Gavin Foster explains why we should welcome the third cellphone operator with open arms
Two’s company, but three’s a crowd. That’s the line taken by cellphone giants MTN and Vodacom, who both believe that the soon-to- be-announced third player in the cellular game will have a long, hard slog ahead before realising profits.
But it’s likely that consumers will benefit. Another network will most likely mean improved service and a wider range of options, as well as lower prices – although just how much they can come down is open to speculation.
“We welcome competition because it keeps us on our toes and is generally good for the consumer,” says MTN’s Jacques Sellschop.
“But the man in the street naturally expects a dramatic drop in prices. We don’t believe this will happen because of the vast investment required.”
To establish a network on par with the existing two, covering 45% of the geographical area of South Africa and within reach of 75% of the population, requires a capital investment of at least R4-billion.
This means that the new player will be in a more precarious position than its competitors, who have already been generating income for more than five years and are thus more likely to survive a full- on price war.
But there are other options that can be exploited by the newcomers. One of them is to initially establish an infrastructure in certain carefully selected areas only. This will allow the new contender to target high-population sub-economic areas for its primary service at a discounted rate, to get the numbers up, and then piggyback on the existing networks for calls outside these areas, at an additional charge to the customer.
The network would have to negotiate an interconnection fee for calls that roam MTN’s and Vodacom’s networks, much as all cellphone operators have to pay Telkom a fee for using its landlines to supplement their own networks, but there’s no doubt that some sort of a deal will be struck.
A powerful bargaining chip held by the new network is the fact that it will probably be allocated bandwidth in the 1 800MHz frequency range, which can be used as barter against the newcomer’s more established opposition.
Both MTN and Vodacom’s licences allow them to operate only in the 900MHz range, which is fast approaching saturation.
To continue to grow their client bases they need extra bandwidth, and the South African Telecommunications Regulatory Body (Satra), which is responsible for dividing up the airwaves, could force them to negotiate with their new opposition by allocating the third network exclusive rights to the largely unused 1 800MHz range.
Another benefit for cellphone users is likely to come in the form of billing by the second rather than by the minute or half-minute, as is the norm with MTN and Vodacom.
There’s no reason for the two big players not to implement per-second billing already, but it will probably take a nudge in the ribs from their newest opposition before either takes the plunge.
Both existing networks at present advertise contracts offering “free minutes” without making it too clear that a call lasting even one second is charged out as a full minute.
Subsequent airtime usage is rounded off in 30-second chunks for billing purposes, which is lucrative for the networks but expensive for the user.
MTN and Vodacom are currently under investigation following allegations of price collusion, but if the third network chooses to offer the client a better deal, any possible arrangements made between the bigger players would be trampled in the dust as the two networks scramble to retain market share.
Satra could also be asked to lend the newcomers a hand in the field of number portability. At present the networks each control their own series of numbers – 082 for Vodacom, 083 for MTN – while their many service providers, who are responsible for administration and billing of clients’ accounts, also control their own blocks of allocated cellphone numbers.
In Europe number portability is freely available, meaning that a client can migrate to another service provider or even network without losing the original number.
Satra controls the allocation of telephone numbers in this country, and should they be asked to legislate number portability, it would deprive MTN and Vodacom of a very powerful weapon in their arsenal – “Dump us, and you might as well order new stationery, because your number stays behind.”
According to Sellschop, operators who enter the arena long after the game has started often find it difficult to knock up a winning score.
“Third operators worldwide have a history of not reaching profit within a viable period,” says Sellschop.
Vodacom’s Joan Joffe expects the newcomer to influence prices in the short-term simply because it’s going to have to offer consumers something to make them want to change.
She points out that a long-sustained price war is unlikely: “We can expect them to come in with new features and an excellent marketing campaign, but I don’t think their principals are going to want to get into a long, sustained price war.
“It’s difficult to make money at first – it’s certainly profitable eventually, but it takes a lot of stamina and one wonders, the way the third licence bids are constituted, if there’s anybody there with real staying power.”
Neither network is prepared to make life any easier for the third operator. “We’re certainly not going to be beneficent,” says Joffe. “It’s a competitive business, and we’ll be in a competitive situation.”
But with the third network contractually committed to providing a cheaper service aimed at meeting the needs of the bottom end of the market, it seems certain the big players are going to have to dance to a different tune in future.