As a result of economic slowdown, South African mobile network operators (MNOs) are feeling a distribution margin squeeze and are challenged to maintain profitability while their margins decline.
The pressure of declining average revenue per user is an added concern to take into account for the local operators.
MTN, SA's second biggest MNO, attributes its muted subscriber growth to some "short-term challenges in the distribution channel and lower handset sales".
It notes the challenges MTN is facing are not unique to MTN and mirror what the industry is going through.
According to MTN, the South African market still prefers physical vouchers, or scratch cards, over virtual vouchers which come at a much higher cost to distribute.
Sometimes the quality of the scratch cards that are produced by third-party distributors does not meet the minimum quality standards, resulting in increased call centre enquiries, MTN notes.
It adds that another challenge the traditional retailers are facing is that their market is limited to their areas of supply, compared to virtual retailers that have a broader market that is not constrained by geographical location.
"We are educating our customers about new technologies available," MTN says. "In addition, MTN produces its own airtime vouchers that meet its minimum standards of quality. We have an extended network of depots where we distribute airtime vouchers to traders in order to cater to our customers in the rural and informal markets."
Third operator Cell C says with regards to electronic prepaid distribution, the convenience of virtual vouchers have resulted in reduced need for physical vouchers and the challenges associated to the distribution of physical vouchers.
"Virtual vouchers represent various advantages when compared to physical vouchers," says Karin Fourie, Cell C's executive head for communications. "The ordering process is much faster, as stock can be made available within a few hours, rather than waiting for physical stock to be delivered."
Additionally, Fourie says, from a security point of view, physical vouchers are effectively like cash, whereas virtual vouchers are actually part of an IT system, making them more secure.
Philip Stander, MD of Globetom, points to fraud and theft as the biggest challenges for the physical vouchers.
"Physical distribution requires the wholesaler to keep physical stock and distribute it over sometimes large geographies which can be expensive, time-consuming and unreliable because of logistical obstacles," says Stander.
"The cost of distributing sometimes means it doesn't make financial sense to offer very low denominations of airtime because of the cost of delivering the vouchers. Additionally, physical stock runs out which means retailers need to estimate how much stock they need and hope they don't run out. If they run out, they run the risk of a loss in profits by having to turn subscribers away that can only afford low value vouchers."
For MNOs to stay ahead of market changes, as their margins are being put under pressure, Stander says they require efficient and affordable prepaid distribution channels and should be looking to consolidate their wholesale distribution channels.
Networks are starting to, or should seriously consider consolidating their fragmented physical distribution partners onto a unified electronic platform, and in the process reduce risk and the cost of distribution, he concludes.
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