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Built It and They Will Take It For Free

Market Scorecard



International markets have had a tough start to this week. There are increased concerns about the viability of striking a trade truce this year. China has been hitting back against the US for signing the Hong Kong bill. Locally, the telecom companies had a very tough day, MTN was down 6.4%, Vodacom was down 5% and Telkom was down 4.2%. This was due to the Competition Commission's report on data pricing in South Africa.

Yesterday the JSE All-share closed down 0.97%, the S&P 500 closed down 0.86%, and the Nasdaq closed down 1.12%.



Company Corner


Michael's Musings

As many would have seen yesterday, the Competition Commission of South Africa (CCSA) released a report criticising the mobile operators in South African for high data prices. You can read the final report here - Data services market inquiry, and this is what Vodacom and MTN had to say in response to the report - 'Wrong' to blame operators for data prices not falling faster.

The report deals with a number of issues, and has far reaching recommendations. The biggest issue is the overall cost of data, which the CCSA says is on the high end when looking at global data prices and is above the median price when looking at other African countries. The mobile data companies have two objections to that claim, the first is that the price being considered doesn't include all the free bonus data that you get when you buy certain bundles. Meaning the effective price that consumers pay is lower. Maybe if the pricing structure from the data companies was not so complicated, we could compare apple with apples? Have you ever tried to see the cost of data on different networks? It is impossible to know because depending on where you buy the data there is a different price, coupled with the fact that some data expires in one day, other data expires in a month.

The second point that the data companies make is that their costs have to be higher due to the lack of spectrum, and given that they are required to cover the whole of South Africa with coverage. MTN points out that 95% of South Africa has access to a quality 4G network. As you can imagine, have infrastructure in the Karoo, servicing a handful of people is rather costly. CCSA in their report note that the lack of spectrum will contribute to higher costs, they state though that the data companies are overstating the actual costs of a lack of spectrum. In the CCSA report, they show Vodacom's EBITDA margins for South Africa and for the international division of the group. In South Africa, they have margins of 38.9%, where their international operations have EBITDA margins of 31.3%. The argument from CCSA is Vodacom can drop prices further to match the EBITDA margins of their international operations.

In my view, EBITDA margin is the wrong figure to compare the two operating groups. Due to a lack of spectrum, Vodacom and MTN have to spend billions more each year on infrastructure. That increased cost is only shown on the income statement through a higher interest cost due to debt needed to build more towers and higher depreciation and amortisation costs. For this to be a fair comparison CCSA needs to compare the Net profit margin of both business segments, which Vodacom does not break out in their financial statements.

The next issue that CCSA has is the price discrimination on data costs, based on how much data is bought. The less data bought the higher effective price of that data. The CCSA conclusion is that this is discrimination against the poor. The telecom companies again dispute these figures saying that the discrepancy between data costs is not as significant as stated and say that it is standard market practise to charge higher amounts for smaller units. We are all familiar with the concept of bulk buying discounts?

The findings of the report are debatable, and you probably find that the truth lies between what the report found and what the telecom companies are arguing. What is ludicrous though are the recommendations of the report, not to mention the timelines that have been prescribed. My head is still shaking thinking about the proposals, I can't believe that they are in an official report.

There is the headline grabbing number of price reductions of 30% to 50%. How? When looking at the CCSA flawed comparison of EBITDA between territories, the difference is only 20%. What probably blows my mind the most is that the telecom companies will need to give away free data on a daily basis. It is not the job of private enterprise to give things away for free. How about free food from grocery stores and free daily taxi rides? If the government wants to give data away for free, how about paying the telecom companies for the data?

Another recommendation is that MTN and Vodacom have to sell significantly discounted wholesale data to other service providers. Basically saying to MTN and Vodacom, thank you for building a world class network, something that Telkom and Cell C could not do, but now you have to give away access to that network at a discounted price. The goal from the CCSA is to make it easier for the other networks to get customers because they will have a better network. What it means in the long run though, is that Vodacom and MTN have very little incentive to keep their network at a world class level.

There area many other things in the recommendation section, you can read more of them here - Free data for all South Africans in radical regulatory intervention.

It is worth noting that the cost of data has been falling each year. Maybe not as fast as people would like, but it has been falling. It would fall quicker though, if the government gave these companies the spectrum needed to operate at more efficient levels. As a side note, a big cost to run the networks is electricity, and now diesel due to load shedding. Government has played a big part in the high cost of data.

So in summary, data prices need to fall by 30% - 50%, where on top of those massive drops in retail prices, wholesale prices need to drop even more to significantly lower prices. Then on top of that everyone needs to get free data on a daily basis. Huh? Short term that might bring the cost of internet access down but in the long run, this will be bad news for all stakeholders. We will contact Vestact clients directly if we think any action is needed.






Our 10c Worth


One thing, from Paul

For every 100 people in India, there are only three credit cards. A comparable penetration figure for the US is 320. This is good news for Visa, which competes with Mastercard to provide the switching back-end of such cards. There is lots of growth to come.

India's first initial public offering (IPO) of a credit card issuer, SBI Cards and Payment Services is about to hit the market. Only 5% of Indians' consumption per capita takes place through credit cards, but that is growing by 12% annually. The barrier to faster growth is the fact that merchants in smaller centres have been slow to install sales points. This is because three-quarters of retail sales are at mom-and-pop stores, with very low transaction values.

Smartphones are part of the solution, since they can be used to authenticate consumers and merchants alike, in a unified banking and retail system. India's richest man, Mukesh Ambani, has 355 million customers for his 4G mobile network, Jio. Unsurprisingly, the oil-to-telecom tycoon wants to connect 30 million small retailers with common inventory-management, billing and tax platforms as well as low-cost payment terminals.

More on Bloomberg: India's Millennial Credit Card Boom Runs Into Ambani.








Byron's Beats

If you are a Star Wars fan you would already know what The Mandalorian is. If not, you will soon hear about it from a Star Wars fan, I am sure. In short The Mandalorian is spin off series from Star Wars which is airing on Disney +.

This article titled Why The Mandalorian cites Fortnite dev Epic Games in its credits caught my attention.

As you know, Tencent holds a stake (40%) in Epic Games so we have skin in the "game" here. Epic has really cool technology called Unreal which is a toolkit developers use to design games. Well this technology is now being used in film making. The article explains it nicely along with a cool clip showing how it works.

As we demand more and more quality entertainment, technology will play a more important role. I am not surprised to see gaming and film making slowly integrate with each other. Netflix, Disney, Nvidia, Google, Apple, Amazon and Tencent are heavily involved or getting started in content creation. We as investors are happy to hold on for the ride.






Bright's Banter

The one time nifty fifty sensation Xerox, with a market capitalisation of $8.3 billion dollars has been trying to buy HP, a company with a $30 billion market capitalisation. This is more like the tail wagging the dog or a goldfish trying to swallow a 10 foot shark.

What I found interesting in this potential deal is that Xerox is so desperate for the deal that it is willing to go hostile. Maybe Xerox is not goldfish after all, it's just a piranha masquerading as a goldfish. Maybe this piranha could win this battle, one bite at a time!

Xerox plans to go directly to HP shareholders in a proxy fight and the company might win since activist investor Carl Icahn is the shareholder of both companies and makes money on both sides of the deal. This is becoming a lovely case study on reverse mergers and acquisitions for MBA students.




Linkfest, Lap it Up


Here is how political views are shifting in the US. The trend has also been seen in other developed countries and will probably play an increasing role in elections to come.

Infographic: Socialism Increasingly Popular With Young U.S. Adults | Statista You will find more infographics at Statista

Then some humour to end off a rather intense daily news letter - A selection of the 30 most disappointing under 30.






Signing off


Stats SA will release South African GDP figure today. The expectation is for growth of 0.1%, which is not great for reducing employment or for reducing the governments debt bill. The telecom companies are slightly higher this morning, but the JSE All-share is lower. Good news on the current front, the Rand is trading at $/R14.55.

Sent to you by Team Vestact.


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