Cabinet makes its call on cellular operators

After much speculation, the minister finally released the long-awaited licensing conditions for the third and fourth cellular operators last Thursday. Overall, there were no surprises other than the need for the additional operators to upgrade their networks to third-generation technology.

The next step will be for the minister to appoint a technical consultant to transform the licensing conditions to concrete licence requirements. We should expect to see these licence conditions published by mid-February 1999.

Here follows BMI-T's preliminary analysis of the licensing conditions:

Very similar to the Vodacom and MTN licence conditions, essential points are:

• 15 year licence period, national licence;
• requiring a once off payment of R100 million payable over the licence period against a determined interest rate; and
• levying an annual income-based fee only payable from the third year of operation.

BMI-T commentary: This was to be expected and is standard practice worldwide. Interestingly, the minister decided against auctioning the two licences, as is the practice in the US. Auctioning these licences would have raised considerably more than R100 million, but it may well have excluded some potential consortia that would not have been able to afford it. Also of interest is that the recommended fee was set at R5 million by the SATRA appointed consultants. Possibly the R200 million (2 x R100 million) can be used by the minister to subsidise the roll-out of services by these new operators to underserviced areas.

The minister proposes to put a moratorium on the issuing of similar licences for a period of five years from date of issue.

BMI-T commentary: Vodacom and MTN did not receive such a moratorium although they did receive a benefit in the form of a sliding scale reduction on their outstanding licence fees which, according to the press release, amounts to some R100 million. The issue of similar licences will have to be clarified to determine what constitutes a similar licence, as this clause will expire around 2004 (if licences are issued in 1999) and it will be about one to two years after Telkom's exclusivity expires.

This moratorium will most likely benefit Vodacom and MTN more than it does the new cellular operators as Vodacom and MTN will remain the dominate operators for at least the five year period. In addition, would a second network operator be allowed to employ wireless technology, such as DECT, that would allow a certain degree of local mobility? Finally, will satellite-based mobile telephony constitute a similar licence?

The new operators will be required to maintain a legitimate and meaningful empowerment shareholding.

BMI-T commentary: Not unsuspected, although a clear and unambiguous definition would need to be given to the words "maintain a legitimate and meaningful".

The licences will require the new operators to upgrade their infrastructure to third-generation technology as early as possible.

BMI-T commentary: Wow! Third-generation - this was unexpected. Third can be defined as universal mobile telecommunications systems (UMTS) also known as IMT-2000 or FPLMTS. What is UMTS? The following diagram shows broadly what UMTS is - it's about deploying a single unifying protocol that provides the ability to integrate different protocols.

UMTS is expected to be partially deployed in 2002/3 with full deployment by 2005. We can then expect to see the new cellular operators upgrade their infrastructures over a similar timetable. Of course the question then is: will the new operators deploy extensive infrastructure knowing that they are to upgrade within two to three years of network roll-out? Or will they seek to rather reach a commercial agreement with the existing operators to allow roaming across the GSM 900 networks?

This requirement to upgrade also indicates that the minister will licence these new operators to use the frequencies required for UMTS. The next question is: will the existing operators, Vodacom and MTN, be licensed to upgrade their infrastructure and thereby access the required frequencies?

Another key issue to be resolved is how long will the grace period be after the commercial launch of the third-generation system in which the operators will be required to upgrade their infrastructure.

Finally, if this condition remains then it is a bold step by the minister in ensuring SA leads Africa in cutting-edge mobile telephony technology!

Infrastructure sharing and roaming will be encouraged in the public interest, where technically feasible.

BMI-T commentary: "In the public interest" will be an interesting issue to follow. The minister can encourage infrastructure sharing or even roaming through many policy and licence conditions. For example, capping the interconnection charges at low rates will make the deployment of a new infrastructure uneconomical. Whether Vodacom and MTN extract some form of concession for across network roaming remains to be seen. To capture the high mobility and business market would require the new operators to provide coverage similar to the existing operators. By encouraging roaming the minister is assisting the new operators in providing a national coverage from the start-up of their networks.

This encouragement fails if the technology to be deployed by a bidder is incompatible with GSM 900 in that roaming is not technically feasible across the two networks.

Universal service principles are to be supported with the key indicators being affordability, price and quality of service.

BMI-T commentary: Not unexpected. The degree to which the licence conditions enforce these universal service obligations will give a good indication of the thinking behind the additional licences. The danger here is that the new operators are overloaded with service obligations or that there is a blurring between Telkom's universal service obligations and that of the new operators.

The only surprise is the technology issue - that of being required to upgrade to third-generation systems. Otherwise, the licence conditions are broad and somewhat vague about what the nuts and bolts are to be!