Given the amount of capital South Africa’s big mobile operators are pouring into their networks — well over R20bn between them this year alone — one could be forgiven for thinking the industry isn’t facing the serious headwinds many are predicting in the short and medium term.

MTN last month said it would increase its originally budgeted capex for South Africa for 2016 by almost 50%, to a record R11,7bn. Although some of that spending is undoubtedly about playing catch-up to rival Vodacom after several years of relative underinvestment, it’s still an eye-watering amount in a country where the economic outlook remains bleak.

Although Vodacom said recently that it is cutting its capex intensity slightly in the coming years — from 15,5% of group revenue in the 2016 financial year to 12-14% over the next three years — it has already spent more than R17bn in its network in South Africa in the past two years, aggressively expanding its 3G and 4G/LTE infrastructure, on the expectation of further strong growth in demand for data.

Unlisted Cell C doesn’t disclose its capex numbers, but it, too, has upped its investment countrywide and is fast deploying new 3G and 4G sites. A proposed restructuring that will see JSE-listed Blue Label Telecoms becoming a significant shareholder should leave its balance sheet stronger and the company therefore better able to invest to keep pace with its bigger rivals.

Telkom invests a fraction of the other players in mobile, positioning wireless more as a broadband alternative to its fixed-line infrastructure. Though Telkom’s mobile division offers both post-paid and prepaid voice and data services to consumers, it’s real growth lately has come from providing so-called “fixed-wireless” options as a replacement for fixed broadband.

The big three, though, continue to spend like there’s no end in sight to consumers’ appetite for mobile broadband – probably a fair assumption if one considers a report from Cisco, which predicts that the average 4G smartphone in South Africa will consume 7,2GB of data per month by 2019.

Policy uncertainty

Yet policy uncertainty, especially around the allocation of radio frequency spectrum, is making the operators’ planning difficult. The delay in digital television migration, now many years overdue, is also giving the operators a big headache. The longer migration takes, the longer the broadcasters will hog valuable spectrum needed to deploy next-generation broadband networks. Without spectrum, the operators won’t be able to cope with escalating consumer demand.

Significant capex spending by the big mobile operators comes as the revenue mix shifts markedly away from legacy voice to data. Vodacom and MTN grew fat on voice telephony, but margins from that side of the business have come under considerable pressure in recent years as competition intensified thanks to a revitalised Cell C and the launch of Telkom’s mobile arm as well as moves to cut wholesale inter-network call rates, which allowed the smaller players to force down retail prices.

Vodacom last month announced it would pull the plug on its M-Pesa service in South Africa after consumers turned their noses up at it

A second challenge for the operators is that the margins from data are typically lower than they have been for voice services. As the revenue mix shifts in favour of data, it puts pressure on the bottom line. Worse, innovative “over-the-top” (OTT) providers such as Facebook (with WhatsApp and Messenger), Google (Hangouts) and Microsoft (Skype) are using the operators’ advanced data networks to eat into their traditional profit centres of voice and SMS. Vodacom, MTN and Telkom have all called for OTT players to be regulated in South Africa so as to make the playing field more level, but this has drawn a fierce backlash from consumers.

Horizontal expansion

To counter some of the pressures, which are likely to intensify in the years ahead, the operators are looking to create new but related businesses in everything from financial services to television entertainment. Vodacom, for example, already sells its customers funeral plans. And MTN offers a video-on-demand service.

But the jury is out about whether such horizontal expansion is the right approach, or whether the operators should stick to their knitting. Vodacom last month announced it would pull the plug on its M-Pesa service in South Africa after consumers turned their noses up at it. It’s had more success in insurance.

Ultimately, though, the biggest challenge facing all the mobile operators is the lack of spectrum. Government has for years failed to come up with the policy the regulator, Icasa, needs to allocate access. And there are growing fears that the policy, when it is published, will not follow the nearly universal model of auctioning it off, but instead will allocate spectrum on an administrative basis, seeking to create a wholesale network of some sort in which government has significant input.