The Delta Perspective
February 2009
The emergence of a new
breed of operators in
South Africa
Author Josep Maria Moya - partner: jmm@deltapartnersgroup.com
Tammy Whyman - principal: tw@deltapartnersgroup.com
The scene is set for
one of the most exciting
years in South Africa’s
telecom history
Now that all the New Years’ predictions
are out, it is time to sift through the
hype and take a deep look into the state
of the telecoms industry in South Africa.
There has certainly been no shortage of
news in 2008 and the first part of 2009,
both about the telecoms sector and the
state of the world’s economy.
And here at Delta Partners, we feel that
this year it is finally going to be different
for the South African telecoms industry.
“There is a confluence of factors in
2009, which is set to turn the industry
around - allowing for a ‘new breed’
of operators to emerge,” states Josep
Moya, partner of Delta Partners.
“In what is certainly turning into a
highly competitive environment, only a
minority out of the numerous new and
established players will survive and there
is going to be significant consolidation
in the years to come.
“These survivors will be those who are
able to transform their current business
models and adapt not only to changing
economic conditions, but also to the
ever-increasing demands from end-users
in both the business and consumer
segments,” Moya says.
Key predictions for the South
African telecom market in 2009
• MTN and Vodacom will continue to
compete in corporate services but
will find difficulty in materialising
synergies with the mobile business
due to organisational and commercial
differences
• An international player may enter the
mobile market via acquisition or a
new license
• Telecom infrastructure sharing will
increase across South Africa (i.e.
towers and sites, backbone fibre,
submarine cables)
• Telkom’s nomadic W-CDMA offer will
struggle to achieve significant results
• Telkom will struggle to implement a
clear strategy and investors may lose
patience as margins further decline,
making itself a target for acquisition
once again
• Several VANs will be forced to sell or
merge as they will lack the cash to
make necessary capital investments
• Several service providers will be
eliminated, as their contracts will not
be renewed
 South Africa today in the
global context
While South Africa boasts some of the most developed
telecom networks, products and services on the continent, the
development of the South African telecommunications market
in terms of competitive players and their relevant penetration
into the market is quite low.

This comes as even more of a surprise
when you consider South Africa’s status
as the most developed economy in
Africa and its market-based approach to
economic growth.
Telecommunications is an essential lever
that spurs economic growth. To this
extent, it is difficult to understand how
the liberalisation and growth of the
telecoms sector has been decoupled
from growth seen in other local
infrastructure sectors in recent years.
The lag in the telecom sector is
especially evident when looking at
broadband penetration, where South
Africa falls behind countries with similar
GDP per capita including Iran, Lebanon,
Bulgaria and Brazil. (see exhibit 1)
The mobile market, however, has
developed in line with international
benchmarks, a reflection of the early
competition in the mobile space, which
started in 1994.
As a result, mobile broadband adoption
far outweighs the prevalence of fixed-
line-based ADSL, which continues to
provide challenges relating to cost,
bandwidth allocation and access to
physical infrastructure.

EXHIBIT 1: Comparison of internet and broadband penetration per GDP level

Note: Data from December 2008

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But how did we get there?
The South African telecommunications Regulator (ICASA) has
slowed the development of the market by several years by
constantly delaying the entry of competition and international
gateway access.
Some notable progress has been made,
as evidenced in the passing of the
Electronic Communications Act in 2006.
However, the fact that it took three
years to pass this Act shows the lack
of clarity about the direction that the
sector should take.
Issues that are critical to open up the
market - such as spectrum allocation,
local loop unbundling, carrier pre-
selection and WiMAX licenses - are
still under deliberation and are further
crippling the competitive environment.
The Government’s interference with the
sector has also raised strong criticisms
from the industry challengers and
consumers alike.
In particular, the drawn-out court
battle between the Ministry of
Communication and alternative
network provider, Altech, over the
issuance of new self-provisioning (ECNS)
licenses has filled the sector with further
uncertainty and delayed much needed
investments in access technologies.
The Government has also been criticised
for allowing Telkom to delay the landing
of sea cables.
However, that is about to end with
the launch of three new undersea
telecommunications and data cables,
the first of which - Seacom - is
scheduled to go online in June.
The other two, the Western Africa
Cable Consortium and the East African
Submarine System, will be up in
2010, and will be key drivers to lower
broadband prices and create additional
competition. Prices are expected to drop
by at least half of the current best rate
per megabyte.
When looking at prospects for 2009,
Tony van Marken, Executive Chairman
of Vox Telecom, tells Delta Partners:
“I am hopeful that the electronic
communications network services
(ECNS) licensing process will continue
without any new twists and turns.
“The key here is that ICASA does not
impose a license fee that does not
make economic sense for operators.
Overall I am optimistic that we are
moving in the right direction in terms
of deregulation.”
At Delta Partners, we are also optimistic
about the direction that some players,
who we label ‘New Breed of Operators’
are taking. These are players who have
been able to sift through the regulatory
uncertainty, chart their own unique
space in the market and bet on the
future by understanding the needs of
the market.
Pending issues to increase
competition in South Africa
• Wireless spectrum allocation
• Cost of ECNS licenses
• Black economic empowerment
(BEE) requirements for licenses
and spectrum
• Carrier pre-select
• Sub-marine cables
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 Mobile operators into
the unknown:
Vodacom and MTN
Since the South African mobile market was opened
up in 1993, Vodacom and MTN have gone on to
become formidable players in the regional market.
Their continued dominance of the
South African market was aided by
Cell C’s less-than-aggressive entry
strategy as is traditionally seen by
third entrants.
This has given both operators solid
footing to use their lessons from the
domestic market (and free cash flow) to
take advantage of growth opportunities
outside of the maturing South African
market and even Africa itself.
That said, it is still in South Africa where
the mobile operators are truly pushing
their capabilities to the maximum, by
turning their attention to the cream
left in the market by Telkom in the
broadband and data space.
As mobile and data technologies
converge, Vodacom and MTN have
been at an advantage with a “self-
provisioning” license, which allowed
them to lay any type of infrastructure -
mobile or fixed.
Seeing the under-penetrated
broadband market created from the
lack of competition and adequate
infrastructure, these operators have, and
continue to, create state-of-the-art high
speed data networks.
Both operators now have hundreds
of kilometres of fibre optic cabling
in the ground, as well as half of the
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broadband market through 3G/HSDPA
data cards. (see exhibit 2)
Broadband via 3G and HSPDA brings
the advantage to customers in terms
of quick installation and mobile
convenience. However, fixed-wireless
technologies (i.e. WiMAX or W-CDMA)
can potentially offer higher speed and
lower costs to effectively serve the
residential market.
Thus the mobile operators could find
their 3G data market eroded by a new
breed of operators entering the market
with such technologies – which are
already in use by Neotel and Telkom.
According to Neotel’s Head of Products
and Services, Rajeev Sinha: “We believe
that wireless is the right way to deliver
services to our customers. A lot of
South African customers belong to a
sub-grade level of consumption, which
does not justify the cost perspective of
laying cable.”
MTN and Vodacom have created
separate commercial divisions to bring
new corporate customers and services
to the table. MTN has further proven its
dedication to the segment by its recent
acquisition of Verizon’s South African
business, which will be folded into its
“Network Solutions” business.
Vodacom has also recently bought
Gateway Communications and
EXHIBIT 2: The South African Broadband market
Source: Company reports and statements. Data extrapolated to December 2008
StorTech to execute its plan of offering
additional and value-added business
services such as managed data
networks, technology outsourcing and
data storage and security.
With these recent acquisitions, the
battle for the corporate customer has
begun. In this segment, the mobile
operators have to also compete with
the most innovative value-added
network service providers (VANS)
and resellers, most of which have
developed converged offerings
including voice, data and managed
services – all with one single point of
contact to the end customer.
MTN and Vodacom will have to make a
significant effort to gain the lost terrain
with these customers.
South African mobile operators
will also need to focus on cost
optimisation in the current uncertain
economic climate. Even in abundant
times, operators around the world
are reviewing their business models
and outsourcing what they have
deemed to be non-core functions (e.g.
contact centres and network passive
infrastructure management).
South Africa, being one of the
world’s up-and-coming contact centre
destinations, has an advanced and
value-added offering for call centres,
which has already seen mobile operators
extensively outsource this function,
especially for low-value customers.
Operators are also encouraged by the
regulator to share mobile masts and
the extent of infrastructure sharing
amongst the players is expected to
deepen in 2009.
It is clear that South African operations
of MTN and Vodacom have been
transforming themselves into a new
breed of player, but just how much can
they handle without losing focus?
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 Both have recently been involved in, or
recently announced, intentions of heavy
merger and acquisition activity, which
will distract top management.
The move by the mobile operators
into the data space presents a new
set of challenges and calls for a new
set of skills that are currently not
present in their organisations. The
sales organisations of all product lines
will need to be integrated to offer a
converged product.
Finally, both players need to be ready
to defend the traditional mobile
market now that the equilibrium has
been broken by Telkom’s sale of its
shareholding in Vodacom to Vodafone,
and its entry as a nomadic player
through W-CDMA.
Furthermore, let’s not forget the mobile
players also need to compete for market
share at the base of the pyramid, a
space wide open for any player who
is able to create an appropriate and
relevant offering that has the ability to
be profitable for the business. However,
if both operators try to compete along
all fronts, they may be spread too thin.
To add to the difficulty of strategic
decision-making, the entry of further
strong players into the country is
plausible. The African CEO of Zain,
Chris Gabriel, was recently quoted
in a Reuters report saying: “We are
interested in the South African market.”
And because Zain sits on over US$4bn
of recently-raised funds for acquisitions,
the company will be monitoring the local
market for any opportunity to enter.

Telkom
In 2008, many industry experts and analysts were ready to
write Telkom off as a cruise boat on a collision course with
an iceberg, observing unexpected strategy shifts by the
management, increased customer dissatisfaction with service
levels, constant high prices, and decreasing margins.

However, a look into 2009 shows that
the tide could be turning for Telkom,
as it faces the inevitable opening up
of the market and it is seen to be
working hard to transform itself into a
‘new’ operator.
Perhaps the principal opportunity, and
most daunting challenge, for Telkom
is what to do now that it does not
have Vodacom on its balance sheet
and has a significant amount of cash
in an environment where cash is a
scarce resource.
The self-determined “freedom” that
Telkom now has will come at a price
and in the very short term, investors
will be looking for those high margins
that Vodacom gave to the group. This
is not easy to replicate, especially in the
mature domestic fixed-line market.
Sensibly, it seems that Telkom has
decided to focus on the high-margin
sweet spot, the corporate segment.
Up until now, this segment has
largely been Telkom’s unique asset in
South Africa, despite the increased
competition from other VANS who

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have targeted this segment on the
fixed-line and IT side.
In terms of share of corporate wallet,
Telkom has had to watch the mobile
players walk away with a large
share of these clients in the form of
mobile services.
Now, it can reel those revenues back, by
creating a converged offering. This may
be especially attractive as companies will
be looking to cut costs during uncertain
economic times, but still want the
convenience of one-stop shopping.
The challenge for Telkom will be to
organise its splintered business units
around a segment-focussed strategy,
ensuring that all commercial efforts
are aligned to serve each segment
through a truly specialised corporate
accounts team.
It will need to incorporate ICT
knowledge for the expanded corporate
offering and will also have to increase
efforts to proactively manage the
entire customer base as a key growth
driver, since marginal value from new
customers is extremely low compared to
the value of the current customer base.
Although the strategy may seem like it
has the right focus, the question now
becomes: “Will Telkom make money?”
T-systems and BT Global services,
the first incumbents to focus on ICT
solutions internationally, have struggled
to create a respectable profit margin
from this business model. The issue is
that carrier services are a commodity,
corporate ICT services require a lot of
human support, and IT services have
generally low margins in what has
become a fiercely competitive market.
Creating converged services
Telkom’s recently-launched W-CDMA
is an initial step towards a mobility
offering, although at this stage it
is only offering nomadic services at
discounted rates.
It is hard to envision whether
this will transform into a fully-
converged service, or into a no-frills
service that can serve the low-end
segment for basic connectivity and
telecommunications capability.
Now that Telkom has divested from
Telkom Media, the company is left
without any content provider, therefore
making a “triple” or “quadruple-play”
offering more unlikely.
The continued burden of costs
Tekom’s efforts to increase revenues also
need to be coupled with actions to cut
costs.
One way would be to improve
profitability by selling, outsourcing or
discontinuing non-core activities and/
or unprofitable business lines (e.g. the
payphone business), which will further
diminish as mobile penetration increases
in SA and across the continent.
Additionally, its effort to propose a
radical outsourcing plan has been
detracted due to strong
union opposition.
New forays into the mobile space and
international businesses will also pull
costs upwards as new competencies
need to be developed. As of yet, it is
not clear where Telkom will be able to
address the critical cost cutting issue as
it enters into 2009.
International strategy
Telkom now has a free license to pursue
an international strategy - something
that it was lagging in comparison to
other regional players.
Moves are foreseeable and anticipated
by investors, now that it has cash in
the bank and has broken itself from
Vodacom’s constraints.
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 Telkom’s first step in “freedom” was
to buy the African assets of Internet
service provider (ISP), M-Web - bringing
Telkom’s immediate footprint to seven
African countries.
Perhaps the acquisition of a
geographically-diverse data player
can be seen as a signal of its new
international strategy. We should
expect other acquisitions early
in 2009.
Still, we cannot forget that Telkom
could be an acquisition target on its
own, as several regional operators
are grabbing more and more African
assets. (see Exhibit 3)
Several regional operators have
cash that they plan to use in Africa.
Although Telkom is still a large
purchase for most operators - even
Exhibit 3: Contribution of Africa to regional players revenues
Source: Operators’ Reports. Etisalat, Orange excluded –do not report African financials separately
8
without its Vodacom assets - any
potential investor would have to bring
synergies to the table, perhaps in the
form of mobile expertise, to unlock
further value within Telkom.
In 2009, the stage has certainly been
set for Telkom to become a new breed
of operator. But will its legacy of stifled
competition and poor service inhibit the
transformation that needs to take place?
So far, the new executive team has
proven itself ready to make turn-around
decisions, such as divesting from Telkom
Media, and make bold market moves,
like launching a mobile operator.
And it’s likely that the vast client base
of Telkom will support its baseline
revenues as it goes through the
necessary transformation into non-
traditional business lines.
 Cell C
After one of the worst-performing launches of a
third entrant, for Cell C, it is certainly time for a new
beginning. It may get that chance in 2009.
Now that Telkom has launched its own
mobile operator, speculation about Cell
C as a potential takeover target for
Telkom has subsided.
However, Delta Partners still sees value
in the potential acquisition of Cell C
by Telkom. Telkom needs the mobile
experience that Cell C has. Telkom
would also ramp up with several million
subscribers who it could cross-sell
broadband products to.
If Telkom does not pursue an acquisition
with Cell C, we predict that other
international players will.
Cell C may be the vehicle that one of
the regional players, like Zain, needs
to get into the country. If Cell C were
acquired, it may become the catalyst to
disband the operation of Virgin Mobile,
a mobile virtual network operator
(MVNO) utilising Cell C’s network,
which as had a lacklustre performance
in terms of subscriber growth, with less
than 1% of market share gained since
launch in 2006.
With or without a change in
shareholders, Cell C may finally decide
Exhibit 4: Market share gained by mobile third entrants
that now is the time for an aggressive
push into the market, vying for the last
10% of non-mobile population and
churners from the other networks.
However, that would require extensive
rural coverage of a large and sparsely-
populated country. Given its current
financial results, it would be difficult
for Cell C to dedicate the funds to
such an intensive investment. Tower
sharing with the other operators may
be one option.
Another avenue for Cell C to increase
market share is to promote the MVNO
model by facilitating access to its
network for other aspiring MVNOs,
such as Pick’n Pay and Kulula.com,
which are reportedly interested in
launching branded MVNOs. This model
may become more critical if Virgin
Mobile decides to exit the market.
Certainly, with all of the expected
changes in the mobile space, Cell C
does not stand much of a chance by
following the “status quo” in the
mobile voice market and will need to
create its “new telco” strategy.
Mobile penetration
at time of 3rd entrant
9
 The up-and-coming Neotel
Neotel’s launch as the second national operator was
long-awaited by consumers and corporates alike.
Neotel has preferred to stay away from
the hype and ensure that it has an
attractive offering and quality network
technology in place. That strategy is
beginning to see its fruition as high
value clients are attracted to Neotel’s
innovative and economical offer.
According to Neotel’s Rajeev Sinha:
“With more and more competition,
you are forced to become more
innovative. I have never seen in any
market, because of competition, that
companies are not growing.”
However, in the time that has lapsed
between the lengthy license process and
the prolonged full-scale entry into the
market, the mobile operators and some
alternative fixed players have been able
to snatch some of Neotel’s potential
high-value market.
The road to self-provisioning
For hundreds of service providers and resellers, or
VANS licensees, 2009 has started out with a bang.
On January 19th, the Regulator
issued all VANS with infrastructure
licenses (i-ECNS licenses). This was a
long-awaited outcome of an arduous
process that is guaranteed to change
the competitive landscape. It is also a
hopeful sign that ICASA will continue
making key new pro-competitive
regulations which will open up further
strategic options for these players.
While many i-ECNS license holders, such
as Internet Solutions or Vox Telecom
for example, have been nimble enough
to make opportunistic acquisitions -
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To roll out the service quickly and
efficiently, Neotel is relying on fixed
wireless technologies, such as WiMAX
and W-CDMA, which will allow the
organisation to connect customers
until there is enough demand to merit
putting additional fibre in the ground.
The year 2009 will be the first full
year of operation for Neotel, where
we can see its strategies come to
life. The challenges Neotel will face
are those related with any challenger
start-up: spending on marketing to
increase customer awareness, pushing
aggressively into the corporate segment,
and creating more distribution channels
through agreements, like with PostNet
and Autopage.
which have given them a steady annuity
base - many others do not have the
size to make a bet on needed capital
expenditure (CAPEX) investments before
having clarity on the licensing situation.
Some alternative players have also been
traditionally better positioned to serve
a wide range of niche needs, and can
now complement with further services
to create a converged offering.
Van Marken, of Vox, comments: “At
Vox, we are starting to see the benefits
of offering our assets as converged
Exhibit 5: Changes to the VANS business model through Self-provisioning
• Most players could have significantly higher margins as they
would no longer have to rely on interconnecting through
incumbents to provide access to the end customer - except
for the last mile.
• Building out infrastructure calls for capital expenditure. This is
a challenge in itself, given current financial markets situation
and difficulties to raise additional capital or debt to finance
such projects and/or its higher cost.
• For those who decide not to roll-out infrastructure, there will
be an increased number of backbone providers, which should
also help to lower costs.
• For all specialised operators the challenge will be to protect
their business - especially those focussed on business custom-
ers (voice and data), as the incumbents are currently focussed
on growing that segment in South Africa.

solutions. I am not sure the major We should also expect continued

players have yet turned the rhetoric into
execution, but I fully expect this will
become a reality.”
Resellers, especially, should expect
continued pressure to be cut out from
the chain by the operator, a trend
already observed in this market through
the acquisition of several exclusive
service providers by the network
operators.
Now that the resellers can provision their
own networks, it could greatly change
their business model. (see exhibit 5)
The challenge for the i-ECNS licensees
will be to continue to balance their
current operational focus while taking
decisions about self-provisioning. In
either scenario, there is the constant
challenge of creating a differentiated
offering to retain the customer base and
attract new business.
consolidation of the alternative players
through acquisitions, although the
credit crunch will likely restrict access to
the credit needed. Some of the factors
that are going to allow the winners to
succeed include:
• Deployment of certain infrastructure
that allows i-ECNS holders to deploy
their own offering and differentiate
them from competitors;
• Optimisation of the cost structure
allowing for effective pricing
strategies and reducing the entry cost
and cost of ownership for the end
customer;
• Effective and efficient integration
of recent and future acquisitions
allowing for synergy creation as a
consequence of economies of scale
and an integrated offering;
• Having the right distribution partners
and commercialising the services
through a relevant brand promise and
customer experience.

So, will it be different?

Obviously, much happens in the telecom industry in
any given year, especially in immature markets.

But consider that Telkom and Vodacom are now poised to take new directions.
MTN and Vodacom are now bigger broadband providers than Telkom. Neotel
will have its first full year of operations. More than 500 VANS could now become
network operators. The world is the deepest economic crisis since the Great
Depression of the 1930s, leaving some operators strapped for cash and others
with tremendous bargaining power. We dare say that 2009 will create a “new
breed” of operators in South Africa.
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 Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology

(TMT) sector in high growth markets, with more than 130 professionals operating across the Middle East and Africa from its offices

in Dubai and Johannesburg, and through its three highly synergetic business lines:

Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than

25 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them

address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity: As a fund manager, Delta Partners manages a $75M private equity fund, targeting investment opportunities in the

TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Group’s unique TMT industry

expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis,

and support to portfolio companies.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several telecom transactions in the

region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region,

either to the seller or buyer side of the transaction. Delta Partners actively leverages its close link to Delta Partners’ private equity arm

to access the investor community as well as top-level financial talent.

At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to

services, combining strategic advice and hands-on pragmatic approach.

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