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Wed 2 Jul 2008 04:00 AM

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Tapping potential

South Africa's telecoms sector is entering an interesting phase as it begins to feel its way in a potentially progressive and liberalised regulatory environment.

South Africa's telecoms sector is entering an interesting phase as it begins to feel its way in a potentially progressive and liberalised regulatory environment.

South Africa's telecommunications market has seen massive growth in the last few years and is by far the most mature sector on the African continent, explains Lindsey McDonald an ICT industry analyst, Frost & Sullivan.

A bird's eye view of the sector exhibits strong governmental and regulatory policies that exist within the sector, encouraging the growth and uptake of telecommunications in the region, especially in historically under serviced areas, she explains.

Both Vodacom and MTN have knowledgeable experience in niche high end and vast low end markets giving them a competitive advantage against new market entrants. - Lindsey McDonald

In recent years, policy regulations within the sector have made way for a more liberalised telecommunications sector.

The introduction of the Electronic Communications Act (ECA) which has replaced the defunct Telkom friendly Telecommunications Act of 1996 is set to change the sector by rolling out more technology neutral converged services based licences to bidding communication companies, according to Denis Smit, MD of BMI-Techknowledge.

The ECA legislation potentially encourages a service based, level playing field among telecoms players, paving the way for greater competition, as opposed to a vertically based market that has existed in the past.

The Act has started the ball rolling in creating a more liberalised playing field, according to McDonald.

Although the regulatory landscape has started to open up the market, much of the policy implementation is slow, which is bottle necking the industry, says Andre Wills, MD Africa Analysis.

Sector overview

In the fixed line sector, the promulgation of the ECA led to the licencing of a second national operator, Neotel which offers advanced voice and data services. The fixed line sector has been dominated by the incumbent Telkom.

The creation of a second national operator was inevitable after the incumbent Telkom had been criticised for its high interconnection fees which have inhibited economic growth through local and foreign investment, as well as poor provision of basic communication in the rural areas.

The historical lack of competition in the fixed line arena has created a poor fixed line teledensity of just 4.8 million fixed lines among a population of 48 million, according research done by market intelligence group BMI-Techknowledge.

Market expert Stephen Dolk, of NUS consulting says that the latency by the regulator to licence the SNO regulator has tripped up potential growth within the sector.

Neotel's entry into the market is expected to bring a boost to the fixed line sector, committing a US$ 1.52 billion boost into network infrastructure over the next ten years. Local media reports that Neotel aims to take around 15% of Telkom's fixed-line revenue in the first few years of operation.

South Africa's mobile telecommunications sector on the other hand is fairly well established and like most African mobile telecom markets, the country has shown strong growth over the past few years. The ratio of mobile to fixed connections is 7:1.

At the end of 2007, mobile subscriptions stood at around 40 million people in a population of 48 million. According to research at BMI-Techknowledge, the country has yet to reach saturation point: penetration reached 93% in 2007 and will only just pass the 100% mark at the end of 2008.

Forecasts predict 58 million subscribers by 2012 - a figure that will represent 114% penetration.

The mobile sector consists of four players: Vodacom and MTN who have been operational for over 15 years, and Cell C and Virgin Mobile South Africa (VMSA) which entered the market more recently.

South Africa media reports reveal the last two mobile entrants have struggled to gain a substantial market share against pan African rivals Vodacom and MTN.

McDonald says that both Vodacom and MTN have knowledgeable experience in niche high end and vast low end markets giving them a competitive advantage against new market entrants.

However VSMA has given itself a five year time period to gain around a 10% share through its MVNO partnership with Cell C.

Middle Eastern based mobile operator Zain has expressed an interest in entering the South African market which would create an interesting challenge for MTN and Vodacom on their home territory.

The converging nature of the telecom landscape has given mobile operators the chance to successfully provide wireless broadband services to offer an alternative to the ADSL service provided by Telkom.

The mobile coverage by Vodacom and MTN is practically countrywide creating voice communication and in some instances data services to many under serviced rural areas where fixed line (ADSL) infrastructure is lacking.

Three cellular operators have secured enhanced GSM licences (which are formally permitting them to offer dual-band GSM 900/1800 services.)

Although Telkom has more ADSL subscribers at present, cellular 3G/ HDSPA subscribers are set to overtake this number this year, according to BMI-Techknowledge analysts.Data in the form of GPRS, EDGE, 3G and HDSPA has become very popular on cellular networks due to the mobility and affordability of the services in both the top end and low end of the market.

Broadband in the form of ADSL and 3G/ HDSPA over telecommunication networks are expected to exceed 2 million subscribers by 2010, according to research done by BMI-Techknowledge. Furthermore, Gartner estimates that more than half of all 3G wireless subscribers from the African continent are located in South Africa.

The SA broadband sector, both fixed and mobile, is set for further growth as the liberalised communications market matures and existing players gain access to international bandwidth from a choice of several undersea cables, explains William Hahn, principal analyst, Gartner.

"At present, however, interconnection and facilities leasing inhibit sustained growth within the sector." SA operators gain access to international capacity via SAT-3 which Telkom has monopolistic rights over. The cost is very high and bottle necking the industry.

Three undersea cables are currently being built on "open access" models and will swamp SAT-3's capacity of by about 30 times, says Hahn. They are expected to be operational by 2010, in time for the football World Cup.

On the eastern side of the African continent, meanwhile, the Seacom cable is being deployed as a purely private venture, whilst on the western side of Africa the African West Coast cable is being operated by government controlled Infarco.

The other east coast cable system known as EASSy is being built on a hybrid model of ownership.

The coming of age submarine fibre optic cables will no doubt change the industry, explains Hahn. "These cables are long time needed break for the industry, seeing as the country, and the continent it leads, has been literally starving for capacity for so long.

Much of SAs liberalisation process and growth with regards to unified licencing reforms depends on the regulator ICASA. The regulator has also been criticised by many telecom players for slowing down the liberalisation process.

South Africa's regulator, although independent, has been accused of receiving directives from the Department of Communication under the government.

Competitive push

A key turning point within the sector has been the promulgation of ECA as it has warranted the entry of another fixed line operator, a positive factor in the development of the South African telecoms sector, explains Frost & Sullivan's Lindsey McDonald.

The South African Parliamentary Portfolio Committee on Communication recently stated plans for a fourth mobile operating licence as well as fixed line operating license to be made available at the end of 2009.

"More players means a boost in competitive market politics within the entire SA ICT sector as each operator introduces more services under a converged licence."

The provision of technology converged licences has been a key trend in the sector, explains McDonald. The introduction of more market players in a converged regulatory environment has already begun to see a series of better pricing and service offerings by various players within the market, in a bid keep revenues and subscriber numbers up.

Neotel's first broadband services have significantly undercut all current broadband providers according to recent reports.

Smit adds that SAs 3G services are now one of the cheapest in the world, which is an interesting prospect for the market thanks to a competitive mobile market and converged licence strategy.

Competition side effects

An interesting side effect of a potentially more competitive market and liberal licencing regime is the reinvention of many of the SA communication companies.

South Africa's telecom consolidation and acquisition phenomenon is prevalent of late in the sector - a global trend in the age of converged telecoms, explains Hahn. "Component operators are merging and buying each other in order to build a synergy based portfolio," he says.

South Africa's telecommunication operators and other communication entities are high demand in the wake of a more unified service licencing regime.

But an issue that is stalling the liberalisation of the market by creating more market players is the licencing conversion process by ICASA.

Indeed, one of the legislative stipulations of the ECA is the provision of technology neutral licences to communication players including Value Added Network Services (VANS) operators, explains David Meintjes, chairman of Connection Telecom.The licences, known as the Individual Electronic Communications Network Service (I-ECNS) licences, will allow these players to legally self provide, or build and operate their own networks.

At present, however, the sector is awaiting a licence conversion process of all the licences issued under the Telecommunications Act to those viable under the new ECA. There are 13,000 of them, Meintjes explains.

Communication operators that are guaranteed I-ECNS are Telkom, Neotel, MTN, Vodacom and Cell C. VANS that are in the front running for I-ECNS are and other communication providers MWeb, Global Web Intact, Vox Telecom, Internet Solutions and Verizon.

"ICASA has been unable to complete the conversion process as yet and will probably exercise a six-month extension to finish the process," says Meintjes.

In the interim, the slow licencing process is causing speculation within the market and inhibiting communication providers from fully committing themselves to the market that needs strength.

"In order to get the best competitive and affordable offering within the market, the sector needs licencing clarity," says Andre Wills, director, African Analysis.

Some analysts feel that the roll out of networks by VANS will not affect the competitive landscape immediately but will start the open market ball rolling.

Broadband prospects

A positive outcome of the I-ECNS debacle will work well with the presence of the undersea fibre optic cables. Communication and network providers will be able to connect their terrestrial networks with promised affordable international bandwidth, says Wills.

These cables will create opportunities that can lower costs for all players and allow more consumers to get basic service, as well as high-end users to receive more sophisticated offers.

ECNS licence holders Telkom, Neotel, Vodacom and MTN are currently in the process of rolling out local fibre optic metropolitan frameworks with the plans to tap into the undersea cables.

Hahn adds that although submarine cable will create opportunities, it needs to be coupled with competitive licencing that allows for local South African operators to build there own networks.

"Submarine cable will not be a panacea: there also have to be commensurate build-out in the terrestrial fibre segment and the access sector is never easy, or cheap."

As the opportunity to roll out terrestrial networks comes closer through the regulation of I-ECNS; telecom operators, VANS and other communication operators are vying for WiMAX licences which are currently being held in short supply by the regulator.

At present there are few commercial WiMAX licences in the South African market with the regulator stating that it will issue six more licences in the sought after 2.6 GHz and 3.5 GHz band.

At present, ICASA is currently having beauty contest with regards to issuing more licences. The stipulations emphasise that bidders for the licences must have a 51% black ownership in order to procure them. This ruling has been controversial.

The forecast for a SA wireless environment therefore relies on the issuing of I-ECNS to roll out local networks, then another green light from the regulator to own a WiMAX licence.

So, although the overall sector shows considerable growth and future potential, it seems the industry's future and market dynamics are reliant on the efficient implementation of the regulatory policies by ICASA.

What one observes now, is an industry with huge potential and advantage, at a cross roads, says Wills.

Role of the ECA• Defines new categories of licences;

• Provides for interconnection between licensees;

• Provides for a radio frequency plan, a numbering plan to enable number portability, and carrier pre-selection;

• Specifies type approval and technical standards for communications equipment;

• Provides for the Universal Service Agency and Universal Service Fund to continue to bring services to historically disadvantaged people and remote locations.

The ECA has repealed the defunct Telecommunications Act 2006 allowing for:

• The partial privatisation of incumbent operator Telkom SA Limited;

• The creation of a new regulatory authority;

• The introduction of a SNO to compete with Telkom.

Telkom's monopoly on certain services were guaranteed for a minimum five-year period (to March 2002) to enable the operator to modernise and expand its network without sacrificing financial resources to compete with other companies.

However, without the necessary Presidential approval in place for the new Act, the older legislation is still believed to hold sway over the sector.

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