Tempering the vibrant, high growth African market with the more mature, conservative appetite of the South African market makes for an interesting balancing act. Brett Haggard take a closer look at MTN’s operation in South Africa and finds out that even in a lower growth market, voice and the data boom are the primary focus areas.
With Africa’s penetration levels way below the rest of the world and healthy annual double-digit growth, there’s not a great deal for telcos not to like about this vibrant, innovative and exciting market. There are a couple of exceptions to this rule, however, and for MTN, balancing the relatively mature environment in South Africa with the untapped potential of the rest of the continent and the Middle East is challenging to say the least. It’s a job the telco group seems to be carrying out with a great deal of aplomb though, raking in US$13.4 billion in the past financial year – a 9.2% increase on last year – and growing its subscriber base by 25.2% to a total of 129.2 million in the same time frame. The SEA region into which South Africa fits contributed 22.2% of that revenue in the past financial year – a drop of 2.5% on the previous year – and accounts for 28.7 million or 12.6% of the subscribers across the group. thought leadership South Africa accounts for 17.1 million of these customers. Karel Pienaar, CEO of MTN South Africa, says that although the South African operation experienced a small, albeit significant 0.7% shrinkage in subscriber numbers during that same period, since January 2010, MTN South Africa saw growth in the region of 10%.
Voice remains king
What’s particularly interesting is that Pienaar says that across the group, mobile voice remains the killer application, regardless of whether it’s in a high growth market or a much lower growth market such as South Africa. “Africa is one of the lowest penetrated markets for mobile voice in the world, and it has a long way to go to catch up with South Africa, which has well over the 100% mark,” he says. But, despite the more than 100% penetration in the South African market, Pienaar says there are still communities in South African – with no more than 100,000 to 200,000 potential users and limited access to all forms of infrastructure such as power and clean water – where there’s zero penetration. So, it makes sense that this is where MTN South Africa is focusing the majority of its efforts today. And, Pienaar says, even though these communities would be perfectly served by a 2G base station, MTN is implementing base stations with a full complement of 3G services. “3G technology is ripe and ready for rural environments,” Pienaar says. “Today’s base station technology allows us to get by with 70% lower power consumption and zero air conditioning, meaning that wind turbines and solar panels are more than capable of supplying the power required to run a rural base station,” he explains. When it’s looked at from this perspective, the question is not ‘Why is MTN using 3G technology to supply rural communities with communications?’ but is rather ‘Why isn’t everyone?’.
Rural markets need different business models
“Those benefits aside, addressing the rural market also means coping with declining ARPUs, which means the value proposition into those markets needs to be applicable to the needs of the community it services. MTN’s focus for these regions is therefore squarely on the affordability of telecoms services, which translates into per second billing and lower denominations when it comes to transactions. And obviously, entry-level smart devices that lower the barriers to entry but also allow for services outside of voice to be consumed are very important in the mix of things. With all of these factors considered, Pienaar says there’s more than enough potential to go around. “There’s a clear need for telecoms services in these rural areas,” he says, “and I believe it’s part of our responsibility as telcos to address these regions where little or no existing infrastructure exists. “I’m not a fan of the so-called ‘cream skimmers’, who are looking at rolling services out almost exclusively for the urban and high-end portions of the market,” he says. And looking at how under-addressed parts of the South African market are today, it’s not hard to agree with his sentiments. Pienaar says that MTN South Africa’s investments – both in rural and urban areas – are centred on delivering improved quality. “Rolling services out in rural markets is only the first part of the equation,” he says. “After a month or two of a customer in one of these areas making use of your services, it becomes all about the quality of the experience. “The expectations of customers in rural areas climb very quickly,” he says, “and we’ve found that as the quality of the experience improves, so usage levels improve.”
Data services for rural markets
Bearing out Pienaar’s point about the quality of the experience, he says MTN has seen uptake of data services in rural areas happen organically, with little or no marketing assistance. “We’ll make 21Mpbs of capacity available on one of our base stations without creating too much noise about it and within weeks, almost magically, data growth appears,” he says. And to make rural data services cost effective, where other South African mobile telcos are making use of 900MHz UMTS to provide data services in urban areas, MTN South Africa is using this technology as the basis for its rural, green sites. “The quality of the codecs being used for voice in this environment have improved dramatically, so we’re able to provide an improved customer experience with data and voice, while running a more efficient, sustainable network,” he adds.
Data is the next big thing
When it comes to growth across all areas of the South African market, Pienaar says it’s all about data. “African countries as a norm have a data penetration rate of between 1% and 5%,” he says. “And quite simply, if we as a continent want to be competitive with the rest of the world, we need to get these penetration rates up – and quickly.” Part of arriving at this point, Pienaar says, will be setting targets for the continent, like committing as an industry to ensuring that 50% of households have access to affordable broadband Internet services by 2020. “Right now, across the group, the percentage of revenue we derive from data is well below the 10% mark,” he continues, “and while I feel that in the future data will be where we derive the majority of our revenues, the time frames are debatable.” Across all of MTN’s operations at 12%, South Africa is the leader in terms of revenue contribution from data. The next closest is Cyprus with 3% and Cameroon with 2%. All of the other countries where MTN has operations are well below the 2% mark. While having networks capable of supporting speedy Internet access is an obvious underlying requirement to begin driving the adoption of data, Pienaar says that the importance of smartphone penetration into the market is a factor that cannot be overstated.
Devices drive data adoption
“By 2014, we believe that smartphones will account for 60% of the handsets shipped into the South African market,” Pienaar says. By contrast, smartphones are currently less than 5% of the South African market. Smartphones are only the start, however. “Notebooks, tablets and other forms of terminals drive this trend too. Currently MTN South Africa ships between 3,000 and 5,000 notebooks on data contracts each month. And that’s likely to grow,” he says. For the telcos it means substantially changing their strategy to focus more heavily on stockholding, logistics and providing support around these devices. “That means we will have to get into the device business as operators,” he says.
More than a bit-pipe
At the same time, Pienaar says that operators realise they can’t exist as nothing more than a ‘bit-pipe’. “Operators will have to move into the application and social networking business instead of simply providing the infrastructure that underpins these entities. While there’s a shortage of solutions to this conundrum, the answers are coming, Pienaar says. “It’s clear though, that operators won’t be able to survive in the long term if all they provide is the underlying transport for data,” he says. The biggest challenge the industry faces at present, however, is making worthwhile profits from data, since the margins are vastly different from those in the voice market. “Once again, this hasn’t been solved as yet, but it’s clear that it’s a volume game,” he says. “As the old analogy goes, he with the most packets on his network wins,” Pienaar quips, “and there’s a great deal of technology helping this process along. Since we can’t raise the costs of data to the end user, technology and smart business practices will be called on to raise the efficiency and lower the cost of providing data services. “We have to bring the costs of providing data services to the end user to one fifth, or 20%, of what they are today if we are to substantially impact the market and drive penetration rates up to the level we need,” he says. While technology has an uncanny ability to bring costs down through the natural and constant drive towards more efficiency, Pienaar says that MTN is actively engaged in infrastructure development programmes that see it placing fibre-optic infrastructure in the ground and in many cases, sharing the costs of laying that fibre on a national, municipal and metropolitan level with other telcos. In some cases, there are even infrastructure-sharing agreements in place. MTN South Africa is also investing heavily in international, undersea infrastructure, since as the costs of international access decrease, so the costs of Internet access to the masses are directly impacted.
Driving innovation around prepaid
“There’s also a great deal to be said about driving innovation at a pricing level,” he says. “We haven’t yet moved into the prepaid market for data properly and we both want to and need to become more innovative on this front,” he says. If one considers that – in Africa – the mobile communications market only really flew when voice and SMS services became available on a prepaid basis and telcos became innovative around how these prepaid offerings were structured, there’s plenty of truth in what Pienaar says. With more innovative pricing structures for data on the prepaid front and affordable smartphones that make active use of data connections becoming commonplace, the benefits of mobile Internet access will be brought within reach of the mass consumers in the market. And that is in all likelihood going to be the tipping point.