The meaning of Neotel’s sale

Few words in telecoms are more powerful than “incumbent”. 

Among fixed-line operators like Telkom, it means deeply entrenched infrastructure, massive opportunity for leverage of that infrastructure, and control over the roll-out of new technology. Among mobile operators like MTN and Vodacom, it means early-mover advantage, dominant market share and a near-licence to print money.

Despite the best efforts by Telkom to squander its advantages by stalling both new technologies and wider access to its infrastructure, it was never seriously challenged by Neotel, the so-called second network operator. When it launched back in 2007, Neotel committed to spending R10-billion on putting fibre into the ground, planting base stations and bringing wireless “last mile” connections into consumers’ homes.

It sounds impressive. But now let’s have a look at another announcement made by Vodacom this week. For the year ended 31 March, it invested R6.9-billion in South Africa and R3.9-billion in its African operations in Tanzania, Democratic Republic of Congo, Mozambique and Lesotho. That’s a total of R10.8-billion put into infrastructure in one year. In the coming year, it’s expected to push that up to R13-billion.

And then there’s Cell C, the third mobile operator, licensed only six years after the two giants carved up the mobile market between them. Last year, it announced massive funding to expand infrastructure, partly from investors, partly loaned by Nedbank. Its biggest bet in many years, the total lifeline came to about R5-billion. Telkom spends that amount, on average, every year.

Neotel’s numbers tell an even sadder story. For the last few years, Neotel has been spending the equivalent of about R500-million a year on infrastructure.

Neotel deal
In these numbers lurk the real meaning of Neotel and Cell C as competitors to the incumbents. You don’t win market share by spending one rand for every 10 of your competitor. You don’t stand a chance of sitting at the big people’s table if you have to go borrow money from your dad every time you want to dress like them.

So high are the stakes in telecoms, spending a mere half-a-billion rand a year, or borrowing R5-billion as a lifeline, highlights the gaps rather than closes them.

It also answers the biggest criticism thrown at the major networks by consumers: “What are you doing with all the profits you make off us?” Vodacom’s annual report provides an eloquent answer. While revenue grew by only 8,3%, capital expenditure grew by 14%. In the next year, capex is expected to grow 20%.

The Neotel deal gives Vodacom fibre in the ground as well as access to long-term evolution spectrum for high-speed data. That may mean better performance and higher speeds in the medium term, but it doesn’t change the game. It confirms the trend that the big players keep getting bigger.

And the little guys? Expect a few more big acquisitions. –

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