Data Services Market Inquiry – Public Hearings...Data Services Market Inquiry –Public Hearings...

Data Services Market Inquiry –Public Hearings

Mr Sipho MasekoGroup Chief Executive

18 October 2018

Key themes

Data Services Market Inquiry – Public Hearings – 18 October 2018 3

Key themes

1. A broad view of access to data is needed. This includes the whole ecosystem – devices,

network equipment, operators, distributors and retailers

2. Mobile is overwhelmingly the most widespread means of accessing data services in South

Africa

3. The fixed business is small compared to mobile and is highly competitive

4. The problem is in mobile. Telkom has been an aggressive challenger in the market through

lower prices, better value for money and innovation but it has been very hard to build market

share


What needs to be done?

• Regulated access to dominant mobile operator infrastructure

• Improved number portability

• Equitable access to spectrum – sub-1GHz for Telkom, equitable assignment of high

demand spectrum

• Consider bottlenecks in airtime distribution

• Review taxes on smartphones

Theme 1: A broad view of access to data is needed


Data Services Ecosystem

There are many elements of the data services ecosystem

Telecoms operators

Device/ handset

manufacturersInfrastructure vendors

Content providersRegulatory

stakeholders


Complex data services supply chain

Metro Network

Retail

Wholesale

Retail Internet Service

Providers

Mobile

Wide range of large and small agencies / resellers / virtual ISPs

Fixed

Access Network

Agencies / Resellers /

Virtual ISPs


All elements of the ecosystem contribute to the price of data

• Devices - essential for accessing data - a key contributor to total access costs

• Distribution and retail channels for devices and airtime all add costs (wholesalers, retailers,

banks)

• Network equipment (and impact of volatile exchange rate)

• Operators that have business in South Africa only face higher costs when procuring devices and

network equipment

• Taxes, including excise duties on devices and VAT, contribute to higher overall cost of accessing

data

• Equipment and device costs affect capex requirements


Theme 1 summary: A broad view of access to data is needed

• There are many elements that come together to give customers access to data services

• This broader view of data “access” is needed if we are to understand all of the issues that face

customers

• This broader concept of “access” is important when we think about policy and regulatory

measures

Theme 2: Mobile is the most widespread means of data access


Mobile is already the primary means of communication for most South Africans

• Majority of South Africans rely exclusively on

mobile to communicate

– 88% of households in South Africa rely

exclusively on mobile

– Dependence more pronounced in rural areas

and low income households

– Even in metro areas where wireline networks are

available, mobile dominates

Household access to landline and

mobile telephone by province, 2017

Source: StatsSA General Household Survey, 2017, Figure 48


• With the progressing trend

of converged

telecommunications, mobile

is playing a vital role in the

success of the modern SA

telco.

• Mobile will experience good

growth with a CAGR of 2%.

• The fastest growing access

will be 4G/LTE (40%CAGR)

which will form 12% of total

mobile subscriptions by

2019.

• Mobile voice revenue will

continue to decline, at a rate

of -9% CAGR being offset

by growing data revenues

(14% CAGR)

80,000

82,000

84,000

86,000

88,000

90,000

92,000

2016 2017 2018 2019

Total Subscriptions (000s)

68,366 69,976 71,187 72,106

16,677 17,613 18,438 19,167

0

20,000

40,000

60,000

80,000

2016 2017 2018 2019

SA Mobile Prepaid & Postpaid 2016-19 (000s)

Prepaid Postpaid

5,1314,715

4,2323,8673,839

4,416

5,1005,708

0

1,000

2,000

3,000

4,000

5,000

6,000

2016 2017 2018 2019

SA Mobile Voice & Data Revenues 2016-19 ($m)

Mobile Voice Revenues Mobile Data Revenues

0

10,000

20,000

30,000

40,000

50,000

60,000

2016 2017 2018 2019

SA Mobile Subscriptions 2016-19 (000s)

GSM W-CDMA/HSPA LTE

2G 3G 4G

Mobile data will continue growing with newer technologies and faster speeds


94% of all broadband connections in South Africa are mobile

• 94% of all broadband connections are

mobile2

– 3% fixed-wireless

– 3% fixed wireline (fibre and DSL)

• If the Inquiry wants to reduce data costs

for the majority of South Africans, it

should focus on issues in mobile

Source: 1. StatsSA General Household Survey, 2017 2. BMI-T

FTTX1%

DSL2% Fixed wireless

3%

Mobile broadband

94%

Broadband subscriptions


75% of all broadband connections in South Africa are Vodacom or MTN

• The majority of South

African consumers access

the internet using

Vodacom and MTN’s

mobile data services

• If consumers perceive the

cost of data and cost to

communicate to be high

then the logical starting

point is the price Vodacom

and MTN charge to end-

users

Source: 1. StatsSA General Household Survey, 2017 2. BMI-T

Vodacom44%

MTN 31%

Other MNOs20%

Broadband subscriptions

FTTX1%

DSL2%

Fixed

wireless

3%

Mobile


Theme 2 summary: Mobile is the most widespread means of data access

• Mobile is the primary means of access to data services in South Africa

• Fixed constitutes a very small share of total broadband connections

• Vodacom and MTN, together, account for the large majority of mobile broadband connections

Theme 3: The fixed business is small compared to mobile and highly competitive


Entry has occurred at all levels of the fixed data services supply chain

• International connectivity – commodity product with significant excess capacity and low prices

• National transmission and metro – significant entry has forced leased lines prices down

• Access – intense competition in fibre, attacking copper DSL base (fixed wireless and mobile also

targeting the copper DSL customer)

• Retail – growth in ISPs


Competition in international connectivity has reduced the costs of delivering data services

Source: Market related estimates based on Telegeography, Telkom’s own sales and customer feedback regarding other providers

0.781.28

10

14.5

2001 (SAT-3/SAFE) 2009 (SEACOM) 2010 (EASSy) 2012 (WACS)

Source: https://manypossibilities.net/african-undersea-cables/

0

50

100

150

200

250

300

350

400D

ec-1

3

Fe

b-1

4

Apr-

14

Ju

n-1

4

Aug

-14

Oct-

14

Dec-1

4

Fe

b-1

5

Apr-

15

Ju

n-1

5

Aug

-15

Oct-

15

Dec-1

5

Fe

b-1

6

Apr-

16

Ju

n-1

6

Aug

-16

Oct-

16

Dec-1

6

Fe

b-1

7

Apr-

17

Ju

n-1

7

Aug

-17

Oct-

17

De

c-1

7

Fe

b-1

8

Apr-

18

Ju

n-1

8

R p

er

Mb

it/s

pe

r m

on

th

Market price of SA-UK 10Gbps link

Estimated design capacity of submarine

cables in SA, terabits/ second


Competition in transmission has resulted in price reductions

Source: BMIT

11,500

5,405

23,000

6,894

46,000

9,788

69,000

12,672

8,066

3,503

13,410

4,546

23,278

7,128

36,500

8,791

4,800

7,500

3,050

13,900

4,995

17,000

5,500 5,100

1,600

8,200

14,250

6,600 8,200

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2013 2017 2013 2017 2013 2017 2013 2017

5 Mbps 10 Mbps 20 Mbps 30 Mbps

Highest Average Lowest Neotel/LTSA

Leased line prices


Telkom leased lines do not affect competition in mobile

Competitive supply of transmission services

• Industry-wide trend towards self-provision – backhaul, metro and long-haul

• Vodacom self-provides backhaul to 92% of its sites

• Competition from new fixed networks is reducing the cost of transmission services further

• Creation of Openserve guarantees non-discriminatory access to transmission services

• Openserve leased line revenue from external customers down by approximately 28% between

FY14 and FY18, a CAGR of -6%. Mobile fixed links have been the biggest contributor to this

decline

Transmission accounts for a small proportion of the total costs of running a mature mobile

network


There is also intense competition between fixed access providers

• FTTx access providers can enter in selected areas → low

barriers to entry

• Several FTTx providers now in the market, including MNOs

• Growth depends on geographic expansion → significant

capex

• Hundreds of ISP brands selling fibre, DSL, wireless

• Price reductions common

• Copper DSL base switching to fibre or wireless


Theme 3 summary: The fixed business is small compared to mobile and highly competitive

• The fixed segment is where all of the recent entry has taken place

• There is intense competition throughout the fixed network supply chain

• This has resulted in falling wholesale and retail prices

• There is no indication that this competition is slowing down

Theme 4: The problem is in mobile


• Despite > R11bn in capex, Telkom

Mobile still has only 5.5% subscriber

share after 8 years

• Cell C’s subscriber share has grown by

just 2 percentage points since 2011

• Rain entered in 2017, but remains very

small

• Vodacom and MTN subscriber shares

have not changed significantly, despite

aggressive pricing by new entrants

• The dominance of the duopoly

operators in voice has been leveraged

into mobile data

Mobile market shares have been static over a long period of time

Enduring market positions of Vodacom and MTN despite entry by Cell C and Telkom Mobile

Source: 1. Business Tech (https://businesstech.co.za/news/mobile/266423/south-african-mobile-market-share-vodacom-vs-mtn-vs-cell-c-vs-telkom

Mobile subscriber shares

https://businesstech.co.za/news/mobile/266423/south-african-mobile-market-share-vodacom-vs-mtn-vs-cell-c-vs-telkom


Telkom has been the primary disruptor in data services


Vodacom and MTN prices not sufficiently constrained by the competition

Vodacom and MTN are not sufficiently constrained by Telkom and Cell C’s pricing

• Telkom offers significantly greater value for money than Vodacom and MTN

– 25% better in prepaid

– 43% better in post-paid vs Vodacom, 27% better than MTNSource: 1. Tarifica South Africa Competitor Intelligence Report: Evolution of Consumer Tariffs Q4 2016 – Q1 2018 (June 2018)Note: Charts show consumer usage costs for each operator over time based on 9 standardised usage profiles for prepaid and post-paid separately (voice, data, and SMS). % quoted refer to averages over full period

0

50

100

150

200

250

300

350

Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

Ran

ds

Cell C MTN Telkom Vodacom

0

100

200

300

400

500

Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

Ran

ds

Cell C MTN Telkom Vodacom

Prepaid Post-paid


This dominance of two large mobile operators has led to customers paying higher prices

• International price benchmarking is challenging. However, some indication of relative prices in South

Africa: ‒ Mobile prices in South Africa are high compared to other countries with 4 operators

‒ This is largely driven by Vodacom and MTN prices which are significantly above those of Telkom and Cell C

‒ Many people in SA experience “high prices” because Vodacom and MTN have by far the largest subscriber bases

Source: Tarifica Global Benchmark Report Q22017

6.15.7

2.7

9.0

5.6

14.2

16.7

14.8

3.3 3.4

6.3

7.9

10.2

13.9 14.2

16.7

India Sweden United Kingdom Nigeria France Brazil United States South Africa

Post-paid average score Prepaid average score


This means that the large MNOs in South Africa are highly profitable

Average EBITDA margin FY11-FY17 of two largest operators (countries with 3 or 4 operators)

• Average Vodacom and MTN EBITDA margin over the past six years – Above median for countries

with 3 and 4 operators

• Vodacom EBITDA margin over the past three years approx. 40%– Compared to Vodafone for all

European operations of approximately 30%

• Indicators of high levels of profitability – unevenly distributed within the market

Source: BAML Global Wireless Matrix June 2018Note: Number in ( ) indicates number of operators

21

% 23

% 24

%

24

%

27

% 29

% 31

% 33

%

33

%

34

%

34

%

34

%

34

%

35

%

35

%

36

%

36

%

36

%

37

%

37

%

38

% 40

% 42

% 43

%

44

% 46

%

47

%


This has a direct impact on South Africans - spend on mobile is higher than in in many countries

Source: BAML Global Wireless Matrix June 2018

• Mobile is key item of household expenditure

• Critical that competition is working effectively to support South African consumers

0.5

%

0.5

%

0.5

% 0.6

%

0.6

% 0.7

%

0.7

%

0.7

%

0.7

% 0.8

%

0.8

%

0.8

%

0.8

% 0.9

%

0.9

%

0.9

%

0.9

%

0.9

% 1.0

%

1.0

%

1.0

% 1.1

%

1.1

%

1.1

% 1.2

%

1.2

%

1.2

% 1.3

% 1.4

% 1.5

%

1.5

%

1.8

%

2.2

%Household spending on mobile as a percentage of GDP


There are several factors that entrench the dominance of Vodacom and MTN

• First mover advantages

– Cheap customer acquisition and limited competition

– National coverage and economies of scale

– Site access advantages

• Retail dynamics

– Customer stickiness (inertia exacerbated by ineffective number portability)

– Network effects favouring larger competitors

– Channel dominance

• Ineffective competition in the wholesale market

– Constraints on access to favourable mobile sites

• Spectrum

– Telkom has no sub-1Ghz spectrum

– Raises network rollout costs/slows down rollout

– Increases reliance on roaming for in-building coverage and in peri-urban areas


Theme 4 summary: The problem is in mobile

• Mobile market shares have been stable over many years

• Telkom and Cell C have been unable to build significant market share, despite being aggressive

price competitors

• Vodacom and MTN are able to sustain high prices without sacrificing market share. This makes

their South African businesses highly profitable

• The market position of Vodacom and MTN is based on enduring barriers to entry and expansion

faced by the late entrants

Conclusions and remedies


Telkom’s preferred approach to solving the problem in mobile is to promote competition

• Promote competition

– Create conditions for effective competition

– Remove impediments preventing smaller players from becoming more effective competitors

– Properly-functioning competitive forces that ‘regulate’ the market in consumers’ interests

• Greater competition will

– Result in further de-concentration of the market

– Pressure Vodacom and MTN to reduce prices → better value for money for consumers

– Bring about price levels that promote both consumer welfare & sustainable returns to operators

• The mobile sector does not need more entrants, nor retail price regulation. It needs to allow

smaller operators to compete on an equal footing with Vodacom and MTN, which have benefited from several first-mover advantages


This competition must be sustainable

• Effective competition will deliver value for money to customers, but the current duopoly structure

and the second-mover disadvantages faced by later entrants currently inhibit this from arising - the

enduring dominance of Vodacom and MTN is detrimental to consumers and also long-run

competition

• Effective competition must also be sustainable

– Continuous investment is required to ensure coverage, service quality and upgrades to 4G and 5G

– Operators need sufficient return on investment to justify ongoing network upgrades

– The four major telecoms operators have invested an average of R26 billion per year (5 years);

R30 billion last year

• Inquiry should focus on ensuring effective competition that is sustainable in the long-run


Targeted remedies designed to support competition

• Focus on improving sustainable competition in mobile

– Addressing the competition problems that support Vodacom and MTN’s enduring market position

• Wholesale market

– Regulated access for dominant mobile operator infrastructure

– Improved number portability

• Spectrum

– Assign sub-1Ghz spectrum to operators who do not currently have access to such spectrum

– Equitable assignment of high demand spectrum

• Airtime distribution

– Consider bottlenecks in airtime distribution

• Taxes on devices

– Review taxes on devices – possibly remove excise duties on cheap smartphones

Thank You

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