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Telecoms consolidation to continue despite MTN-Telkom deal's death

Paula Gilbert
By Paula Gilbert, ITWeb telecoms editor.
Johannesburg, 18 Aug 2015
Analysts say consolidation in SA's telecoms sector will continue, as operators are trying to gain access to the spectrum.
Analysts say consolidation in SA's telecoms sector will continue, as operators are trying to gain access to the spectrum.

Attempts at consolidation in the telecoms sector will continue, despite the recent failure by MTN and Telkom to get a bilateral roaming deal approved by the Competition Commission.

ICT veteran Adrian Schofield says consolidation is inevitable, because the market is heading towards a saturation point.

"Economies of scale and a duopolistic environment are the logical ways for the big enterprises to protect their margins. No matter how well the competition legislation protects the smaller players, they will find it increasingly difficult to offer a satisfactory return to their shareholders."

"The current market environment, increased competition and declining prices, increasing input costs and market saturation, will drive further consolidation," Ovum senior analyst Richard Hurst says.

However, he believes, given recent rulings by the Competition Commission, "merger opportunities may appear in the adjacent markets for telecoms operators".

The Competition Commission yesterday announced it was recommending the Competition Tribunal prohibit the proposed roaming deal and radio access network sharing agreement between MTN and Telkom, saying the deal would "substantially prevent or lessen competition in the mobile services market" and give MTN a "significant competitive and time advantage".

Schofield says he was not surprised by the Commission's recommendation, because consolidation often results in less competition, and so "the Commission had little choice".

The proposed deal would have seen Telkom and MTN signing a network management services agreement and reciprocal roaming deal, which would effectively let each party roam on the other's mobile network. MTN would have taken over financial and operational responsibility for Telkom's Radio Access Network (RAN), which would have given MTN access to additional spectrum capacity to roll out a long-term evolution (LTE) network.

"The access to additional spectrum capacity by MTN will confer first mover advantages to it relating to network speed, capacity and mobile offerings," according to the Commission.

BMI-TechKnowledge director Brian Neilson says the Commission's recommendation is hard to argue with, "especially if MTN has access to Telkom's considerable spectrum assets suitable for LTE".

"Taken at face value, this argument is difficult to dispute. Smaller players like Cell C and Telkom Mobile have proven that they can take on the big players on price, forcing the latter to follow suit, which is good for the consumer," says Neilson.

Vodacom/Neotel vs Telkom/MTN

Africa Analysis MD Dobek Pater, however, has a different view and believes the Commission's decision is effectively favouring Vodacom.

This follows last month's Commission recommendation for the Tribunal to approve Vodacom's proposed buyout of Neotel, but under strict conditions.

The conditions primarily concerned the use of Neotel's coveted spectrum and wide-ranging investment in telecoms infrastructure. If the deal goes ahead as recommended, Vodacom cannot use Neotel's spectrum for two years and must commit to a R10 billion investment in fixed network, data and connectivity infrastructure within five years of the deal's approval.

Pater acknowledges: "Vodacom is constrained for the next two-plus years by the conditions of its acquisition of Neotel; therefore, it may not be able to take much of an advantage of this window of opportunity [left by the MTN-Telkom non-deal]."

Neilson believes you have to look at the two deals differently, however, because Neotel is not a dominant fixed-line player like Telkom.

"More importantly, CompCom stated that they offered Telkom and MTN the opportunity to come forward with pro-competitive remedies that would allow the deal to go through, which failed to materialise. Vodacom and Neotel were prepared to accept the conditions imposed on their deal."

Saving Telkom from itself

Telkom Group CEO Sipho Maseko called the decision "disappointing", despite the Commission claiming the transaction would significantly curtail Telkom Mobile's ability to aggressively grow and respond to competition in future.

"Telkom will be limited by the agreement between the merging parties, whereas MTN's capacity will not be limited," according to the Commission.

Pater calls this statement "baffling".

"It sounds as if CompCom is trying to save Telkom from itself. When Telkom entered into negotiating this co-operation agreement with MTN, surely it must have realised what the impact on its operations would be," says Pater.

"The agreement would have worked both ways. Therefore, MTN would gain access to Telkom's spectrum (2.3GHz), but on the other hand, Telkom would have gained access to a far wider national wireless network footprint than it has currently, which would have made Telkom Mobile more competitive," according to Pater.

Schofield says the deal would probably have had more benefits for MTN than Telkom, "but that probably overlooks Telkom's plans for its position in the market in the medium to long term".

Hurst says in terms of the access to spectrum, the deal would have given first mover advantage to MTN, something the commission has blocked for Vodacom when it came to access to Neotel's spectrum.

"The commission needs to be even-handed in its approach to these matters, especially when the thorny issue of spectrum remains unclear from a policy and regulatory level."

Spectrum wars

Hurst adds both the Neotel/Vodacom and MTN/Telkom deals "highlight the fact that a sense of urgency is now required when it comes to the allocation of spectrum and the digital migration process".

"It just serves to highlight the fact that operators are trying to gain access to the spectrum by any means possible," he says.

"The spectrum issue is just one factor constraining the development of the market and will not be resolved until the spectrum used for analogue TV signals can be reallocated, possibly three years or more from now, judging by the government's abysmal progress to date," says Schofield.

Neilson says short of new spectrum being issued in the next two years, Vodacom will gain an advantage in late 2017 if the Neotel deal goes ahead.

"Meanwhile, a lot of Telkom's valuable spectrum suitable for LTE will lie fallow, as the fourth mobile operator's subscriber base remains small and the network under-utilised," adds Neilson.

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