There’s plenty happening in South Africa’s telecommunications industry, and plenty more is likely to take place in the coming months — events that could define the sector for the rest of this decade and beyond.
They are being driven by shifting market dynamics, looming M&A activity and leadership changes.
First, though, let’s consider the market as it is now. The sector leaders are Vodacom and MTN, which together make up more than 70% of the vast mobile market; their revenue share is even higher.
Then there are the smaller players.
Telkom, which once dominated the sector, is struggling to compete in what has become a scale game in mobile. The company has been shrinking for years, in terms of its revenue and profitability as well as the number of people it employs. These headwinds come as it replaces its legacy networks (copper, mainly) with more modern technologies (fibre and 4G or 5G), where margins are much lower.
Pressures are mounting, especially after Telkom lost one of its key advantages in last year’s spectrum auction: access to a larger pool of frequencies than its rivals, which allowed it to compete aggressively with cheaper data plans. That advantage is gone — Telkom’s FreeMe plans, for example, which once led the market and helped the company displace Cell C as the third-largest mobile player, are no longer as appealing to consumers.
Telkom lost one of its key advantages in last year’s spectrum auction: access to a larger pool of frequencies than its rivals
Cell C, meanwhile, has already given up trying to compete with its larger rivals in infrastructure. It recently completed the shutdown of its own radio access network (RAN) — which connected consumers to its base stations — preferring to opt instead to take advantage of the combined R20bn a year capex of Vodacom and MTN.
Cell C does this through wholesale agreements in terms of which the bigger operators use its spectrum assets to provide a “virtualised RAN” on an outsourced basis. This means Cell C no longer invests billions every year to try to keep pace — an effort that in the past severely damaged its balance sheet. Newly appointed CEO Jorge Mendes, who was previously with Vodacom, will now have to demonstrate that the new model is sustainable.
Then there’s Rain, the upstart wireless operator that has punched well above its weight, using clever guerrilla marketing tactics to get noticed — even when it was pitching a cheeky merger with Telkom last year.
Rain has had plenty of network problems since its launch (the result of a congested network), but the company has played an important role in driving down data prices and plugging a gap in areas where fibre isn’t yet available. Its newly secured spectrum assets will help it in this regard, though fibre broadband remains the superior technology. Rain is now pivoting and becoming a full-service telecoms operator, offering voice telephony alongside its data plans.
So, how will the action unfold next? Here’s an educated guess.
Telkom will likely be the first to be subject to corporate action as interested parties look to profit from its depressed share price. A consortium that includes Mauritius-based Axian Telecom and former Telkom CEO Sipho Maseko’s Afrifund is making a play for it.
But MTN is also likely to return to the table, after having walked away from preliminary talks last year; it’s known to be particularly keen on Telkom’s extensive fibre network, housed in its Openserve subsidiary.
MTN probably has deeper pockets than the Maseko consortium, though it might be easier for the latter’s plan to get okayed by regulators. Barring the parties merging their bids, the smart money must be on MTN getting a deal over the line despite the complexities involved — but only after much foot-dragging from the government, which has already indicated that it’s not willing to dilute its 40.5% stake. Will ANC ideology trump common sense? Telkom’s long-term survival could be on the line if the government digs in its heels.
Cell C may have a brighter future than its troubled past. A long-drawn-out recapitalisation — led by its largest shareholder, Blue Label Telecoms — has put this business in a much stronger position. It recently appointed former MTN South Africa CEO Godfrey Motsa to its board and hired a new CEO in Mendes. Brett and Mark Levy, the brothers who run Blue Label and who bought into the troubled Cell C in 2017 in a rush of blood, will be holding thumbs that better days lie ahead. Blue Label may even seek to take control of the company soon, expanding its stake beyond 50%.
There are big changes coming in fibre broadband, too, driven by Vodacom and Remgro pooling their fibre assets. Significantly, Vodacom has agreed that the combined business — in which it is buying a 30% stake (with an option for 40%) — will provide fibre on an open-access basis. This means Vodacom’s “closed” fibre network could soon be opened to other internet service providers, driving down prices, especially for business customers.
Before that, though, the deal must get the go-ahead from the competition authorities, which have been sitting on it for 18 months. Madness! Because Vodacom won’t control the merged assets, and given its commitment to open access, it should get the deal across the line.
*McLeod is editor of TechCentral
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