Stephen Whitford
Business of...

Putting vooma into stokvels

ICT entrepreneur Simon White is confident he`s found the right solution to bridge the gap between the traditional African savings phenomena and modern technology.

The (third) generation gap

South Africa`s networks hope to avoid the 3G mistakes made by Europe. In the end, it will boil down to content and costs.Third generation (3G) mobile telephony has a bad press. Europe`s main mobile networks all burned 100 billion euros four or five years ago purchasing expensive 3G licences, and this outlay has partly been blamed for the subsequent crash in telecommunications stocks.At one stage it looked as if the 3G concept would never see the operational light of day, and when it eventually did, the early signs were not encouraging. 3, a 3G-only mobile operator, launched services in Europe in March last year, and the take-up was small, with 3 eventually having to discount its offerings.Despite the slow start, the major networks have now started to roll out 3G offerings. In South Africa the big networks have also been busy.MTN and Vodacom both agree that upgrading their networks to third generation (3G) will bring substantial benefits to users, though it`s still not entirely clear when users will have access to these services. On this point, the networks have vastly different views.First of all, it is important to define what a 3G network is and what it does.Ashraff Paruk, MTN Group CIO, says a 3G network is an upgraded version of current network infrastructure, giving increased capacity, enabling it to carry greater volumes of traffic. The greater capacity of a 3G network will result in carrying costs of calls being cheaper and data download speeds increasing to 384 Kbps, with an upload speed of 64Kbps.Paruk says this translates into a direct cost saving that will be passed on to the consumer. Secondly, it will give the user a pervasive broadband Internet experience and will allow users to experience true multimedia on their phones."GPRS (General Packet Radio Service) allowed users to have an average Internet experience with their mobile phones. A network with EDGE (Enhanced Data rates for Global Evolution) capability, a faster version of GPRS which MTN is currently rolling out on its network, will give users a good experience, while 3G will give them a really great experience," he says. Learnt a lotPieter Uys, Vodacom COO, says Vodacom`s aim is to roll out the technology as a complete solution to the user."We have learnt a lot from the research Vodafone has done in Europe. Corporates have not used GPRS because it is too expensive, too slow and too complicated for employees to use. Vodafone has packaged 3G services differently, reduced the tariffs and made the product more attractive by simplifying the process," he says.Uys says Vodacom will use this strategy, along with partners like Oracle and Microsoft, to offer a complete solution to corporates. All users will have to do is insert CD and 3G wireless cards into a laptop and the technology will automatically configure the laptop and enable it to connect to the company`s network through Vodacom`s 3G network. When the laptop or phone is on a 3G network, users will be able to download and read e-mail and attachments in a matter of seconds and access any application or information on their companies network, he says.For the average consumer, Uys says Vodacom aims to provide a shopping type experience. "Just as the user walks into a music store, listens to a CD and purchases it, so we want users to be able to see a product on the phone, sample it and purchase it. And when users buy music or games, they will pay for the product and not the download," he says. `I`ll eat my hat`When MTN had a demonstration in June of what 3G technology could do, Karel Pienaar, MTN Group CTO, said that if Vodacom launched a commercially viable solution before the end of the year, "I`ll eat my hat".Well if Uys has anything to do with it, Pienaar will be eating his hat come the holiday season."The technology is available and ready to use. Why should we wait another six months when we can launch it before Christmas? Why should South Africa have to lag behind the rest of the world? The country is ready for new technology, it just has to be easy to use. Vodacom also intends to roll the technology out in our Africa operations, so that the technology is available to users when they travel," he says.Uys insists 3G will not be for the elite only, but for all consumers to use. "We realise we are going to have to get our pricing structure right, because if it is too expensive, people won`t use it," he says.Paruk says MTN will launch when consumers are ready, whenever that is. However, indications from Pienaar`s comments at the demo in June suggest MTN is thinking of launching around mid-2005, or possibly later in the year.This could see Vodacom offering 3G services up to a year earlier than MTN, giving them first shot at getting the early adopters in the market and an opportunity to try and interest as many corporates as possible.However, Paruk is not fazed by Vodacom`s aggressive approach. "Even if we have to launch a year after Vodacom, we will do that if that is when we believe the market is ready," he says.Paruk seems confident this strategy will not leave MTN behind but will help it provide a product that is ready to use, and cost effective. And while Vodacom might have the first chance to pitch solutions to corporates, Paruk does not believe this will be a disadvantage to MTN."Corporates do not jump into using solutions. They want to see the solution work and that is worth their while," he says.This strategy falls in line with MTN`s general policy of releasing new products. It is also not the first time Vodacom has aggressively attacked the market with a new product, while MTN has been cautious. Take, for example, Vodacom`s launch of location-based services (LBS). Vodacom has spent a lot of money advertising Look4me. And yet MTN has yet to launch an LBS solution.MTN`s strategy may be the correct one as the subscriptions to Look4me in no way cover the costs of promoting the product. Perhaps the only real advantage in Vodacom`s strategy is that it is seen by consumers as being the first to market.Paruk says he believes Vodacom might well launch by the end of the year, but does not think the service will be viable and does not think phones will be ready to give users an acceptable experience of the technology.While MTN is cautious, Uys is quick to point out the advantage that Vodacom has in being partly owned by Vodafone. The UK network owns a 35 percent stake in Vodacom and, through this relationship, Uys says Vodacom not only has access to research on how users have responded to 3G, but also fast access to the technology through Vodafone`s suppliers.Time will tell whether the relationship proves to be as fruitful as Vodacom hopes and whether MTN`s relationship with Ericsson, the sole supplier of its networking equipment, will be as fruitful. What about Europe?One thing both networks agree on is that they don`t want the technology to be hyped. In June, MTN`s Pienaar dumped serious caution on speculation about the possible release of 3G services. And while Uys and Paruk believe in the pervasiveness of the technology, there remains the question of 3G`s dismal performance in Europe to date.European operators forked out billions of euros for their licences and began upgrading their networks when 3G phone batteries were not even able to last a day before needing to be recharged. Because of the high licence fees, the networks have been forced to try and recoup their costs, which has had a negative impact in the uptake of 3G services.The cost of the handsets (around double the cost of GSM handsets) and the battery life are the main reasons cited by Pienaar for MTN`s caution about the product; and Paruk concurs that the problem has not been resolved as yet.Added to that, with the availability of broadband in Europe and the proliferation of hot spots, users have had less reason to utilise 3G services. Access to e-mail has never been far away and users are able to have a broadband experience at work or at home, negating the need for 3G technology.In some cases, 3G technology has worked against itself. With voice calls on 3G being cheaper, users had more of an incentive to make a call, often instead of sending an e-mail from the phone or making a more expensive video conferencing call. For the ganderHowever, what has failed in Europe may work in Africa`s favour. Uys says the first major difference between Europe and South Africa is that local networks have not had to pay the exorbitant licence fees that were paid by operators in Europe."A year and a half ago, we only believed 3G would be possible in South Africa in early 2006, because of the high licence fees. But when government announced we would pay the same fee for a 3G licence as we did for our 1800MHz licence, it suddenly become viable for us," says Uys.Instead of the billions of euros forked out overseas, networks pay a mere R6 million a year for the licence. Vodacom has received an upgrade on its test licence to a friendly user licence, which enables it to test the product with a larger group of users - and has now applied for a full licence from the Independent Communications Authority of South Africa (Icasa).Paruk says while broadband Internet access in Europe may be widespread, South Africa has a vastly different environment from Europe. There is very little broadband Internet access and hotspots are not widespread, nor does Paruk believe they will become so."The culture is different here. Hotspots will never become pervasive here because the people will never use them. South Africans don`t got to restaurants to work, they go there to eat and meet people," he says.Not only does South Africa not have widespread availability of hotspots but, for the most part, users do not have broadband Internet access. Paruk says the networks have already become ISPs in that they provide Internet connectivity through GPRS.Faster download speeds will see the cellular networks coming into direct competition with Telkom and Sentech to provide broadband Internet access to users. And, unlike Sentech, which is having teething problems rolling out its network, MTN and Vodacom already have networks in place, which merely have to be upgraded."There is a need in South Africa, and across Africa, for pervasive broadband access. 3G can provide that. 3G won`t be a technology for the elite, but just the next upgrade of the network. It is our hope that even a user in a shack in Tembisa will soon be using 3G services to get his kwaito rings onto his phone," Paruk says. What about content?While both MTN and Vodacom are excited about the technology and the type of service it can provide the user, there is the problem of the actual provision of content. Part of the problem with WAP and GPRS was that the technology was not sold on what one could actually do with it. And when more content started becoming available, there was still the fact that the technology was difficult to use.Uys says content providers are excited about the possibility of providing visual content to users. "Users will be able to purchase MP3s or ringtones online, downloading them straight to their phones instead of having to download them onto PCs before transfering them," he says. Users will also have music videos, movie trailers, news or sports clips, and even video footage of traffic conditions, streamed live to their phones.However, perhaps surprisingly, some content providers are not as excited about the opportunities offered by video and music on the phone.Gavin Penkin, portal and entertainment director at Exactmobile, says with premium content comes increased licensing costs, and the networks, to date, have been parsimonious with the revenue."We sell a lot of different types of content that we create ourselves, but when one starts selling premium content, content owners want a large cut of profits," he says.Although Vodacom used to take a large portion of this revenue, it has now lowered its costs, taking 24 percent of revenue from content bought by prepaid subscribers and 15 percent of revenue from content bought by contract subscribers, says Penkin.Cell C, which started providing a premium SMS service about three months ago, is offering slightly less attractive tariffs, while MTN still takes between 36 percent to 50 percent of the price of the content.While MTN has said its pricing model will soon be changed, it has shown a pattern of taking a minimum of 30 percent of earnings before interest, tax, depreciation and amortisation (EBITDA) on any product sold though its network. With premium content providers from overseas looking to take up to 60 percent of the price of sale, if MTN were to take 30 percent, that would leave a mere 10 percent for the content providers locally, which is not profitable for them.Then there is the question of whether users are going to use 3G services at all, says Penkin."For the most part, corporates are not using GPRS, so why would they use 3G? There are many users out there with a camera phone, but do they use them to send pictures to people on a daily or weekly basis? How many people out there are buying premium content using GPRS? The market is 18 months away from being ready to use 3G services and, until then, launching a 3G network would just be a waste of money," he says.Wayne Levine, iTouch commercial director, says user education is a big problem and he hopes the networks will be doing more to educate users and make the technology easier to operate."In Korea, phones are sold ready to use, so users don`t have to get the settings for the phone model and input them in order to use GPRS or 3G technology. If the networks can get that right in South Africa, it will have a big impact on levels of usage," Levine says. Stiff competitionAnother key issue for 3G will be the billing model and the costs charged by content providers, says Levine. "The music industry globally is still coming to grips with its products being sold on phones and is in the process of negotiating with the cellular industry on the price of content. Added to the cost of the content, there is the issue of how it will be charged for. We just don`t know what billing model the networks are going to use," he says.And with MTN having just launched its Loaded portal on its website, offering content to users, the networks are becoming content providers themselves, which is going to pose stiff competition for the existing players.In the end, it is going to be content and cost that determine the success of 3G services, says Penkin. If the networks and the content providers offer the services at the right cost and educate the user, 3G could have a big impact. If not, it`ll simply be a service that is available, but largely ignored - until these factors are addressed.