEO Jorge Mendes. “Remember, in the last round of spectrum auctions there was a condition that each mobile network operator had to have one MVNO and guarantee their success for three years, to encourage competition,” Mendes tells the FM. “I’d argue that we are the only ones who are deliberate about it and really intentional [about] growing MVNOs in a significant way, as opposed to ticking a box that may look like competition.”

The investment case

The market has not been kind to South Africa’s mobile operators over the past year — as the numbers show. Over 12 months, MTN shares are down 38.6%, while Telkom has slid 23.4% and Vodacom is down 14.4%.

Locally, operators have seen their share of challenges — most importantly an unpredictable power supply, which has driven up network costs owing to added diesel, battery and security costs. This situation has “dragged margins as the companies incurred additional operating expenditure on diesel [generators] and security costs”, says Jono Bradley, equity research analyst at Absa Corporate & Investment Banking.

At the same time, the local currency has faltered and consumers continue to be under pressure.

“A strained consumer has meant growing top-line revenue in South Africa remains challenging. MTN and Vodacom have increased prices on their prepaid bundles to spark growth, but it remains to be seen whether consumers are able to increase spend,” says Bradley.

Then there are the macroeconomic headwinds, particularly outside South Africa. These have mainly affected the two largest players, Vodacom and MTN, whose customers are mostly foreign.

Life for MTN has been especially hard since Nigeria’s new forex policy, announced in June 2023, took effect. Under the new policy, the value of the naira is determined by market forces rather than by the central bank. The currency is thus free floating, and its value can fluctuate based on supply and demand.

Since the policy change, the naira has lost more than half its value, pulling down MTN’s full-year earnings for 2023.

As Peter Takaendesa, head of equities at Mergence Investment Managers, puts it, MTN has “a lot of external factors beyond management’s control ... There is not much management can do in the short term when currencies collapse the way they have done in key West African markets and the company’s ability to pass through some of the inflation pain to the consumer is constrained by regulators.

“The cycle will ultimately turn for the better, but that requires strong operational execution from the management teams to at least maintain market share and patience by investors.”

Like its rival, Vodacom has had to absorb inflationary pressures and weaker exchange rates across its markets, including the recent devaluation of the Egyptian pound, which all contributed to a fall in earnings for the year ended March.

However, “Vodacom and MTN still have strong growth potential in their rest of Africa operations, particularly in mobile data and fintech,” says Takaendesa. “Service revenue growth is likely to remain in double digits for those regions in local currencies. Unfortunately regulatory and currency risks remain high.”

Whatever else is happening in the ICT sector, there appears to be no shortage of funding for telecommunications infrastructure. And fibre, especially, has continued to gain attention from lenders, who see its stable recurring revenue and long-term contracts as an attractive business model. 

Late last year, Vumatel and Dark Fibre Africa parent company Maziv secured a R25bn loan led by Standard Bank for a fibre expansion initiative. In 2022, Standard Bank backed MetroFibre Networx’s R5bn fibreoptic expansion through a similar arrangement.

That same year, fibre network operator Octotel secured R2bn in financing from RMB to push its network rollout, particularly in outlying parts of South Africa. At the time, it planned to use the funds to reach 500,000 homes. 

Seacom, one of Africa’s largest undersea cable providers, recently received backing from the International Finance Corp in the form of a $260m loan.

South Africa’s digital infrastructure story is “quite a good one”, says RMB co-head of technology, media and telecommunications Arun Varughese. “And we still have a long way to go — for example, connectivity in rural, informal and lower LSM areas ... that still hasn’t happened.”

But Jono Bradley, equity research analyst at Absa Corporate & Investment Banking, says rolling out fibre in most African markets is likely to be slow given the challenges faced by fibre operators, with fixed wireless access likely to be the preferred home broadband connectivity technology.

“Fibre operators are increasingly turning to lower-income areas, including townships, to roll out fibre-like uncapped products” such as fibre to the node, which offer high-speed uncapped connectivity on a per device basis. “This presents a challenge for [telecoms companies] with no real fibre offering as subscribers in lower LSM areas could shift their data spend towards these uncapped products, forcing the incumbent [telecoms companies] to lower data prices to compete, a potential drag to revenue growth,” says Bradley.

—  Fibre attracts funding

Other revenue streams

Beyond the matter of infrastructure, telecom operators have been working to mitigate the erosion of voice and SMS revenues, mainly by internet players, by exploring other areas of business.

“Areas such as enterprise services, fibre connectivity, the Internet of Things and fintech are all growth avenues,” Arun Varughese, RMB’s co-head of technology, media and telecommunication, tells the FM.

“All these new revenue areas have strong growth potential and runway in Africa. The strength of the [mobile network operators] is the depth of their brand, their large consumer and enterprise customer base and their existing infrastructure. With these elements, we do believe that [the operators] have the potential to pivot from ‘telcos’ to ‘techcos’.”

The most successful pivot for South Africa’s two largest players has been to financial services under the fintech umbrella.

In January payments giant Mastercard invested R3.8bn in MTN’s fintech business as part of a plan to partner with industry experts to help grow that new revenue line. The transaction values the unit at $5.2bn (R97bn).

In Kenya, where Vodacom and affiliate Safaricom operate M-Pesa, mobile money services now represent the largest financial services subsector, with usage rates almost twice as high as those for traditional banks, says Charlotte Masvongo, S&P Global Ratings credit analyst.

“Telecommunication companies have become banks’ main competitors because of the affordable mobile money services they provide,” she says.