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| The telecommunications industry |
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| Liberalisation of the South African
telecommunications market and
increasing competition |
Telkom is currently the only provider of residential
public switched telecommunications services in
South Africa. A second licence to provide public
switched telecommunications services was granted
to Neotel on December 9, 2005. Neotel was
commercially launched on August 31, 2006 and
commenced providing services in the beginning of the
2007 calendar year to large corporations and other
licensees. Neotel is 30% owned by Transtel and Esitel,
which are beneficially owned by the South African
Government, and other strategic equity investors,
including a 26% stake beneficially owned by TATA
Africa Holdings (Pty) Limited, a member of the TATA
Group, a large Indian conglomerate with information
and communications operations. Neotel has indicated
that it will begin providing services to residential
customers in the 2007 calendar year. The Government
has created an infrastructure company, Infraco, which
is expected to provide inter-city bandwidth at
cost price to Neotel, and later to the rest of the
industry, which will further compete with Telkom's
communications network. A process to issue additional
licences to small business operators to provide
telecommunications services in underserviced areas
with a teledensity of less than 5%, commenced in
2005 and is continuing. These are referred to as
underserviced areas licensees, or USALs. The Minister
of Communications has identified 27 of these
underserviced areas. ICASA has issued licences to
successful bidders in seven of them and the
Minister has issued invitations to apply for licences
in 14 additional areas. In August 2006, ICASA
recom mended to the Minister that licences be granted
to successful applicants in 13 of these areas. It is
expected that further licences will be issued in the
2007 calendar year.
Telkom currently competes for telephone customers
with the three existing mobile operators, Vodacom, our
50% owned joint venture, MTN and Cell C. MTN is a
public company listed on the JSE Limited and Cell C
announced in June 2006 that it entered into a joint
venture with Virgin Mobile, which we expect will
increase competition. Telkom also competes with
service providers who use least cost routing
technology that enables fixed-to-mobile calls from
corporate private branch exchanges to bypass our
fixed-line network by being transferred directly to mobile networks. In recent periods, our fixed-line
business has experienced migration from our fixed-line
data services to mobile data services.
As competition intensifies, the main challenges our
fixed-line voice business faces are continuing to
improve customer loyalty through improved services
and products and maintaining our leadership in the
South African communications market. As a result of
increasing competition, we anticipate a continued
reduction in overall average tariffs and market share
and an increase in costs in our fixed-line business.
Increased future competition may also result in a
reduction in Vodacom's overall average tariffs, loss of
market share and an increase in its customer
acquisition and retention costs. At the same time, we
expect competition to stimulate overall market demand
for communications services. |
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| South African fixed-line
communications market |
| While South Africa features a highly developed
financial and legal infrastructure at the core of its
economy, it also suffers from high levels of
unemployment and income disparity. With respect to
the economically disadvantaged communities of the
population, communications providers must compete
with other basic necessities for customers' limited
resources. In a number of areas of the country and for
particular communities, mobile services are the
preferred alternative to fixed-line services, primarily
due to mobility. Although the fixed-line penetration rate
in South Africa was only 9.8% and 10.0% as of
March 31, 2007 and March 31, 2006, respectively,
due to the diverse rural geography and demographic
factors in South Africa, we do not expect South
Africa's fixed-line penetration rates to increase in the
near term. In the 2007 and 2006 financial years, our
total fixed access lines decreased primarily due to a
decrease in the number of residential PSTN lines,
partially offset by an increase in ISDN channels and
business postpaid PSTN lines. Residential postpaid
PSTN lines were adversely impacted by customer
migration to mobile and higher bandwidth products
such as ADSL and lower connections, while the
decrease in prepaid PSTN lines was primarily as a
result of customer migration to mobile services and our
residential postpaid PSTN services. Similarly, traffic
declined in both the 2007 and 2006 financial years,
being adversely affected by the increasing substitution
of calls placed using mobile services rather than our fixed-line services and dial-up Internet traffic being
substituted by our ADSL service, as well as the
decrease in the number of residential PSTN lines and
increased competition in our payphone business.
During the same period, ISDN channels and ADSL
services have increased, driven by increased demand
for higher bandwidth and functionality. In light of these
market conditions, we will seek to maintain existing
customers in the face of increasing competition and
increase sales of data products while utilising existing
capacity, largely through increased sales of our
bundled products. |
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| South African mobile communications market |
South Africa has experienced significant growth in the
number of mobile users since GSM mobile services
were launched in the country in 1994. The penetration
rate for mobile users increased from an estimated
2.4% at March 31, 1997 to an estimated 84% at
March 31, 2007. As a result, Vodacom's South African
revenue increased 24.1% and 19.1% in the 2006
and 2007 financial years, respectively. While we
believe the mobile penetration rate will continue to
increase, we do not expect that it will continue to grow
at the same high rates that it has experienced in
the recent past. Consequently, Vodacom is placing
increased focus on customer retention and maintaining
its market leadership by providing innovative value
added services and data products and superior
customer service as well as seeking new associate
business opportunities in South Africa and gearing up
to provide total converged solutions to corporates.
Vodacom's previous focus of customer acquisition and
selective growth in other African countries still remain
focus areas. In furtherance of this strategy, in the 2005
financial year, Vodacom signed an alliance with its
shareholder, Vodafone, which gives Vodacom access
to Vodafone's branded products and services, global
research and development and access to Vodafone's
marketing and buying powers. In addition, Vodacom
launched the first commercial 3G network in South
Africa in December 2004. Vodacom also launched
Vodafone Mobile Connect Cards, 3G/GPRS/HSDPA datacards providing fast, secure access to corporate
networks from computers, Vodafone live!, with global
and local content, picture and video messaging and
downloads, Mobile TV and BlackBerry®. In addition,
Vodacom recently launched 3G with HSDPA, giving
its customers access to global high speed broadband
communications.
A large part of the growth in mobile services was due
to the success of prepaid services. Approximately
86.5% of Vodacom's South African mobile customers
were prepaid customers at March 31, 2007 and
93.2% of all gross connections were prepaid
customers in the 2007 financial year. During the 2007
financial year the growth in contract customers in
South Africa exceeded the growth in prepaid
customers as a result of the migration of the South
African middle class from prepaid to contract services.
The increasing number of prepaid users, who tend to
have lower average usage, together with the lower
overall usage as the lower end of the market continues
to be penetrated have resulted in decreasing overall
average revenue per customer. |
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| The South African regulatory
environment |
| Introduction |
The licensing and provision of telecommunications
services in the Republic of South Africa has
historically been subject to the Telecommunications
Act and the extensive regulations made under the
Telecommunications Act. The Telecommunication Act
was repealed when the Electronic Communications
Act came into effect on July 19, 2006.
The Electronic Communications Act aims to supplement or replace sector specific legislation and change
the market structure from a vertically integrated,
infrastructure based, market structure to a horizontal,
service based, technology neutral, market structure
with a number of separate licences being issued for
different areas, and to clarify the different roles of
ICASA and the Minister of Communications in policy
development, licensing and regulation. The Act seeks to promote convergence and establish the legal
framework for convergence in the broadcasting signal
distribution and telecommunications sectors.
While a new licensing regime has been created by the
Electronic Communications Act, all existing licences are
to remain valid until converted to new licences in
accordance with the new licensing regime. Regulations
made under the Telecommunications Act are also to
remain in force until new regulations required are
made to fully implement the provisions of the Electronic
Communications Act. We expect that the new licensing
framework will result in the market becoming more
horizontally integrated and will substantially increase
competition in our fixed-line business. In addition, the
process of converting our licences to the new licensing
framework may be lengthy and complex and could
result in the imposition of additional obligations and
limitations in connection with the converted licences,
which could disrupt our business operations and
decrease our net profit.
As a result, the regulatory environment is evolving,
lacks clarity in a number of areas and is subject
to interpretation, review and amendment as the
telecommunications industry is further developed and
liberalised. In addition, the regulatory process entails a
public comment process, which, in light of the
politicised issue of privatisation of industries such as
telecommunications in South Africa, makes the outcome
of the regulations uncertain and may cause delays in
the regulatory process. A number of significant matters
have not been addressed or clarified. |
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