Cell C declares a price war

Johannesburg, 30 Nov 2001

Cell C is undercutting Vodacom and MTN with the pricing for its prepaid services, not because it wants to, but because it is the only way to win any market share in the prepaid market.

Speaking at the Boom Room event in Johannesburg last night, Cell C`s chief strategist Paul Doany said a price war was one of the changes the company had to make to its business plan after a two-year delay in winning its licence.

"We didn`t want a price war," he said. "We needed to undercut the incumbents. We don`t undercut them, we get no market share."

This belief is based on consumer research which showed in no uncertain terms that the market is sensitive to price.

"Every bit of research we did, every question we asked came back with 'if it is cheaper we will consider coming`," he said.

But Cell C did not want to undercut prices too severely, and still plans to compete with the incumbents mostly on the basis of a simplified offering.

Originally the company believed Vodacom would not respond to its entry for three months but would then lash out suddenly after that, having lost a significant number of customers. It expected MTN to concentrate on data services, as it has done.

Cell C is unlikely to go the same route. Doany said research has shown the total market for mobile data in SA to number only around 600 000 individuals, which does not excite its interest when it is looking at having around a million active voice customers by the end of 2002.

To date, neither incumbent has come up with offers to counter the newcomer, although MTN promised a "considered response".

This may prove Doany`s assumption that MTN and Vodacom would be happy to lose around a million customers before they get uncomfortable.

"I think personally they are willing to lose that much [one million] before they start fighting on price."

And if they start fighting back in the price war "they will fall into a trap," he promised.

Cell C also believes there is space for it in the post-paid or contract market, despite the incumbents` difficulties in signing up new customers. Doany said that in the last six to eight months, 40% of individuals with contracts up for renewal refused to sign on for another 24 months, saying they would wait to see what Cell C could offer.

"This doesn`t mean they are potential customers, but it means we have a market to tap into," he said.

Long-term roaming

A price war may be the most evident change in Cell C`s business plan after a two-year licence delay, during which time around seven million new cellular subscribers were connected, but it is not the most important, Doany believes.

"The first change of strategy we decided on was to go for a long-term roaming agreement."

According to the company`s research, even 30% discounts on current prices would not attract users if network coverage proved inferior to that of the incumbents. This meant either another delay for network roll-out or a roaming agreement.

A 15-year agreement with Vodacom was promptly concluded.

Doany admits to being surprised that MTN had not snapped up the deal, saying its perceived value would be good for a listed company`s share price. But MTN refused to give up the advantage of its coverage.

"If I were MTN I would have signed on Cell C`s terms," he said.

The agreement also minimises the financial risk.

"Having a 15-year roaming agreement in place means our cost structure is absolutely fixed," he said.

However, the roll-out of Cell C`s own network continues as planned, and Doany said the plan is to have only 40% of traffic using the Vodacom network by March next year.