Customers sit and wait for service inside a Vodacom store at Vodaworld, the headquarters of Vodacom Group Ltd., Vodafone's biggest African business, in Johannesburg, South Africa, on Monday, January 28, 2013. Almost two decades after Vodafone Group Plc entered Africa, the region -- where most people earn less than $2 a day and mobile phone towers run on diesel -- is turning into one of the company's biggest profit generators. Photographer: Nadine Hutton/Bloomberg

Vodacom, the country’s largest cellular provider, has no choice but to adopt a lower prepaid tariff in response to the recent price competition, according to industry analysts. But a further drop in prices could set the industry on the brink of a price war.

Talk of a potential price battle has made Vodacom the second-worst performer among the nation’s largest stocks on the local bourse this month.

Vodacom, which has the most subscribers, has declined 6.7 percent this month, making it the second-worst performer on the Top40 index this month. Vodacom rival MTN, Africa’s biggest mobile phone company, slid 1.2 percent. The gauge of South Africa’s largest and most liquid stocks gained 1.4 percent over the same period.

South African operators are being squeezed by declining voice revenue as the nation’s communications regulator cuts tariffs, while the market has become saturated with 130 cellphone subscribers per 100 people as of the end of last year.

Two weeks ago, MTN cut its prepaid tariff to 79c a minute, undercutting Vodacom’s R1.20.

“People are worried about this new prepaid tariff of 79c,” said Craig Hackney, a London-based analyst at Noah Capital Markets. “People are worried that Vodacom may need to respond to that and that there is not enough voice elasticity in the market to compensate. It’s probably concerns about them being pulled into a price war.”

Vodacom spokesman Richard Boorman declined to comment on altering the tariff.

“What I can say is that the mobile voice market is highly competitive – as an example, Vodacom’s average effective price per minute on prepaid as per our most recent trading statement is 56c per minute,” Boorman said, arguing that this rate was 25 percent lower than a year ago and 50 percent cheaper than three years ago.

“If you compare that to the sharp increase in the price of things like electricity and fuel, which are also important input costs for us, then you get an idea of the challenge facing the industry,” he said.

But Spiwe Chireka, the programme manager for telecoms at the International Data Corporation, said Vodacom, unlike its competitors, did not have a permanent low tariff.

“This leaves them as the most expensive network. Considering that things are getting harder, consumers are becoming a little more price sensitive.

“I don’t think they’ve got a choice if you look at what happened to MTN when they did not take part in the price war in 2013,” Chireka said of MTN’s loss of market share.

Vodacom’s challenge is that it derives more than 80 percent of its earnings from South Africa.

“If they don’t react literally it means their market share is at risk,” Imara SP Reid equity analyst Sibonginkosi Nyanga said. He added that Cell C, the third-largest firm, might have difficulty beating the 79c tariff while expecting debt restructuring early next year. “It’s going to be disaster for them.”

Yesterday, Cell C announced four new prepaid recharge vouchers.

“Our four new vouchers will make it possible for customers to get the most out of their spend up to the last cent,” Cell C acting chief executive José Dos Santos said.

Nyanga has recommended Vodacom as a hold because it pays a good dividend. He also advised a hold on MTN.

Vodacom shares added 0.02 percent to close the day at R123 yesterday, while MTN shares rose 2.28 percent to close at R215.