Cell?C’s risky price war

2014-09-14 15:00

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Mobile operator’s market share is now 19%, up from 17% a year ago, but a sustained campaign may not prove to be the best thing financially for the company

Cell C’s outrage at the new draft mobile termination rates, which it described this week as “catastrophic”, could indicate that its expectation of preferable rates is crucial to its success.

It called the communications regulator Icasa’s draft rates a “dramatic U-turn”. Icasa has, in Cell C’s opinion, proposed a “massive” reduction in asymmetry – which refers to differential rates that are meant to assist smaller players in the industry.

The termination rates were recently challenged by Vodacom and MTN, and it appears Cell?C has interpreted the revised tariffs as being prejudicial to it.

The termination rates – the fees mobile companies pay each other to carry their calls – will be reduced from 20c to 8c by 2018. The rate that small operators will be able to charge will be reduced from 44c to 30c next month and to 10c by 2018.

This gives Cell?C advantageous rates for a few years, but not as much as it was expecting. What is not known is the extent to which Cell?C was relying on advantageous rates to succeed with its business model.

Its aggressive price war has allowed it to make a huge dent in the market share of its larger competitors. It now has 18?million active subscribers, compared with Vodacom’s 32?million and MTN’s 25?million. Recent figures released by Blue Label Telecoms showed Cell?C’s market share now sits at 19%, up from 17% a year ago.

But there are questions around the financial impact of a sustained price war on the company. Suggestions of money problems were made obliquely a while back when Saudi Telecom Company, which indirectly holds shares in Cell?C through Oger Telecom, wrote down the value of its stakes in Cell?C and India’s Aircel, resulting in a loss of R1.49?billion for Saudi Telecom.

The majority shareholder in Cell?C is Oger Telecom, a Dubai-based telecoms company with interests in Turkey, Saudi Arabia and other emerging markets. Saudi Telecom Company is owned by the billionaire Hariri brothers, sons of assassinated Lebanon prime minister Rafic Hariri.

Oger Telecom chair Mohammed Hariri was brought

in to take up the position of Cell?C chair, with many speculating the Saudi shareholders wanted to keep a keener eye on their investment.

In July last year, Cell?C received a R3.5?billion injection from Oger Telecom and a R2.2?billion loan from Nedbank, the Development Bank of Southern Africa and others. Half of the loanwas to be used to refinance existing debt, which suggested the price war initiated by Cell?C was hitting its pockets.

Another indication was an announcement made a

few weeks ago in which Cell?C asked its bondholders for permission to delay repayment of R2.3?billion debt – they agreed to push maturity on the debt to 2018.

In an interview with City Press, Cell?C chief executive José dos Santos said: “That was really a vote of confidence on our part. Simply put, bondholders thought, ‘Why would we pay that debt back when we can use that cash to enhance the business?’ So the people who are holding the bonds looked at the business and said, ‘We’re getting a good return, why cash in? We believe in the business, the management team, and so we extend it for another three years.’”

Dos Santos refused to disclose the average revenue per user – an indicator of how much income it was receiving from each subscriber. “What I can say is that it has marginally gone up over the last two quarters.”

According to him, revenue share – the share of the market in revenue rather than number of subscribers – “is a better indicator”.

He added: “So we’re sitting just short of 12% revenue share and our target was anywhere up to between 20% and 25%, and that’s why we’re now targeting the high-value customer and going for small and corporate businesses.”

He said containing costs was also a priority. “If you don’t have strict measures and controls, chances are you will battle to survive in the medium to long term. I have two or three key people in the management team whose sole purpose is to look at efficiencies in terms of input costs.”

Cell?C is looking at growing revenue in the mobile virtual network operator (MVNO) sector. An MVNO is a company that provides services but does not have its own network and will lease a network.

Cell?C recently announced an MVNO agreement with clothing retailer Mr Price, and there is strong speculation it will tie up with FNB, which Dos Santos does not deny, but says he cannot say much about.

According to him, MVNOs have been part of Cell C’s strategic consideration since 2012.

“We had to get billing in place, systems in place, partners in place. We didn’t talk to four or five people, we were talking to a dozen people at the time, and we picked our partners and they picked us. And we’re going to see that competitive space coming into play,” he said.

On the deal with Mr Price, which has been confirmed, Dos Santos said: “They’ve identified a segment of the market and a customer base, and they have positioned themselves a certain way and they see an opportunity.”

Dos Santos said Cell?C’s network expansion plans were on track and by November its entire network in Gauteng will be modernised.

According to him, consolidation in the industry is inevitable.

“But I’m not referring to consolidation of one buying another. I’m referring to consolidation on an efficiency basis. We have to share infrastructure, bottom line,” he said.

Better bad

Cell?C has better prices than its competitors, but its reception is not as good. This is the view of City Press readers who responded to an informal survey we conducted this week.

A number of them said they had changed to Cell?C because of its lower prices. A high percentage of the people surveyed had swapped to Cell?C because of price, but there was also a relatively high percentage who had gone back to MTN, Vodacom or Telkom Mobile because the reception was poor.

The biggest complaint was poor reception, and a few complained about service.

About a third of respondents said they were getting better prices, reception and service all round.


arthurm2478: I changed to Cell C but I was not happy with the reception. Data prices were reasonable but I had to switch back to Telkom mobile.

204teens: The best prices, call rates and supercharge benefits.

SiazimuB: I changed to @CellC and have no regrets.

taj1970: Service was so bad we went back to MTN, which in itself is horrid but still better than Cell C.

NdindiS: Reception is really bad especially where I stay. The prices are good, though.

Melusi_MD: Better prices. Worst reception and service.

keneiloe_sebola: The prices are reasonable, but the reception is horrible. Decided to switch back to Vodacom.

nicbc123: I changed and reception isn’t great but data is cheaper when you can receive it.

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