Cell C gears up to take on the big boys

Cell C yesterday laid out its broad business plan and announced that Deutsche Telekom subsidiary Detecon would join Verizon, Accenture and Siemens as its primary partners.

The third cell operator last week became assured of its planned pre-Christmas switch-on with an out-of-court settlement, estimated at between R60 million and R100 million, with the Nextcom consortium.

Cell C says only two major factors have changed during the long delay in the licensing process: more users have signed up with MTN and Vodacom, and the price of cellular network equipment has decreased significantly.

"Certain costs have come down since we submitted our bid," says Paul Duane, chief advisor to the consortium, referring to the cost of network equipment and handsets. The resulting 30% to 40% saving on capital expenditure "slightly compensates for the delay".

That delay is estimated to have seen 500 000 potential clients lost to the incumbents, valued at $1 000 each. Around a third of those customers are to be recovered with the 20% total market share Cell C is aiming for within six to seven years.

Certainty of access to the high-data capacity 1800MHz spectrum is also expected to save Cell C money compared to its competitors. The company says it is relatively inexpensive to build dual 900MHz/1800MHz cellphone towers, while MTN and Vodacom will have to pay for new equipment.

Listing is one of the options we could consider, but there are other ways. We will only list if the market conditions are right.

Zwelakhe Mankazana, director, 3C Telecommunications

Cell C is to replace older single-band telephones to give users access to its entire network, which is to use the 1800MHz and 900MHz GSM frequencies and E-GSM, an extended frequency in the 900MHz band.

Negotiations are underway with both MTN and Vodacom to conclude a roaming contract giving Cell C immediate, semi-national coverage. Cell C plans to have 550 base stations operational by year-end to cover most urban centres, with a target of 2 000 within 18 months.

Cell C also announced that it has signed up Deutsche Telekom subsidiary Detecon to provide management and operation assistance, in addition to the network tender awarded to Siemens and the IT contract awarded to Accenture.

Much of the rest of the original business plan remains the same. The operating company, Cell C, is wholly owned by 3C Telecommunications, which is in turn 60% owned by Saudi Oger and 40% by empowerment group Cellsaf. Saudi Oger is to provide full corporate debt guarantees, including coverage for the cash Cellsaf needs to fund its stake.

Verizon (formerly GTE before its merger with Bell Atlantic) remains the operational network partner and retains the right to purchase 15% of the Saudi Oger stake. There are also still plans to free Saudi Oger from its obligations after expiry of its guarantees in 24 to 30 months.

3C director Zwelakhe Mankazana says this does not necessarily imply a public listing. "Listing is one of the options we could consider, but there are other ways. We will only list if the market conditions are right."

A full roadshow presenting plans to financiers and analysts is to begin almost immediately.

Cell C says stakeholders in Cellsaf, the investment consortium that owns 40% of the Cell C holding company, will be given priority in the awarding of sub-tenders in its nearly R2 billion spending budget.

Siemens has been awarded a $221 million contract to establish and maintain the cellular network, while Accenture will head up a $28 million contract to install IT infrastructure and systems. The combined value of the contracts is in the region of R1.99 billion.

In documentation explaining its plans, Cell C says it has "the right to nominate sub-contractors on an ongoing basis, with the express intent of ensuring that its shareholders, among others, participate in the network design and implementation".

The confidential agreement concluded with Nextcom to end its court challenge to the issue of the licence apparently did not include any previsions on preferential treatment for companies aligned with it. While avoiding details, Cell C says the only companies to be favoured will be Cellsaf shareholders.

Siemens is to supply core network infrastructure, including switching, base stations, a prepaid platform, value-added services equipment and GPRS equipment at a cost of $206 million over 18 months. Operational support and other options increase the value of the deal to $221 million.

Siemens says it has already secured contracts and leases for land on which to locate base stations. The company also installed and maintains the MTN network.

The network contract binds Siemens to use locally procured content for 50% of its work, with more than 60% of that half awarded to companies owned by the historically disadvantaged. Accenture has the reverse set of figures, with more than 60% local content with half of that reserved for black economic empowerment.

The Accenture consortium will also include three wholly black-owned companies: Molepe, Prov-Tech and Temoso. The latter will also profit indirectly through its 2.5% holding in Cellsaf.

Cellsaf has a wide base of shareholders, with 10 business groups, 12 social empowerment groups and 11 regional investment and technology companies owning varying percentages.

Other contracts have been awarded to Network BBDO, BrandAfrica, AskAfrika, DisonNdlovu, DeneysReitz and KPMG.

Cell C says it has no plans to start a potentially bruising price war with its deep-pocketed incumbents, but will depend on a "dazzling" marketing campaign, innovative packaging and new products to attract subscribers.

One such product has been named HomeZone, and will allow for differentiated pricing in poorer areas.

HomeZone will give users access to the network at reduced tariffs if calls are made from within a predetermined area serviced by a certain number of cells. The receiving cell could also be used to determine the rate and create cross-subsidisation.

"A call from Alex[andra township] to Alex could be one charge, and a call from Alex to Soweto a similar charge," says Mankazana. "But a call from Sandton to Sandton, right next door, could be charged differently."

Such contract options will give users greater choice, Cell C says. Prices may not be lower than those of MTN and Vodacom, but by adapting contracts exactly to user requirements, it expects savings to the consumer.

Much anticipated always-on GPRS (General Packet Switched Radio System) and related two-and-a-half generation services could be another ace up Cell C`s sleeve.

"We could launch GPRS by the end of this year, but we probably won`t do so before the middle of next year," says Duane, citing the unavailability of GPRS handsets as one of the reasons.

However, the core Cell C client base may not be the perfect market for expensive GPRS services. The company says it will target the lower to middle contract market, and the middle to upper prepaid market, which contain "reasonable value" customers. That leaves MTN with its focus on the businessman as the most likely early adopter of GPRS, while Vodacom will probably continue to hold the majority of the prepaid market.

Cell C is still waiting for delivery of its official licence document from the Independent Communications Authority of SA (ICASA).

ICASA apparently missed a self-imposed deadline to deliver the document yesterday, but Cell C is still confident that it will not need to wait long.

"It will be a very short while until the actual licence document is issued," says Mankazana.

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