Vodacom has faced one of its “toughest” years. Cuts in mobile termination rates (MTRs) by 50%, intensifying competition, increasing pressures on consumer spending, regulatory challenges, cost pressures and a difficult macro environment made for a strenuous first half of the year. By the fourth quarter, Vodacom appeared to be gaining momentum. Against this backdrop, CEO Shameel Aziz Joosub says he’s pleased with the group’s performance.
“We saw significant price crashes in all our markets and we had to innovate and adjust our approach to maintain market leadership,” says Joosub. The rand volatility and its devaluation against key currencies impacted expenses in South Africa and international operations, according to Chief Financial Officer Ivan Dittrich. Recent tariff increases were a last resort as prices weren’t increased in over 10 years, says Joosub.
Strong investment and cost focus, supported by strong data growth is helping Vodacom remain competitive despite market challenges.
MTR cuts had the most significant impact, affecting group service revenue by R2bn. Joosub adds that the only positive outcome is that the worst of this adjustment is over. The group can now focus on differentiating and growing network reach and capacity through investment and enabling access to low-cost products like smartphones and tablets.
Data services made progress. Active data customers increased to 26.5m and smart data devices in the network grew to 11.6m. Data revenue now contributes more than a quarter of group service revenue.
New services like M-pesa, financial services, content and Machine to Machine (M2M) are growth pillars for the group. There are 1.8m M2M customers. In South Africa there are 1m registered M-pesa customers, of those 76000 are active users. Usage was incentivised through airtime. “We have to actively increase our distribution and create an ecosystem to ensure customers can transact with the M-pesa platform,” says Joosub.
M-pesa in progress
Internationally M-pesa is gaining traction, users increased by a third to 8m with revenue growth at 27.5%. About R8bn is moved monthly through M-pesa. Tanzania’s M-pawa, a savings and loans product launched in September in partnership with the Commercial Bank of Africa has 1.8m active users. International money transfer services are key in getting sophisticated financial service products to market and achieving scale in the number of M-pesa users, says Joosub.
In South Africa, there have been challenges with M-pesa systems and a few issues are being resolved which is why a lot of work has been focussed below the line, says Joosub. “We are not driving it too hard. We need to make sure everything is 100% where we want it to be.” Until the product is working effectively, a campaign to drive usage will be launched.
International operations delivered a “solid performance”, according to Joosub, reducing dependency on South African operations. However growth was dampened by intense pricing competition in Tanzania and the lack of adherence to pricing regulations by competitors in the DRC. Active customers increased to 29.5m and active data customers grew to 9.9m. Data revenue growth is at 32.9%.
“Almost half of our active customers are coming from operations outside South Africa,” says Joosub. International market revenue accounts for 30% of network investment. Data uptake is further driven by low-cost devices being introduced in markets. The 50% growth in 3G sites resulted in a 185% growth in data traffic.
Data is going to be big in the next couple of years.
The expansion strategy involves investing properly in existing markets to have pure market and network leadership and then pursuing growth opportunities. “We make sure in every market we have clear network leadership. That for us is paramount in our DNA,” says Joosub.
There are plans to reduce reliance on traditional voice services and to diversify revenue streams. Data is targeted to contribute 40% to group service revenue.
“Data is going to be big in the next couple of years,” says Joosub. “In Europe they’re saying that the average person will have 8 connected devices by 2020.” This means in South Africa we will have more than 200m connections. More investment in data is on the cards as people are consuming more data due to increasing connection speeds. The next step is to control fibre and extending it to whole businesses.
Neotel on ice
It’s been a year since the deal with Neotel was signed. The transaction has been with authorities for approval. Joosub says it is disappointing that the approval has been delayed for so long. “Every day of delay is a day lost in connecting South Africa,” he says. The restriction to build fibre has a systematic impact on South Africa, with a number of houses and offices still not connected, he says.
Without Neotel in proper hands, there is a risk that the goals won’t be achieved.
There are no plans to back out of the deal and the group does not expect any obligations on the deal as there are a “number of positives” that can flow from it. “It speaks strongly to government’s goals in terms of what they want to achieve for 2020 … Without Neotel in proper hands, there is a risk that the goals won’t be achieved.”
By building their own fibre, it will also help reduce cost pressures. The cost of fibre build versus the cost of taking it from Telkom is one tenth. “If we build our own, 80% of sites will have transmission of fibre,” says Joosub.
The Neotel deal is a crucial growth opportunity for Vodacom, making it Telkom’s main competitor. Vodacom will be able to extend its services, increasing the capabilities of entities by growing its data footprint. As for resources lost in the deal, Joosub says the lawyers’ fees and time investments of people internally are immaterial in the greater scheme of things.