Hello sub­scribers, good­bye rev­enue

Cel­lu­lar sub­scrip­tions are boom­ing, but is rev­enue doomed?

Finweek English Edition - - Communication & Technology - SI­MON DIN­GLE AND JADE MENEZIES si­mond@fin­week.co.za & ja­dem@fin­week.co.za

MTN, VO­DA­COM AND CELL C have all an­nounced in­creases in their re­spec­tive sub­scriber base. How­ever, mount­ing mar­ket pres­sures can’t be ig­nored. The slow­ing econ­omy, cur­rency volatil­ity and de­creases in cus­tomers’ dis­pos­able in­come are just a few of the prob­lems fac­ing mo­bile and telecom­mu­ni­ca­tions op­er­a­tors coun­try­wide. Sub­scribers don’t nec­es­sar­ily equate to rev­enue.

“Strong sub­scriber growth con­tin­ues to be a fea­ture in al­most all coun­tries in which we op­er­ate, in line with our sub­scriber guid­ance, while cur­rency volatil­ity has gen­er­ally had a more neg­a­tive im­pact on av­er­age rev­enue/user (Arpu) re­ported in US dol­lars,” says MTN in its sub­scriber num­ber up­date for first quar­ter 2009.

MTN Group’s to­tal num­ber of sub­scribers in­creased by 8% to 98,2m for the quar­ter to De­cem­ber 2008. The group has reached the 100m sub­scriber mark, which means one in five peo­ple in its 21 mar­kets in Africa and the Mid­dle East are MTN sub­scribers. How­ever, Arpu dropped in all coun­tries, SA’s by 6%. “The de­cline of many lo­cal cur­ren­cies against the US dol­lar has neg­a­tively af­fected Arpu trends,” says MTN.

An­a­lysts said that wasn’t sur­pris­ing; nor is it a clear in­di­ca­tion of MTN’s per­for­mance. “You gen­er­ally see a scal­ing back in Arpu dur­ing the first quar­ter. There’s likely to be less spend af­ter the fes­tive sea­son,” says Ves­tact an­a­lyst Sasha Naryshkine.

“Arpu is also quoted in US dol­lars and doesn’t re­ally tell us much about us­age,” says Ka­plan Eq­uity An­a­lysts’ Irnest Ka­plan. “If you re­ally want to know about us­age you need to work out the lo­cal cur­rency com­pared to the US dol­lar and com­pare those fig­ures to pre­vi­ous years.”

MTN says its larger op­er­a­tions – in­clud­ing Nige­ria, Côte d’Ivoire, Syria and Su­dan – ex­pe­ri­enced sig­nif­i­cantly more re­silience in lo­cal cur­rency Arpu than re­flected in the re­ported US dol­lar num­ber. De­spite MTN’s out­per­for­mance in the SA mar­ket over re­cent years, Ves­tact’s Naryshkine still be­lieves it’s a good in­vest­ment.

MTN isn’t the only mo­bile and tele­coms op­er­a­tor boast­ing an in­crease in sub­scriber num­bers: com­peti­tor Cell C re­cently re­leased re­sults show­ing a 34% in­crease in ac­tive sub­scribers to 6,4m. Cell C re­ported an in­crease in prof­its to R8,6bn for the year ended De­cem­ber 2008 and achieved earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion of R812m.

Newly ap­pointed CEO Lars Re­ichelt is up­beat about Cell C’s prospects. “The po­ten­tial for growth re­mains strong and we’ll fo­cus our ef­forts in 2009 to en­sure Cell C of­fers sim­ple, in­no­va­tive, value-for-money prod­ucts and im­proved cus­tomer ser­vices. Cell C will ag­gres­sively ex­pand its net­work cov­er­age and man­age an­tic­i­pated growth in us­age. We’ll also fur­ther im­prove the op­er­a­tional and fi­nan­cial per­for­mance of the com­pany.”

How­ever, Steve Min­naar, head of in­vest­ment re­search at Old Mu­tual In­vest­ment Group, says Cell C’s op­er­at­ing prof­its pale in com­par­i­son to its debt of more than R16bn. “There’s no rev­enue re­ally – the com­pany is bank­rupt,” Min­naar says.

He’s also of the opin­ion Cell C’s in­creased sub­scriber base is mean­ing­less. “A very savvy pre­paid mar­ket in SA knows how to work the cel­lu­lar net­works to save money. For ex­am­ple they switch over from MTN in the week to Cell C at the week­end to ben­e­fit from spe­cial call­ing rates.”

“And with Cell C they’re prob­a­bly roam­ing on Vo­da­com any­way. So Cell C gives free min­utes away to at­tract sub­scribers but pays Vo­da­com for them. That’s bad busi­ness.”

But there’s money to be made from pre­paid users. In Vo­da­com’s an­nual re­sults for the year ended March 2009 the newly listed com­pany re­vealed that while Arpu for con­tract cus­tomers in Africa was de­clin­ing, for pre­paid cus­tomers Arpu was on the rise.

Like its ri­vals, Vo­da­com also showed an in­crease in sub­scriber num­bers, which swelled by 16,5% to 39,6m. It re­ported a 14,5% growth in rev­enue to R55,2bn for the year to end-March 2009, but has net debt of R17,5bn.

The SA mar­ket, with its high pen­e­tra­tion and re­duced Arpu, is see­ing slow­ing growth, while the rest of Africa shows good growth prospects. Min­naar sug­gests that dif­fer­en­ti­at­ing in the SA mar­ket is be­com­ing in­creas­ingly dif­fi­cult. “No­body cares much whether they use MTN or Vo­da­com – it’s pretty much of a much­ness. The net­works are all sell­ing the same white T-shirt.

“For­tu­nately, in the SA mar­ket they’re smart enough to re­alise a price war isn’t the an­swer. It just messes up the mar­ket for every­one.”

If the net­works are to con­tinue driv­ing rev­enue, they’re go­ing to have to come up with more than just sub­scribers.

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