Vodacom leads growth in South African WCDMA market - South African market reaching a crucial tipping point in terms of high- speed mobile services

The number of South African WCDMA and HSPA connections surpassed the 1 million mark for the first time last year, establishing South Africa as comfortably the most mature market in Africa in terms of high-speed mobile networks. According to our estimates, South Africa will surpass the 2 million mark in third-quarter 2008. Even as many other markets in the continent begin to upgrade their networks, South Africa still accounted for half (49.63%) of all African WCDMA and HSPA connections by end of first-quarter 2008, the period tracked in this report.

All three South African operators have launched WCDMA networks, and two - Vodacom and MTN - have also commercially launched HSPA networks that claim to offer download speeds of up to 3.6 Mb/s. The market has reached a level of maturity that suggests even a specialist WCDMA operator may now be viable. Indeed, this appears to be what fixed-line operator Telkom is planning. The operator is in discussions to divest its 50% stake in Vodacom in order to allow Vodafone (owner of the other 50%) to take a majority shareholding in the business. Once it has exited Vodacom, Telkom is free to re-enter the mobile market on its own terms. Last month, it was revealed that Telkom has partnered with Chinese equipment vendor Huawei to rollout fixed-wireless services initially and WCDMA services at a later date. The operator will reportedly invest ZAR1.7 billion (US$213 million) in building-out this new network over the next three years.

In the meantime, market-leader Vodacom dominates the South African market with a 55% share of total connections and a 72% share of high-speed (WCDMA and HSPA) connections. Its number of high-speed connections surpassed the 1 million mark for the first time in first-quarter 2008. At present this figure represents only a fraction of Vodacom's total connections (4.45%) but the situation is changing quickly; growth in its WCDMA and HSPA connections is running at over 100% year-on-year (compared to less than 6% on GSM) and high-speed connections accounted for 30% of total Vodacom net additions in first-quarter 2008.

This shift towards higher-speed networks is reflected in Vodacom's changing mix of services. Its two flagship high- speed services are the 'Vodafone live!' content portal (accessed via WCDMA or HSPA) and mobile TV (a mix of a WCDMA-based streaming TV service known as 'Mobile TV Playa' and a dedicated DVB-H-based broadcast service). In its fiscal-year 2008 (ended March 31 2008), Vodacom said it had 1.4 million Vodafone live! users (up from 899,000 the previous year) and 31,000 mobile TV users. As a consequence, the operator saw a 50% annual rise in data revenue in fiscal 2008 to ZAR4.7 million (US$618,000). Data revenue as a percentage of service revenue was 12.6%, up from 9.7% the previous year. Vodacom also launched data bundles for prepaid users during the year but the gulf in ARPU between prepaid and postpaid customers remains high at US$8 and US$64, respectively (an average of around US$17).

Vodacom's figures suggest that the South African market could be reaching a crucial tipping point in terms of high- speed mobile services. As well as an increasing range of high-speed handsets available (Vodacom will launch iPhone 3G later this year), USB dongles and datacards are also gaining traction in the market. However, in common with the rest of Africa, network coverage and handset affordability will be the key to future growth.

Will Croft, Analyst, GSMA Intelligence:

With market penetration set to surpass the 90% mark within the quarter, South Africa is one of the most mature African markets. However, WCDMA and HSPA in South Africa is still very much in its early stages with the WCDMA (Family) share of total net additions running at just under 20% in first quarter 2008. We expect this to ramp up steadily as handset availability and network capacity grows, but do not forecast the erosion of the installed GSM base until 2010. We forecast that WCDMA (Family) net additions will account for almost 100% of total net additions within a few years.

The difference in pre- and post-pay ARPU illustrates the challenge operators have in signing-up customers to high- speed services in a cash-based economy. In a market with 86% of its base on prepay, convincing customers to switch to contract tariffs is tough. Operators will need to attract customers to data services by promoting them on prepay tariffs, and offering attractive bundles, promotions and discounts.