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Neotel to turn Vodacom into behemoth

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 19 Jan 2015
Vodacom will have too much muscle if it is allowed to buy Neotel, argue those against the deal.
Vodacom will have too much muscle if it is allowed to buy Neotel, argue those against the deal.

If Vodacom is successful in its R7 billion bid to buy Neotel, the resultant company will be overly dominant in the mobile space, and kill all competition - to the ultimate detriment of end-users.

This is according to some interested parties who - over the course of last Thursday and Friday - told the Independent Communications Authority of SA (ICASA) why the deal was a bad idea. ICASA is now pondering the submissions and is set to make its decision known in March. Yet, even if Vodacom and Neotel win over the regulator, they still need the competition stamp of approval - and that process is still under way.

Graham Mackinnon, Cell C's group general counsel, on Thursday told the panel that "consumers will lose out in the long run if Vodacom becomes super-dominant. [The company] is already dominant as it is. Only competition benefits consumers - and this deal will ultimately only benefit Vodacom."

Quick win

MTN's argument took a similar tack, with MTN SA CTO Eben Albertyn noting Vodacom would gain a 50% cost advantage if it is successful, and would be "gifted" an unfair advantage over the competition.

While Vodacom refuted it would have a 50% cost advantage, its bid for all of Neotel will boost its fibre network, as SA's second national operator has more than 15 000km of fibre, which will be a catalyst for Vodacom's plans to roll out fibre-to-the-business and fibre-to-the-home. It would also give it the ability to tap into Neotel's spectrum in the 800MHz, 1.8GHz, and 3.5GHz ranges.

Albertyn noted buying Neotel gives Vodacom an immediate solution to two constraints all operators are facing: a need for spectrum and fibre. As a result, he argued, being allowed to buy Neotel will entrench Vodacom's dominance in the market.

Vodacom already turns over more than all its competitors and its subscriber base is close to double that of all its competitors, as is its capital spending, he said. By comparison, Cell C has 11% revenue market share, while Vodacom has 52%, MTN 35% and Telkom Mobile just 2%. Telkom has 90% revenue market share in the fixed market.

In addition, gifting Vodacom Neotel will allow Vodacom the advantage of being able to turn on long-term evolution across the country, said Albertyn. He noted the other operators cannot move as fast with 4G because of a spectrum dearth. "The question is whether Vodacom should be allowed to add another structural advantage on top of all its other advantages."

Alternative solutions

Meanwhile, Internet Solutions (IS) argues the deal will adversely impact the competitive landscape; leading to higher prices, lower network quality and increased risk of collusion in the telecoms sector.

Ovum analyst Richard Hurst notes Vodacom is already well on its way to becoming a mobile behemoth because of its sheer size and network capacity. He notes the issue comes down to spectrum, and highlights government's failings in releasing more much-needed frequency.

Because of endless delays in allocating spectrum, Vodacom has simply found a go-around, says Hurst. "Where there's a will, there's a way." However, if government were to issue more spectrum fairly, that argument would fall away, he says.

Hurst expects the deal to be successful, but anticipates some concessions so that downstream players are not disadvantaged. Speaking on behalf of IS, Webber Wentzel partner Peter Grealy argued Vodacom's purchase of Neotel would result in the re-emergence of the pre-Neotel monopoly - when Telkom was the only fixed-line player. This, he argued, was because Vodacom could insist Neotel must stop allowing downstream players access to its network.

If Vodacom wins out it will have a huge advantage at a time when the fight for market share is moving into the enterprise space, and can take Telkom head-on, says Hurst. Econex economist Nicola Theron, testifying on behalf of IS, added the deal will create a dominant player in the fixed and mobile space, at the cost of competitors.

However, says Hurst, the new Vodacom will not mean an end to competition, rather that the form of the battle for market share will change, and MTN - SA's second largest operator - could also invest or partner to increase its reach. Neotel and Vodacom argue Vodacom's competitors will face stiffer competition, but this will lead to more competition.

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