Cell C Strategy Compromises Long Term Growth
BMI View: Cell C's over-reliance on the mobile market for revenue growth makes it the most vulnerable player in South Africa's telecoms market. BMI therefore cautions that while its plans to cut prepaid mobile tariffs by a third will help maintain the rapid subscriptions growth it has experienced since September 2013, the operator may suffer the most over the long term from the declining value of the mobile voice market.
CEO Jose Dos Santos reported impressive subscriptions growth during the six months to March 2014, with net additions of 1.3mn in Q413 and around 3mn in Q114, bringing Cell C's total subscriber base to 16.6mn. This was double total net additions of 2.15mn during the year to September 2013, indicating that Cell C's low value strategy is paying off.
|ARPUs On The Edge Of A Cliff?|
|Monthly Blended ARPU By Operator (ZAR), 2011-2013|
Cell C has also revealed plans to reduce prepaid call tariffs from ZAR0.99 (USD0.10) to ZAR0.66 (USD0.06) per minute beginning June 1. This was a response to MTN and Vodacom's moves to cut their prepaid call tariffs to ZAR0.79 a minute in April 2014. Should Cell C's two larger rivals further lower their prices, this could mark the beginning of a price war in South Africa's mobile market.
Heightened competition has already started taking its toll, as MTN reported record low blended monthly ARPU of ZAR100.5 in Q114, down 11.3% quarter-on-quarter. This is a sharp acceleration in the rate of ARPU decline, given that during the two years to December 2013, MTN's ARPU fell 15.4% and Vodacom's dropped 19.9%.
Although the rapid decline in ARPU will weigh on MTN and Vodacom's revenues, BMI notes that Cell C is the most vulnerable player in South Africa's telecoms market. We have long held the view that operators with strategies to diversify their revenues away from the core mobile voice segment would outperform over the long term and this is becoming increasingly clear in the South African market. MTN and Vodacom have already ramped up investments in their wireline networks, which will enable them to capture growing opportunities in the converged services market, particularly with enterprise solutions and IPTV (See 'Convergence Services On The Horizon As Operators Scale Up Wireline Investments', May 1). Meanwhile, incumbent Telkom, which BMI estimates had less than 3% mobile market share at the end of 2013, has made little progress in developing new converged services offerings. However, it owns by far the largest fixed-line and fibre network in the country, and is therefore still in a good position to diversify its revenues away from core fixed voice and broadband services.
By comparison, Cell C has no significant fixed-line assets and has made little effort to court the enterprise market, meaning it is most exposed to depreciation in value of the consumer mobile market. Dos Santos announced that the operator has already received an equity injection of ZAR1.5bn in 2014 and raised ZAR1.8bn in local debt and USD120mn in foreign debt, which will contribute to investment in increased network coverage and capacity, in order to improve quality of service for its ballooning subscriber base.