Third cell licence is on its way

Yes, it's official. The government, through SATRA, will issue the invitation to bid for one cellular licence this Friday. Much clarity has been given to the market in that the government and SATRA jointly announced that they will invite applications to tender for a single cellular licence to be issued this year. Many broad issues were alluded to in their announcement, but very little detail was given at their press briefing.

In this column I will describe these broad issues and highlight interesting challenges facing likely bidders and existing cellular operators.

Technology

The licence requirements will not specify technology. This has been consistent with the message from SATRA over the past few months. By this statement it must be assumed that whatever bid wins will have access to the spectrum required for that particular technology.

Network coverage

The licence conditions will call for a roll-out of the new network that meets the following conditions:

• Within two years: 30% population coverage and 4% geographic coverage

• Within four years: 40% population coverage and 7% geographic coverage

• Within six years: 50% population coverage and 10% geographic coverage

By comparison, Vodacom and MTN achieved 70% to 80% population coverage within five years. Some key questions that need answering are:

• Does coverage refer to physical network or does it refer to service provisioning?

• Does roaming across other networks contribute towards population and geographic coverage?

Roaming

The licence conditions will encourage roaming across MTN's and Vodacom's networks. Any roaming would require some form of exchange of value between the existing operators and the new entrant. So how can roaming be encouraged? Here are some suggestions:

• SATRA provides MTN and Vodacom with access to the 1800MHz band in exchange for roaming rights for the additional operator (perhaps for a limited period?).

• SATRA provides the framework wherein roam rights can be negotiated between the existing and new cellular operators.

• SATRA mandates roaming based on the argument that MTN roamed across the Vodacom network within the first few months of the startup of both networks as Vodacom had a six-month head start in network roll-out.

Roaming will allow the new operator to provide a virtual network from date of licencing as a third cellular operator. Although this would accelerate the market entry of the additional operator, there is the potential downside, as the subscriber to the new network operator will not experience the benefits of using an 1800MHz-based network. For example, brand building based on network attributes under this scenario would be difficult, as the subscriber would not experience these benefits.

Interconnect agreements and infrastructure leasing

An interconnect framework and infrastructure leasing was alluded to during the press briefing but no details were provided. The interconnect agreement and charges are pivotal to any business plan, especially if roaming is encouraged by SATRA. The strength and ability of a regulator to set the interconnection framework for a market where a monopoly or a duopoly exists is critical to the success of a new entrant to that market.

The interconnect framework needs to identify the process wherein negotiations take place, provide a timeframe for negotiations, provide the dispute process and identify the likely outcomes if the regulation arbitration is sought.

The following timetable was provided at the briefing:

• Tender document to be released on the 26 February.

• Tenderers may contact SATRA for clarification or tender queries up until the 28 May.

• Public hearings held from 16 to 26 June.

• The list of bidders will be published on 18 July.

• Public commentary from the 18 to 31 July.

This timeframe gives bidders three months to prepare bids for submission, assuming that after the 28 May, SATRA will provide no more information or clarification on the tender documents. A detailed timeframe will be presented in the tender documents.

Faithful Dialtone readers would have seen our article last week where we indicated that SATRA may have backtracked from its firm statement that two licences will be issued this year. SATRA has indicated that it will evaluate the economic viability of a fourth cellular licence in July 2001.

We believe that the operators should employ the following strategies:

• Increase in package offering: Both the existing and additional operator will seek to further segment the cellular market to better target unique segments with the right value proposition. A good indication of this trend is the proliferation of cellular packages in the UK market. The number of cellular packages grew from two (two operators) to over 25 (four operators) by 1998.

• Call stimulation strategies: All operators will develop their own call stimulation strategies to encourage behaviour change among cellular users. This strategy will include marketing messages that will seek to change the perception that cellular usage is an expensive form of communication.

• Customer retention: Network operators will focus strongly on retaining their high-value customers. Overall, these customers will (should) strongly benefit from the development of value propositions aimed at retaining their loyalty. Significant savings can be made by operators in reducing churn from their networks.

• Customer acquisition: New customer acquisition is more expensive than the cost of retaining existing customers. As the value of new cellular subscribers decreases and as the market matures, network operators will develop more sophisticated segmentation models to develop cost-effective value propositions aimed at the different segments.

BMI-TechKnowledge is currently researching the opportunities that exist for a third/fourth cellular operator in SA and we 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.