Vodacom looks forward to price cuts increasing data usage on its network
Mobile operator says it expects to recover lost revenue as more users connect to internet
Network provider Vodacom, which is expected to lose up to R2.7bn over the next year courtesy of a data-price cut, says it expects to recover the lost revenue over time as more users connect to the internet.
Vodacom said on Tuesday that it had reached an agreement with competition authorities to reduce prices across all of its data bundles starting from April 1 2020.
High data prices have been a concern in SA for years. Trade & industry minister Ebrahim Patel, who commissioned the original inquiry into local data prices, said high prices had long kept poor people from participating in the digital economy. He said the price cuts were likely to help small businesses in particular.
Vodacom has reached an agreement with the Competition Commission to slash data costs by over 30% across all channels. Business Day TV spoke to Vodacom CEO Shameel Joosub about the move.
Attention will now be on how other operators, particularly MTN, settle this matter with the Competition Commission.
Vodacom group CEO Shameel Joosub told Business Day that the company would absorb the costs of the agreed price cuts, and he had the full support of its majority shareholder, UK-based Vodafone, on this.
Data makes up about 44% of Vodacom's service revenue or 30% of total revenue, accounting for about R27.3bn a year.
One of the initiatives SA’s largest mobile operator will institute is cutting the cost of its 1GB monthly bundle from R149 to “no more than” R99, making for a 34% reduction, from April 1.
Analysts said the price cuts could spur more usage on Vodacom’s network and increase profitability. But they also warned the move could hit its bottom line.
Petri Redelinghuys, founder of Herenya Capital Advisors, said a 33% reduction in this revenue stream should result in a R9.1bn shortfall, or 10% reduction in total group earnings. “Add to this the fact that unused data now rolls over and does not expire at the end of each month,” Redelinghuys said.
Shaun Murison, an analyst at IG Markets, said: “While the group’s profit margins from data will be negatively impacted, cheaper data in the market place should help increase volumes.”
Redelinghuys said Vodacom could use this opportunity to employ its technology to spur data usage. Vodacom is making use of big data, machine learning and artificial intelligence to offer its clients service bundles that include airtime, data and SMS.
“This enables Vodacom to make its customers personalised service offerings that last year translated into the accelerated uptake of bundle offers, which has been proving to be very successful in driving data sales.”
Ofentse Dazela, director of pricing research at IT consulting company Africa Analysis, said the jury was still out on whether Vodacom could deal with increased traffic likely when the agreement came into effect.
He said the settlement would see sales of low-capacity, prepaid data bundles “going through the roof”, a scenario that may come with unintended consequences. These included more service degradation, usually in the form of network slowdowns in some areas.
He said that mobile networks were “by design very erratic in their behaviour”. When usage peaked, quality of service was somewhat compromised with upload and download speeds declining.
Joosub said the group expected higher traffic on their network, but the price cuts would not affect planned R10bn capital expenditure for the year. The group hoped for an increase in network infrastructure usage above last year's 65% level, he said.
Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said it was difficult to accurately forecast the full effect of price reductions as it also depended on how much Vodacom’s customers would be willing to spend.
Vodacom's share price closed 1.38% higher on the news at R109.10, giving the Midrand-based operator a market capitalisation of R200.29bn.
Takaendesa said the market was already expecting some form of data price reductions after the commission released its data-services market inquiry report in December.
However, the move “clearly dilutes the investment case as the agreed data price cuts are just the first step of many interventions to come if one believes the Competition Commission will follow up with the other longer-term proposals that are meant to address the structurally concentrated mobile market in SA”, he said.