IF SOUTH Africa’s two major mobile telecoms players have been sucked unwillingly into a price war sparked by upstart rival Cell C, investors weighing up the possible outcome would be wrong to think Vodacom and MTN had the same stakes in that war.
MTN’s bigger emerging-market footprint means its investment potential does not depend on what happens within SA’s borders.
“Ultimately, MTN plays in many more markets in Africa that have lower cellphone penetration than South Africa,” said Kaplan Equity Analysts’ Irnest Kaplan.
“On that basis, at group level MTN would seem to have better growth prospects — albeit not quite as good as they were three to five years ago. Having said that, Vodacom has done remarkably well over recent years.”
What protects MTN is that the mature South African market makes up a relatively small part of its revenue. Not so with Vodacom.
“Everyone here has a cellphone, and Vodacom has had to look at tactics to sell more data, but pricing there is already quite competitive. It’s very difficult to win over subscribers, and Vodacom depends very heavily on South Africa,” Kaplan said.
Both cellular giants are well run and offer growing dividends, but MTN could offer greater capital gain.
“One tends to grab market share with amazing new prices, but there comes a point where the business is not as profitable and shareholders are not as happy. Anyone who overly criticises the cellphone companies for charging too much should remember that costs per minute have come down by about 10% to 15% compounded.”
This means that contrary to public perception, cellphone companies are not charging sky-high prices.
It also helps the two giants that the third player, Cell C, lacks economies of scale.
Said Kaplan: “I don’t see it being a major threat to the other two. It stimulated the market radically, and they had momentum to profitability, but the way the market is, in order to grow dramatically, it will have to win over subscribers through price or great service. I think it’s perhaps naive to believe Cell C can service millions of subscribers in a much better way.”
MTN and Vodacom’s network quality is similar, with Vodacom perhaps stronger on data. Cell C will have to improve its network quality to get people to switch for that reason alone.
So it comes down to price, then?
“They’ve tried that, and now the other two have responded. In the next five years, Cell C cannot win that battle -it doesn’t have the network, it doesn’t have the size. I can’t see it outdoing MTN and Vodacom in a sustained lower-pricing model, and I’m not sure how it can take control of its own destiny,” said Kaplan.
MTN seems to offer the best diversified bet for investors, but this has risks too, thanks to its sprawling emerging-market footprint.
“MTN earns in a range of currencies and reports in rands. It has exposure to some currencies that could weaken — based on local, unpredictable and uncontrollable factors for MTN — suddenly and in a short space of time.”
This means that shifting global sentiment can explain otherwise inexplicable dips in MTN’s share price.
“By the same token, Africa is one of the continents where most cellphone growth will come from … if global investors look to get involved in it, the company with the best prospects and the most licences in Africa is MTN. On a well-regulated exchange like the JSE, it’s a no-brainer.
“Cellphones are a good defensive investment. People don’t buy these products and then stop buying them.”
Spiwe Chireka, an analyst at the Industrial Development Corporation’s Africa division, said Vodacom’s prospects had been helped by its deal to buy Neotel — which will give it new avenues for growth, as well as a better data offering.
“South Africa may be saturated and (have) growth in single digits, but what will pay off for Vodacom — which earns 90% from South Africa — is those two projects,” she said.
“For MTN, its single-digit growth in South Africa is slowing. Its subscriber numbers are falling, and it was hardest hit by Cell C’s initial disruption, losing more subscribers than Vodacom.
“MTN probably took a wait-and-see approach, which has come back to bite them. But (MTN’s) latest price cut shows it’s finally responding to what the competition is doing.”
One issue facing operators is the cut in mobile termination rates, which came into effect last month.
These cuts, implemented by Icasa, are intended to boost competition. But it will mean small players will be paid more for calls placed to their network while larger operators will get less.
Vodacom and MTN took Icasa to court over this, and the messy legal process continues.
Chireka said if “the final rate ends up being any higher, that could cause concern for Cell C’s profitability.
“The rates will be key — if the rates rise, we might see Cell C combine with 8ta, or some other unexpected partnerships or mergers. Cell C might examine its future as a stand-alone.”
• This article was first published in Sunday Times: Business Times