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Internet MattersThe Quiet Engine of

the South African Economy2012

:


2/34World Wide Worx

Founded in 2000, World Wide Worx is South Africas

leading independent technology research and strategy

organisation, with a focus on technology in business

strategy. It oers a range of independent reports as well as

custom research and strategic services. It provided the rst

benchmarks in Africa for evaluating online presence, and

continues to innovate in this arena as the digital economy

extends beyond the Internet. In oering strategic insight

into the hi-tech economy, World Wide Worx also provides

a powerful platform for decision support. For moreinformation, please visit www.worldwideworx.com.


3/34

Internet Matters:The Quiet Engine of

the South African Economy

By Arthur Goldstuck for World Wide Worx

Commissioned by Google South Africa


4/34

World Wide Worx, 2012. All rights reserved.

For information or permission to reprint, please contact World Wide Worx at:

E-mail: [email protected]: + 27 (0) 11 782 7003Postal Address: PO 752 Pinegowrie

2123

South Africa


5/34

Preface ii

Executive Summary iii

Background: A Connected Country 1

The Internet Economy in South Africa 3

What is the Internet economy? 3

E-commerce 3

Internet access and presence 5

Online advertising 6

Investment in data infrastructure 7

Government spending 7

Total value of Internet economy and GDP 7Implications of infrastructure investment 8

The SME Sector in South Africa 9

Denitions 9

Contribution to economy 9

SME Survey 2012 methodology 9

Impact of the Internet on SMEs 10

Segmental variations 10

Contribution of websites to survival 11

Other contributions of websites 12

Contact with customers 12

Updating inventory 13

Company sustainability 13

Business growth 14

Competing for market share 14

The benet bouquet 15

Case Studies: SMEs on the Web 16

Party Platters 16

Rolling Rehab 17

SMEs across the Web 18

Growth of the Internet economy 19

The Five-year gap 19

The Experience Curve proven 19The Digital Participation Curve 20

South Africans on the curve 20

Digital Participation as a marketing framework 21

Impact on the Internet economy 22

Contribution to GDP globally 23

Internet Contribution to GDP growth in South Africa 24

Conclusions and recommendations 25

Government and policy-makers 25

Communications industry 26

SMEs and entrepreneurs 26

Ordinary individuals 26

CONTENTS


6/34ii World Wide Worx

It has long been believed that South Africa has the largest

Internet economy in Africa. However, just how much of a

contribution the Internet makes to the overall economy

has never been quantied. There have been numerous

studies of the Internets contribution to the economies of

most advanced and developed nations, and almost none

for developing countries such as South Africa.

In order to understand the impact of the Internet on the

South African economy, Google South Africa commissionedWorld Wide Worx to prepare this independent report. The

report is the rst ever in-depth analysis of the Internet

economy of South Africa, and will hopefully pave the way

for discussions on how African countries can leverage

their respective strengths to use the Internet to accelerate

economic growth. While the results of the report have been

discussed with Google South Africa, World Wide Worx is

responsible for the analysis and conclusions.

Both World Wide Worx and Google South Africa are

pleased to present these ndings in order to foster a better

understanding of how the Internet is the silent engine thatis driving the South African economy.

PREFACE


7/34iiiInternet Matters

It has long been believed that South Africa has the

largest Internet economy in Africa. However, just

how much of a contribution it makes to the overall

economy has never been quantied.

Now, an Internet Economic Impact Study conducted

by World Wide Worx has revealed that the Internet

economy contributes 2 percent to South Africas gross

domestic product (GDP). Moreover, this contribution is

rising by around 0.1 percent a year, meaning it shouldreach 2.5 percent by 2016.

The total spent by consumers, small and medium

enterprises (SMEs), and Government on products and

services via the Internet, as well as on Internet access and

infrastructure, is R59-billion.

The biggest contributor to this slice of the economy is not,

as is often assumed, the investment made in bre and other

data infrastructure by the mobile networks. Although this

comes to R13.5-billion, it is surpassed by the amount spent

on Internet presence and access, at R29.2-billion. Thesetwo categories are followed by Business-to-Consumer

e-commerce (B2C e-commerce). The single biggest sub-

sector in B2C e-commerce is the airline industry, which has

fully embraced e-ticketing and is rapidly migrating ticket

sales online. In 2011, these sales came close to R9-billion.

E-commerce is growing at a rate of around 30 percent a

year, with the growth showing no signs of slowing down.

Indeed, with many major consumer brands and chains not

yet having devised comprehensive online retail strategies,

the scope for future growth is even greater.

In comparison to these numbers, Government spending onInternet infrastructure and access is relatively low, coming

in at a little more than R1-billion, although general ICT

spending runs into several billion Rand.

Considering the impact the Internet has on the emergence

and sustainability of small and medium enterprises, and

the contribution these SMEs make to economic growth,

it can be expected that Government spending will grow

substantially in the coming years.

According to SME Survey 2012, which is the original

representative survey of small and medium enterprises in

South Africa conducted by World Wide Worx, 410,000 SMEs

in South Africa have a website, representing 63 percent

of active, formal SMEs. Sectors with a particularly high

likelihood of SMEs having a website include Information

Technology (89 percent), communications (76 percent)

and tourism (77 percent). The research shows that SMEs

with a website are far more likely to be highly protable

than those without. Of those with a website, 27 percent are

strongly protable, while only 11 percent of those withoutcan claim the same. Only 5 percent of those with a website

are running at a loss, while 16 percent of those without a

website are in the red.

The full impact of these websites on the economy is placed

in perspective by the number of SMEs that would not have

survived without a website. Approximately 150,000 SMEs

in South Africa would not be able to survive without their

Web presence. With SMEs accocunting for about 7.8-million

jobs in South Africa, this means as many as 1.56-million jobs

would be in jeopardy were it not for the Internet.

This is an indirect impact of the Internet on the South

African economy, but one that is as signicant as the direct

impact.

The impact will increase signicantly in the coming

years. It will be fuelled not only by growing awareness

of the signicance of the Internet by both business and

Government, but also by rapid growth in the number

of Internet users. This will be stimulated partly by the

smartphone explosion currently taking place in South Africa.

Mobile networks report 63-million active accounts, making

for cellular penetration of 126 percent; a consequence

of widespread use of dual-SIM cards. World Wide Worxresearch shows true individual penetration to be about 80

percent, with 40-million South Africans using phones.

These users represent the future potential of Internet

growth in South Africa. Around 10-million phones are

sold in South Africa every year, and it is expected that, by

2013, smartphones will account for half of this number.

Smartphone users, in turn, eventually become Internet

users, a trend that already began in South Africa in 2010.

Prior to that, in 2008, the Internet user base had already

started growing at an accelerated pace due to falling

EXECUTIVE SUMMARY


8/34iv World Wide Worx

wholesale bandwidth costs and the emergence of a new

generation of Internet Service Providers (ISPs).

However, according to the Digital Participation Curve, a

model developed by World Wide Worx, it takes up to ve

years before new Internet users gain the condence and

experience in the medium to become active participants in

the Internet economy.

Consequently, with the number of Internet users havingaccelerated from 2008, the number of experienced users will

begin accelerating in 2013, and will continue to do so for the

following ve years. The result is that an Internet economy

worth R59-billion in 2011 and making up 2 percent of the

South African economy will grow to as much as 2.5 percent

of the economy by 2016.

This compares to the largest sector, currently nance, real

estate and business services, which at R565-billion makes

up 21.2 percent of GDP, and the manufacturing industry,

at 13.4 percent. The data also shows that the Internet

economy in 2011 was almost as large as the agricultural

sector, which made up only 2.2 percent of GDP in the last

quarter of 2011.

Does this mean Internet access has become as important

as food? Hardly! But other comparisons reveal its growing

signicance as a contributor to the economy: it will over

time begin approaching the size of the construction sector(an estimated R120-billion in 2011), suggesting this is

potentially one of the new building blocks of the South

African economy.

Given the fact that, for most organisations, the Internet

functions as an enabling tool for communications,

collaboration and transactions, it could well be described

as the quiet engine of the South African economy.


9/341Internet Matters

Nothing sums up the potential of both the current

and future impact of technology on Africa better

than the insatiable appetite for connectivity.

Today it is about the connections between human voices; in

future it will increasingly revolve around the data stream that

is made possible by these connections.

At the end of 2011, South Africa had approximately 8.5-million

Internet users.1 This represented no less than a 25 percentincrease over the 2010 gure of 6.8-million, maintaining a

high growth rate fuelled by the explosion of smartphones in

the South African market.

This growth brings Internet penetration in South Africa to

approximately 17 percent. Despite rapid growth, however, it lags

signicantly behind the biggest Internet user bases of Africa.

Nigeria, with 45-million users, has 29 percent penetration, while

Egypts 21.6-million users gives it 26 percent penetration and

Moroccos 15.6-million users represents 49 percent penetration.

Kenya claims 10.4-million Internet users, for 25 percent

penetration.2

In each of these countries, the high Internet penetration is

a consequence of heavy use of the Internet on cellphones,

but it should be borne in mind that physical Internet access

infrastructure is less developed in these countries, and quality

of access is relatively poor.

Nevertheless, this pushes South Africa into fth place in

terms of number of Internet users, but even further back

with regard to penetration: Cape Verde, Mauritius, Reunion,

Sao Tome, Seychelles and Tunisia all have greater percentage

penetration.3

A core reason for low penetration in South Africa is price. The

rental charge for ADSL, for example, comes on top of phone

line rental, which is now around R140 a line. World Wide Worx

research into mobile consumers has shown that lower-income

South African cellphone users spend an average of R100 a

month in total on their phones. The mere rental component

of a line is beyond the reach of most South Africans, let alone

using it for calls or adding ADSL on top.4

While these costs are not directly comparable to other African

countries, due to the varied structure of broadband services,

their negative impact was recognised by the regulator,

Icasa, when it announced in April 2012 that the component

of ADSL charges paid by ISPs for delivering data across the

Telkom network to end users, had to be reduced by 30%.5

ISPs welcomed this requirement as a step towards lower

broadband costs.6

Access infrastructure is also still limited to major urban areas,

although this is being addressed by the roll-out of new bre

grids by several network operators, as shown in this report.The picture for cellular penetration is somewhat dierent.

In South Africa, according to World Wide Worx, 63-million

SIM cards are in use, giving 126 percent SIM penetration

(the definition used for cellular penetration by the

International Telecommunications Union). However,

the true user base is around 40-million, and penetration

for unique users at 80 percent.4 At least 20 percent of

SIM connections are from dual-SIM usage, switchboard

systems, or asset management, where GSM signals are

used to track fleets or livestock.

The numbers in the rest of Africa are not as impressive as for

South Africa, but the continent is catching up fast.

According to research by Informa Telecoms & Media, on

30 September 2011 the African continent became the

worlds second biggest region for cellphone use, reaching

616-million users and overtaking both Western Europe and

North America. Asia-Pacic remains the bigger mobile-using

region today.7

The implications are staggering: on the surface, it appears that

more than half of all Africans are using cellphones. This means,

in turn, that at least half of the population of Africa has access

to voice and text communications. This also opens the way for

migration to Internet use.

Beneath the numbers, however, lurks the reality that many

of these users - as many as a third have dual-SIM cards.

Especially in Nigeria, it is common for business people and

ordinary consumers alike to have two phones, each with a

SIM card from a dierent provider. This way they avoid the

prohibitive additional cost of the interconnect fee for making

calls between dierent providers.

BACKGROUND: A CONNECTED COUNTRY

1. World Wide Worx, Internet Access in South Arica 2012

2. InternetWorldStats, 31 December 2011

3. InternetWorldStats, 31 December 2011

4. World Wide Worx, The Mobile Consumer in South Arica 2011

5. Icasa, Media release, The frst step towards local loop unbundling in South Arica:

a 30 % reduction in the existing IPConnect Price rom 1 April 2012

6. http://www.bandwidthblog.com/2012/04/02/

isps-welcome-telkom-ip-connect-cost-reduction

7. Informa, Press release, 3 November 2011:Arica is worlds second most connected

region by mobile subscriptions


10/342 World Wide Worx

Nigeria, a country of 158-million people, is expected to reach

100 percent SIM penetration in the next ve years. Egypts

81-million people will reach 150 percent SIM penetration.

However, even when a billion SIMs are connected in Africa, it

is expected that fewer than 600-million people will be actual

phone users.

Cynical observers have been deeply critical of these

gures, correctly arguing that they obscure the reality of

the connectivity of Africa, and absolve governments ofresponsibility for fostering and promoting access.

But a massively positive trend also emerges from the

numbers. If half of all Africans are using phones, it means that

more Africans than not have in their hands a communications

device they can use almost anywhere. It gives them access to

family, friends and information on an unprecedented scale.

This provides the foundation for what happens next. One

word sums it up: data.

While Africans are not yet rushing to

sign up to data services, they are slowly

being pulled into the world of Internet

connectivity by the phones they use.

Next year, for the rst time, smartphone

sales in South Africa will overtake those of

ordinary phones.8

That trend will follow in the rest of Africa in the coming years.

Where the dominant smartphones in South Africa are high-

end devices the BlackBerry and Samsung Galaxy ranges

the phones likely to achieve equivalent sales proportions in

other Africa countries are low-cost smartphones using the

Android operating system.

Already, one single model, the Huawei Ideos phone, has taken

a dominant share of the smartphone market in Kenya through

positioning itself as a Google phone, oering access to both

Internet browsing and social network access.9

Social networks are the entry point to the Internet for many,

even in rural areas. A fascinating trend observed by World

Wide Worx in South Africa is that the use of games on a

phone is higher among rural than urban users.10 This indicates

not that they have more time on their hands, but that they

are exploring their phones and learning their capabilities in

an unthreatening context. But once they build that comfort

and condence in the use of the phone, they begin exploring

other capabilities, like browsing and social networking. Fast

forward ve years, and more than half of those using phones

will be using smartphones: one in four Africans.

This brings Internet access, social networking, market

information, job seeking and entertainment within immediate

reach of almost every economically active person in Africa.

The amazing aspect of this trend is that most of these users

will not think of it as using technology; it will be a device they

will take for granted as an everyday tool.

It has been shown in the past across Africa that, when

presented with tools of dened capabilities, creative and

innovative ways are found to turn them into even more

relevant tools for local communities.

Throughout Africa, mobile money transfer

services are enabling ordinary individuals

to manage their nancial lives and enter

the formal economy.

One of the key factors behind the

mobile push onto the Internet is the low

penetration of both computers and xed

line Internet access in South Africa. Of 105-million people on

the Internet in Africa in 2011, only 31-million had broadband

access, i.e. while 12.8 percent of the population had Internet

access, only 3.8 percent had broadband.11

For xed broadband, the number is dramatically lower:

around 1-million, xed line broadband subscribers, and most

of these are in South Africa. This is to a large extent a factor of

low computer penetration: only 7.9 percent of households in

Africa have a computer, and half of these are in South Africa.

The total number of computers in use in South Africa, largely

in business, is around 9.5-million.12

This low level of broadband penetration represents a major

barrier for access to online services by small businesses and

consumers. Yet, despite these limitations, in South Africa close

to two-thirds of active small and medium enterprises have

established a presence on the Internet. As this report will

show, this presence has been a critical factor in the survival

and growth of SMEs.

FAST FORWARD FIVE YEARS,

AND MORE THAN HALF OFTHOSE USING PHONES WILL

BE USING SMARTPHONES: ONE

IN FOUR AFRICANS.

8. Pienaar, K., Regional Strategies or the Next Stage o Growth in Arica, AfricaCom

Conference, 10 November 2010

9. Goldstuck, A., Tech trends shaping the uture, World Wide Worx presentation,

December 2011,

10. World Wide Worx, The Mobile Consumer in South Arica 2011

11. ITU: World Telecommunication/ICT Indicators Database

12. ITU: World Telecommunication/ICT Indicators Database and World Wide Worx:

Internet Access in South Arica 2012



THE INTERNET ECONOMY IN SOUTH AFRICA

This report makes use of the Expenditure Method of calculating GDP, broadly based on the approach

of the Boston Consulting Group but also taking advantage of primary research conducted by World

Wide Worx to quantify various aspects of the industry.

13. Boston Consulting Group: The Connected World: The $4.2 Trillion Opportunity,

March 2012

What is the Internet economy?

The Internet economy comprises access to and use of the Internet, investment in infrastructure and expenditure in Internetactivity in a country. These include Internet infrastructure, money spent on online retail and online advertising, and businessand Government engagement with the Internet.13

The size of the Internet economy is not ocially measured in South Africa, and has to be estimated based on a range ofavailable expenditure measures. This is an indication partly of the lack of awareness of the signicance of the sector, as well asthe lack of maturity of Internet use in business and Government.

The following estimates are based on a wide range of measures and sources.

E-commerce

B2C e-commerce

Business-to-Consumer (B2C) e-commerce comprises both traditional retail conducted in the online space and intangibleproducts like air ticket sales, fullled online.

The total spent on online retail goods in South Africa in 2010 passed the R2-billion mark for the rst time, growing by 30 percentto reach R2.028-billion. In 2011, this high growth rate was maintained, with a further 30 percent increase, to R2.636-billion.

The following gure shows the Rand value of online retail each year since 1996:



Figure 1 excludes travel, which is not traditionally classied as retail. However, online retail is dwarfed by the sale of air ticketsonline.

As gure 2 below shows, online air ticket sales have come close to the R9-billion mark, growing by 24 percent in 2011,suggesting it will pass the R10-billion level in 2012.

Table 1 below provides a comprehensive picture of growth in retail and air travel ticketing sales online, separately and incombination. It is abundantly clear that online ticketing of air travel will continue to dominate B2C e-commerce in South Africafor at least the next ve-to-ten years, given present growth trends in conventional online retail.

Table 1 does show, however, that the growth rate for online travel booking is slowing down slightly, but o a very high base.



The total revenue from these services, for the six months tothe end of September 2011, was R5.114-billion.16 Annualisingthis, i.e. using it as the basis for estimating revenue over12 months, this study estimates Telkoms Internet revenue

for 2011 at R10.2-billion.

Vodacom and MTN, the two majormobile networks, include in their annualand interim reports their revenue fordata services, which in eect comprises

their Internet access services. For the sixmonths to September 2011, Vodacomreported R3.7-billion revenue.17 This isannualised to R7.4-billion.

MTN reported in its annual report forthe full 2011 year, that it had generated R4.464-billion inrevenue from data services.18

Neotel does not publish a detailed breakdown of revenuesince it is not a listed entity, but it does provide its annualrevenue numbers in media briengs and interviews. Thegure it expected to report for 2011, it said, was R2-billion.19

iBurst reported 70,000 subscribers in 2011.20 At an estimatedaverage subscription of R250 a month, minimum revenuewould be around R210-million.

Cell C does not release gures on data use, but a submissionto the regulator, Icasa, by the Society of ProfessionalEngineers, claimed a gure of 250,000 data subscribers.21

The most typical data account, a 1GB/month package,costs R2,400 year. This indicates data subscriber revenue ofat least R600-million.

The total data revenue from telecommunications operators,then, was an estimated R24.874-billion.

Internet Service Providers

Only the largest Internet Service Providers (ISPs) are included,and can be assumed to make up at least 80 percent of themarket:

In the last year in which Dimension Data issued an annualreport before its acquisition by Japanese telco NTT DoCoMoin 2009, it reported that its subsidiary Internet Solutionshad made up 6 percent of its $3.973-billion revenue.22 Thisworks out at $238-million and, at the lowest exchange rateof R7.50 in 2009, comes to R1.785-billion.

THE TOTAL DATA

REVENUE FROM

TELECOMMUNICATIONS

OPERATORS, THEN,WAS AN ESTIMATED

R24.874-BILLION

14. Boston Consulting Group, The $4.2 Trillion Opportunity: The Internet Economyin the G-20, 2012

15.http://stats.oecd.org/glossary/detail.asp?ID=4721

16. Telkom SA Limited, Group Interim results or the 6 months ended 30 September

2011

17. Vodacom, Interim results or the 6 months ended 30 September 2011

18. MTN Group Limited, Audited results or the year ended 31 December 2011

19. Mochiko, T., Business Day, Neotel re-hiring soon ater fring, 20 April 201120. Engineering News, Burger, S., iBurst ocuses on aordability with new oerings,

29 September 2011

21. Society of Professional Engineers, Submission o Complaint Form, Icasa, 11

March 2012

22. Dimension Data,Annual Report 2009

B2B e-commerce

In line with equivalent studies of the Internet economyconducted globally,14 Business-to-Business (B2B)e-commerce is not included in thisstudy, as it does not fall under thegenerally accepted denition of whatconstitutes the Internet economy,namely consumption, investment andexports.

Separate research by World Wide Worxhas quantied B2B e -commerce at morethan R30-billion. However, expenditureis already incorporated within severalsectors making up GDP, and inclusion inan Internet economy gure would constitute substantialdouble-counting. Further, much of it is conducted overclosed, proprietary networks; it is not seen as e-commercein the context of the OECD denition, which states thatElectronic commerce refers to commercial transactionsoccurring over open networks, such as the Internet.15

Internet access and presenceIt is probably impossible to quantify the entire Internetaccess, presence and equipment market in South Africa.However, a number of estimates have been extrapolated

from revenue data, user numbers, average costs, andrelated services data that is publicly available or researchedby World Wide Worx.

Telkom, in its annual reports, breaks its Internet revenuedown into ve categories, namely: data connectivity, leasedline facilities, Internet access and related services, manageddata network services, and multi-media services.

Inevitably, the biggest contribution comes

from the major telecommunications operators,

specically Telkom, Vodacom and MTN. A

substantial contribution also comes from the

smaller telcos, such as Neotel and Cell C, along

with a range of large and small Internet ServiceProviders (ISPs).



MWEB, as a subsidiary of Naspers falling within its PayTV Division, effectively as part of MultiChoice, does notreveal separate revenue figures. However, at the time thatit was briefly up for sale, in 2008, it was reported to havegenerated revenue of R1-billion the previous year.23 Aninsight into current turnover is provided by a valuationof MultiChoice South Africa compiled by Religare as aguide to shareholders in Phuthuma Nathi Investments,an empowerment company that holds 20 percent ofMultiChoice. It indicated a turnover for

Other (including MWEB) of R1.913-billionin 2011.24 Based on the 2008 revenue figure,and subsequent industry growth rangingfrom 15 percent to 25 percent a year, itcan be assumed that MWEB and other Internet activityin South Africa, within the Pay TV Division, generatedaround R1.7-billion in 2011.

Altech describes its business as converged which, for thepurposes of this report, means that it is almost impossibleto separate out its Internet revenues and investment. Itspublic statements regarding activity in this arena tend tobe focused on its investments in East Africa. One divisionthat is strongly focused on data and connectivity services

in South Africa, Altech Technology Concepts, generatedR27-million in the six months to end August 2011.25 Thiscan be annualised to R54-million.

Vox Telecoms does not break out revenue for its Internetservices ( Vox DataPro and Vox @lantic) in its annual report,but provides an indication in its interim report. For the sixmonths to end February 2011, group revenue was R925-million, with Vox DataPro contributing R210-million and@lantic R93-million, for a total of R303-million and almostone third of group revenue.26 For the full year, revenuewas R1.76-billion. If the contributions were the same, theturnover from the Internet service divisions amounted toapproximately R586-million.

For the following service providers, where thebiggest portion of their revenue comes fromselling data over Telkom-installed ADSL lines,at least half of their revenue can be assumed tobe accounted for by Telkoms own ADSL rentalcharges.

Web Africa is a relatively small, privately-heldISP with big ambitions, forecasting turnoverfor 2011 of R130-million.27 This suggests that, at anoverall industry subscriber growth rate of 30 percent,it can be assumed to have turned over R100-mllion in

2011. Excluding Telkoms share of that revenue, thiswould add R50-million to Internet expenditure.

Afrihost, a 12-year-old ISP, claims a subscriber base of50,000 customers and also reports over R100-million a yearin turnover.28 Excluding Telkoms share of that revenue, thiswould add R50-million to Internet expenditure.

Other well-known independent ISPs, like Axxess DSL,Imaginet, OpenWeb, and Cybersmart,

probably between them account for a similarrevenue total. Numerous smaller ISPs alsoprovide access services, and ascribing a similartotal to them would probably be conservative.

The rest of the ISP industry, then, is estimated to generateabout R100-million in additional Internet expenditure.

Total ISP revenue: R4.325-billion.

Online advertising

The size of the online advertising market tends to beresearched only every three years or so, due to the dicultyof extracting accurate data from advertisers and onlinemedia. In 2009, World Wide Worx estimated the online

advertising market size for that year at R419-million amongconventional online media entities.29

The growth forecast for the following twoyears was 35 percent a year, indicating onlineadvertising revenues of R565-million in 2010and R760-million in 2011.

A general consensus in the market is that theconventional online media sites are matched in

revenue by Google ads appearing on South African sites.Since Google does not provide regional breakdowns ofrevenue this remains the best estimate for its contribution

Total Internet expenditure:

Telecommunications operators: R24.874-billionInternet Service Providers: R4.325-billion

Total: R29.2-billion

TOTAL ISP REVENUE:R4.325-BILLION

ONLINE

ADVERTISING

MARKET WORTH

R1.52-BILLION IN

2011

23. Muller, R., MyBroadband, MWEB Auction, 3 June 2008

24. Religare Institutional Research: Naspers Limited, 15 December 2011

25. Altech Investor presentation for the six months ended 31 August 2011

26. http://www.sharedata.co.za/\sensad.asp?id=171188

27. http://bit.ly/Hj61BD

28. http://bit.ly/HjbNUj

29. World Wide Worx: Online Media in South Africa 2009



to the market, hence an online advertising market worthR1.52-billion in 2011.

Investment in data infrastructure

This section only takes into account the investment madeby the large telecommunications operators into majorinfrastructure projects. As a result, it can be regarded as aconservative estimate:

Telkom has not released gures for investment in datainfrastructure for 2011, so the gures contained in its2011 annual results for the year prior are used as a basis. Itinvested R917-billion in its next generationnetwork the industry term for an all-IP network, i.e. one that functions onthe Internet Protocol. It has stated thatinvestment in this network would continuein 2011 and 2012 in order to replace itslegacy network. A further R369-million wasspent on its bre network.

Total investment: R1.286-billion.

MTN invested in its network, primarily for breinfrastructure, 3G base stations and Internet Protocol (IP),in 2011: R4.105-billion. For 2012, R4.599-billion has beenbudgeted, i.e. a 12 percent increase over 2011.30

Vodacom in the six months ended 30 September 2011,invested close to R3.5-billion in its network infrastructure,primarily expanding 3G and bre networks. While thisincluded expansion to improve quality and stability on thevoice network, most of an annualised gure of R7-billioncan be assumed to be geared towards data infrastructure.31

FibreCo Telecommunications, a joint venture between Cell

C, Internet Solutions and Convergence Partners, investedR1-billion in the rst phase of a national bre grid during2011. A total of R5-billion will have been invested uponcompletion of the project.32

Neotel says that it spends R500-million every year incapex, of which 80 percent is committed to expanding thenetwork.33

West Africa Cable System, landed on the South Africancoast in 2011: total cost $650 (approximately R5-billion).34Assuming cost is spread over three years, and 60 percentof the cost carried by South African companies (excluding

state-owned enterprises), investment in 2011: R1-billion.

SEACOM has invested R100-million in additional SouthAfrican infrastructure to link its undersea cable to terrestrialnetworks.35

Total investment in data infrastructure: R15.5-billion.

Government spending

According to the Estimates of National Expenditure2011,36 published by the South African Government, atotal of R2-billion was budgeted for the Department of

Communications for 2010/ 11. Of thistotal, R1.289-billion was allocated toICT enterprise development. The onlyindications of further breakdowns withinthis gure point to it being allocatedto Broadband Infraco and Sentech forinvestment in broadband and breinfrastructure.

Total budgeted on broadband and Internet access by

Government: R1.2-billion

While there are doubtless many other areas of Governmentspending on Internet infrastructure and access, these arethe only gures that could be directly identied as such inthe budgeting breakdown.

Total value of Internet economy and

GDP

TOTAL INVESTMENT

IN DATA

INFRASTRUCTURE:

R15.5-BILLION

Total estimated value of the Internet economy in

2011, based on the above totals:

E-commerce (B2C): R11.5-billion

Internet access and presence: R29.2-billion

Online advertising: R1.5-billion

Investment in data infrastructure: R15.5-billion

Government spending on

broadband infrastructure: R1.28-billion

Total: R58.98-billion

30. MTN Group Limited, Interim results or the 6 months ended 30 June 2011

31. Vodacom, Interim results or the 6 months ended 30 September 2011

32. Press release: FibreCo awards contract to technology giant ZTE, 22 September

2011

33. Speckman, A., Business Report, Neotel on proft trail as sales rise, 26 March 2012

34. MTN press release: Broadband windall in the ong or millions o MTN

subscribers as WACS cable lands, 30 April 2011

35. Mail & Guardian, SA land inrastructure gets R100m boost rom Seacom, 25 July

2011

36. National Treasury, Estimates o National Expenditure 2011, 23 February 2011



South Africas total GDP is approximately

R2.964-billion.37

The Internet economy, as a proportion of GDP, is thereforeestimated to make up 2 percent of the South Africaneconomy. This is a dramatic gure, but matches up to thatprojected separately by the Boston Consulting Group,which indicated the South African Internet economy toamount to 1.9 percent in 2010, and growing to 2.5 percentby 2016. This suggests growth of 0.1 percent per year, and

an identical 2 percent gure for 2011.

It underlines the fact that the Internet in South Africa is ina phase of rapid growth, which is reected in the extensiveand highly visible activity of laying down networkinfrastructure to support demand.

Many of the high-prole investments in infrastructure arenot one-o events, but part of ongoing programmes ofdevelopment in order to meet an anticipated continuedgrowth in demand. The potential growth of the sector,then, will be a factor of growth of demand. The next sectionelaborates on the signicance of this growth.

Implications of infrastructureinvestment

Aside from the network built by Telkom, most currentinvestment in data infrastructure in South Africa has comesubsequent to a January 2008 High Court ruling that ValueAdded Network Services, as Internet Service Providers andrelated communications network operators were knownthen, may build or self-provide their own networks. 38

The ruling loosened the regulatory logjam that had createdmassive pent-up demand for data services, both at aphysical infrastructure level and in terms of the services

leveraging this infrastructure.

Many of these logjams remain, however. For example,many are pinning their hopes on Fibre To The Home (FTTH),which is regarded as the natural consequence of Fibre To

The Building (FTTB) going mainstream in the businessenvironment. There is almost no limit to the capacity of abre strand: speed and bandwidth is constrained by theequipment on either end of the bre line, and what thecustomer is willing to pay. The typical FTTB oering to

corporates is a 100Mbps connection, and that is becominga standard expectation for FTTH as well.

However, outside of oce parks and gated complexesthat have been planned with bre infrastructure from thestart, few have access to it. For an individual installation,the gure bandied about is R20,000 for installation - if thecustomer is already near an existing bre line.

Nevertheless, it can readily be argued that the contribution

the Internet economy makes to GDP today would havebeen substantially smaller had the regulatory environmentnot been eased in 2008, and its continued growth wouldhave been stalled.

This presents a clear challenge to policy-makers andGovernment to re-examine their approach to constraintson the Internet economy.

On an access level alone, it calls into question the continueddelays in spectrum allocation, the continued regulatoryfreeze on reallocating spectrum that is not being eectivelyutilised, and the lengthy process toward digital terrestrialtelevision migration, which in turn holds back the digital

dividend of broadcast spectrum that can be freed up forbroadband access.

At an infrastructure level, it poses a challenge to majoroperators to lower the cost of use of their services, which aremade up of multiple components, each of which presentsan obstacle to users. These range from access devices, toline rental, to usage constraints like data caps and cost ofad hoc data.

Cost is also added by inability to plan due to foot-draggingby regulators over long-awaited relaxation of obstacles.

These include Local Loop Unbundling (LLU), which isdesigned to give other service providers access to last-mile infrastructure owned by the incumbent but originallyfunded by the taxpayer.

On an enterprise and entrepreneurial level, it poses achallenge to any individual or entity that believes theInternet can make a dierence in their eectiveness,productivity or opportunity, to push for enablement ofthese opportunities. As the next section will show, this isof special signicance for small and medium enterprises(SMEs) in South Africa.

37. Statistics SA, Quarterly gross domestic product by industry at current prices, 4thQuarter 2011

38. World Wide Worx, Internet Access in South Arica 2012



Denitions

The denition of SMEs used by World Wide Worx is basedon the National Small Business Act 1996, as amended in2004, which stipulates varying denitions for each industrysector, including number of employees, turnover, and valueof assets.

For each sector, the denitions dier, except in the case ofnumber of employees, where all sectors except agricultural

have an SME size-limit of 200 employees (in agriculture it is100). A small enterprise is generally dened as having upto 50 employees, and a medium enterprise from 51 to 200.Companies with up to 20 employees are dened as verysmall enterprises.

Contribution to economy

According to data previously produced by the Companiesand Intellectual Property Registration Oce (CIPRO) andits current replacement, the Companies and IntellectualProperty Commission (CIPC), the number of companiesregistered in South Africa ranges from 1.2-million to

2.4-million. However, it has been found that the number ofactive entities is substantially smaller, variously estimatedat between 600,00039 and 675,000.40 World Wide Worxcurrently bases its estimates on a total of 650,000 activeSMEs in South Africa.

According to several academic studies41 and researchpapers,42 SMEs in South Africa contributebetween 52 percent and 57 percent toGDP and provide about 61 percent of thecountrys employment.

The Department of Trade and Industryoered a further breakdown in 2008,

indicating that micro-enterprises (1-5employees) provide employment for17 percent of the workforce, smallenterprises (21-50 employees) for 21percent, and medium sized enterprisesfor 18 percent of employment, for a totalof 56 percent. Large enterprises make upthe balance. 43

However, Deputy Minister of Trade andIndustry Elizabeth Thabethe has more recently reiteratedthe 61 percent gure for SME employment in South Africa.44

Considering that around 12.8-million people are employedin South Africa that would account for about 7.8-million

jobs.

SME Survey 2012 methodology

World Wide Worx has conducted South Africas original andlargest annual study of success factors and competitivenessof SMEs since 2003. Each year a focus area is identied anddeveloped into a core research question or hypothesis.

The ndings are then published in a report that is madeavailable to clients, while headline ndings and executivesummaries are made publicly available.

SME Survey 2012 is based on 2,000 interviews with arandomly selected sample of decision-makers at South

African small and medium enterprises,consisting of companies with 1 to 200employees.

The sample was generated from availabledatabases comprising more than 70,000companies, and was as representative asall the major small business databasesavailable in South Africa. The sampledrespondents matched the researchrequirements for understandingthe impact of various factors on thecompetitiveness and survival of SMEsin general, in particular Internet accessand a Web presence. The random natureof the sample ensured that it would be

possible to compare the nancial health of companies withand without a website.

THE SME SECTOR IN SOUTH AFRICA

ACCORDING TO SEVERAL

ACADEMIC STUDIES AND

RESEARCH PAPERS, SMES IN

SOUTH AFRICA CONTRIBUTE

BETWEEN 52 PERCENT

AND 57 PERCENT TO GDP

AND PROVIDE ABOUT 61

PERCENT OF THE COUNTRYS

EMPLOYMENT

The core research question in 2012 was:

What impact does a website have on

the competitiveness, protability and

sustainability of an SME? The full ndings will

be published in a report entitled SME Survey

2012. However, the ndings relevant to the role

of the SME in the Internet economy, and viceversa, are published in this study, in association

with Google.

39. http://www.southafrica.info/business/trends/newbusiness/smetoolkit.htm40. SME Survey 2009

41. Abor, J., and Quartey, P. Issues in SME Development in Ghana and South Arica,

International Research Journal of Finance and Economics, Issue 39, 2010

42. Kongolo, M.,Job creation versus job shedding and the role o SMEs in economic

development, African Journal of Business Management Vol. 4 (11), 4 September,

2010

43.Annual Review O Small Business In South Arica 2005-2007, Dept of Trade andIndustry, RSA, 2008

44. Speaking at the launch of the Woza Online project, 19 January 2012.



Impact of the Internet on SMEs

Almost two-thirds of SMEs in South Africa have a website.While this gure is impressive in its own right, it is theimpact that the website makes for these SMEs that is thetruly impressive statistic. As the followingsection reveals, an SME with a website issignicantly more likely to be highly protablethan one without.

For those without a website, the implicationsare clear.

Over a third of SMEs are in danger of makingthemselves irrelevant to their customers. Thisis because, with an ever-increasing number of peoplesearching online for service providers, the 37 percent ofSMEs in South Africa that do not have any kind of Webpresence are losing out on a major channel of potentialcommunication.

This is perhaps the most important statistic to come outof SME Survey 2012. As gure 3 below shows, while a high63 percent of formal SMEs in South Africa have a website,this leaves more than a third of SMEs without an onlinepresence.

Other results from SME Survey 2012 have shownconclusively how having a website correlates withincreased protability.

As many as 79 percent of SMEs with a website report thatthey are protable, with 30 percent of these stating theyare strongly protable. Of those without a website, only59 percent report protability and just 14 percent of theseclaim to be strongly protable.

A common argument made by thesecompanies is that there are not enough peopleonline to justify a Web presence. However, ashas been shown in this report, a critical mass of

consumers is already online, and the growth inusers is accelerating.

This translates directly into having morepeople going online to nd services. This

means the market is reaching the point where a companyswebsite will become the glue that holds together all of itsother marketing eorts and activities.

Segmental variations

The great irony highlighted by the SME Survey 2012 is thefact that the nancial services sector, supposedly one of

the most high-end areas of business, has one of the lowestpercentages of website use.

Less than half (41 percent) of all auditors, accountants andinsurance brokers can be found online. This is particularlytroubling in light of the fact that the major banks allhave a signicant presence online and a vast array of

ALMOST

TWO-THIRDS OF

SMES IN SOUTHAFRICA HAVE A

WEBSITE



Internet-based tools available for their customers. Moreand more people who are familiar with the banks websiteswill, when looking for an auditor or accountant, expect to atleast nd them online.

The reason many of these professionalsare not yet online is that 78 percentcurrently maintain a fairly high level ofprotability. Therefore, they do not feelthe need to stay with the times. However,

as the Internet becomes the single mostimportant means of searching for a serviceprovider, these SMEs will nd themselvesat an ever-increasing disadvantage.

In fact, the only sector with a lowerpercentage (36 percent) of websites is thatof education largely because many training institutionsand specialist schools and colleges are targeting the massmarket. Their failure to develop a website is an extremeexample of the perception that not enough people in SouthAfrica use the Web, and only 19 percent of respondents tothe Survey in this sector claimed to be protable.

It is hardly surprising that the sector of SMEs with thehighest percentage of websites is the IT and telecomssector, with a massive 89 percent of companies on theWeb. These are clearly companies that are fully aware ofthe importance of a website, since this is the space in whichthey do business.

Tourism is also well developed from this perspective, withsome 77 percent of SMEs in this sector having websites.

This is an industry that clearly recognises the fact that theircustomer base is likely to search for them online. They also

understand how important it is to utiliseevery available channel to attract customers.

One nding from previous surveys that hasbeen borne out by the latest results is thatthe larger an organisation, or the longer it

has been around for, the more likely it is tohave a website. Thus a newly formed SMEthat immediately creates an online presencecan give potential customers the impressionthat it has been established for much longer,or that it is a much bigger business.

Regardless of the vertical market the SME plays in, or thesize of the business, the Survey clearly shows that thegrowing ubiquity of connectivity means that a website isfast becoming a must-have.

After all, when the customers come looking, the companyhad better be there.

Contribution of websites to survival

Another core question of SME Survey 2012 was the impactof a website on a companys ability to remain in business.

SMES WITH THE

HIGHEST PERCENTAGE

OF WEBSITES IS THE IT

AND TELECOMS SECTOR,WITH A MASSIVE 89

PERCENT OF COMPANIES

ON THE WEB



A full 30 percent of those companies with a website statedthat their business would not have been possible withoutthe website.

Figure 4 represents a full 20 percent of formal, active SMEs,accounting for approximately 150,000 small, medium andmicro enterprises (SMMEs) in South Africa.

Extrapolating from the gures referenced above, that SMEsaccount for about 7.8-million jobs; this would suggest

that, had the 20 percent for whom the Web has been keyto survival not had websites, as many as 1.56-million jobswould have been in jeopardy.

Other contributions of websites

Contact with customers

A high proportion of active SMEs, 39 percent, regard theirwebsites as a key tool for contacting customers, while



an even higher proportion, 41 percent, regard it as keyto customers contacting them. The inbound role of thewebsite is thus seen as marginally more important thanoutbound.

Updating inventory

The process of using the website to showcase the latestproducts available from the company was acknowledged

by 39 percent of respondents as an important benet.

Company sustainability

Figures 8.1, 8.2 and 8.3 reveal the impact of a website onfour areas of competitiveness. For general sustainability, aproxy for protability, 40 percent of SMEs have found theirwebsites to be key contributors.



Business growth

Contributing to business growth was a benet reported by42 percent of SMEs, the same as for growing revenue.

Competing for market share

The same proportion of companies reported thatcompeting with equivalent businesses was an importantbenet of their website: 40 percent for SMEs regard thewebsite as an important contributor. Just 14 percent sawa website as unimportant in competing against similarbusinesses.



The benet bouquet

It is clear that, not only does the small business experiencea bouquet of benets from having a Web presence, but theeconomy as a whole benets enormously.

The conclusions from SME Survey 2012, taken incombination with an examination of the contribution ofthe Internet to the South African economy, lead to the clearsignal that a Web presence is a priority for the SME sector.

The policy imperatives that ow from these ndings go

further, however.

Given that the Internet itself is making a growing

contribution to the economy, and that it is a critical

element in the sustainability of small businesses and hence

of employment, it is vital that the Government introduces

policies that promote both growth of Internet use and of

SME access to the tools of the Internet.



CASE STUDIES: SMES ON THE WEB

In January 2012, Woza Online was launched as a joint venture between Google, the Department of Trade

and Industry, Vodacom and the Human Resources Development Council with the aim of enabling South

African SMEs to create their own websites quickly and at no cost.

In the rst two months following the launch of Woza Online, a total of 11,200 SMEs created their own websites.45 Naturally,these vary widely in terms of scope and purpose. Two examples of SMEs with limited resources are proled to show what theyhave achieved using a website.

Party Platters

http://www.partyplatters.wozaonline.co.za

Lianne de Beer started her from-home catering service,

Party Platters, to take advantage of her passion for food.I enjoy trying new ideas and am always looking for a

delicious recipe to add to my selection, she writes onher website. She oers a wide variety of customisedplatters of freshly-made food, delivered to your door.

W h e n L i a n n e s t a r t e dout, she depended on

friends, family, word-of-mouth referrals and flyers.

Business was good, but notspectacular.

I would have on averageof four jobs per month withan average of two-to-four

platters per job. In the rstmonth of my website going

live, I had 18 individualjobs, with an average of veplatters per job.

She told her story to the Mail & Guardian, whichreported:46

For Lianne de Beer, owner o a six-year-old business called

Party Platters in Edgemead, Cape Town; the main reason

or delaying getting a website is cost. Beore Woza Online,a proessional-looking website would have set her back at

least R10,000 - out o reach or her home-based business,she says.

De Beer says the response rom website partyplatters.wozaonline.co.za has allowed her to scale up her businessrom the part-time service she kept going while raising her

toddlers to a ull-time pursuit, now that her children areslightly older.

The results have astoundedLianne. She says that she

initial ly registered thepartyplatters.co.za domainjust to secure a professional-

looking e-mail address, andhad planned to broach thewebsite when she had the

funds to do so.

But the biggest problemcurrently with a websiteis the exorbitant costs of

custom development and design work. I gured I wouldget to this in due course as I got busier to be able toaord these costs. Now, with the Google Site builder,

I have been able to do what I wanted to without costsand still have something that looks really professional.

45. http://leadsa.co.za/?p=8179

46. Terblanche, B., Google lures small business online , Mail & Guardian, 23 March

2012



Rolling Rehab

http://www.rollingrehab.wozaonline.co.za

Caroline Rule has a mission. She wants to show people

who live with a disability how to gain the independencethat comes with being able to drive a vehicle. Shelaunched Rolling Rehab to help people who have lost

limbs or the use of limbs, as well as people who havesuered strokes or traumatic brain injury. It oers a rangeof assessments, including a driver ability assessment,

passenger needs assessment and a vehicle adaptationsassessment.

Caroline also helped set up a driving school called DrivingAmbitions, with the QuadPara Association SA (QASA).

Avis donated a fully adapted vehicle to accommodatea wide variety of peoplewith dierent disabilities.

They now assist peoplewho are unemployed with

a disability, or who earnvery low salaries, and sourcefunding to provide free or

subsidised driver training,and assist them with gettinga driving licence.

We believe that by helpinga person to get their licence,

we are making themmore employable. Public transport is not wheelchair

accessible, so it is extremely dicult for anyone withmobility impairment, particularly wheelchair users,

to get to work. In many government positions theycan only get promoted if they have a licence. So, byproviding this service, we are hoping to make peoplemore independent and less reliant on hand-outs.

At the Rolling Rehab premises in Hennopspark outsidePretoria, visitors are sometimes startled to see a vehicle

pull up and a disabled person alighting from the driversseat. Usually, the driver would have returned from a

driving lesson in an especially adapted car, donatedby Avis, under the guidance of one of Carolines expertinstructors.

Until recently, however, much of Carolines time was

spent oering telephonic guidance. People would hearof her through word of mouth, make contact, and spend

as much time on the phone as it would take Caroline torun through the many options available to them.

Then she heard about Woza Online, and began puttingtogether a website in her spare time. Suddenly, allthe information she spent so much time imparting is

available at the click of a mouse button.

I have put a lot of the most commonly needed info on

my website, so now instead of answering long e-mailsor taking long telephone calls, I can refer people to my

website, where they can nd the relevant information,she says. But that was onlythe most obvious benet.

Within days of the site going

live, she was contactedby a company that hadbeen trying to identify an

appropriate beneciaryof their corporate socialinvestment programme.

Theyd come across her site,and instantly decided thatRolling Rehab should be the

beneciary.

This was purely because they had been able to readabout what I am doing. Although Rolling Rehab is not

registered as a charity, it functions as a charity as there isnot much money to be made in this business. As a result,I never felt that I could aord a website, although I knewthat I desperately needed one.

So this approach suited me perfectly. I have got mybasic information on the site, and I can grow it as I get

the time. I believe it is a perfect tool for many peoplewith disabilities as they are often forced into an

entrepreneurial position, so I have been spreading theword.



SMEs across the Web

Many services provided by SMEs simply could not have existed before the arrival of the World Wide Web and interactivedatabase queries. For example:

Then there are services that, thanks to a website, have instantly transformed local knowledge about them into globalawareness.

Thinkmoney (www.thinkmoney.co.za)Price comparison services would, in the past, have used printedguides that were not only out of date the moment they werepublished, but only allowed specic comparisons that wereworked out prior to publication. Now, a site like Thinkmoney isable to provide direct comparisons of nancial services like creditcards and insurance, across a large number of criteria. It can addnew services as they are made public, and it can change the prices,benets, and features the moment these are altered by providers.Visitors are also able to leave their own reviews. As a result, a siterun by a small team of entrepreneurs generates more than half a

million page views per quarter.

Kruger Sightings (www.krugersightings.com)There are few sectors that have been as dramatically transformedby the ability to create a Web presence as tourism. From bed andbreakfast establishments to tour operators, the Internet has takenthem national and global. Kruger Sightings is a powerful exampleof how a single, young entrepreneur can leverage the passionfor game viewing among both local and international visitorsto create an online service that has become an SME in its ownright. The website provides a live blog-type update of sightingsin the Kruger Park. All sightings are provided by visitors, whoseenthusiasm for the service has made it one of the most populargame viewing resources in South Africa. The site has also spun oa Twitter feed and mobile app.

Clearly, long before Woza Online, many success stories in South African retail would not have been possible without the Web.These include the online ower sellers Netorist, the wine information and purchasing site Cybercellar, the books websitesKalahari and Loot, the online auction site Bid or Buy and electronics sites like Take 2, Have2Have, Wantitall and eDreams.

All of these online SMEs are among the top 20 online retail sites in South Africa and, along with the websites of major retailerslike Pick n Pay and Woolworths, make up the bulk of online retail in South Africa. Their websites are not only such organisationsown gateway to the Internet economy, but provide their customers with the vehicles to contribute to that economy.

Clearly, as more SMEs are empowered and enabled with a Web presence, their contribution to the Internet economy willrise. As the next section shows, South Africa is about to see an unprecedented rise in the number of Internet users with apropensity to shop online. The ability to leverage this propensity, and convert it into actual shopping behaviour, will make a

critical contribution to the Internet economy.



World Wide Worx has developed a model for

forecasting Internet uptake, called the Digital

Participation Curve. It carries ve year forecasts

for engagement in commercial aspects of the

Internet, and will be used as a formula for

estimating growth of the Internet economy ve

years ahead.

The concept was developed after South Africa suered its

own version of the Internet bubble bursting, despite nothaving the same frenzy around Internet stocks as in the

developed world. Instead of an Internet boom fuelled by

start-ups, South Africa saw established businesses throw

tens of millions of Rand at their online presence. Despite

these investments, the Internet-using public almost entirely

ignored the oerings of these businesses, mainly nancial

institutions and retailers.

Many blamed the failure of these ventures on the bursting

of the tech stock bubble in the United States. But South

Africa never had the venture capital industry

that made the bubble possible; and it did not

have the ood of bizarre business models

from start-ups that attracted huge attentionbut minimal revenue.

What it did have was a rapidly growing

Internet user base, and a complete lack

of understanding of that user base. No

research was conducted into the makeup of

that base, partly because decision-makers in

large organisations often believe they know

best and see research as a sign of weakness.

To be fair, some did conduct research, but they asked the

wrong questions. In almost every case of a major online

investment at the turn of the millennium, the investors

ignored one of the prime rules of traditional go-to-marketstrategies: they failed to segment the market.

The key moment in online business in South Africa was not

2006, when online retail began to take o, but 2001, when

early investments in e-commerce collapsed. The reason this

was such an important moment was not so much because

of what could be learned from failure, but because of what

could be learned about the makeup of the online market.

Those learnings still guide online strategy a decade later.

The Five-year gap

From 1999 to 2001, the number of South Africans with

Internet access rose more dramatically than at any other

time from 1994 to 2008. In just two years, it increased

from 1.8-million to 2.8-million. In the face of such growth,

massive investment was thrown at e-commerce ventures

by major institutions, including Standard Bank, Old

Mutual, Liberty Life, Woolworths, Saambou and Primedia.

Their respective online innovation brands, BlueBean.com,

FundsNet, MyLife, inthebag, 20Twenty and Metropolis,

were expensive disasters even when, like 20Twenty, they

attracted fanatically loyal customers.

Why, if they inspired such loyalty, did the brands not

capture the imagination of all Internet users, and set the

market alight?

How could such major institutions fail to attract a reasonable

proportion of such a large Internet population?

Simple: they failed to segment the market.

Analysis of customer numbers supplied to World Wide

Worx by online retail owners suggested that,

rather than the 2.8-million people who were

online, the real audience for advanced onlineservices was between 300,000 and 400,000

people. In fact, only 357,000 individuals had

registered with online shopping services.

Comparing this with historical data collected

in World Wide Worx Internet research, it

became clear that those who were ready to

shop online and engage with more high-

end services were, by and large, those who

had been online since 1996, when precisely

354,000 South Africans had access to the Internet.

A coincidence? Hardly!

The Experience Curve proven

The correlation of the 1996 user number and the 2001

online shopping registration total suggested that ve years

on the Internet was a key level of experience for users to

engage in transactional behaviour in particular, and to

participate in the digital economy in general. This ranged

from participating in e-commerce, to launching businesses

online, to creating personal websites or elaborate blogs.

And this meant that, by 2006, those 2.8-million people

everyone had been targeting in 2001 would nally be

GROWTH OF THE INTERNET ECONOMY

WORLD WIDE WORX

HAS DEVELOPED

A MODEL FOR

FORECASTING

INTERNET UPTAKE,

CALLED THE DIGITAL

PARTICIPATION CURVE



ready to be targeted. This concept was initially termed the

Experience Curve by World Wide Worx.

The model enabled World Wide Worx to forecast that 2006

would see the beginning of the recovery in online retail,

among other sectors. When the trend line for online retail

showed ever-slowing growth from 2001 through to 2005

the growth rate reached 20 percent o a very low base

the prophets of doom were out in force. But it was clear that

their timing was just as bad as that of the 2001 spendthrift

corporations.

While strict following of the trend lines at the time suggested

that online retail growth would drop to 15 percent the next

year, the Experience Curve suggested a turnaround. And

indeed, a dramatic turnaround occurred, with 30 percent

growth recorded in 2006.

This seemed to y in the face of common logic, since the

trend line for growth in number of Internet users remained

almost at, at around 3 percent a year. However, the

Experience Curve made it clear that it was time on the

Internet, rather than numbers on the Internet, that dictated

its usage.

The model was proven again in 2007. At a time when

growth in Internet numbers remained relatively flat, at

6 percent, online retail grew at 35 percent.

The Digital Participation Curve

It is now clear that there is a powerful relationship between

length of time an individual has been on the Internet, and

that individuals willingness to bank online, shop online,

engage in social media and specialised social networks,

and generally strive for online self-actualisation.

That is the same term used for the peak of Abraham

Maslows well-known Hierarchy of Needs.47 It begins with

basic physiological needs, like food and shelter, works its

way up through social needs like love and belonging, and

peaks with self-actualisation.

The Internet Hierarchy of Needs is almost identical. It starts

with physical needs, such as getting connected and quality

of that connection, works it way up through social needs

like communication and networking, and peaks with self-

actualisation, such as user-generated content, interaction

with websites, and leisure shopping.

This evolution up the Internet Hierarchy of Needs does not

happen overnight. According to the Experience Curve, it

takes at least ve years for the average individuals Internet

usage to develop from a physical Internet connection to

online self-actualisation.

By the end of 2008, 3.2-million South Africans had been

online for ve years. The number grew to 3.75-million

in 2011. The online market is suddenly real, the online

user is suddenly experienced, social media like blogging,

which took o in 2008 is mainstream, social and businessnetworking sites like Facebook and LinkedIn have taken

South Africa by storm, and it all appears to have happened

overnight.

In the process, it became clear that the Experience Curve

was not only about Experience, but also about Participation.

It showed that, once people were condent enough in the

online environment, they would become active participants

in that environment. This led to the understanding that

the curve was not only about experience of the digital

environment, which is a somewhat passive concept, but

about participation in that environment, which is the active

expression of that experience.

The model thus became the Digital Participation Curve. I t

looks like this (see gure 9). The upper curve is the growth

curve of Internet users in South Africa, while the lower

curve shows the number of those who have been online for

ve years or more.

South Africans on the curve

In 2008, the success of the Digital Participation Curve in

explaining the anomalies of growth in that year nally saw

it accepted broadly in the corporate world as a predictor of

online activity.

Many South Africans were puzzled by what they saw

happening that year in e-commerce, online banking,

online advertising, website trac and social networking. In

particular, they were taken by surprise by the sudden take-

o in all these areas from 2006 to 2009, when common

logic told them that we should have been entering an

Internet slump, in line with the Global Financial Crisis. The

problem with all logic, however, is that is does not take into

account underlying factors, historical forces and the nature

of trends.

47. http://www.abraham-maslow.com/m_motivation/Hierarchy_of_Needs.asp



The long-term implications are tremendous. Since 2008,for the rst time since the 1990s, we have seen a sustainedincrease in the rate of growth of number of Internet users in

South Africa. This largely comes o the back of ve factors:

1. The explosion in the use of smartphones, andthe ability to access the Internet on these phones.

2. The growth in ADSL connections in small andmedium enterprises in South Africa. Wherepreviously an oce relied on a dial-up connection,typically only one person in that oce was able touse the Internet. ADSL is not only cheaper thandial-up for an oce, but it also allows for everyonein that oce to be connected, at the same cost,and at far higher quality.

3. The explosion of new services and serviceproviders, increasing competition, bringing down

prices, and building greater awareness than everbefore.

4. The wild popularity of social networking in SouthAfrica, which is now penetrating the mass marketat a rapid rate.

5. The explosion of local content on the Internet.

These phenomena are transforming access, and willcontinue to do so. However, that is hardly the end of thestory.

Based on the ve-year lag, it is clear that, if growth in thenumber of users began accelerating in 2008, then by 2013the Digital Participation Curve must reach an inection

point, i.e. a point on a curve or chart at which signicantchange occurs in the shape of the curve, or a comingtogether of events that change our way of thinking. Both

meanings apply here: all those who began coming onboard the Internet from 2008 onward, will become fullyengaged with it from 2013 onward. And that will mark thebeginning of the most sustained acceleration in the DigitalParticipation Curve that we have yet seen, as gure 10reveals.

In other words, businesses that missed out on the 2006-2009 Internet boom in South Africa, can set their watchesnow for the beginning of the next boom, only a year fromnow.

Digital Participation as a marketing

framework

It should be obvious by now that the Digital ParticipationCurve is also a framework for evaluating marketingmodels. It shows what proportion of the market is readyto participate in the digital economy. While this does notmean all of these people, say the 3.75-million experiencedInternet users at the end of 2011, will actually participateor buy or sell; it does mean they have the propensity to doso. The actual participation will be dependent on both theirpeer groups, i.e. the social word of mouth that often guidesour decisions, and on how successfully they are targeted bybusinesses or organisations.



This highlights the importance of social networking and

social media as vehicles through which people move

from propensity to participate, to actual participation. Ittherefore underscores the importance of social networking

and social media as tools for organisations to target

individuals.

However, there is no no one-size-ts-all strategy. Once

the Digital Participation Curve has been acknowledged,

the market of ready customers must now be segmented

further. For every industry sector, for every product

category, and for every specic product, the segmentation

will be dierent.

For example, airline tickets need minimal segmentation,

but specic airlines with specic value propositions need

further segmentation. Electronic goods in general needlittle further segmentation for selling online, but specic

product categories and products need careful and detailed

segmentation. Digital content like paid downloadable

music and access to articles needs even more detailed

segmentation to explain why there is almost no propensity

to purchase yet. Once that segmentation is arrived at, the

Digital Participation Curve explains when and at what rate

that propensity will grow enough to make it a viable area

of e-commerce.

It is important to note here that the Digital Participation

Curve is not only about e-commerce and selling online.

It is more generally applicable, and relates to the extent

to which individuals are willing to engage online with

companies and organisations with which they have a

relationship.

This means that, once an organisations entire client base

begins to be represented on the Digital Participation Curve,

it can expect that its entire client base will wish to interact

with it online. This places a massive challenge before

corporate South Africa and small and medium enterprises

to be ready for their customers by 2013. If companies do

not do so, their customers may well defect to the alternative

providers that do meet their online needs and expectations.

At the very least, they will nd their brand value and image

undermined by their inability to serve their customer base

in the environment where it expects to be served.

In short, if South African organisations are not ready toserve their customers online by 2013, their customers will

nd organisations that are ready.

Impact on the Internet economy

Given the direct relationship between the Digital

Participation Curve and e-commerce, it can be assumed

that intensied digital participation will result in an

equivalent increase in data demand, and consequently

in infrastructure investment to meet this demand. This

eect can be expected to be felt across all segments of the

Internet economy.



Consequently, as we see a 15-30 percent rise in the number

of experienced Internet users each year over the coming

ve years, we can expect to see an ongoing increase in

the size of the Internet economy at least double that of

the general economy, i.e. at around 7-8 percent a year.

This will translate into the Internet economy making up

a steadily increasing proportion of GDP, which means that

the 2.5 percent forecast for 2016 is not only possible, but a

highly likely outcome of current growth trends.

Contribution to GDP globally

Research conducted by The Boston Consulting Group

across 20 economies has shown that South Africas Internet

economy, as a proportion of GDP, does not compare well

to either leading industrialised nations or developing

countries. Across the G-20, a group of 20 major economies,

the average contribution of the Internet economy to GDP

in 2010 was 4.1 percent, expected to grow to 5.3 percent

by 2016.

The average for developed markets was 4.3 percent,

growing to 5.5 percent by 2016, while for developing

markets it was 3.6 percent, expected to grow to 4.9 percentby 2016. This compares to South Africas 1.9 percent in 2010,

2 percent in 2011, and an expected 2.5 percent by 2016.

The leading Internet economies are those of the United

Kingdom (8.3 percent, growing to 12.4 percent by 2016),

South Korea (7.3 percent, growing to 8 percent) and

China (5.5 percent, growing to 6.9 percent). South Africa

is ahead of only two of the countries measured, namely

Turkey (1.7 percent, growing to 2.3 percent) and Indonesia

(1.3 percent, growing to 1.5 percent). It is on a par with

Russia, but will fall behind soon (1.9 percent, growing to

2.8 percent), and is catching up with Brazil (2.2 percent,

growing to 2.4 percent).

The fth member of the BRICS grouping,48 India, has one

of the fastest growing Internet economies, at 4.1 percent

in 2010 and rising to 5.6 percent in 2016. That will make it,

jointly with Japan, the fourth biggest Internet economy in

terms of contribution to GDP.

What makes Indias Internet economy dierent? The BCG

analysis reveals that a high proportion is made up of

exports, which is almost non-existent in South Africa, to the

extent that imports into the Internet economy make this

a negative gure in terms of contribution to GDP. Further,

Indias online retail sector is expected to grow rapidly and

will make up close to half that countrys Internet economy

by 2016.

48. Comprising Brazil, Russia, India, China and South Africa.

The key message for South Africa, in terms of

growing the Internet economy, is to loosen thelogjams constraining this economy, to promote

ubiquitous and aordable access, and to take a

more active embrace of open competition. This

will, in turn, ensure that the economic benets

of the Internet are enjoyed sooner rather than

later, and by the many rather than the few.



INTERNET CONTRIBUTION TO GDP

GROWTH IN SOUTH AFRICA

The growth of the Internet economy has an impact not only on GDP in itself, but also on the growth rate of GDP. If theInternet economy adds an additional 0.1 percent to GDP each year, its contribution to the growth in GDP each year will beabove 5 percent, as table 2 shows.

At an average growth of around 8 percent a year, suggested by the Digital Participation Curve, the Internet economy canbe expected to reach R79-billion by 2015, contributing close to 2.4 percent to South Africas GDP. Equally signicantly, it will

contribute 5.71 percent to the growth rate of GDP.

It is once again clear, then, that the Internet economy has become a key component of the South African economy, and aboost for the Internet economy would translate readily into a boost for the overall economy.

The message to Government is equally clear: invest more actively in the Internet economy, and the benets will spill overdirectly into the overall economy.



The ndings of this study provide a number of pointers and calls to action for all segments of society: individuals, small and

medium enterprises, large businesses, the communications industry, policy-makers and Government. All have a role to play in

either improving access and participation in the digital economy, or leveraging it to best economic and productive eect. With

all parties playing a role, a robust Internet ecosystem will evolve to the benet of all role-players.

Government and policy-makers

Governments have a central role to play in ensuring universal access to Internet services, an enabling environment for

infrastructure development and competition, and a policy framework that allows for the lowering of costs, the promotion of

digital literacy and innovation.

Based on the ndings in this report, it is recommended that regulators and Government policy-makers apply the greatest

urgency to removing obstacles in the way of Internet access evolution in South Africa. This includes the following key steps:

CONCLUSIONS AND RECOMMENDATIONS

y Allocating spectrum for high-speed wireless access, in particular 4G or Long Term Evolution (LTE),

according to ability to make such access available to the highest proportion of the population, in

the shortest possible time.

y Ensuring that licensing of new broadband technologies, such as LTE, be treated with urgency, in

order that South Africa not be seen to be falling behind, or in reality falling behind, in the roll-out

of those technologies that make the Internet more ecient and eective.

y Harmonising contradictory, conicting or constraining national, provincial and municipal lawsregulating communications infrastructure roll-out, such as way-leaves and other right-of-way

laws.

y Immediately withdrawing spectrum allocation from entities that have owned it for many years

without using it, and reallocating such spectrum.

y Rening the broadband policy framework developed by the Department of Communications to

ensure that the denition of universal access takes into account the need for Internet access in

every home, rather than at a community level.

y Ensuring that roll-out of high-speed technologies, such as Fibre-to-the-Home and LTE, is not

constrained by regulatory delays and unrelated priorities or agendas that result in inaction.

y Assisting in the lowering of costs of access devices and equipment, through lowering or removal

of duties and taxes relating to these products.y Removing all bottlenecks in the way of digital terrestrial television migration, and providing a

clear framework for utilisation of the digital dividend of broadcast spectrum that will be freed

up subsequent to this migration.

y Provide more incentives for investment in Research & Development.

y Provide greater funding for centres of technological excellence and entrepreneurship.

y Provide greater incentives to small enterprises to engage with the Internet economy.

y Reduce the red tape and paperwork required to leverage these opportunities.

y Provide easier and more transparent access to Government tenders, both in terms of the initial

tender opportunity and the eventual tender award.

y Make as many Government services as possible available online.


34/34

Communications industry

It has been shown that the cost of access to the Internetis a major obstacle in the way of ordinary individualsparticipating in the Internet economy. Based on thesendings, it is recommended that major operators andsuppliers:

SMEs and entrepreneurs

All businesses can benet from an enhanced Internet

presence. SMEs and entrepreneurs in particular can

leverage the opportunity represented by the Internet by:

Ordinary individuals

Even the ordinary citizen can help build the Internet

economy simply through attitude. Some of the simplest

examples of this kind of contribution include good digital

citizenship, respect for copyright laws, supporting local

artists and content, and buying goods and services online

when it is more cost-eective and convenient.

This means, in turn, that individuals also have a responsibility

to themselves to become better educated about what the

Internet can do for them, and how they can best leverage it.

y Embracing the Internet in terms of creating

an online presence with a website.

y Adopting and investing in new technology,such as cashless payment options, customer

relations management and supply chain

management tools.

y Becoming educated in the opportunities

available on the Internet, such as access to

Government tenders available from some

departments.

y Where lev

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