Spectrum access and industry consolidation are urgent imperatives if information and communications technology (ICT) is to be used as an effective tool in assisting South Africa to achieve the growth objectives of the National Development Plan.
Smartphone adoption has resulted in demand for data growing rapidly and, with penetration rates still relatively low, this is expected to intensify.
Outside some of the more traditional uses of data — social media engagement, gaming, banking — data brings seemingly limitless potential for driving education and employment, which are especially important in South Africa.
Small businesses are struggling, unemployment is high and the education system is not generating sufficient skilled graduates committed to working and living in the country.
There are many suggestions on how to address these issues, but from a telecommunications perspective, national access to affordable and fast Internet is imperative.
But a lack of access to spectrum is stopping the country from being able to build out broadband. Spectrum is like a virtual highway carrying voice, SMS and data traffic. With too many networks vying for space in this pipe, “traffic jams” are bound to occur. Also, South Africa’s delay in moving from analogue to digital TV signals has held up development. The digital TV transition that was scheduled for 2010 is now only expected to occur in 2019.
Without access to the right spectrum, telecoms operators are forced to invest more for consumers to have a reasonable experience. This cost is then passed onto these consumers and the initial capital layout is financed by equity investors who receive diminishing returns on investment. It also delays investment in 4G and, later, 5G, which will not only prove invaluable to customers but will likely provide better returns on capital as well.
The complexities of spectrum congestion are not entirely lost on government or the regulator.
The telecoms ministry recently issued a white paper proposing a wholesale open-access network (Woan). The proposed Woan will, in effect, split the network operator from the end-service provider.
This model already exists to some extent with companies like First National Bank using Cell C’s network to provide services.
The upshot is that there would be more companies selling data, increasing competition and pushing down prices for consumers. Unfortunately, it does not adequately address who pays for upgrades to the network and the inferred compensation for putting up the capital to build that network in the first place.
Communications regulator Icasa tried to implement a solution before the white paper came out, proposing an auction to make available further spectrum to network operators. This would have allowed telecoms companies to increase the speed and coverage of their networks, and would have boosted the fiscus. But it did not address the objectives of all stakeholders.
A third option seems to make more sense. Network providers can commit to building infrastructure on a national basis in compensation for being awarded spectrum. Network builds could have certain requirements attached — increased speed or providing schools or low-income areas with free data.
Consolidation must also be encouraged to free up spectrum. As it stands, the two largest networks, Vodacom and MTN, already have a significant advantage in terms of network quality — and they are continuing to outspend their smaller competitors. Building and operating four separate networks is expensive and unnecessarily crowds radio frequency spectrum. Rather allow virtual network operators to roam across networks, perhaps with government incentivising this.
Should consolidation happen, increased retail competition should see retail prices dropping. Government and the regulator will breathe easier again as congestion is relieved, and equity investors will remain incentivised to invest their cash into building out a network that will eventually be optimally utilised.
Of South Africa’s four mobile networks, Vodacom has the greatest market share and is the most cost-efficient. MTN is making money in South Africa, but is experiencing many challenges elsewhere – arguably diluting the groups’ focus on South Africa. Cell C has struggled to reach profitability. And Telkom, while finally making money, is without the scale it would like.
Although several acquisitions have been tabled in the telecoms space recently, the competition authorities have been quick to block them due to concentration concerns. Hopefully, the authorities will soon realise that providing high-speed Internet at affordable rates to as many people as possible must be the most important consideration in awarding spectrum and assessing corporate action. Ultimately, the consumer will benefit in several ways — lower-cost data, Internet access and employment — and satisfied equity investors will just happen to be a pleasant by-product.
- Nick Crail is fund manager at Ashburton Investments