The end of the road for telcos

Matone Ditlhake, Chief Executive Officer of Corridor Africa Technologies.

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The telecommunications sector continues to build digital infrastructure, but the margins are increasingly coming under pressure because it is capital intensive to erect masts or lay fibre underground.

Specifically, it puts return on investment in infrastructure for network operators at a marginal level. The pressure on margins and cashflow is immense; they need to find innovative ways to deliver stable communications infrastructure at a lower cost.

Policymakers urgently need to consider the full landscape of taxation (tax breaks) and regulation, to ensure that companies investing in infrastructure are incentivised to build and upgrade the networks that underpin online services.

Government has recognised that the outcomes of the National Development Plan (NDP) 2030 can be realised through digital technology, and that ICT is a key enabler of this vision. It is, however, imperative to create widespread access to affordable broadband connectivity in line with the SA Connect policy.

Expanding infrastructure is one of the NDP's key strategies, and this includes the expansion of information and communications infrastructure. According to the NDP, by 2030, ICT will underpin the development of a dynamic and connected information society and a vibrant knowledge economy that is more inclusive and prosperous.

The vision is to provide a seamless information infrastructure that will meet the needs of citizens, business and the public sector, providing access to the wide range of services required for effective economic and social participation – at a cost and quality at least equal to SA's competitors.

Government says by 2030 it would make extensive use of ICT to engage with and provide services to citizens. All individuals will be able to use a core of ICT services and enjoy access to a wide range of entertainment, information and educational services.

It also states that by 2030, the e-strategy collaborations between state, industry and academia would also create innovation systems, including software and applications incubators, local content and multimedia hubs and research and development networks.

Operators continue to invest in extraordinarily complex networks that enable the entire ecosystem, but the low returns raise questions about the robustness of continued investment in capacity, coverage and speed of the networks to connect internet users with services.

This points to ‘disadvantageous taxation on infrastructure, burdensome regulatory requirements, and other value-destroying factors’, which basically reduce the incentives to roll-out network infrastructure.

Home schooling and working from home has dramatically increased the demand for internet connectivity. This unprecedented reliance on connectivity for digital services and customer interactions during a period of economic uncertainty has raised further concerns on the affordability of data in South Africa.

Government has already forced telcos to reduce the costs of mobile data and to provide a small amount of free data to prepaid users. Telcos now feel the pressure of decreasing margins despite disproportionately increased usage, which requires them to continue investing in network deployments and upgrades.

Although the internet value chain is growing strongly, the benefits and returns are flowing principally to players in the online services segment or over-the-top services. It's the likes of FAANGS (formerly Facebook, Amazon, Apple, Netflix and Google – now Alphabet) that are benefiting most from modern digital infrastructure roll-outs.

The telecoms operators building and running the connectivity infrastructure, which underpins these services, are not benefiting as strongly as one might expect.