As if Cell C’s woes weren’t enough for its biggest shareholder, Blue Label Telecoms' core business could come under pressure from cellphone operators who are seeking to enter the same market to cut costs.
Analysts say Blue Label's main business of selling prepaid airtime and electricity vouchers will experience more competition in the future as existing mobile network operators increasingly move into the same segments. Mobile network operators are adding more digital services to their apps, including bill payments, to make it a one-stop-shop for online transactions. This will result in reduced fees for Blue Label, which is distributing and reselling the prepaid airtime and SIM card starter packs on behalf of mobile network operators.
Apart from Cell C, all is going well for Blue Label in its other operations, but over time this could change as the likes of Vodacom, MTN and Telkom add more services that, in effect, cut out the middle man. Any loss of business in this segment would have a significant effect on Blue Label's financial position, as the prepaid airtime business accounts for about 80% of the group's revenue, contributing R20.7bn to its coffers of a total R25.8bn.
Blue Label, which owns 45% of Cell C, said trading losses and debt problems at the operator were the reason for its R6.6bn loss for the period, more than double its market capitalisation of about R2.72bn.
Blue Label co-CEO Brett Levy said its core business was defensive and would survive in the long term. “When you walk into a spaza shop or into Checkers or into a bank in the next five years, our little POS (point of sale) terminal is going to transact everything in that store,” Levy said.
He said selling prepaid products was quite attractive for retailers and the informal sector.
“The retailer in the middle wants more prepaid because the biggest selling item in their store is a product they hold no stock of. It is the most unbelievable product. Everything else — too much bread, too little milk, cashflow required.”
“Bringing it all together in the next 10 years is us, as consumers, because as time goes on, we want to control our spend better and we want to make sure we don’t go over budget,” Levy said.
Mergence Investment Managers portfolio manager Peter Takaendesa said Blue Label's prepaid distribution business looked to be in good shape, despite Cell C's performance.
Steve Ambrose of Strategy Worx agreed with that sentiment, saying, “they're an absolute money machine”.
“Their core business is excellent. And that is why they have positioned themselves so carefully to do it in a way that is tax efficient and doesn't actually damage their core business,” Ambrose said.
Takaendesa warned that over time, Blue Label's business might come under pressure as cellphone operators look to cut costs and may look to reduce lucrative distribution fees given to companies such as Blue Label.
In addition, the expansion of mobile network operators into the world of financial services presents another potential risk. With more digital banking apps, operators can circumvent the role of distributors by having subscribers buying data and airtime and other related prepaid products on their own platforms instead of using third-party channels, he said.
Ambrose said increased competition was definitely a risk for Blue Label's business in future, but in the short term, the company would be likely to remain in its dominant position. He said the difficulty for mobile network operators would be replicating Blue Label's distribution network, particularly in rural parts of the country.
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