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    Home » News » Vodacom: caught between a rock and a hard place?

    Vodacom: caught between a rock and a hard place?

    By Editor8 November 2011
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    Though Vodacom’s interim results, announced on Monday, showed a strong improvement in dividend payments and headline earnings per share, at least one analyst is troubled by the lack of growth in voice revenue, despite a sharp increase in voice minutes used by its customers.

    If voice demands continue to increase but revenue doesn’t follow the trend higher, then Vodacom — and its rivals — could find themselves in a particularly challenging position.

    Kaplan Equity Analysts MD Irnest Kaplan says concerns about declining voice revenues “won’t surprise the informed investor” because they are “nothing new”. But he suggests most consumers don’t have any idea about the implications.

    “Vodacom is preserving its current revenue by pumping far more minutes through its network at lower prices to maintain market share,” says Kaplan. He says it’s “fairly obvious” that this approach is unsustainable and that, eventually, “something has to give”.

    One solution would be to stop reducing voice prices, which would prop up revenues. However, this would stifle growth in voice minutes used, which in turn would lead to a loss of market share as consumers move to networks with lower voice rates.

    If, on the other hand, networks continue the current trend of enticing consumers to make more voice calls for lower revenue – Vodacom’s total voice minutes were up 26% while revenue for them only increased 2,7% – Kaplan says they’re going to have to contend with degraded quality of service.

    “I know technology changes and networks improve, but the fact remains that there are certain bottlenecks on any network and you can’t just grow [voice minutes] at 30%,” Kaplan says. “At that rate of growth, the amount of voice will double in just two-and-a-half years.”

    For now, growth in minutes means voice revenue is remaining fairly flat. But, as Kaplan points out, if prices keep declining, then maintaining this will require huge growth in usage, which is itself unsustainable in the face of declining revenue.

    He says operators are touting data as the saving grace, but that this is an unlikely fix for the problem. Firstly, data is not as lucrative as voice and only accounts for 10-15% of most SA operators’ revenue. Secondly, data costs are in some cases dropping even faster than those associated with voice services.

    “Operators are making money from data now, but they’re also having to offer promotions and compete on price,” says Kaplan. “Plus, they can’t just offer promotional pricing to new customers but have to reduce rates for existing customers, too, if they want to retain them.”

    Many promotions, he says, run in idle network time, especially after hours, at very low rates. “But that doesn’t reduce peak demands at all.”

    He says the promotions lure new customers and those customers also make calls during peak time, so networks still have to increase capacity.

    Kaplan suggests one solution could be the one adopted my many UK networks, where users are charged a flat rate for more minutes or data than they’re likely to be able to use. He says this also seems to be the path Telkom has chosen in an effort to keep customers using its service.

    Another possible solution is for networks to find ways to add value to data services via application stores or other services where consumers’ data usage can generate additional revenue.

    “At the moment, people’s network decision is based on who’s cheapest. Not many people factor in quality of service of value-adds,” Kaplan says. “Phones are always with people. There is no other business I know where the person has that unique relationship with a product, and that hasn’t been tapped into properly by the operators.”  — Craig Wilson, TechCentral

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    Irnest Kaplan Kaplan Equity Analysts Vodacom
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