Internet services providers (ISPs) in SA face challenges as market growth rates subside, despite the high growth opportunities in fibre and cloud services.
This is according to a new report from BMI-TechKnowledge, entitled "SA Internet Services Market Forecast and Analysis, 2016".
Brian Neilson, director at BMI-T, says while all indicators related to Internet usage trend sharply skywards, revenue growth from connectivity services - the staple diet of the industry - remain muted as prices continue to plummet.
This is great news for consumers, but not so great for the wide array of players that make a living from this industry, BMI-T notes.
The analysis shows market annual growth rates have declined from over 30% five years ago, to less than 10% in 2015. This market includes some niches like fibre broadband services, which are growing at close to 80% per annum, but they still make up a small fraction of the total market and hence their influence is low, says the ICT analyst firm.
Growth wave
According to BMI-T, public cloud services represent a growth wave for telcos and ISPs, an opportunity partially mitigated by growing competition from large global 'hyperscaler' players like Microsoft and Amazon, resulting in a forecast 18% CAGR for local telcos and ISPs, reaching more than R4 billion by 2020.
However, Neilson points out local companies are still able to benefit from this growth market, and to date system integrator players have been particularly successful.
Neilson says the price pressure comes from ongoing competition in commodity connectivity services, including wholesale services such as those provided by Telkom's Openserve division.
While these are an enabler of lower retail prices, he adds, wholesale prices are structured in such a way as to favour the largest ISPs.
Tim Parle, BMI-T telecoms sector specialist, says competition in the market is quite healthy.
In the fixed broadband market, Telkom's move to create Openserve and the reduction of IP Connect costs, plus the prevalence of uncapped packages, have been key drivers, according to Parle.
"In the mobile space, we now have over 50% of the adult population in SA having a smartphone, 3G coverage is approaching being ubiquitous, and the prevailing cost of R50/GB (on contract) is being challenged by 3G and LTE deals from Cell C and Telkom."
FTTH consolidation
BMI-T points out consolidation in the industry is an ongoing global and national trend, and recent initiatives focused around consolidating and acquiring wireless ISPs is clear evidence of this.
It predicts a similar trend in the fibre-to-the-home (FTTH) market down the line, as many entrepreneurs who have started deploying fibre in suburbs will choose to exit the market when the time and price are right, while the 'big guns' in the fibre market like DFA and large operators are waiting in the wings to buy them out.
Meanwhile, the firm says FTTH prices have been very competitive, and are approaching those of DSL to stimulate rapid uptake and churn.
"There has been a tremendous growth in this area [FTTH] since around 2010," Parle says. "DFA took a strong market lead and challenged Telkom's incumbent position. There are also challengers such as LinkAfrica and the metro networks in the City of Johannesburg, City of Cape Town and eThekwini.
"BMI-T calculates that above and beyond Telkom, the other players in SA have deployed more than 26 000km of metro fibre route in the last eight years. This is enough to follow the coastline of Africa - the second largest continent."
Mobile effect
Subsiding growth rates in connectivity services are now starting to touch mobile broadband too, although this is less noticeable in the handset market.
BMI-T notes that per their latest published financial results, MTN grew data revenue in SA by 23.9%, Vodacom by 27.7%, Cell C by 58.5% and Telkom Mobile by 68.5%.
This is underpinned by improved access to more affordable devices and highly competitive data deals, both prepaid and contract, it notes. BMI-T observes deals well below the R50/GB norm and some fear this is 'a race to the bottom' to win market share.
Between commodity connectivity services, VPNs, hosting and new-generation cloud services, BMI-T's overall market growth forecast is less than 10% compound annual growth over the next five years, showing how critical it is to play in the fast-growing market niches.
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