The cellular licence plot thickens

You will recall that I previously described three possible scenarios for the outcome of the additional cellular licences being issued by SATRA in SA. Well, last Friday saw KPMG publicly state that it has determined that the South African cellular market can only support at most one additional licence.

We believe the SA cellular market exhibits elements of approaching maturity and strong growth.

It certainly has been a fascinating flow of events, with SATRA oscillating between one and two licences to be issued. Up until the beginning of February 1999, SATRA referred to two licences but at the start of February two small words crept into its talk. SATRA began to talk about issuing "up to" two licences. This small change in sentence construction has a major impact upon the consortia bidding for the licences.

While all these delays have been going on the cellular market has not stood still. We estimate that by the end of December 1998, 2.45 million net subscribers were active on the two networks and 1 million new subscribers were added to the networks during 1998.

We believe the SA cellular market exhibits elements of approaching maturity and strong growth. But this is a contradiction in words - how can the same market exhibit different growth characteristics? It can if you have two fundamentally different products. Enter the contract and prepaid subscribers.

Our calculations show that the net annual additions of contract subscribers have peaked and 1998 saw a drop in net contract subscriber additions. Prepaid has grown from strength to strength in new additions per annum. 1998 saw 700 000 prepaid subscribers added to the networks with large growth occurring over December.

Why has prepaid taken off? The prepaid market is a heterogeneous mixture of different market segments and this market has elements of informal and formal components. There is a large "unbanked" component of our society who never had a formal relationship with any of the financial institutions. These people, who actually can afford contracts, can only access the cellular market through prepaid where no credit checks are required. We also see families who can qualify for a contract, opt for prepaid as it provides an ideal budgeting mechanism. Prepaid is also starting to be adopted by small to medium sized companies as it offers similar ideal budgeting mechanisms.

Here are some of the issues that additional operators will need to deal with.

Firstly, any new operator(s) will only start commercial operations in 2000 as it is unlikely that sufficient infrastructure will be deployed in 1999. We are still to see the invitation to bid being published!

Secondly, the average revenue per subscriber drops as the cellular market grows. This trend is not unique to SA as it is seen in other cellular markets. The implications are that the average value of a new cellular subscriber is lower than that of an existing subscriber, so a new operator needs to win existing customers brought onto the market through churn while winning new subscribers.

Thirdly, the value proposition. The needs of cellular subscribers have evolved as the cellular market has developed. For example, today there is very good geographic coverage. We do not pay additional fees for this and every subscriber on the network can roam around the network at no extra cost. We therefore take the geographic coverage for granted. So how does a new operator deal with this issue?

There are three possible strategies that can be followed when dealing with geographic coverage. The operator can start with regional coverage and roll-out its network, or it can conclude some sort of network roaming agreement with an existing operator, or it can only start commercial operations once it has rolled out the network. Each of these strategies has positive and negative implications.

But is geographic coverage an issue? Preliminary research conducted by our company (Third/Fourth Cellular Opportunities Report) shows that consumers would expect some sort of tariff discount for inferior geographic coverage.

We are currently researching the opportunities that exist for a third/fourth cellular operator in SA and will publish our findings by the end of March 1999. This report will draw upon 2 500 business and consumer interviews supported with 100 industry interviews. Many of the key issues regarding additional cellular licences are being researched to understand how the consumer will behave under different cellular value propositions.

This is the only report of its kind in SA. Every serious bidder, infrastructure provider, international operator and banker will find answers to crucial questions regarding how the consumer will behave in a market where there are three to four cellular operators. Call us on (011) 803-6412 or send me an e-mail for further details about this ground-breaking cellular report.