The mobile decade

There`s a lot to celebrate about the local telecoms industry`s development over the past ten years. But there is also cause to mourn what might have been if government policies to liberalise the market had been bolder.Democracy arrived in South Africa at about the same time as cell phones and the Internet. As we enter an election year marking the tenth anniversary of democracy, it is a good time to reflect on all that has happened in the telecoms sector in the decade.In some respects, it has been a dizzying whirl of new technologies and broader choice. But in others, it has been a frustrating war between entrepreneurs and bureaucrats – with the bureaucrats tending to win.The overall growth of South Africa`s telecoms sales pie over the past decade is astonishing. The most recent statistics from the International Telecommunications Union (ITU) are for 2002, when it estimated the country`s total telecoms revenue at R56 billion, seven times that of 1993. That figure should be even higher since the ITU`s statisticians haven`t yet gathered the data to include revenue contributed by businesses other than Telkom and the three cellphone networks.This “other” telecoms market is represented in the accompanying revenue graph by the thin lilac line. Businesses trapped in this margin have had a torrid time. Whenever they have developed a profitable niche, Telkom has tried to seize it by claiming it as part of its monopoly on basic telephone services, or has attempted to stamp it out by declaring it illegal.That this “other” margin has not only survived but widened in ten years reflects the remarkable tenacity of South Africa`s entrepreneurs.Recent rulings by the Independent Communications Authority of South Africa (Icasa) and the courts have created a far healthier environment for the wider business community to participate in the local telecoms market.October saw Icasa open the doors of the wireless Internet access market to all by ruling against Telkom`s claim of monopoly rights over the fledgling “WiFi” industry. Icasa ruled that no licence will be required to operate commercial wireless services as long as the service is contained within the service provider`s premises.In another ruling, Icasa paved the way for the call-back industry to operate limited services legally by ruling that Pinnacle Technology`s value-added network services licence covers call-back services not initiated by a telephone call.The Pretoria High Court deflated Telkom`s bluster that almost all companies face legal action or disconnection for the high crime of placing PABX calls directly on the destination network – so-called least cost routing. The court simply dismissed the phone company`s application to have this practice declared illegal.Chances are that once the contribution of these “other” sections of the local telecoms industry have been gathered, 2002`s revenue will be shown to have mushroomed to eight times its 1993 size. And now that government policy appears to be slowly changing from stifling to stimulating the entrepreneurial sector of the telecoms market, it`s a safe bet that this band will grow to dominate the next decade`s revenue graph.One glance at either the revenue or subscriber graphs show the undisputed champion of the past decade has been the cellphone industry. Subscriber growth has been exponential since the industry launched shortly before the first democratic elections in April 1994. The market share of the three licensed cellphone networks corresponds fairly closely to their age. Vodacom, a Telkom offshoot which received the first licence along with a head-start in the form of Telkom`s car phone subscribers and other mobile phone assets, had about half of the 14 million subscribers counted by the ITU in 2002. Division of spoilsMTN, the second entrant, had about five million and the new entrant Cell C already had amassed two million. So the pot in this three handed game was divided into 50 percent, 36 percent and 14 percent stakes a year ago. It will be interesting to watch how Cell C does in trying to close the gap.The graph comparing cellphone subscribers to main telephone lines in operation hints that at least some of the mobile industry`s gains have been at Telkom`s expense. After the number of mobile phones overtook the number of fixed lines in this country in 1999, the ITU`s statistics show there was a slump in the number of main telephone lines in operation and the trend has been downward ever since.The rise and fall of main telephone lines in operation holds a salutary lesson about what happens when apparatchiks and their five-year plans win the day. In 1996 government policy makers decreed that retaining a state monopoly would increase the number of fixed phone lines faster than allowing private businesses to enter the market and stimulate it with competition.Telkom was given “exclusivity” of Public Switched Telecommunications Services (PSTS), along with a monopoly over other vaguely phrased telecommunication services until 7 May 2002. Though its exclusivity could be extended for another year if rollout targets were met, Telkom never bothered to apply for this extension by the 2001 deadline – perhaps because it was clear by then that government`s five-year plan had collapsed beyond salvage. It is estimated that up to two thirds of the new lines Telkom installed to meet government`s targets were soon disconnected.South African consumers voted with their wallets for the cellphone market, where there was limited competition, over the fixed-line market with its monopoly supplier.The ITU`s statistics indicate that by now at least every third person in South Africa has a cellphone. But that figure is not quite as impressive once the traffic carried by the local cellphone networks is scrutinised. Few of the country`s millions of handset owners can afford to use their devices often. Making a phone call remains an expensive luxury for most South Africans on a landline, let alone those on a cellphone. Eroding advantageWhen cellphones first arrived, making a business call using one cost about ten times what it did on a landline. As the graph comparing a three-minute call made during office hours on a landline versus a cellphone shows, Telkom has steadily eroded its price advantage with hefty annual tariff increases. The result is that mobile business call rates have become only about five times higher than landline rates over the decade.Most cellphone users are paying more than the amount used in the ITU`s statistics. While business users willing to lock themselves into two-year contracts with monthly subscription fees of R135 get charged from R1.90 per minute, pre-paid users pay R2.80 per minute. An indication that this rate is too dear for most customers is that as the subscriber base has grown, the average talk time per subscriber has dropped steadily. In 1999, the ITU`s figures show South African cellphone users averaged nearly 16 hours of mobile calls during the year. By 2001, the average had fallen to 12 hours.Market research by Stellenbosch University projects 21 million cellphones in South Africa by 2006, although the cellular operators tend to be more conservative in their projections. But if the traffic per cellphone continues to decline at its present pace, those extra phones are not likely to translate into much revenue growth for the networks.The cellphone licensees have used a variety of dodgy business practices to ramp up the nation`s handset population.The most controversial has been the method by which they have effectively encouraged the resale market for stolen cellphones. This has been achieved by placing every conceivable bureaucratic obstacle in the way of theft victims getting their stolen handsets blacklisted. The end result has been a steady exchange of affluent subscribers who quit bothering to replace stolen handsets with people who buy stolen cellphones cheap but can`t afford to make many calls.The impressive growth of the local cellphone networks over the past decade is admirable – provided you don`t look too closely at the shaky foundation laid for future growth. This is an industry with “quick-buck artists” scribbled all over it. Telkom the cash cowWhile the mobile networks have sacrificed quality of customers in their scramble for quantity, Telkom`s market has grown slightly more lucrative as it has become smaller. The average hours its customers spend making local calls has risen from 68 to 70 hours a year. This fractional increase is not enough to explain how Telkom has managed to report staggering revenue growth on the back of dwindling main telephone lines in operation. But how Telkom has squeezed more money out of fewer customers isn`t hard to guess: the price increase in office-hour local area landline calls has averaged 24 percent a year for the past decade.This is contrary to Telkom`s licence, which stipulates that tariff increases have to be below the consumer price index. But instead of using the cost of a three-minute office hour call – the benchmark used by the ITU and other organisations that gather telecoms data – the calculation is based on a “basket of tariffs”. This basket is a mystery wrapped in enigma.To outsiders, the mythical subscriber used for these annual calculations is as plausible as those other yearly fictions, Father Christmas and the Easter Bunny. He or she appears to make no local calls during business hours and mainly phones foreign destinations where Telkom has been forced to limit its increases or drop its rates because of competition from call-back operators.There is never a review of how a given year`s “basket of tariffs” compares with the actual average increase consumers see on their bills. The system government instituted to protect consumers from monopoly price gouging has amounted to little more than a demonstration of the old adage “figures can`t lie, but liars can figure”.Telkom has attempted to disguise the extent to which it is milking its captive business market by steadily reducing its out-of-office-hour tariffs. This would benefit householders, except that the drop in main telephone lines in operation hints that people are increasingly deciding they don`t need both a residential landline and a cellphone.Telkom has the upper hand in that it is selling a business “must-have” and not a toy for teens. Landlines remain the lifeblood of business people who need them for Internet access and faxes, not to mention sales calls.The economic health of the country depends on vigorous competition getting injected into this market. South African business can`t operate effectively while everyone is scared of using their telephones because of the bill.Since 1998, the four licensed network operators have been whittling down their wage and equipment overheads. Telkom`s last results said the corporation`s goal is to reduce its salary costs from 22.6 percent to 18 percent of turnover.The widened profit margins the networks are gaining by cutting jobs and equipment orders might be welcomed by their shareholders, but savings from such operating efficiencies are rarely passed on to consumers. The graphs on the previous page offer dismal pictures for telecoms consumers.Fortunately, orders for telecoms equipment and new jobs are on the horizon now that the long awaited second network operator is finally likely to open for business this year. In December, Communications Minister Ivy Matsepe-Casaburri granted CommuniTel and Two Consortium each a 13 percent stake in the proposed competitor to Telkom.Government has been struggling to find credible partners for a consortium in which the telecoms arms of its electricity and transport parastatals are to hold a 30 percent stake and 19 percent has been earmarked for black economic empowerment group Nexus Connection. The original idea was to find a buyer for the remaining 51 percent. But since nobody had the guts to tackle South Africa`s regulatory regime, Matsepe-Casaburri had to help the process along by allowing two smaller partners than initially hoped for to buy 26 percent between them. The unallocated 25 percent equity will remain with government, which will take responsibility for seeing that this portion is warehoused for a hoped-for future investor.A 10-year celebratory telecommunications publication has been compiled by 3D Global Strategic Communications MD Melissa Powell in which contributions have been gathered from various industry players. The publication notes that models for reform have differed according to individual countries` political, social and economic situations, structures and agendas. Four distinct models have developed: privatisation with full competition (New Zealand, Chile and Malaysia); privatisation with phased-in competition and regulation (EU, Japan, Hong Kong, Australia, Korea, Argentina, Brazil and South Africa); liberalisation without privatisation (Sweden, Colombia and India); and private sector participation without privatisation or liberalisation (Thailand, China and Saudi Arabia).“By 2001, the incumbent telecom operators in 113 countries worldwide had been fully or partly privatised, according to ITU statistics,” writes Powell. “The number of regulatory institutions has increased from 13 in the early nineties to more than 110, with many of them created in the past five years. The role of these authorities has led to much debate as technologies race ahead of reform.”Placing the interests of parastatals over those of the wider business community has carried all kinds of hidden costs and lost opportunities for this country. Marginalised in their domestic market by monopoly laws barring investment in the telecoms sector, larger private sector information technology corporations have embarked on some ill-fated offshore investments.The history of telecommunications contains a clear moral about the benefits economies gain by creating investor- and entrepreneur-friendly environments. Policy makers need to remember the telephone was not a windfall for the country in which its inventor, Alexander Graham Bell, was born, Britain. Nor for the country that provided Bell`s university education, Germany. The wisdom of Bell`s decision to build his industry in the US was made amply clear by later events. In both Britain and Germany, government officials looked upon the networks created by private citizens with greedy eyes and snatched them away. In Europe and its colonies, the telephone became part of the post office, which was part of the government.Since 1984, when the US secured an even stronger competitive lead in the telecoms game by splitting the giant company AT&T into “Baby Bells” – including Telkom`s strategic equity partner SBC – other economies have been battling to reverse the damage done by making their phone services a twig of the post office.In South Africa, this process has proceeded more smoothly and quickly than in many other economies. But there is still a lot to be done.