Competition Commision Report on South Africa

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.