Data prices may fall if new spectrum allocation leads to more competition

When SA completed its latest, long overdue, radio frequency spectrum auction in March, it created an expectation in the minds of consumers that mobile data costs would be reduced. 

The Competition Commission and the Independent Communications Authority of SA (Icasa) have previously flagged the delay in the allocation of additional spectrum as one of the reasons behind high mobile data costs in SA. With the vast majority of South Africans relying on mobile data for internet access, lower data costs are critical for our developing country’s quest to improve access to education, employment and information. 

The recent allocation of the spectrum may not immediately result in lower data prices, however, as prices are driven by a range of factors such as the levels of competition between network operators, infrastructure build costs and regulatory intervention. In light of the various factors at play, it seems SA consumers may have to be patient in waiting to see how the increased spectrum allocation translates into more affordable mobile data costs. 

It is well understood that one of the factors that drive up mobile data costs is the operator’s capital expenditure relating to passive infrastructure, which includes base stations, high sites, ducts and infrastructure for fibre-to-the-home. During the recent spectrum auction MTN, Vodacom, Rain Networks, Telkom and Cell C successfully acquired spectrum allocations. In total, the various bidding firms spent in excess of R14.4bn. 

In addition to the fees incurred for the auction, the successful bidders are likely to incur additional capital expenditure to put these spectrum allocations to good use. While the successful bidders may have incurred substantial capital expenditure, they are likely to benefit from reduced maintenance costs arising from the release and allocation of the high demand spectrum in low frequency bands.

The various frequency bands require different set-ups and this would affect the amount of capital expenditure required for the operators to service the demand in various areas. For example, in areas that are less populated the number of base stations required to achieve coverage would be fewer than in more populated areas, and therefore the use of low-frequency bands would be a more favourable option for operators in such areas. 

In essence, 5G operates on a far shorter wavelength than older network technology standards. As a result, 5G can carry a lot of data far faster than 4G. It can also support many more devices. Where 4G can support about 4,000 devices per square kilometre, 5G can support about 1-million. 

But it also means a far shorter range. In fact, by some measures 5G wavelengths are only about 2% as long as 4G ones. That means you need many more 5G towers per square kilometre than you do 4G towers. While it’s possible for each of those towers to be smaller in size and less costly in comparison to traditional cellphone towers, the capital expenditure required for erecting and maintaining such towers is still significant, since the operators will be required to fund this additional capital expenditure.

Because the cost of infrastructure build and maintenance is one of the factors that drive mobile data costs, there is no certainty that the availability of additional spectrum may lead to more affordable mobile data costs.

That said, there is one way in which the additional spectrum might bring about lower mobile data costs and that is through increased competition among the mobile operators. South Africans have already experienced the benefits of increased competition. For example, Rain Networks has been able to provide competitive prices on unlimited mobile data packages, and in doing so it has competed with both other mobile networks and fibre providers, and this has resulted in lower overall costs of connectivity. This is especially important in areas such as townships, where affordable internet access will make the most difference. 

For some of the smaller networks or operators, providing localised mobile data services is more feasible if facilitated through spectrum sharing arrangements, particularly in rural areas where the spectrum is underutilised due to fewer coverage requirements. The role of the authorities, such as the Competition Commission and Icasa, in monitoring mobile data costs is critical. They need to ensure South Africans are getting a fair deal when it comes to buying mobile data.

In addition to the potential lowering of data costs, various stipulations included in the auction process mean there will be other positive outcomes. These include connecting previously unconnected citizens and public institutions (such as public schools, health facilities and unconnected police stations) within a specific 36 months from the date of issuance of the spectrum licences. 

There is also likely to be a positive economic effect from the released spectrum. Expanded 5G networks in particular are crucial to emerging technologies such as the internet of things, which must be developed in SA to achieve its stated fourth industrial revolution ambitions. 

So, while South Africans may not see dramatically lower mobile data costs any time soon, there is no doubt that consumers will see some effect in the long term. What we hope to see from the latest spectrum auction is that the stakeholders in the data services sector build on the latest gains and provide more South Africans with access to data services and information, in a quality manner and, most importantly, at a lower cost. 

• Bulose is partner: corporate/M&A, and Stephens senior associate: corporate/M&A, at CMS SA.