South Africa Telecommunications Report Q1 2008

A major disconnection of inactive subscribers by market leader Vodacom meant that the South African market, based on reported subscriber figures from the country's operators, actually declined during the third quarter of 2007. Vodacom discounted 2.9mn inactive prepaid accounts from its network, resulting in negative growth for the operator and a drop in its market share to 55%. However, we agree with the operator that the move will give a more accurate picture of the size of the market and indeed, we hope that Vodacom's decision will encourage South Africa's other operators to do the same. Despite the market not growing during the quarter, based on the strong growth that was reported in the first half of the year, we still believe that customer numbers will have hit our 44.8mn target by the end of 2007, pushing penetration up to almost 95%. Moving forward, growth will undoubtedly slow, although there are encouraging signs from Vodacom in particular that demand for 3G and data services is increasing, which bodes well for ARPU growth.

In the fixed-line market, incumbent operator Telkom continues to struggle to maintain its subscriber base in the face of competition from the mobile sector. The total number of access lines in service on its network dropped by 1.2% in the year to September 2007, although increased line rental tariffs and greater demand for broadband, corporate and international calling services meant that total revenues did increase slightly. Disappointingly, South Africa's second licensed national operator Neotel has still not launched nationwide commercial services; at the time of writing, the operator was offering national backbone services to corporate telecoms customers, such as mobile and data services operators. However, local media reports claim that Telkom has been hindering Neotel's ability to offer such services; if true, this would be a worrying development for a market that has yet to feel the benefits of liberalisation and we would expect national regulator ICASA to take a firm line with the incumbent over competition issues.

This quarter sees the unveiling of BMI's new business environment rankings for the African telecoms market. Unsurprisingly, given its mature market, well developed economy and low political risk profile, South Africa scores highly. However, it has been knocked off the top spot by the fast growing Nigerian market, whose massive growth potential is enticing new investors despite some political and economic risks. With mobile penetration at almost 95%, South Africa cannot compete with other sub-Saharan markets in terms of subscriber growth. However, we believe that the country could make itself more attractive by improving its level of regulation and pushing ahead with market liberalisation measures, most notably, reducing Telkom's dominance in the fixed-line sector.