Almost immediately after MTN put out a statement last week that it had approached smaller rival Telkom about a potential tie-up, the main question was whether the deal — estimated to top R30bn — would get regulatory approval.
Depending on who one speaks to, the Competition Commission, which feeds the Competition Tribunal information about the market and shares its recommendations on any takeover, could either block the deal outright or impose such heavy conditions that its commercial merits would be undermined.
But assuming that the talks between the two parties move beyond the preliminary stages, the outcome of the commission’s assessment is important for the SA economy, which ranks among the least competitive in emerging markets in terms of the cost of communication.
It is tempting to say the competition authorities, which sit within the trade, industry & competition ministry headed by Ebrahim Patel, should block the merger between SA’s No 2 and No 3 players as the tie-up would lead to higher-priced phone bills for consumers and businesses. In theory, competition is the lifeblood of the telecom industry, resulting in innovation and fairer prices. Except it has not led to lower prices in the SA.
In 2020, the commission issued the findings of a market inquiry into the reasons behind South Africans paying some of the highest prices for internet data connectivity. Aside from highlighting the government’s role in stifling competition because it dragged its feet in releasing the radio frequency spectrum, the commission made another important observation: “The retail mobile market has remained stubbornly concentrated despite the entry of two challenger networks over time.”
Translation: MTN and Vodacom price their mobile voice and internet connectivity bundles as if Telkom and Cell C do not exist.
Take Cell C, for example. Its financial viability came under so much threat that it gave up trying to break into the upper echelon of the industry with its consistent annual profits.
Telkom may no longer be in as strong a position to offer cut-price broadband deals
It had looked like Cell C’s pricing strategy was bearing fruit as it chipped away at the market share of MTN and Vodacom by attracting millions of new subscribers every year with cut-price data and voice offerings. But the growing user base started putting strain on its network, prompting one irate user in 2014 to erect a large billboard berating Cell C as “the most useless service provider in SA”.
That growing user base also forced Cell C into taking on more debt and tapping its shareholders for cash to fund billions of rand in investments on network infrastructure — an outlay that only landed it in financial trouble
Is Telkom, which has shot past Cell C as SA’s third-largest mobile phone operator, going down the same path? It’s hard to say, but what is not in doubt is that MTN and Vodacom remain miles more profitable than Telkom, putting them in a strong position to fend off any aggressive pricing strategy for the partially state-owned company.
Telkom’s fighting chance to break the duo’s stranglehold is down to a strategy rejig in 2013 to become a data-led mobile network provider, a move that allowed it to take advantage of delays in auctioning new spectrum as incumbents kept prices relatively high to make up for the cost of repurposing frequency bands historically used for voice calls to handle surging data demand.
The landscape is changing rapidly, not least because of the allocation of R14.5bn worth of new radio airwaves, meaning Telkom may no longer be in as strong a position to offer cut-price broadband deals to consumers fed up with dropped calls and slow network speeds. Perhaps in an implicit acknowledgment of the changes, Telkom — which is estimated to have a 15% share of the market — painted a picture of a company that seems to have reached the ceiling in substantially winning market share in the mobile phone market.
The above should be enough for the commission and the Independent Communications Authority of SA, an industry watchdog that will weigh in on the potential deal, to have an open-minded approach if and when the two companies put the transaction before them for approval.
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