Data Services Market Inquiry Public Hearings Mr Sipho Maseko Group Chief Executive 18 October 2018
Key themes
Key themes 1. A broad view of access to data is needed. This includes the whole ecosystem devices, network equipment, operators, distributors and retailers 2. Mobile is overwhelmingly the most widespread means of accessing data services in South Africa 3. The fixed business is small compared to mobile and is highly competitive 4. The problem is in mobile. Telkom has been an aggressive challenger in the market through lower prices, better value for money and innovation but it has been very hard to build market share 3
What needs to be done? Regulated access to dominant mobile operator infrastructure Improved number portability Equitable access to spectrum sub-1ghz for Telkom, equitable assignment of high demand spectrum Consider bottlenecks in airtime distribution Review taxes on smartphones 4
Theme 1: A broad view of access to data is needed
There are many elements of the data services ecosystem Telecoms operators Infrastructure vendors Device/ handset manufacturers Data Services Ecosystem Content providers Regulatory stakeholders 6
Complex data services supply chain Mobile Fixed Wide range of large and small agencies / resellers / virtual ISPs Retail Agencies / Resellers / Virtual ISPs Retail Internet Service Providers Wholesale Access Network Metro Network 7
All elements of the ecosystem contribute to the price of data Devices - essential for accessing data - a key contributor to total access costs Distribution and retail channels for devices and airtime all add costs (wholesalers, retailers, banks) Network equipment (and impact of volatile exchange rate) Operators that have business in South Africa only face higher costs when procuring devices and network equipment Taxes, including excise duties on devices and VAT, contribute to higher overall cost of accessing data Equipment and device costs affect capex requirements 8
Theme 1 summary: A broad view of access to data is needed There are many elements that come together to give customers access to data services This broader view of data access is needed if we are to understand all of the issues that face customers This broader concept of access is important when we think about policy and regulatory measures 9
Theme 2: Mobile is the most widespread means of data access
Mobile is already the primary means of communication for most South Africans Household access to landline and mobile telephone by province, 2017 Majority of South Africans rely exclusively on mobile to communicate 88% of households in South Africa rely exclusively on mobile Dependence more pronounced in rural areas and low income households Even in metro areas where wireline networks are available, mobile dominates Source: StatsSA General Household Survey, 2017, Figure 48 11
Mobile data will continue growing with newer technologies and faster speeds 92,000 90,000 88,000 86,000 84,000 82,000 80,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Total Subscriptions (000s) 2016 2017 2018 2019 SA Mobile Subscriptions 2016-19 (000s) 2016 2017 2018 2019 GSM W-CDMA/HSPA LTE 2G 3G 4G SA Mobile Prepaid & Postpaid 2016-19 (000s) 80,000 68,366 69,976 71,187 72,106 60,000 40,000 16,677 17,613 18,438 19,167 20,000 0 2016 2017 2018 2019 Prepaid Postpaid SA Mobile Voice & Data Revenues 2016-19 ($m) 5,708 6,000 5,131 5,100 4,715 5,000 4,416 4,232 3,839 3,867 4,000 3,000 2,000 1,000 0 2016 2017 2018 2019 Mobile Voice Revenues Mobile Data Revenues With the progressing trend of converged telecommunications, mobile is playing a vital role in the success of the modern SA telco. Mobile will experience good growth with a CAGR of 2%. The fastest growing access will be 4G/LTE (40%CAGR) which will form 12% of total mobile subscriptions by 2019. Mobile voice revenue will continue to decline, at a rate of -9% CAGR being offset by growing data revenues (14% CAGR) 12
94% of all broadband connections in South Africa are mobile Broadband subscriptions FTTX 1% DSL 2% Fixed wireless 3% 94% of all broadband connections are mobile 2 3% fixed-wireless 3% fixed wireline (fibre and DSL) If the Inquiry wants to reduce data costs for the majority of South Africans, it should focus on issues in mobile Mobile broadband 94% Source: 1. StatsSA General Household Survey, 2017 2. BMI-T 13
75% of all broadband connections in South Africa are Vodacom or MTN Broadband subscriptions Other MNOs 20% The majority of South African consumers access the internet using Vodacom and MTN s mobile data services Mobile FTTX 1% DSL 2% Fixed wireless 3% MTN 31% Vodacom 44% If consumers perceive the cost of data and cost to communicate to be high then the logical starting point is the price Vodacom and MTN charge to endusers Source: 1. StatsSA General Household Survey, 2017 2. BMI-T 14
Theme 2 summary: Mobile is the most widespread means of data access Mobile is the primary means of access to data services in South Africa Fixed constitutes a very small share of total broadband connections Vodacom and MTN, together, account for the large majority of mobile broadband connections 15
Theme 3: The fixed business is small compared to mobile and highly competitive
Entry has occurred at all levels of the fixed data services supply chain International connectivity commodity product with significant excess capacity and low prices National transmission and metro significant entry has forced leased lines prices down Access intense competition in fibre, attacking copper DSL base (fixed wireless and mobile also targeting the copper DSL customer) Retail growth in ISPs 17
Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 R per Mbit/s per month Competition in international connectivity has reduced the costs of delivering data services 400 Market price of SA-UK 10Gbps link 350 300 250 200 150 100 Estimated design capacity of submarine cables in SA, terabits/ second 10 14.5 50 0 0.78 1.28 2001 (SAT-3/SAFE) 2009 (SEACOM) 2010 (EASSy) 2012 (WACS) Source: Market related estimates based on Telegeography, Telkom s own sales and customer feedback regarding other providers Source: https://manypossibilities.net/african-undersea-cables/ 18
Competition in transmission has resulted in price reductions 70,000 Leased line prices 69,000 60,000 50,000 46,000 40,000 36,500 30,000 23,000 23,278 20,000 10,000 0 17,000 14,250 13,410 12,672 11,500 13,900 9,788 8,200 8,066 6,894 7,128 8,791 5,405 5,100 7,500 4,546 6,600 8,200 4,800 3,503 3,050 4,995 5,500 1,600 2013 2017 2013 2017 2013 2017 2013 2017 5 Mbps 10 Mbps 20 Mbps 30 Mbps Highest Average Lowest Neotel/LTSA Source: BMIT 19
Telkom leased lines do not affect competition in mobile Competitive supply of transmission services Industry-wide trend towards self-provision backhaul, metro and long-haul Vodacom self-provides backhaul to 92% of its sites Competition from new fixed networks is reducing the cost of transmission services further Creation of Openserve guarantees non-discriminatory access to transmission services Openserve leased line revenue from external customers down by approximately 28% between FY14 and FY18, a CAGR of -6%. Mobile fixed links have been the biggest contributor to this decline Transmission accounts for a small proportion of the total costs of running a mature mobile network 20
There is also intense competition between fixed access providers FTTx access providers can enter in selected areas low barriers to entry Several FTTx providers now in the market, including MNOs Growth depends on geographic expansion significant capex Hundreds of ISP brands selling fibre, DSL, wireless Price reductions common Copper DSL base switching to fibre or wireless 21
Theme 3 summary: The fixed business is small compared to mobile and highly competitive The fixed segment is where all of the recent entry has taken place There is intense competition throughout the fixed network supply chain This has resulted in falling wholesale and retail prices There is no indication that this competition is slowing down 22
Theme 4: The problem is in mobile
Mobile market shares have been static over a long period of time Enduring market positions of Vodacom and MTN despite entry by Cell C and Telkom Mobile Mobile subscriber shares Source: 1. Business Tech (https://businesstech.co.za/news/mobile/266423/south-african-mobile-market-share-vodacom-vs-mtn-vs-cell-c-vs-telkom Despite > R11bn in capex, Telkom Mobile still has only 5.5% subscriber share after 8 years Cell C s subscriber share has grown by just 2 percentage points since 2011 Rain entered in 2017, but remains very small Vodacom and MTN subscriber shares have not changed significantly, despite aggressive pricing by new entrants The dominance of the duopoly operators in voice has been leveraged into mobile data 24
Telkom has been the primary disruptor in data services 25
Rands Rands Vodacom and MTN prices not sufficiently constrained by the competition Vodacom and MTN are not sufficiently constrained by Telkom and Cell C s pricing Prepaid Post-paid 350 300 500 250 400 200 150 100 50 300 200 100 0 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 0 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Cell C MTN Telkom Vodacom Cell C MTN Telkom Vodacom Telkom offers significantly greater value for money than Vodacom and MTN 25% better in prepaid 43% better in post-paid vs Vodacom, 27% better than MTN Source: 1. Tarifica South Africa Competitor Intelligence Report: Evolution of Consumer Tariffs Q4 2016 Q1 2018 (June 2018) Note: Charts show consumer usage costs for each operator over time based on 9 standardised usage profiles for prepaid and post-paid separately (voice, data, and SMS). % quoted refer to averages over full period 26
This dominance of two large mobile operators has led to customers paying higher prices 16.7 16.7 14.2 13.9 14.2 14.8 9.0 7.9 10.2 6.1 5.7 6.3 5.6 3.3 3.4 2.7 India Sweden United Kingdom Nigeria France Brazil United States South Africa International price benchmarking is challenging. However, some indication of relative prices in South Africa: Mobile prices in South Africa are high compared to other countries with 4 operators This is largely driven by Vodacom and MTN prices which are significantly above those of Telkom and Cell C Many people in SA experience high prices because Vodacom and MTN have by far the largest subscriber bases Source: Tarifica Global Benchmark Report Q22017 27 Post-paid average score Prepaid average score
21% 23% 24% 24% 27% 29% 31% 33% 33% 34% 34% 34% 34% 35% 35% 36% 36% 36% 37% 37% 38% 40% 42% 43% 44% 46% 47% This means that the large MNOs in South Africa are highly profitable Average EBITDA margin FY11-FY17 of two largest operators (countries with 3 or 4 operators) Average Vodacom and MTN EBITDA margin over the past six years Above median for countries with 3 and 4 operators Vodacom EBITDA margin over the past three years approx. 40% Compared to Vodafone for all European operations of approximately 30% Indicators of high levels of profitability unevenly distributed within the market Source: BAML Global Wireless Matrix June 2018 Note: Number in ( ) indicates number of operators 28
0.5% 0.5% 0.5% 0.6% 0.6% 0.7% 0.7% 0.7% 0.7% 0.8% 0.8% 0.8% 0.8% 0.9% 0.9% 0.9% 0.9% 0.9% 1.0% 1.0% 1.0% 1.1% 1.1% 1.1% 1.2% 1.2% 1.2% 1.3% 1.4% 1.5% 1.5% 1.8% 2.2% This has a direct impact on South Africans - spend on mobile is higher than in in many countries Household spending on mobile as a percentage of GDP Mobile is key item of household expenditure Critical that competition is working effectively to support South African consumers Source: BAML Global Wireless Matrix June 2018 29
There are several factors that entrench the dominance of Vodacom and MTN First mover advantages Cheap customer acquisition and limited competition National coverage and economies of scale Site access advantages Retail dynamics Customer stickiness (inertia exacerbated by ineffective number portability) Network effects favouring larger competitors Channel dominance Ineffective competition in the wholesale market Constraints on access to favourable mobile sites Spectrum Telkom has no sub-1ghz spectrum Raises network rollout costs/slows down rollout Increases reliance on roaming for in-building coverage and in peri-urban areas 30
Theme 4 summary: The problem is in mobile Mobile market shares have been stable over many years Telkom and Cell C have been unable to build significant market share, despite being aggressive price competitors Vodacom and MTN are able to sustain high prices without sacrificing market share. This makes their South African businesses highly profitable The market position of Vodacom and MTN is based on enduring barriers to entry and expansion faced by the late entrants 31
Conclusions and remedies
Telkom s preferred approach to solving the problem in mobile is to promote competition Promote competition Create conditions for effective competition Remove impediments preventing smaller players from becoming more effective competitors Properly-functioning competitive forces that regulate the market in consumers interests Greater competition will Result in further de-concentration of the market Pressure Vodacom and MTN to reduce prices better value for money for consumers Bring about price levels that promote both consumer welfare & sustainable returns to operators The mobile sector does not need more entrants, nor retail price regulation. It needs to allow smaller operators to compete on an equal footing with Vodacom and MTN, which have benefited from several first-mover advantages 33
This competition must be sustainable Effective competition will deliver value for money to customers, but the current duopoly structure and the second-mover disadvantages faced by later entrants currently inhibit this from arising - the enduring dominance of Vodacom and MTN is detrimental to consumers and also long-run competition Effective competition must also be sustainable Continuous investment is required to ensure coverage, service quality and upgrades to 4G and 5G Operators need sufficient return on investment to justify ongoing network upgrades The four major telecoms operators have invested an average of R26 billion per year (5 years); R30 billion last year Inquiry should focus on ensuring effective competition that is sustainable in the long-run 34
Targeted remedies designed to support competition Focus on improving sustainable competition in mobile Addressing the competition problems that support Vodacom and MTN s enduring market position Wholesale market Regulated access for dominant mobile operator infrastructure Improved number portability Spectrum Assign sub-1ghz spectrum to operators who do not currently have access to such spectrum Equitable assignment of high demand spectrum Airtime distribution Consider bottlenecks in airtime distribution Taxes on devices Review taxes on devices possibly remove excise duties on cheap smartphones 35
Thank You