Cell C leads price war

2014-05-18 15:01

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Cell C has taken the wave of price wars to a new level by dropping its prepaid rate from 99c a minute on per-second billing to 66c.

It will also cut its contract rate to 79c a minute and its new strategy will focus on wealthier contract customers and small-to-medium enterprises.

“We are turning 99c on its head, effective 1 June,” said newly appointed CEO Jose dos Santos, who admitted Cell C was “forced by large incumbents” to price down.

Cell C chief financial officer Robert Pasley conceded the new rate was a risk for the company but said MTN and Vodacom left it with little choice when they slashed their prepaid rates to 79c two months ago.

“Yes the 66c is a risk. It is a bit of a trade-off, isn’t it? But the competitors have come across as aggressive and we must compete,” said Pasley.

According to him, last year was an “unusual year because revenue only increased 14%, tariffs declined and EBITDA was narrowing”.

He added: “Cell C pays lower termination rates than its competitors but now the differences in termination rates is becoming smaller. We experienced a double hit.”

Dos Santos said there was a risk to slashing prices, especially if the cut in rates doesn’t amount to a significant increase in subscribers. But Cell C has done a cost-benefit analysis and the pros far exceeded the cons.

In the last year, Cell C has increased its total revenue by 14% and its subscriber base by 35%, but the company is still to declare a net profit.

“Our EBITDA [earnings before interest, tax, depreciation and amortisation] is positive.

“Our revenue grew 14%. We need 20%-25% revenue growth in the next [four to five] years and this is in line with our strategy,” said Dos Santos.

“Our investments have been financed by combination of equity and debt. In 2013, we received equity injections of R2.6?billion and a further R1.5?billion has been injected so far in 2014.”

Dos Santos added Cell C was able to raise local debt of R1.8?billion and foreign debt of $120?million (R1.2?billion) during last year to augment equity injections, and support business expansion and capital investment.

“Since 2009, there has been speculation that Cell C is not going to be around for much longer. That we were able to raise foreign and local debt shows our investors believe in us,” said Dos Santos.

ICT analyst for Frost & Sullivan, Mervin Miemoukanda, said Cell C was able to grow its subscriber base in 2012 when it slashed rates to 99c but doesn’t think the new rate will have the same effect.

The 66c-a-minute billing is a promotional rate, he said. Its revenue might go up slightly in the beginning but it is not sustainable. “They would need to get a huge chunk of subscribers to make it sustainable,” said Miemoukanda.

According to Pasley, Cell C will focus its main strategy around building scale. “We need to increase scale and our strategy is around increasing subscribers, improving network and working on our communications and marketing strategy,” he said.

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