Mobile’s capex splurge anticipates data surge
Local operators build up networks as wait for spectrum drags on
GIVEN the amount of capital South Africa’s big mobile operators are pouring into their networks — well over R20-billion between them this year alone — you could be forgiven for thinking the industry is not facing the serious headwinds many are predicting in the short and medium term.
MTN said last month that it would increase its originally budgeted capital expenditure for South Africa this year by almost 50%, to R11.7-billion. Although some of that spending is undoubtedly about playing catch-up to rival Vodacom after several years of relative underinvestment, it is still an eyewatering amount in a country with a bleak economic outlook.
Although Vodacom said recently that it was cutting its capex intensity slightly in the coming years — from 15.5% of group revenue in the 2016 financial year to 12%-14% over the next three years — it has already spent more than R17 billion on its network in South Africa in the past two years, aggressively expanding its 3G and 4G/LTE infrastructure, on the expectation of further strong growth in data demand.
Unlisted Cell C does not disclose its capex numbers, but it, too, has upped investment countrywide and is fast deploying new 3G and 4G sites. A proposed restructuring in terms of which JSE-listed Blue Label Telecoms will become a significant shareholder should leave its balance sheet stronger and the company better able to invest to keep pace with its bigger rivals.
Telkom invests a fraction of the other players in mobile, positioning wireless as a broadband alternative to its fixed-line infrastructure.
Although Telkom’s mobile division offers both post-paid and prepaid voice and data services, its real growth lately has come from providing so-called “fixedwireless” options as a replacement for fixed broadband.
The big three, though, continue to spend like there is no end in sight to consumers’ appetite for mobile broadband — probably a fair assumption if you consider a report from Cisco, which predicts that the average 4G smartphone in South Africa will consume 7.2GB of data a month by 2019.
Yet policy uncertainty, especially around the allocation of radio frequency spectrum, is making the operators’ planning difficult. The delay in digital TV migration, now many years overdue, is also giving operators a big headache.
The longer migration takes, the longer the broadcasters will hog valuable spectrum needed to deploy next-generation broadband networks. Without spectrum, the operators will not be able to cope with escalating consumer demand.
Significant capex spending by the big mobile operators comes as the revenue mix shifts markedly away from legacy voice to data. Vodacom and MTN grew fat on voice telephony, but margins from that side of the business have come under considerable pressure in recent years as competition intensified thanks to a revitalised Cell C and the launch of Telkom’s mobile arm, as well as moves to cut wholesale internetwork call rates, which allowed the smaller players to drive down retail prices.
A second challenge for the operators is that the margins from data are typically lower than they have been for voice services.
As the revenue mix shifts, it puts pressure on the bottom line. Worse, innovative “overthe-top” providers such as Facebook (with WhatsApp and Messenger), Google (Hangouts) and Microsoft (Skype) are using the operators’ advanced data networks to eat into their profit centres of voice and SMS.
Vodacom, MTN and Telkom have all called for such players to be regulated in South Africa to make the playing field more
Margins from data are typically lower than for voice services
level, but this has drawn a fierce backlash from consumers.
To counter some of the pressures, which are likely to intensify in the years ahead, the operators seek to create new but related businesses in everything from financial services to TV entertainment.
Vodacom, for example, already sells its customers funeral plans, and MTN offers a video-on-demand service.
But the jury is out about whether such horizontal expansion is the right approach, or whether the operators should stick to their knitting.
Vodacom said last month that it would pull the plug on its M-Pesa banking service in South Africa after local consumers turned their noses up at it (see report below).
It has had more success in insurance.
Ultimately, though, the biggest challenge facing all the mobile operators is the lack of spectrum.
The government has for years failed to come up with the policy that the regulator, Icasa, needs to allocate access.
And there are growing fears that the policy, when it is published, will not follow the near universal model of auctioning it off, but will instead allocate spectrum on an administrative basis, seeking to create a wholesale network of some sort in which the government has significant input.