Tough call for Cell CComment on this story
Johannesburg - Vodacom, South Africa’s largest wireless network operator by subscribers, may hurt its profitability in the short term with a new 79c per minute prepaid call rate but it is smaller rival Cell C that could find itself caught between a rock and hard place over the next few weeks and months, according to analysts on Friday.
Cell C, once the protagonist by sparking competitive reductions in retail voice tariffs in 2012, may be unable to respond to rate cuts, which its competitors have introduced recently, by matching or reducing its prepaid flat rate tariff from 99c.
Dobek Pater, director and analyst at Africa Analysis, forecast that Cell C might wait until July when Vodacom’s promotional offers expired but he added that Cell C had to respond sooner to avoid losing its price-sensitive subscribers, some of whom it had attracted from MTN and Vodacom over the past year.
But large debt, which matured early next year, and low share of revenue in the market had made privately held Cell C, which is also in the throes of a multimillion rand network upgrade project, less agile.
On Tuesday Cell C announced an expanded range of its Supacharge vouchers at low denominations but which can only be used between Cell C subscribers. But the offer paled in comparison to Vodacom, which also announced a promotional bundle offering 20 voice minutes for R10 to any network, anytime.
MTN led the price reductions when it announced a flat rate tariff of 79c per minute to any network, any time during mid-April.
It has applied to the industry regulator to convert the promotion into a permanent rate.
Pater said Telkom’s Sim-Sonke remained the lowest prepaid plan in the market. It offered 29c per minute for calls between Telkom Mobile subscribers and charged 75c per minute for calls to other networks.
“I’m not sure we’re going to see a lot of price war. Effectively these may be the last decreases we see in a while,” Pater said.
The lack of a price war may please investors in Vodacom whose shares showed a decline of 6.7 percent last month, making it the second-worst performer among the nation’s largest stocks, according to Bloomberg which quoted analysts saying shares slid on talks of a price war.
Pater said Vodacom and MTN could comfortably sustain further tariff declines for six months to a year.
“79c is still profitable for Cell C on an operational profit level but Cell C is not yet profitable. It can’t really afford to sacrifice further revenue to a price war,” he said.
Even if Cell C were to drop its tariff to 79c there was not much more in the way of value that it could offer in competition with its rivals, Pater argued.
“For pre-paid services the transparency is probably there across all networks now.” Cell C’s challenge had been its lower quality of network and the delivery of services especially when it attracted more subscribers on to the network.
In July Cell C broke through the million gross connection barrier, boosting its subscriber base to more than 11.7 million. But chief executive Alan Knott-Craig acknowledged that churn, the percentage of subscribers that discontinued their service over a certain period, was still high.
Daniel Isaacs, equity analyst at 36ONE Asset Management, said that the price cuts were no surprise as the market dynamics became more competitive. For Vodacom in the short term “it’s obviously negative. Price-cutting will affect profitability and isn’t necessarily offset with volume growth as SA is a mature market”.
Wireless network operators are focusing on improving consumer usage and spend on data products. Isaacs added that profit contribution of voice was far more significant than data, so growth rates in data would need to be significant to reduce that gap.
However, the industry giants were cash-generative and showing growth in earnings. Strong dividend yields also underpinned the stock prices. - Business Report