MTN sets torrid pace for its rivals in price-cut war
MTN South Africa has initiated a price war by dropping the tariff of its pay-persecond plan from R1.20 a minute to 79c a minute in a move that will change the dynamics of the country’s voice market forever.
The intention is to undercut Cell C’s 99c-a-minute offer using a similar, transparent pricing scheme.
This time around, there are no onerous conditions or fine print attached to the plan, making it a compelling proposition for consumers. MTN has indicated that it intends to make the new pricing permanent.
Although Vodacom’s response matches MTN’s pricing, it underwhelms in terms of user-friendliness, as well as the fact that it runs through to mid-July as a promotion. Changing to the plan on Vodacom prepaid requires more than eight steps.
Vodacom also introduced a 50c-a-minute bundle promotion recently, confirming a price war in which the lowest prepaid tariffs have dropped from R2.35 a minute to 79c a minute on prepaid over the past two years.
The aggressive move by MTN was driven by a material loss of share to Cell C in the prepaid market. Market reaction to Cell C’s price caught MTN by surprise; the former’s subscriber base rose from 7.8 million in 2010 to 12.3 million in September 2013 — and a large proportion of that share was gained over the previous 18 months.
Year-on-year growth in MTN South Africa’s revenue was down 10% for the second half of 2013, whereas Vodacom South Africa increased its revenue over the same period. Furthermore, MTN faced a brutal public relations attack from Cell C and Telkom Mobile when it launched a legal challenge to the Independent Communications Authority of South Africa’s mobile termination rate regulations.
Mobile pricing schemes in South Africa have generally been extremely complex to understand — a tactic often used in markets where a monopoly or duopoly exists to limit price discovery and competition.
In South Africa, the two largest operators are an effective duopoly because they still account for 90% of industry revenue.
The 99c-a-minute deal introduced by Cell C in 2012 resonated well with consumers, because it was the first time they had experienced a competitive, single guaranteed rate on any network.
Cell C is no longer the lowest guaranteed flat rate in the market. The key question is whether it has the wherewithal to regain its consumer-- champion positioning. Thus far, it has not matched the 79c rate and, unexpectedly, raised outof-bundle prices on data plans.
MTN’s move was therefore a masterstroke in terms of brinkmanship.
In one fell swoop, it provokes Cell C to reduce its prices by at least 20c a minute, giving up all that it gained from termination rate cuts on April 1. Increased competition, along with regulatory uncertainty, are bound to reduce investor appetite to inject further capital into Cell C.
Second, it places Vodacom in a difficult position because South Africa is a significantly bigger part of its overall business compared with MTN. Any margin erosion will hurt Vodacom as a group much more than it will MTN.
Third, it makes it harder for Icasa to motivate for further asymmetry, because the cost to communicate will have dropped significantly by the time its sixmonth inquiry into the state of competition is finalised.
From an investor point of view, the financial impact is difficult to predict. Much will depend on how many more minutes will be consumed at the lower price point to buoy existing profitability.
Our view is that the elasticity and market share gains will be insufficient to mitigate against margin squeeze from lower prices. Data revenue growth in South Africa is also slowing.
We therefore believe that higher than normal uncertainty will persist and future performance will rely more heavily on international operations than in the past.
From a consumer perspective, one hopes that the renewed price war does not drive Cell C out of business.
According to Bloomberg, covenants to the tune of $160million (about R1.6-billion) are due in July 2015. They will affect operating liquidity if the terms are not amended.
Kenya experienced a similar period of aggressive price competition after termination rates were lowered in 2010, and smaller operators suffered.
Mohamed is an investment analyst and partner at First Avenue Investment Management