Vodacom Boss Speaks out on South African Phone Costs
The South African regulator, ICASA is currently holding a public review of the cost of using cell phones in the country, addressing issues such as handset subsidies, coverage and call costs. Alan Knott-Craig - Chief Executive Officer, Vodacom Group made the following statement:
There are really only two methods to determine whether cellular tariffs are relatively expensive or not. The first is merely to compare them to tariffs in other countries. The second is to determine whether tariffs are broadly affordable.
Firstly comparing South African prepaid cellular tariffs to those in other countries. The aggregate retail tariff in Namibia, Egypt, Morocco, Kenya and many other African countries is more expensive than South Africa. In Zambia, Uganda, Malawi and Botswana tariffs are cheaper than in South Africa. Looking further a field we find that Malaysia, Greece, the United Kingdom, New Zealand, Belgium and Australia are on average more expensive than South Africa. Hungary, on the other hand, is cheaper than South Africa. Local tariffs in Brazil are cheaper, but long distance tariffs more expensive. SMS tariffs in South Africa are amongst the cheapest in the world, and roughly half of those in the United Kingdom and Germany.
But the most telling comparison of all is the South African community services telephone tariffs, which are probably the lowest in the world, providing an even more affordable service to those who need it most. Vodacom carries no less than 80 million minutes of calls per month from these community service telephones.
The fact is that cellular calls in South Africa cost about the same as the average cellular call in the world where a competitive environment exists, and that community services calls in South Africa are probably the cheapest in the world.
Looking to the second measure of whether a cellular telephone call is too expensive i.e. its affordability. The affordability of a cellular call can be fairly accurately established by considering what percentage of the population has a cellphone and uses it. This is called penetration. High penetration reflects an affordable service. South Africa has by far the highest penetration of cellphones in Africa distantly followed by Namibia, Kenya and Egypt who nevertheless have relatively high penetration rates, and slightly more expensive tariffs.
South Africa currently has more than 25 million cellphones in use, and every month an additional 1 million people connect to Vodacom, MTN or Cell C. This is one of the highest growth rates in the world and reflects one of the most impressive, if not the most impressive, increases in cellular telephone penetration in any developing country in the world.
It is interesting to note that developing countries with very low cellular tariffs such as Zambia, Sierra Leone, Uganda and Malawi also have some of the lowest penetration rates. The reason for that is clear. If the cellular rates are so low that investors who build the cellular networks are receiving a mediocre return on their investment, they simply do not invest in very big cellular networks, with the result that the population cannot easily access a telephone. Very low cellular rates can therefore be as counter-productive to penetration as the very high cellular rates found in Niger, Chad and the Congo Republic for example.
In 1993 telephone penetration in South Africa was less than 10%. In the year 2000 telephone penetration in South Africa was approximately 15%. Today it stands at over 51%, and by 2008 it will have exceeded 75%. One of the most remarkable achievements in the world, and a reflection of a broadly affordable service.
My own view is that as penetration approaches 75% to 100% prices will reduce to less than half of what they are today. The past year has already seen reductions of between 10% and 90% for various cellular products. This continued reduction in tariffs will be driven by a combination of new and more efficient technologies and more competition. Not through regulation. Regulation of tariffs in a competitive and successful market where penetration is increasing rapidly is an intrusive contradiction, and a strong deterrent for investment.
The vast majority of countries in the world which have more than one cellular operator participate in the practice of offering potential customers the option of entering into a 12 to 24 month contract in return for a free or subsidized handset or reduced tariff. These contracts are always associated with a tariff plan which requires a minimum monthly spend. The economics are clear. The higher your minimum monthly spend, the greater the subsidy (or discount) that the network operator is prepared to offer. The lower the guaranteed minimum monthly spend, the lower the subsidy the cellular operator is prepared to offer. The shorter the contract, the lower the subsidy. The longer the contract, the higher the subsidy.
In South Africa more than 90% of all cellular customers do not have a contract. They can and they do move between networks based on the best deal on offer, as is reflected in the prevalent churn of approximately 30% in the prepaid market. That means 30% of all prepaid customers choose to either change their network or no longer have a cellphone every year. Contract customers on the other hand display a churn of about 10%, even though they have entered a contract.
What then is the real benefit of consumers entering a contract with a cellular network operator in return for a subsidized handset?
The cost of a handset has generally varied by more than US$1,000 to about US$100 over the past 10 years. These prices represent barriers to entry for the vast majority of consumers, especially in developing countries. Until 1997 all handsets in South Africa were subsidized. Today only about 100 thousand handsets are subsidized each month.
These subsidized handsets facilitate entry by consumers into the cellular market. Since these subsidized handsets ultimately find their way into the prepaid market, those prepaid customers also benefit from the removal of the barrier to entry, hence the astounding growth in the prepaid market. There are 1, 9 billion cellular users in the world today of which the majority are prepaid. Ten years ago there were less than 100 million cellular users in the world.
Very few countries have halted the practice of subsidized telephones associated with contracts. Finland and Korea, however, are two countries which have. Finland now enjoys a cellular growth rate of 4% and Korea enjoys a cellular growth rate of 9%, compared to South Africa's growth rate of 33%. The tariffs did not reduce in either of these two countries. The cellphone operators spent money which had previously been used to subsidise telephones on other marketing innovations to lure customers to their networks. But customers could no longer afford the newest in cellular phones due to lack of subsidization. So the consumer did not benefit, and indeed in my view, was prejudiced in that most of the consumers were shut off from new technology. Finland and Korea are not considered examples of great innovation in telecommunications. Indeed they are slightly dull.
The two most compelling goals for any country in the field of telecommunications, is firstly a high level of capital investment in extending, improving and maintaining its telecommunications infrastructure. Secondly, and equally important, is that a country strives to achieve a telephone penetration of 100%. If these two goals are achieved then it is fair to say that all of the population has access to a telephone and can afford such access.
Tariffs which are too low result in too little investment, which in turn results in too little infrastructure and low penetration. Tariffs which are too high also result in low penetration. This is part of what is called "market failure". The market has failed to provide the population of a country with access to a telephone.
More than 94% of the South African population live and work within cellular coverage. These cellular networks have required an investment of no less than R50 billion (US$7.7 billion) to date. They will require a further investment over the next 10 years of another R100 billion. The success of the South African cellular industry has been strong investment, strong competition and affordable prices. These three factors are inextricably linked, with strong continued investment being the clearest indicator of a healthy industry.
The market in South Africa has exceeded everyone's expectations and will continue to do so. It has not failed. It was not regulation that created the success. It was the courage of those who believed in democratizing the telephone and who invested and worked to achieve that dream."
Posted to the site on 9th August 2005