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'It's going to get tougher'

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 25 Nov 2014
Mobile operators are in serious danger of becoming dumb pipes as over-the-top players eat their lunch.
Mobile operators are in serious danger of becoming dumb pipes as over-the-top players eat their lunch.

2015 will be the year mobile operators will be in serious danger of becoming dumb pipes while continuing to battle dwindling revenue growth, heavy competition and the need to invest for data demand.

Operators have already been under pressure to boost their top lines - as reflected in MTN, Telkom and Vodacom's latest results - and have increasingly been looking to grow income by adding new products, such as financial services and content.

Independent telecoms researcher Samantha Perry says mobile operators are now at the point where they are seriously in danger of becoming dumb pipes as over-the-top players encroach on their space, emulating the situation Telkom was in a while ago. She says, had Telkom accepted this and moved towards this goal a decade ago, it would be better off. "We need dumb pipes."

Perry notes the convergence of IT and communication is happening and companies are now becoming actual ICT players, but telcos must decide whether they want to play in infrastructure, or services, as the two are different businesses altogether. "I'm not sure they wouldn't be better served by working out how best to be dumb pipes."

Strategic moves

Independent analyst Paul Booth anticipates the larger players selling off non-strategic assets and investing in new areas, such as content and video-on-demand, and potentially buying smaller players to bulk up their bases. He notes, however, even as consolidation continues, new players will continue to enter the market; for example, virtual network operators such as Mr Price and Smart Mobile.

The market has already moved towards consolidation, with Vodacom bidding R7 billion for Neotel about a year ago, MTN buying a majority stake in Afrihost and tying up a tower sharing deal with Telkom Mobile, while Telkom has bid R2.67 billion for Business Connexion.

BMI-TechKnowledge director Brian Neilson says the consolidation trend will continue, and he sees up-and-coming Internet service providers (ISPs) being made offers they cannot refuse, although some may rather stay independent. He adds the smaller ISPs - of which there are many coming up through the ranks - are often choosing to play in the fibre space rather than the competitive ADSL arena.

Dark Fibre Africa (DFA) chief strategy officer Reshaad Sha has said there has been a jump in the number of smaller ISPs in the market, from 35 active enterprise ISPs to about 60 now. BMI-T telecoms sector specialist Tim Parle adds a lot of smaller, and frankly unexpected, companies are building networks using DFA's open access fibre, cutting out the need for high-end carrier grade metro Ethernet kit to light up a 10Gbps ring or mesh. "This has been a game changer to me."

Need the cash

However, Sasfin analyst David Shapiro notes operators - and ISPs - will need deep pockets to keep up with the demand for data services. He doubts companies like Cell C and smaller ISPs have the muscle to keep up with the larger operators, unless the ISPs on-sell other services. "It just comes down to capital."

Next year will be an even tougher year for operators, notes Shapiro, as top line growth will continue to slow, while data will continue to gain on voice, at lower margins. "I think it's going to be even tougher." As a result, says Shapiro, there will have to be further consolidation.

Neilson adds operators cannot afford to cut back on capital spending forever as they need to remain competitive, although operators can increasingly share infrastructure so as to manage infrastructure investments more efficiently, which is what Telkom and MTN aim to do with their tie-up.

Booth speculates other future moves could include either Cell C or Telkom being bought out; either in whole or in part. He notes Cell C requires cash to take on the big boys, and government has also signalled its intentions to get out of non-core holdings, such as telecoms.

Among those companies that could be contenders for either Cell C or Telkom - in whole or in part - could be Bharti Airtel, Orange or even NTT, says Booth. He notes the market is not big enough for four to five players, and can only hold three.

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