Big data rate cuts on the way this week

‘Preliminary evidence suggests there’s scope for price reductions in the region of 30% to 50%’ – CompCom.
Image: Moneyweb

The local media tends to feature two kinds of stories on South Africa’s listed mobile phone operators, Vodacom and MTN.

The one will be based on something like the Competition Commission’s report on the Data Services Market Inquiry, where it will focus on how the operators are using their dominant position in the market to overcharge for telecom services.

Sometime later, the media will cover their financial results, and the stories will generally reflect how they are the success stories of the ‘New South Africa’. Never mind that this success has been built in part on overcharging for telecom services.

This week, these stories will merge. The commission is set to announce an agreement with Vodacom on data pricing on Tuesday, a day after this, MTN announces its full-year results.

Although the details of this agreement have yet to be spelt out, what is clear that there will be no going back to business as usual for the operators.

Government has been pressing the operators to push down telecom prices for the better part of a decade, but it has had mixed results at best. The sector’s regulator, the Independent Communications Authority of SA (Icasa) has also been ineffective in holding the operators to account for its pricing.

The commission however, in getting at least one operator to agree to cuts, has not only succeeded where other state organs have failed but also marked a turning point in the business model of the operators.

When the operators stated out in 1994, they stumbled onto the prepaid airtime model. Cellphones were originally seen as toys for business people, but prepaid soon proved to be the real money-spinner. Operators in effect became ‘airtime factors’ where they got handsets into as many people as possible and charged them a premium amount for a voice service. 

The trend to sell internet access over their networks eventually saw this model change. Given the amount of competition in the data market, they shifted to selling as much data as they could at a declining price. Vodacom, for instance, points out that it had “effectively reduced” its data price 23.3% per MB in the 2019 financial year. 

The commission, in its report, insists that the operators are not doing nearly enough to push down prices. Despite the price of 1GB of data falling from about US0.07c in Q3 of 2015 to just over US0.04 in Q3 of 2019, the decline was nowhere near the medium fall against 36 African countries over the same period.

Source: RIA RAMP Index and data submissions to the commission

Despite the declines, the commission says the operators are making decent money, as they have a cost-price mark-up as high as 20%.

Sources: Vodacom Annual Financial statements for years ended 31 March 2015 – 31 March 2019; commission workings

In the report, the commission has set steep targets for the kind of cuts it wants.

“The preliminary evidence suggests that there is scope for price reductions in the region of 30% to 50%.”

If such steep cuts were to go ahead, it could significantly affect their profit, says Irnest Kaplan, MD of Kaplan Equity Analysts. He says it can, however, work out well for a first-mover, as the fall in profit could be offset by it gaining market share.

Although the data rate cuts still have to play out, the operators have been preparing for the time when they are more than ‘dumb pipes’, as they are increasingly looking to move into more value-added services.

Vodacom, for example, is looking to connect more machines to the internet, otherwise known as the Internet of Things (IoT). Globally, there were 9.1 billion machines connected to the internet in 2018. This figure will rise to over 25 billion by 2025. Locally, Vodacom has over 94 million IoT devises.

For its part, MTN is expanding its presence in financial services. In August, it became the first operator to offer a money transfer service in Nigeria, Africa’s largest economy and most populous economy.

Although the spectre of data rates cuts hangs over it, investors are still fond of them. Despite MTN’s share price falling about 15% over the past year to R76.50, it has a decent forward price-to-earnings (P:E) ratio of 11.01 and a high dividend yield of 6.8 %.

There is a similar story with Vodacom. It dropped 2.6% to R111.61 over the past year, has a forward P:E of 11.46 and a dividend yield of 6.99%.

They have also done better than most listed counters, outperforming the JSE All Share index, even after the selloff the past few weeks.

Though the outlook for MTN and Vodacom is a little uncertain, they have proven to be a solid investment for investors. And with the coming data rate cuts, they will even get hard-pressed consumers to like them.

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This will be awesome for all consumers and tourists!

Tourists? What tourists? Tourists can afford data, and to travel. They got the money.

What the entire South African population should be appalled at is the fact that the commission said you CAN carry your data over to the following month, but “some” of the cell phone companies put a 30 day restriction on their products. THUS circumventing the law. I hope many other players come into the market and cut this monopoly down to size!
Remember when MWEB use to charge for every megabyte you used and then one MIRACULOUS day they offered unlimited data for a fixed price????? That was also uncompetitive behavior and they should have been fined BIGLY!

The casualties will be one mobile telco out of business and one other telco that wil drastically scale back its mobile operations. Not a bad move to let the government take out one of your competitors and cripple another.

End of comments.

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