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Combatting Cell C in the past was child’s play for MTN and Vodacom. As the schoolyard bullies, they could easily shove aside the awkward kid trying to get a share of the sandpit that’s South Africa’s cellular market. But Cell C has grown up and discovered steroids. It has older siblings that have taught it how to fight – and it has a vendetta against the two incumbent networks that have made its life hell for a decade. But it will have to beat down some other kids along its way.
In 1996 a Financial Mail report suggested collusion between MTN and Vodacom at the outset of the cellular industry in SA. Now known as the “London Agreement” the 1994 memorandum the magazine claimed to have a copy of was the result of an alleged meeting between the two operators in the British capital, where cellular tariffs for SA were set. There was an attempt to charge the two companies with collusion, but that never made it to court as SA’s competition laws hadn’t yet been revised.
Five years later, another London meeting apparently took place. This time the alleged subject of discussion was interconnection rates networks charge one another for carrying calls. The result was that MTN and Vodacom agreed to hike interconnection by 500% to R1,25/minute in peak times.
Why would such an agreement come out of the blue in 1999? Now Vodacom CEO Pieter Uys has publicly defended the agreement, saying it was the result of consultation with Australian experts over how interconnect in SA should be structured, given the disparities that existed in the market at the time and the arbitrage opportunity they created, which was unacceptable.
However, the timing of the hike came at a vital period in terms of competition in SA’s cellular market. It was signed four weeks before a third operator – in the form of Cell C – was set to open its doors. But a legal challenge delayed Cell C’s launch until 2001.
Cell C CEO Lars Reichelt makes no bones about what he thinks really happened at the 1999 interconnect agreement. “High interconnect is a good way of keeping a competitor out – and that’s what they [MTN and Vodacom] did,” he says. If Reichelt is correct, then Cell C was resolutely and effectively stunted in its market entrance. Its competitors had all existing cellular subscribers, and high interconnect rates meant a third operator would have to pay for more call connections to the incumbent networks than vice versa.
But times have changed. The Independent Communications Authority of SA – Icasa – has had interconnect in its sights for years and has finally announced plans to further reduce them following initial cuts earlier this year. It’s also ruled that Cell C and Telkom Mobile are allowed to charge asymmetrical interconnect rates to other networks – essentially enabling them to charge more for calls coming into their networks than they need to pay other operators.
Things have come together nicely for Cell C. It may or may not have been a victim of explicit bullying by bigger operators in the past – and it almost certainly can be blamed for much of its own hardships. But the new leadership at the company has made strides in turning things around over the last year and a bit. That’s about how long Reichelt has been at the helm since being appointed in March 2009, taking over from Jeffrey Hedberg, who is now filling in as CEO at Telkom.
In less than two years Reichelt has rebranded Cell C, rolled out new network infrastructure, new pricing, new retail stores, significantly reduced its considerable debt by convincing shareholders to convert to equity and brokered a deal with the China Development Bank to secure funding of more than R2bn.
Most recently, Reichelt has brokered a deal with American Tower Corporation for the sale of Cell C’s dormant tower infrastructure. This will inject a further R3bn into the company and further help drive down its debts that started off at R13bn a year ago but reduced to R6bn through the equity agreement that took place before the China Development Bank and American Tower Corporation deals were done.
Cell C’s prime focus is on the data market. That’s the future of cellular networks and where growth will be found.
Vodacom’s interim results released last week showed 41% revenue growth from data services and, after future revisions of cellular technology, voice will also be transmitted using data – or IP – frameworks.
Everyone agrees it’s the “new frontier” in terms of competition. And Cell C has an early advantage. “We want to be the data leader in SA,” says Reichelt. “We believe that’s the way to go. We have the firepower, the technology and by the end of next year we’ll cover 97% of the country’s population with our network.”
The technology benefit Cell C enjoys with its new network is in its ability to implement a progressive 3G technology called HSPA+ at a very low radio frequency (see separate report). And it’s aggressively marketing it – controversially so. It’s targeting things like dropped calls and other problems South African consumers are all too familiar with, knowing its rivals will have to go to great lengths to solve those problems while its new network should be more robust.
The initial marketing called the network “4Gs” – suggesting it made use of 4G, or next generation cellular technology, which it doesn’t. This was brought to the attention of SA’s Advertising Standards Authority by MTN and Vodacom: they alleged Cell C was actively deceiving the public. The ASA agreed and ordered Cell C to remove the 4Gs logo from its branding – but not before it had been seen on billboards, buses, buildings and other flat surfaces throughout SA, along with comedian Trevor Noah’s face and various slogans – such as “Freakin’ fast” – conveying the virtues of its new network.
The controversy brought more exposure and suggested a stroke of genius behind the campaign.
“If you want to make a statement you have to be a little aggressive. And if you’re aggressive you run the risk of controversy. But we didn’t plan for that,” says Reichelt. “We wanted to be refreshing, exciting… not controversial. But, frankly, the competition helped us with their reaction. I’m pleased.
“We have good readings from Millward Brown [the global advertising research agency] that tells us after the first four weeks [of the campaign] we reached 64% recognition of our new brand with South African consumers,” says Reichelt. “The campaign has been twice as impactful as MTN’s Ayoba,” he claims. “We’ve achieved what we wanted. People talk about ‘for great speed’, ‘for great savings’ and ‘for great service’. That’s what 4Gs stands for and I think most people knew it wasn’t really 4G.”
I’m not sure about that. But technology research firm World Wide Worx MD Arthur Goldstuck says Cell C certainly has leapfrogged the competition on the technology front. “However, the downside is that they sit with an existing user base that’s less prone to cross-selling into the data market,” he says. “But having said that, it’s also a market it’s able to prep over time to migrate to data services. Particularly when it starts selling bundles of laptops, notebooks and tablet computers with data and cell services.”
Goldstuck uses the example of Vodacom, currently probably the biggest reseller of laptops in SA. “It’s intention isn’t to be a laptop reseller but rather to provide a platform users can consume data on. That has to be part of Cell C’s long-term strategy.”
And so it is. Reichelt says he’s excited by the opportunities of cheaper computing devices becoming available for South Africans – and the possibility these hold for connecting around 45m citizens not yet connected to the Internet. A massive growth opportunity for all cellular networks.
Says Goldstuck: “There are lots of prospective solutions waiting to be had and Cell C is looking like the kind of organisation that can embrace those. Part of that is the way it’s rolled out its HSPA+ service. It shows it can be a player. Of course, the rider to that is it has to capture a slice of the market first in order to play in it.”
Goldstuck notes Cell C has been particularly smart in rolling out its network in underserviced areas in terms of where traditional investment goes. “These are typically rural areas; but even smaller urban areas and larger towns underserviced by other networks,” he says.
Cell C first launched its new network in Port Elizabeth, then Bloemfontein, Nelspruit and other small towns before giving Cape Town and Durban the treatment. At the time of writing its launch is imminent in Gauteng. It seemed a strange strategy at the time: you’d expect its initial rollout to focus on large metros. But its strategy may be very astute, says Goldstuck. “If you add up all those areas, they have significant market potential and that’s what Cell C is leveraging. In that sector it’s streets ahead and the other guys would have realised that while they were going for the low-hanging fruit. They left the fruit in the middle for Cell C – which will build enthusiasm outside urban centres and, in so doing, build interest in major areas,” says Goldstuck.
The opportunity for Cell C stealing market share away from its rivals lies in the churn rate of SA’s cellular industry, Goldstuck adds. Every year a large percentage of South Africans switch networks – and for Cell C and Telkom’s 8.ta that’s where potential growth lies. “Cell C must be moving nicely above the 15% market share point now,” estimates Goldstuck. “No one expected it to reach that level. The churn rate must be working in its favour. And it’s got more to pick off from the other networks than vice versa.”
If the analysts are correct then Cell C is benefiting from a number of things working in its favour. Sceptical consumers might see it as lipstick on a pig, but those who have tested the new service find it hard to lodge criticism. “We aren’t selling perfect,” says Reichelt. “There will be whoppers somewhere along the way. We’re saying if that does happen we’ll inform you and fix it. This is an inexact science.”
The focus, he says, has shifted to the customer and the service Cell C can deliver: conveying that was the point of its extensive marketing campaign that’s seen more than 60 000 submissions to the “Tell Trevor” it’s set up as a place where it can talk to its customers.
As an unlisted company, Cell C doesn’t have to talk about numbers but usually provides six-month updates nonetheless. When it does so again it seems likely we’ll see healthy growth from an operator that wasn’t given a snowball’s chance in hell by most analysts I discussed it with just over a year ago.
The question from investors is what Cell C’s intentions are in terms of scaling up on the capital front?
“Our aim is to win over customers first,” says Reichelt. “We want to earn their trust and make a habit of delivering on expectations. Possibly listing the company and such discussions are far away and will, of course, be up to our shareholders. But we’ve come a long way in 12 weeks. We’ve gained tens of thousands of broadband customers... but that’s as far as I can go in revealing numbers at this stage.
“Our current financial position is a lot more solid than before and I’m grateful to our shareholders. They’ve made an amazing effort and it puts us on an amazing footing. We can do things now we couldn’t do before. We have oxygen and we have a plan and we intend to go for it,” he says.
And so do the competition. Vodacom CEO Pieter Uys for one welcomes the challenge. “Competition is always good,” he says. “It makes our guys smarter because we don’t want to copy. We want to do something better that’s more innovative. In the end, the consumer benefits because of it.
“MTN has also stepped up its game in SA. Telkom is building a good network and now Cell C has built a data network, where it had no interest before. That’s all good for consumers,” says Uys.
The focus on the customer – if backed with earnest initiatives to win their favour – is the real story here and something, if nothing else, to be grateful to Cell C and Telkom for.
DATA TECHNOLOGY
Through the roof
THE COMPETITIVE EDGE Cell C has is in how it’s able to implement cellular technologies – specifically for data. The company is using a progressive 3G technology called HSPA+ for its data services that currently allows download speeds of up to 21Mb/s.
The technology itself isn’t exclusive to Cell C, and both MTN and Vodacom are rolling out the same. But Cell C is able to implement HSPA+ on a 900MHz radio frequency while its competitors must contend with a higher 2100MHz spectrum, which makes a big difference. Using 900MHz means Cell C can cover a larger area with a single base station than other networks. And 900MHz also allows for signals to better penetrate buildings and improves dropped call rates and Internet speeds when connecting indoors (see graphic).
The new infrastructure is also IP-based from end to end, and Cell C is rolling out fibre optics in its backhaul network to cater for those speeds. The results are significant. Ookla – an independent online service that rates global Internet service providers – reports Cell C is already the number one consumer Internet service provider in South Africa based on pure network statistics. Telkom is rated second and Vodacom third.
The technically inclined reader will immediately respond with: “Sure, but there are currently very few users on the Cell C network. What happens when contention kicks in?”
To which Reichelt answers: “We already have more megahertz to use than the competition. And because we’re using release 7 of the HSPA+ standard we have double the capacity. In essence, when all factors are considered we have three times the capacity of our competition.”
DATA PRICING
Down to price
PERHAPS THE MOST aggressive element of Cell C’s new push is in its cellular data pricing. It’s introduced prepaid and contract Internet packages that include a 3G modem. The idea for the prepaid package is that you pay for the whole year upfront and add additional bandwidth as required.
The entry-level package is R1 499 and includes 24GB of data that can be downloaded at speeds of up to 7.2Mbps. It’s also available as a 12-month contract at R149/month. Next up is a R2 999 prepaid package with modem and 60GB of data, with speeds up to 21.6Mbps that can be alternatively acquired at R299/month.
With prices as low as 5c/MB that makes Cell C the cheapest 3G Internet provider by a long shot.
In 1996 a Financial Mail report suggested collusion between MTN and Vodacom at the outset of the cellular industry in SA. Now known as the “London Agreement” the 1994 memorandum the magazine claimed to have a copy of was the result of an alleged meeting between the two operators in the British capital, where cellular tariffs for SA were set. There was an attempt to charge the two companies with collusion, but that never made it to court as SA’s competition laws hadn’t yet been revised.
Five years later, another London meeting apparently took place. This time the alleged subject of discussion was interconnection rates networks charge one another for carrying calls. The result was that MTN and Vodacom agreed to hike interconnection by 500% to R1,25/minute in peak times.
Why would such an agreement come out of the blue in 1999? Now Vodacom CEO Pieter Uys has publicly defended the agreement, saying it was the result of consultation with Australian experts over how interconnect in SA should be structured, given the disparities that existed in the market at the time and the arbitrage opportunity they created, which was unacceptable.
However, the timing of the hike came at a vital period in terms of competition in SA’s cellular market. It was signed four weeks before a third operator – in the form of Cell C – was set to open its doors. But a legal challenge delayed Cell C’s launch until 2001.
Cell C CEO Lars Reichelt makes no bones about what he thinks really happened at the 1999 interconnect agreement. “High interconnect is a good way of keeping a competitor out – and that’s what they [MTN and Vodacom] did,” he says. If Reichelt is correct, then Cell C was resolutely and effectively stunted in its market entrance. Its competitors had all existing cellular subscribers, and high interconnect rates meant a third operator would have to pay for more call connections to the incumbent networks than vice versa.
But times have changed. The Independent Communications Authority of SA – Icasa – has had interconnect in its sights for years and has finally announced plans to further reduce them following initial cuts earlier this year. It’s also ruled that Cell C and Telkom Mobile are allowed to charge asymmetrical interconnect rates to other networks – essentially enabling them to charge more for calls coming into their networks than they need to pay other operators.
Things have come together nicely for Cell C. It may or may not have been a victim of explicit bullying by bigger operators in the past – and it almost certainly can be blamed for much of its own hardships. But the new leadership at the company has made strides in turning things around over the last year and a bit. That’s about how long Reichelt has been at the helm since being appointed in March 2009, taking over from Jeffrey Hedberg, who is now filling in as CEO at Telkom.
In less than two years Reichelt has rebranded Cell C, rolled out new network infrastructure, new pricing, new retail stores, significantly reduced its considerable debt by convincing shareholders to convert to equity and brokered a deal with the China Development Bank to secure funding of more than R2bn.
Most recently, Reichelt has brokered a deal with American Tower Corporation for the sale of Cell C’s dormant tower infrastructure. This will inject a further R3bn into the company and further help drive down its debts that started off at R13bn a year ago but reduced to R6bn through the equity agreement that took place before the China Development Bank and American Tower Corporation deals were done.
Cell C’s prime focus is on the data market. That’s the future of cellular networks and where growth will be found.
Vodacom’s interim results released last week showed 41% revenue growth from data services and, after future revisions of cellular technology, voice will also be transmitted using data – or IP – frameworks.
Everyone agrees it’s the “new frontier” in terms of competition. And Cell C has an early advantage. “We want to be the data leader in SA,” says Reichelt. “We believe that’s the way to go. We have the firepower, the technology and by the end of next year we’ll cover 97% of the country’s population with our network.”
The technology benefit Cell C enjoys with its new network is in its ability to implement a progressive 3G technology called HSPA+ at a very low radio frequency (see separate report). And it’s aggressively marketing it – controversially so. It’s targeting things like dropped calls and other problems South African consumers are all too familiar with, knowing its rivals will have to go to great lengths to solve those problems while its new network should be more robust.
The initial marketing called the network “4Gs” – suggesting it made use of 4G, or next generation cellular technology, which it doesn’t. This was brought to the attention of SA’s Advertising Standards Authority by MTN and Vodacom: they alleged Cell C was actively deceiving the public. The ASA agreed and ordered Cell C to remove the 4Gs logo from its branding – but not before it had been seen on billboards, buses, buildings and other flat surfaces throughout SA, along with comedian Trevor Noah’s face and various slogans – such as “Freakin’ fast” – conveying the virtues of its new network.
The controversy brought more exposure and suggested a stroke of genius behind the campaign.
“If you want to make a statement you have to be a little aggressive. And if you’re aggressive you run the risk of controversy. But we didn’t plan for that,” says Reichelt. “We wanted to be refreshing, exciting… not controversial. But, frankly, the competition helped us with their reaction. I’m pleased.
“We have good readings from Millward Brown [the global advertising research agency] that tells us after the first four weeks [of the campaign] we reached 64% recognition of our new brand with South African consumers,” says Reichelt. “The campaign has been twice as impactful as MTN’s Ayoba,” he claims. “We’ve achieved what we wanted. People talk about ‘for great speed’, ‘for great savings’ and ‘for great service’. That’s what 4Gs stands for and I think most people knew it wasn’t really 4G.”
I’m not sure about that. But technology research firm World Wide Worx MD Arthur Goldstuck says Cell C certainly has leapfrogged the competition on the technology front. “However, the downside is that they sit with an existing user base that’s less prone to cross-selling into the data market,” he says. “But having said that, it’s also a market it’s able to prep over time to migrate to data services. Particularly when it starts selling bundles of laptops, notebooks and tablet computers with data and cell services.”
Goldstuck uses the example of Vodacom, currently probably the biggest reseller of laptops in SA. “It’s intention isn’t to be a laptop reseller but rather to provide a platform users can consume data on. That has to be part of Cell C’s long-term strategy.”
And so it is. Reichelt says he’s excited by the opportunities of cheaper computing devices becoming available for South Africans – and the possibility these hold for connecting around 45m citizens not yet connected to the Internet. A massive growth opportunity for all cellular networks.
Says Goldstuck: “There are lots of prospective solutions waiting to be had and Cell C is looking like the kind of organisation that can embrace those. Part of that is the way it’s rolled out its HSPA+ service. It shows it can be a player. Of course, the rider to that is it has to capture a slice of the market first in order to play in it.”
Goldstuck notes Cell C has been particularly smart in rolling out its network in underserviced areas in terms of where traditional investment goes. “These are typically rural areas; but even smaller urban areas and larger towns underserviced by other networks,” he says.
Cell C first launched its new network in Port Elizabeth, then Bloemfontein, Nelspruit and other small towns before giving Cape Town and Durban the treatment. At the time of writing its launch is imminent in Gauteng. It seemed a strange strategy at the time: you’d expect its initial rollout to focus on large metros. But its strategy may be very astute, says Goldstuck. “If you add up all those areas, they have significant market potential and that’s what Cell C is leveraging. In that sector it’s streets ahead and the other guys would have realised that while they were going for the low-hanging fruit. They left the fruit in the middle for Cell C – which will build enthusiasm outside urban centres and, in so doing, build interest in major areas,” says Goldstuck.
The opportunity for Cell C stealing market share away from its rivals lies in the churn rate of SA’s cellular industry, Goldstuck adds. Every year a large percentage of South Africans switch networks – and for Cell C and Telkom’s 8.ta that’s where potential growth lies. “Cell C must be moving nicely above the 15% market share point now,” estimates Goldstuck. “No one expected it to reach that level. The churn rate must be working in its favour. And it’s got more to pick off from the other networks than vice versa.”
If the analysts are correct then Cell C is benefiting from a number of things working in its favour. Sceptical consumers might see it as lipstick on a pig, but those who have tested the new service find it hard to lodge criticism. “We aren’t selling perfect,” says Reichelt. “There will be whoppers somewhere along the way. We’re saying if that does happen we’ll inform you and fix it. This is an inexact science.”
The focus, he says, has shifted to the customer and the service Cell C can deliver: conveying that was the point of its extensive marketing campaign that’s seen more than 60 000 submissions to the “Tell Trevor” it’s set up as a place where it can talk to its customers.
As an unlisted company, Cell C doesn’t have to talk about numbers but usually provides six-month updates nonetheless. When it does so again it seems likely we’ll see healthy growth from an operator that wasn’t given a snowball’s chance in hell by most analysts I discussed it with just over a year ago.
The question from investors is what Cell C’s intentions are in terms of scaling up on the capital front?
“Our aim is to win over customers first,” says Reichelt. “We want to earn their trust and make a habit of delivering on expectations. Possibly listing the company and such discussions are far away and will, of course, be up to our shareholders. But we’ve come a long way in 12 weeks. We’ve gained tens of thousands of broadband customers... but that’s as far as I can go in revealing numbers at this stage.
“Our current financial position is a lot more solid than before and I’m grateful to our shareholders. They’ve made an amazing effort and it puts us on an amazing footing. We can do things now we couldn’t do before. We have oxygen and we have a plan and we intend to go for it,” he says.
And so do the competition. Vodacom CEO Pieter Uys for one welcomes the challenge. “Competition is always good,” he says. “It makes our guys smarter because we don’t want to copy. We want to do something better that’s more innovative. In the end, the consumer benefits because of it.
“MTN has also stepped up its game in SA. Telkom is building a good network and now Cell C has built a data network, where it had no interest before. That’s all good for consumers,” says Uys.
The focus on the customer – if backed with earnest initiatives to win their favour – is the real story here and something, if nothing else, to be grateful to Cell C and Telkom for.
DATA TECHNOLOGY
Through the roof
THE COMPETITIVE EDGE Cell C has is in how it’s able to implement cellular technologies – specifically for data. The company is using a progressive 3G technology called HSPA+ for its data services that currently allows download speeds of up to 21Mb/s.
The technology itself isn’t exclusive to Cell C, and both MTN and Vodacom are rolling out the same. But Cell C is able to implement HSPA+ on a 900MHz radio frequency while its competitors must contend with a higher 2100MHz spectrum, which makes a big difference. Using 900MHz means Cell C can cover a larger area with a single base station than other networks. And 900MHz also allows for signals to better penetrate buildings and improves dropped call rates and Internet speeds when connecting indoors (see graphic).
The new infrastructure is also IP-based from end to end, and Cell C is rolling out fibre optics in its backhaul network to cater for those speeds. The results are significant. Ookla – an independent online service that rates global Internet service providers – reports Cell C is already the number one consumer Internet service provider in South Africa based on pure network statistics. Telkom is rated second and Vodacom third.
The technically inclined reader will immediately respond with: “Sure, but there are currently very few users on the Cell C network. What happens when contention kicks in?”
To which Reichelt answers: “We already have more megahertz to use than the competition. And because we’re using release 7 of the HSPA+ standard we have double the capacity. In essence, when all factors are considered we have three times the capacity of our competition.”
DATA PRICING
Down to price
PERHAPS THE MOST aggressive element of Cell C’s new push is in its cellular data pricing. It’s introduced prepaid and contract Internet packages that include a 3G modem. The idea for the prepaid package is that you pay for the whole year upfront and add additional bandwidth as required.
The entry-level package is R1 499 and includes 24GB of data that can be downloaded at speeds of up to 7.2Mbps. It’s also available as a 12-month contract at R149/month. Next up is a R2 999 prepaid package with modem and 60GB of data, with speeds up to 21.6Mbps that can be alternatively acquired at R299/month.
With prices as low as 5c/MB that makes Cell C the cheapest 3G Internet provider by a long shot.
