The directors at Vodacom must be kicking themselves for not ensuring founding CEO Alan Knott-Craig was kept in permanent retirement. He has become their worst nightmare. Just 20 months after joining Saudi-owned Cell-C, Knott-Craig’s perseverance is turning SA’s cosy cell phone duopoly on its head. Investors knocked R40bn off the value of Vodacom and MTN last week. And the disruption has only just begun. – AH
By Alec Hogg*
Growing up an only child in a single parent home exposed me to many deep conversations. Mostly about important stuff. Especially cars. Like everyone else in his circle, Dad wouldn’t be seen dead in a Toyota or a Datsun. “Jap scrap” as he called them.
Those who saw through the advertising claims dismissed those early Japanese vehicles for what they were: cheaply made, poor alternatives in a market dominated by trusted brands.
In time, though, experts like Dad and his cronies switched over. His Mini was swapped for a Daihatsu. Even for motorbikes it was ta-ta Triumph, hello Honda.
The same movie is starting to play in the local cell phone industry.
A dozen years after launch SA’s long-time number three, Cell-C, last week broke through the administrative treacle. It will finally be allowed to play its intended role as Disruptor-in-Chief .
Disruption was formalised as a business strategy by Harvard Professor Clayton Christensen in his seminal classic The Innovator’s Dilemma.
His 1997 book famously tracks the story of mini-steel mills in the USA. Like Japanese motor manufacturers before them, they entered the US steel market at the bottom end where incumbents weren’t really interested.
These small mills gained a toehold competing on price, living off paper-thin profit margins and slowly working up the value curve. Eventually, the interlopers did the impossible. They wiped out America’s once impregnable steel giants.
Inertia together with the network effect means newcomers to a market segment have to think very differently. They rarely win by playing incumbents at their own game.
Christensen’s research revealed a newcomer’s best chance of breaking in is by focusing first on price, then quality. Only once market share builds does it improve the product. Consumers slowly become aware and, eventually, select it over higher margin alternatives.
Had there been a neutral referee, this would have happened long ago in SA’s cell phone industry.
That Cell C is still around to pose a challenge is no thanks to the easily swayed, commercially-ignorant telecoms regulator ICASA.
It beggars belief that just before Cell C was licenced in November 2001, ICASA announcing a six-fold hike in the regulated Mobile Termination Rate (MTR). This effectively entrenched the country’s cosy Vodacom/MTN duopoly.
The MTR is the fee a cell phone company pays when its customer calls someone on a rival network. The MTR sets the floor price for mobile calls. The effect of ICASA’s decision in 2001 raised this base price from 20c to 120c per minute just as Cell C came into being.
This action, unprecedented globally, eliminated price as a competitive option and with it Cell C’s ability to disrupt.
With hindsight, it is now obvious this decision was the result of political interference. At the time, Vodacom was a subsidiary of State-controlled Telkom. The National Empowerment Fund was a substantial shareholder in MTN.
As a consequence of the MTR adjustment, instead of introducing a competitor, with a stroke of its bureaucratic pen the regulator killed off any chance of Cell C challenging the status quo. In the decade since, its parent Saudi Oger has pumped an estimated R20bn into a business that, until recently, wasn’t even an irritation to the incumbents. It is also yet to produce a bottom line profit.
In 2009, the MTR was again raised, to 125c. That was to be the final straw for a citizenry increasingly irritated by such obvious profiteering. While the rest of the world was clamouring to cut MTRs to stimulate competition, SA’s telecoms regulator was swimming into a strong global tide.
Within a year, Vodacom and MTN sensed the changed mood and voluntarily lowered the rate to 89c. But it was too little too late.
ICASA eventually came to the party in 2011 dropping the minimum call fee to 73c. Emboldened by the public’s positive reaction, it cut MTR to 56c in 2012 and then to its current 40c. Last week’s announcement will lower the rate to 20c next year; 15c in 2015 and just 10c in 2016.
At last the prospect of price-based competition has been unleashed.
When I spoke this week to Cell C’s chief executive Alan Knott-Craig, he admitted that since taking office in April last year, he has been “working with Government and the Regulator”. As the founding CEO of Vodacom, he knew only too well how MTRs had hobbled his former competitor.
Knott-Craig offered the Regulator the carrot of a price war backed by financial support from his firm’s Saudi parent. Since he arrived at the Sandton head office, Cell C has cut prices aggressively, its customer base is up 30% and traffic has doubled. Saudi Oger injected $200m last year and promised another $350m in 2013, provided the regulator played ball. Knott-Craig confirmed that after last Friday’s announcement, those funds will now be released. More is available, if needed, in 2014.
Thus far, Vodacom and MTN have chosen to brazen it out, spending heavily on marketing to disguise their commoditised product. On a case-by-case basis they also match Cell C’s rates to potentially switching clients.
Investors are no longer sure that will be enough.
They wiped R40bn off the combined marked caps of Vodacom and MTN last week. The selloff of their shares could turn into a rout after Knott-Craig said on Wednesday that Cell C will take its rivals to the Competitions Commission, accusing them of anti-competitive behaviour.
After many fat years, the two companies which harvest 90% of SA’s cell phone revenues are being brought back to earth. Anyone buying their shares on current weakness is trying to catch a falling knife. That’s a dangerous exercise at any time. More so when an insider like Knott-Craig is the one who has cause it to fall.
- Alec Hogg is a writer and broadcaster. He founded Moneyweb and now runs Biznewz.com. This column first appeared in Business Day.
