How commission’s data ruling will weigh on MTN and Vodacom
Competition Commission ordered the operators to reduce mobile connectivity prices by up to 50% in the next two months
Mobile operators, who are already subject to new regulations that allow data to be rolled over, could find themselves facing even more financial pressure after the recommendation by the country’s top competition watchdog that they slash their internet bundle prices in the next two months.
The Competition Commission, through its data services market inquiry, last Monday ordered the operators to reduce mobile connectivity prices by up to 50% in the next two months or risk being prosecuted.
But what does this mean for the investment case for the country’s largest operator, Vodacom, with 43-million subscribers, and Africa’s largest, MTN, with its 29-million strong user base in SA. As much as R22bn was wiped off the market capitalisations of the two operators on the day of the announcement, signalling concern in the market about what the move could bring.
Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said Vodacom derives about 30% of its revenue from mobile data in SA while MTN generates about 10% of its turnover from that segment.
What effect it will have on the revenue and profits of Vodacom and MTN will depend on a number of factors, including the actual price reductions to be negotiated and how much data traffic will result from the cuts.
“If the Competition Commission refuses to move on the two-month ultimatum then it would be more difficult for the affected telecom companies to limit the impact of the proposed changes,” Takaendesa said.
Ofentse Dazela, director of pricing research at Africa Analysis, said it was likely that a push by the commission for operators to slash data prices by 50% in the next two months will end up in court. Dazela said he believed the operators would fight the recommendations because they had already taken a financial hit after SA’s implementation of new regulations from February to allow consumers to roll over their data bundles.
He said the move will likely wipe out 30% to 40% of network operators’ revenues given that the prepaid internet bundles actually underpin data revenue growth. Also, the war to expand network capacity by Vodacom and MTN, which had been gaining momentum with each spending close to R10bn a year on capex, would probably subside, he said. Dazela said projected capex figures would likely be adjusted downwards as a result.
Takaendesa agrees, saying it is essential to find a happy medium between keeping mobile operators profitable and lowering data prices. “Unfortunately the Competition Commission’s proposals will become an additional risk and overhang to the listed telecom sector until resolved,” he said.
Takaendesa said the industry’s data revenue growth had already slowed materially over the past 12 months due to the data rollover decision.
He said the Competition Commission’s proposals would clearly put further pressure on the industry even if the final data price reductions ended up being lower than the 30%-50% proposed.
A lowering of data bundle rates is likely to encourage more people to start using the internet and, for those already online, to use more services. The result is likely to be increased data traffic on the networks.
Dazela said that as it now stood, the poor were the most affected by the high cost of data bundles.
He said it made no sense for the poor to pay R249 for 2GB of data on a prepaid basis while those who are relatively well off and on a contract can pay R199 for 40GB of data.
But this is not all good news, Dazela warned. “I do worry that SA may not have enough capacity to deal with the enormous traffic growth which will follow the envisaged massive price cuts.”
He said it was important to remember that MTN’s network “nearly collapsed” recently after it reduced the price of its 1GB WhatsApp bundle to R10 per GB, because of the enormous amount of traffic.
“Perhaps gradual price reduction is the way to go with sensible timelines given to operators.”
He said it would be more practical and safer to recommend that operators reduce their data prices by 50% in the next 12 to 24 months.
All operators, including Cell C and Telkom, have said they are still waiting to go through the full report before they can make an assessment of what the effect of the recommendations will be on their operations.
However, Vodacom and MTN have said they need new spectrum, the radio waves that carry information, to be allocated to bring down the cost of data. A lack of spectrum has resulted in the networks spending more money to deliver data services, with costs being passed on to consumers.
MTN, for example, has about 14,000 towers in SA covering 58-million people compared with their Nigeria operation where the same amount of towers cover a population of close to 200-million because they have more spectrum.
MTN and Vodacom were not the only ones singled out by the commission last week. Fixed-line operator Telkom has been urged to reach an agreement with the commission on a substantial price reduction for IP Connect products.
IP Connect allows internet service providers (ISPs) to connect to Telkom’s broadband network to enable them to provide high-speed connectivity to customers.
Considering that Telkom is in a process of decommissioning its fixed-line business, this recommendation comes a little too late if the goal was to stimulate competition in the wired internet market, Dazela said.
However, ISPs operating in the fibre market will welcome the news though competition continues to increase. There are over 70 fibre network operators hosting ISPs on their own networks.