Consulting firm Bain & Company has a grim view of the future for telecommunications in SA, but it is one the company says is founded on past international experience and economic fundamentals.
[VIDEO]As the telecommunications policy process slowly grinds on, Bain is among the few supporters that feel the government has chosen the best path it could through the maze that is the future of telecoms.
Among Bain`s most surprising findings is that the market for basic telephony may already be close to saturation point. Presenting the findings, VP Tim Hough said only about nine million individuals or about 20% of the population has the financial means to use telephone services, which is close to the number of lines already in the country if cellphones are included. The other 34 million citizens are excluded because of unemployment, a very low disposable income and geographic positioning which makes it economically unviable to provide service to them.
Although massive cross-subsidisation may make it possible to provide access to a broader segment, Hough says it is likely only to provide services to those who cannot afford to use them, causing a full loss on the capital invested.
Cost vs growth
The study also found that high prices, the main reason for introducing competition, have not slowed down the growth of telecommunications in SA. According to Bain`s figures, South African growth in both voice and data services, measured either by revenue or by the number of lines, continues to comfortably outstrip growth in Western Europe.
"The fact is that as a corporate you may not like the high prices Telkom charges you, but that doesn`t stop you from using a data network where you need one," says Hough.
Yet liberalisation, even the managed and slow process proposed by government, will cause an overall reduction in prices. That could be disastrous as South African operators suffer from the same revenue decline the European market has experienced. While income drops, cost stays almost stable, causing a painful margin squeeze.
Telkom will find it especially difficult to cut its costs, as labour expenses represent about 40% of its expenses. "The only way you get costs down is by shedding jobs big time," says Hough. "How politically acceptable will that be?"
And while margins are being squeezed, Bain expects the industry to spend between R30 billion and R40 billion on infrastructure within the next five years, with the second national operator (SNO) likely to shell out more than R16 billion. Yet it is unlikely that it will see a return that beats the cost of its capital.
Hough says the 350 largest companies in the country represent more than R10 billion in telecoms revenue, more than half what all other business and residential customers combined are worth. That makes it likely that a price war will ensue around these large companies, a war in which the incumbent player with its massive cash flow is the clear favourite.
Destruction gap
But possibly the most damaging aspect of liberalisation could be the "hundred billion rand value destruction gap" that Bain foresees. The R177 billion estimated current value of MTN, Vodacom and Telkom could be changed into a R72 billion value for those three companies plus the SNO and Cell C within three years, Bain says, even at a price to earnings ratio of 25, if price wars lead to a 20% price reduction year on year.
"You could easily take a hundred billion out of the telecoms sector, without a significant increase for new players," says Hough. "It is not difficult to do and it is happening even in supposedly well-regulated markets in Europe."
Hough believes government got it right by introducing only one fixed and one cellular player, saying the market will barely sustain these and that there certainly is no room for new licences in the foreseeable future. He also believes forcing the SNO to use the existing Transtel and Eskom infrastructure is necessary, in order to keep the capital spent on a new network down to the minimum.
The most important thing now, he says, is to ensure that the telecoms regulator is strong and knowledgeable enough to protect the new players and the industry in general, from what Hough and his company see as the very difficult times ahead for all operators.
Related stories:
VOIP ban 'will make SA a laughing stock`
Share