The war for high-speed spectrum and, ultimately, market share in the telecommunications sector is heating up.
In the latest battle round, Telkom has objected to the acquisition by Multisource of Wireless Business Solutions (WBS), the parent company to iBurst and Broadlink, the licence holder for high-demand spectrum that is well suited for rolling out high-speed broadband, which is in short supply.
This is not Telkom’s first opposition to a purchase in the sector. It recently took the Independent Communications Authority of South Africa (Icasa) to court for its decision to approve the acquisition of Neotel by Vodacom. Subsequent to Icasa’s approval, the deal was given the green light by the competition authorities.
Multisource, a convergence technology company, counts among its shareholders leading entrepreneurs Michael Jordaan and Paul Harris.
When Icasa published a notice for the proposed acquisition of WBS by Multisource on July 9, Telkom was the only party to submit a response. In its submission Telkom noted the approval of an acquisition is beyond the scope of the authority. “In this regard, the authority’s role is restricted to, inter alia, the consideration of the transfer of control of spectrum and service licences.”
The transaction, Telkom said, would entail the transfer of control of both service and spectrum licences.
“The authority has developed, or is in the process of developing, detailed procedures and criteria for the transfer of control of spectrum and service licences, respectively.”
These serve to guard against transactions that do not promote competition, inefficiently and ineffectively use scarce resources, and negatively affect the equity ownership by historically disadvantaged individuals.
Because public consultation is underway to finalise regulation to govern the transfer of control of individual licences and final regulation may contain revised procedures and criteria in this regard, Telkom proposed the consideration of the transfer application be deferred until the regulatory framework is finalised.
As far as spectrum licences are concerned, Telkom claims the incorrect application forms have been used and submitted with incomplete information, “thus rendering the authority unable to properly assess the application”.
But whatever arguments have been set down in Telkom’s submission, industry analysts say the objection is really about spectrum, market share and positioning.
Denis Smit, managing director of BMI-TechKnowledge, said the situation is such that “any spectrum will do right now” and WBS holds licences for particularly attractive spectrum bands well suited to rolling out high-speed broadband.
He said the Multisource transaction is “very fascinating”, particularly if the plan to use the spectrum to roll out a long-term evolution (LTE) network only, because this requires really deep pockets.
Smit said he thought Telkom’s objection was an attempt to slow the transaction down, and that it may even be intended to serve as a delay tactic to allow for a deal to be brokered with WBS in the interim. “The opposition to this transaction may mean Telkom’s realised they left a strategic option off the table.”
Telkom’s deal with MTN was scuppered on August 17 when the Competition Commission recommended to the Competition Tribunal it be prohibited.
A large merger was proposed for a subsidiary of MTN to acquire certain of Telkom’s radio access network assets; the two would conclude a network management services agreement and reciprocal roaming agreements, which would allow MTN to access additional spectrum capacity from Telkom to roll out an LTE network.
In a statement, the commission said: “Although the transaction does not involve the combination of MTN’s and Telkom’s mobile retail businesses, the commission found that the proposed transaction is likely to substantially prevent or lessen competition in the mobile services market. The access to additional spectrum capacity by MTN will confer first mover advantages to it relating to network speed, capacity and mobile offerings. MTN would be able to gain a significant competitive and time advantage, offering network and services that cannot be significantly constrained by rivals, particularly given the market position of Cell C and Telkom Mobile … This outcome of this merger transaction is likely to entrench a duopolistic market structure dominated by Vodacom and MTN.”
Steven Ambrose, chief executive of technology research firm, Strategy Worx, said: “The broader context here is spectrum.
“Although Telkom are objecting on procedural grounds regarding the acquisition of WBS, the greater reason behind this is they want to keep competition out of a space of an area where they are strong that is mobile broadband … it’s an area where Telkom has lots of spectrum and technology that is well advanced.”
The reason WBS had not taken advantage of the spectrum to roll out its own high-speed network was simple, Ambrose said. “It costs huge amounts of money to roll out these networks – we are talking hundreds of millions of United States dollars.”
He added that, in this regard, the potential purchasers, who are associated with Jordaan and Harris, who are “seriously well-connected and wealthy individuals”, are in a position to arrange such finance.
In addition, licencing conditions do not allow a company to bring in another party to construct a network on its behalf.
All this rejigging in the market has been caused by a long-delayed policy directive for high-demand spectrum. The policy is expected to stipulate the principles of spectrum designation but its actual allocation will remain Icasa’s responsibility.
Smit said: “Until such time as there is clarity on spectrum policy, a company like WBS with access to these high-demand frequencies will become more and more attractive.”
The Vodacom Neotel transaction is motivated on the basis that spectrum would enable them to get a jump start on the competition, he added.
Said Ambrose: “While the sector waits on the government’s policy directives, all companies are looking to get ahold of as much spectrum as they can right now. They want to get themselves in the best position; the next 20 years is all going to be about high-speed broadband, both fixed and mobile.”
Having access to this high-speed spectrum already in hand “would give them a real first mover advantage”, said Ambrose, adding that the biggest problem in the delay in policy presents “is for all of us”.
“All of these developments around mobile high-speed broadband have been happening globally and the next generation of broadband will be based on the use of multiple frequency bands, and the tech being developed is based on the ability to connect to all these frequencies.”
If South Africa continues to delay allocating the required spectrum, it could fall so far behind the rest of the world that new-generation hardware may not operate efficiently here, he said. “4G as a technology will evolve into 5G from 2020. 5G is 10 times faster but requires much more spectrum.”
The need to roll out high-speed broadband, despite a delayed policy directive, has resulted in networks “re-farming” spectrum so that, in the absence of spectrum made available for broadband, frequencies traditionally used for voice services are now to provide this service where possible.
“Re-farming 2G definitely affects voice quality, as they take frequency away from voice and give to data, so the space for voice becomes congested, therefore quality becomes worse and worse. Sandton is a perfect example of where the most data is used in mobile devices and it results in massive issues for voice and low speeds for data,” he said. “LTE or 4G technology for broadband is very high speed in most countries where it has sufficient spectrum. But in South Africa it is not much faster than 3G because of restricted access to spectrum.”
The result is big commercial transactions, such as the Vodacom Neotel deal, are being held up by everyone.
Dominic Cull, a telecommunications expert at Ellipsis Regulatory Solutions, said: “Commercially, it is highly undesirable. I think they [Vodacom and Neotel] should withdraw the application, and do it again. Ultimately it will be quicker.”
Smit said that, “whatever happens, there is always the risk that something goes wrong in the policy directive – but we hope this does not occur and that government is properly advised”. Spectrum is “the oxygen that will feed the telecommunications industry for the next two decades”.
Phumlani Moholi, chairperson of Multisource, said the company could not say what Telkom’s motivation to object might be, but that it was continuing with the acquisition proposal process. Regarding the company’s plans following its acquisition of WBS, Moholi said: “We are in no position to comment until such time because the transaction is completed.”
WBS was at risk of losing the use of this ultra-valuable spectrum when, as the Mail & Guardian reported in 2014, the Johannesburg high court found it had been operating illegally as its licence was not valid.
Following this, WBS and Icasa came to an out-of-court agreement: the outstanding amount was slashed from R151-million to R76-million.
This was despite the fact that the Electronic Communications Act does not allow the automatic renewal of a licence once it has expired – which the court deemed it had, when the fee was unpaid in 2010 – and assigns the regulator no power to negotiate the amount owed by any licensee.
Telkom senior media relations specialist Pynee Chetty said the company has had no feedback from Icasa since it filed its submission.