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Solving South Africa’s Telecoms Industry’s Structural Issues

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JEREMY MAGGS: A warm welcome to FixSA. This is the Moneyweb podcast where we delve into the solutions for South Africa’s most pressing issues. Today, we’re zeroing in on the telecommunications industry and how it can tackle various structural challenges that are well-documented but continue to hold our nation back.

What am I referring to? It’s often the inadequate access to affordable data, inconsistent connectivity—especially in rural areas—and the consequent obstacles to education, entrepreneurship, and financial inclusion.

Joining me today is Jorge Mendes, CEO of Cell C, a pivotal player in South Africa’s telecom sector. Jorge, thank you for joining us. Welcome to FixSA! Let’s jump right in: what do you regard as the most significant challenge currently facing the telecommunications sector in our country?

JORGE MENDES: Thank you for having me, Jeremy. There are numerous challenges, but the one I hope is behind us is electricity, specifically load shedding. This has had a profound impact on our country and particularly on our industry.

I’m optimistic that we are moving on from that issue as substantial investments are being made into energy resilience, which is crucial to keeping communications operational. This doesn’t necessarily create revenue; it merely ensures that everything remains functional—billions have been invested in this. So I believe energy resilience has been our biggest hurdle.

Currently, the industry faces market saturation and low returns on capital expenditure, prompting a shift towards models like active sharing of infrastructure.

Having multiple base stations side by side, each with separate generators, batteries, and connections no longer makes economic sense.

Thus, I anticipate a significant increase in collaborative infrastructure sharing, and potentially some consolidation. In South Africa, this seems like the right direction to pursue. This would lower operation costs while allowing for enhanced infrastructure revenue and high-quality technology services, thus expanding 4G and 5G coverage to rural and underserved areas.

JEREMY MAGGS: Jorge, let’s delve into the challenges you highlighted. Starting with load shedding, I’m curious about how severe the impact was and what measures you’ve put in place to mitigate this risk and adapt operations.

JORGE MENDES: Indeed. Base stations require batteries that must sustain operations for a specific duration. If load shedding lasts beyond two hours, you need to recharge the batteries when power returns. Thus, we have had to enhance the number of batteries per base station. Major operators typically manage 14,000 to 15,000 base stations, each requiring several batteries.

Investment in batteries has been significant—easily in the R2-3 billion range annually over the last couple of years just to maintain operational communications.

JEREMY MAGGS: The other topic is infrastructure collaboration, which serves as a broader metaphor for the necessary fixes across South Africa. How have you successfully navigated this in philosophical, strategic, and practical terms?

JORGE MENDES: We have approached this pragmatically. At Cell C, we have faced serious challenges over the years. Launched 23 years ago, we were once a strong consumer champion, but we encountered difficulties that required recapitalization, with R44 billion written off and two major recapitalization efforts.

Read/listen:
Blue Label Telecoms seals Cell C restructuring deal
Transfer of Cell C mobile licence to Blue Label hits snags
Tech troubles: Can Cell C and MultiChoice survive?

We realized that building a high-quality network comparable to the leading operators would require around R35-40 billion in infrastructure to be competitive. Furthermore, we estimated needing about R10 billion annually to keep pace with the market.

Consequently, we struck deals with the top two players for a roaming arrangement to access their technology services. We maintain our core operations, billing systems, and spectrum, but our radio access network leverages MTN and Vodacom’s infrastructure to provide the coverage we need.

This setup allows us to gain world-class coverage while generating considerable revenue for our partners, who can reinvest in their infrastructure.

I believe this collaborative model may emerge as a global standard where competing market players in saturated environments opt for efficiency over redundant infrastructure.

JEREMY MAGGS: Jorge, let’s delve into the challenges you highlighted. Starting with load shedding, I’m curious about how severe the impact was and what measures you’ve put in place to mitigate this risk and adapt operations.

JORGE MENDES: Indeed. Base stations require batteries that must sustain operations for a specific duration. If load shedding lasts beyond two hours, you need to recharge the batteries when power returns. Thus, we have had to enhance the number of batteries per base station. Major operators typically manage 14,000 to 15,000 base stations, each requiring several batteries.

Investment in batteries has been significant—easily in the R2-3 billion range annually over the last couple of years just to maintain operational communications.

JEREMY MAGGS: That bakery analogy resonates well. Moving on, the pressing issue in South Africa’s telecom landscape is affordable data, which you recognize as essential for reducing economic inequality. Where do you stand in this dialogue, and do you believe telecom providers are doing enough?

JORGE MENDES: Significant effort has been put into competitive pricing strategies across all network operators. While I can’t speak for everyone, I can attest that prices have become more competitive due to various influences, including regulatory pressure from the Competition Commission.

There is not a single network operator that is unwilling to lower prices.

The issue boils down to the costs associated with producing services amidst ongoing infrastructure challenges.

Read:
‘Data prices must fall!’ – Competition Commission [Dec 2019]
High data prices? Don’t blame Vodacom and MTN [Jun 2020]
Data prices favour the wealthy, penalise the poor [Aug 2023]

Earlier we touched on energy investments; spending R2.5 billion on infrastructure with no financial return to simply maintain operations is a challenging scenario.

Yet, operational costs generally rise by about 3%-5% annually due to expenses like diesel.

Despite that, we’ve made significant strides in reducing prices. At Cell C, we are willing to accept slightly lower margins to ensure sustainable partnerships that allow both sides to thrive. This has been our philosophy since I assumed leadership on July 3rd last year, and we’ll continue to pursue better pricing for our customers.

Observers can also expect to see a rise in personalized pricing.

Engaging customers via various platforms like USSD or apps results in significantly better rates than standard pricing—creating a more tailored experience.

JEREMY MAGGS: Finding that balance between profitability and affordability must be challenging for you.

JORGE MENDES: Indeed.

A mobile network is inherently contested, requiring infrastructure built to accommodate peak usage.

During COVID, with shifts in user behavior, we faced the need to rapidly increase capacity in residential areas compared to commercial spaces, which necessitates ongoing adjustments.

The same logic applies to our product offerings. If we market large data bundles, they must be supported by the network capacity; otherwise, we risk underdelivering.

Offering vast data allowances at low prices is appealing, but if the network can’t keep up, the value diminishes significantly.

We must ensure that our products not only promise high value but also deliver usability, maintaining a delicate balance.

Furthermore, product personalization based on duration has gained traction—customers increasingly opt for time-limited plans for voice, data, and social media bundles, which is proving successful.

JEREMY MAGGS: Alongside data affordability, there’s the urban-rural divide in telecom infrastructure. What systemic barriers exist that limit your, and others’ ability, to deploy more infrastructure in underserved regions? This is crucial for the broader fix.

JORGE MENDES: A core challenge lies in the infrastructure needed to connect these areas; many lack power and transmission options. Building connections often necessitates establishing multiple base stations that can communicate with each other, ultimately limiting progress.

The cost of connecting far-flung communities is significant and complicates logistics.

This is why we appreciate innovations like Starlink and SpaceX. If their claims hold true, satellite connectivity could provide a more economical solution in these locations. We’re open to exploring such avenues.

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Read: ‘Starlinking’ South Africa through unconventional means?

JEREMY MAGGS: But progress seems slow.

JORGE MENDES: It’s a gradual process. I am seeing progress, and discussions at the regulatory level are underway that should hasten updates. I remain hopeful for advancements within months rather than years. Both GSM and fixed-line operators are increasingly targeting these regions for expansion.

We are witnessing the rise of Wi-Fi mesh networks in rural areas, which is showing promising results, particularly as fiber costs decrease.

While I agree there’s room for quicker action, we must also consider the return on investment while being aggressive in our initiatives.

JEREMY MAGGS: As such, I’m keen to learn about the pressure your sector is applying on regulators. Are the responses satisfactory?

JORGE MENDES: Our relationship with the regulator is collaborative. Challenges persist, as they expect us to meet social obligations and maintain quality, while we advocate for progressive policies that encourage competition and consumer benefits.

There’s a necessary tension; how often have we waited too long for spectrum allocations, which are vital for growth? We cannot afford that delay again.

Currently, I see active efforts at both ministerial and regulatory levels to expedite processes.

JEREMY MAGGS: I’d like to return to the concept of ‘social obligation.’ If you could implement any initiative to boost digital literacy across South Africa, what would it be? Enhanced access to the internet could yield significant benefits for the nation.

JORGE MENDES: Telecom companies are ideally situated to spearhead this initiative. We are pivotal in unlocking digital economic inclusion, which spans education, financial services, and beyond.

Focusing on improving access to smartphones can significantly change the game; that’s why we advocate for regulatory changes to reduce taxes on these devices and discourage the import of 2G technology, enabling more affordable options.

Listen: The digital divide: Risks and opportunities

Smart devices facilitate education, financial inclusion, and the potential for digital innovation.

We’ve made strides in ensuring accessible educational resources by zero-rating several platforms and services for students.

Numerous programs exist to facilitate connectivity for schools, transforming them into ICT hubs equipped with technology.

JEREMY MAGGS: But is this progress sufficient? Wouldn’t a unified approach among major telecom operators be more efficacious?

JORGE MENDES: We operate under a unified framework, and the regulator encourages us to collaborate more effectively. While we prioritize different geographical areas, this targeted involvement increases overall impact.

JEREMY MAGGS: In terms of broader contributions, there’s a viewpoint that telcos should contribute more toward national development goals. If you concede that point, how could this be executed more effectively?

JORGE MENDES: The telecom sector plays a significant role in driving economic growth. For instance, the last spectrum auction raised over R14 billion, which directly benefits public finance.

What’s crucial is how that revenue is utilized thereafter, which is beyond our control.

Our world-class services have the potential to greatly enhance economic performance, especially for small businesses and rural entrepreneurs benefiting from connectivity.

JEREMY MAGGS: Let’s step back for a moment. We operate in a coalition government environment today. I’ve heard the term ‘green shoots’ more times than I can count. With that said, Jorge, do you observe a shift in sentiment in this country? As a prominent CEO, where does your confidence lie, and what concerns do you still harbor?

JORGE MENDES: Overall, I’m feeling more optimistic than I was previously.

Significantly, we’re witnessing increased competition among ministers, resulting in positive transformations. This drive for improved service delivery is promising.

Yet, much work remains—particularly concerning job creation. It’s crucial that growth translates into job opportunities, as relying on social grants is unsustainable long-term. We must focus on developing skills for future jobs, which requires embedding these needs into educational frameworks.

While South Africa has tremendous resilience, we often undervalue what we’re achieving. Though it’s vital to acknowledge the pressing issues of poverty and unemployment—we must do better.

As collaboration between private and public entities intensifies, I think we’re poised for accelerated progress.

JEREMY MAGGS: How is your company adapting to the rise of artificial intelligence? How might it be leveraged to facilitate improvements in our nation?

JORGE MENDES: That’s an excellent question; we need to approach such technologies proactively. This is a global phenomenon that we cannot ignore.

Emphasizing cybersecurity in the age of advanced technology is critical; we have to establish strong defenses around our digital infrastructure.

Listen:
How much will a cybersecurity breach cost your company?
Cybersecurity mission-critical for financial institutions in 2024

Moreover, as we integrate machine learning and AI, ethical frameworks become paramount. It’s vital to implement algorithms to ensure reliability and to prevent issues like misinformation or fraudulent activities, necessitating continuous testing and oversight.

Investing in these areas is crucial for protecting both our organization and consumers, and for ensuring technology serves a constructive purpose.

JEREMY MAGGS: As a parting thought, if the presidency called today and granted you a day as Minister of Telecommunications with the power to implement one change for nationwide connectivity, what reform would you prioritize and why?

JORGE MENDES: That’s a compelling question. I would fiercely advocate for enhanced collaboration within the industry, emphasizing the advantages of infrastructure sharing.

Our industry could achieve far more collectively than by competing on redundant infrastructures; this is essential. While competition within brands is healthy, it’s equally vital to ensure efficient resource utilization.

For example, rather than each operator striving for spectrum dominance, incentivizing cooperative spectrum sharing arrangements would yield greater benefits for consumers across the board.

Clearly, we still have work ahead regarding the execution and management of such initiatives, but optimizing how we share and deploy our resources can significantly enhance the viability of our sector.

JEREMY MAGGS: Thank you, Jorge Mendes, CEO of Cell C, for your insights on this edition

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