South African Cocktail

South Africa's third GSM operator, Cell C is in a fairly rare position of blending the ambitions of African, Middle East and European stakeholders at the same time. The cocktail created seems to be working well as Cell C continues to compete formidably against two of the most professional players in the business.

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By  Tawanda Chihota Published  January 30, 2006

|~|Cape-Town200.jpg|~|South Africa's high youth percentage has helped Cell C appeal to that market segment successfully.|~|When Cell C eventually launched commercial services in November 2001, after a protracted award process marred by allegations of corruption, there was a certain level of pessimism regarding the new comers chances of success. At the time, the two incumbent operators - Vodacom and MTN - had garnered around 9 million mobile subscribers between them, representing a penetration rate of about 20%. Few forecast that the penetration rate would rise beyond 50%, and Cell C's chances of making a successful debut in a sophisticated and already highly competitive market appeared remote. How wrong the doom mongers were. In the little over four years that Cell C has been operational, it has portrayed itself as the zany, youth-oriented brand, which young people can identify with and older people can aspire to in a hope of feeling young again. The positioning appears to have worked. Not only has the South African mobile market added more subscribers than was earlier forecast it could sustain, topping 28 million at the end of 2005 and representing a penetration rate in excess of a whopping 62%, but Cell C has also been able to grow its market share profitably for much of its life-span. At the end of last month, the operator reported that it had boosted its customer base by 18.5% during 4Q05 alone. Cell C said its net subscriber base increased to 3.2 million at the end of December, up from 2.7 million active subscribers at the end of September. More detailed financial and operational information was released earlier during the year. Total revenue increased US$61 million year on year, or 35.1%, to US$236 million in the three months to end-September. Cell C has remained EBITDA positive on a monthly basis since May 2004 and achieved an EBITDA for the quarter of US$22 million. Market share in terms of revenue increased by 13.8% to 9.9% for the six months to end-September 2005. During 3Q05, Cell C conceded 0.3% prepaid market share and gained 0.5% postpaid market share. This improvement in Cell C's postpaid market share was a result of their having achieved a 22% share of net additions for 3Q05. Postpaid accounted for close to 23% of the Cell C subscriber base at the time. Cell C management can take much of the credit for developing the operator's business so successfully in the few years it has been operational, and that is where the story becomes most interesting. Saudi Oger's Oger Telecom manages Cell C and owns 60% of the votes of the operator. Oger Telecom entered into a management agreement with Cell C through which it seconds the CEO, CFO, COO, IT/billing, in addition to regulatory, procurement, security, and other executive managers. The Hariri family of Lebanon controls Saudi Oger. The percentage of Middle East capital in the South African operator rose even further in May last year. Local economic empowerment vehicle CellSaf sold a 15% stake in the operator to Lanun Securities, a Panamanian corporation with directors who, between them, have a wide range of expertise in the engineering and financial sectors. Lanun Securities is also linked to activities in Saudi Arabia. Following the completion of the transaction, for which CellSaf was reported to have been paid in the region of US$180 million, Cell C was owned 25% by CellSaf, 15% by Lanun and 60% by Oger Telecoms. The reduction in empowerment participation in the operator from 40% to 25% required the South African regulator's approval given that Cell C's licence stipulated that the level of local investment could not dip below 40%. The reduction of local equity in Cell C did lead to objections being raised in South Africa regarding the prudence of the sale of one of the country's most sort after assets, particularly in light of high number of local bidders that attempted to acquire the licence when it was first offered. It did not take Cell C long to overcome any dent to its confidence it may have suffered through the negative comments over the CellSaf deal, and by the end of the year the company was announcing a massive deal to partner with the UK's Virgin Group to launch an MVNO in South Africa later this year. ||**|||~|dickbranson200.jpg|~|Virgin Mobile has enjoyed immense success in the UK and US and is set to arrive in South Africa by June.|~|In December the two companies announced that they had concluded agreements to establish a 50/50 joint venture in South Africa to create a new service provider in the mobile market. In terms of the agreements, the joint venture will utilise the Virgin Mobile brand and operate as an independent service provider on the Cell C network. The joint venture, which is expected to launch during the 1H06, will trade as Virgin Mobile South Africa. The match appears ideal. The offer of virtual services had previously been illegal in South Africa, though following the amendment to the Telecommunications Act effective earlier in 2005, the provision of such services was made legal. Virgin is a well-recognised aspirational brand in South Africa, and already has a presence there through Virgin Active sports clubs, Virgin Cola and Virgin Atlantic. Virgin is also interested in entering the Nigerian market and negotiations are still underway there. The company's airline - Virgin Atlantic - flies to Nigeria and hence Virgin has some experience of the market. "The essence of an MVNO launch is all about market segmentation," says Robin Saphra, a senior telecoms executive who was instrumental in establishing Virgin Mobile as an MVNO in the UK. "The point of an MVNO is to extend usage to groups that the network operator may not yet have reached. So in terms of the MVNO deal between T-Mobile and Virgin Group in the UK, the intention was to extend usage to the youth market and to Virgin's distribution channel, through megastores and associated retail outlets," says Saphra. Such was Virgin Mobile's success in the UK that in the latter part of the lifetime of its joint venture partnership with T-Mobile, the network operator started to experience cannibalisation of its own subscriber base through the ongoing operations of Virgin Mobile. "Virgin became too much of a threat when it started offering services like-for-like against T-Mobile in third-party retail outlets like Carphone Warehouse," Saphra explains. Virgin Group's strong marketing muscle and high-level of brand awareness made it a prefect candidate to offer virtual services, though it is advised that both the service provider as well as the network operator be clear on the objectives and parameters of the agreement from the start. Cell C is chasing a target of achieving a 20% market share by the end of 2007, and whether it able to meet this goal will depend heavily on the impact of a mobile number portability programme that is set to be introduced at the end of June. The operator has expressed its support of the development and believes it stands to benefit from larger numbers of subscribers churning from rival networks. "Number portability will increase churn and we will lose subscribers, but we will gain more than we lose because the other operators have larger bases," says Jonathan Newman, advisor to the Cell C CEO. Second-placed operator MTN has suffered greater losses in the domestic market than market leader Vodacom through the presence of a third operator, and speaking to CommsMEA in January, MTN Group CEO Phuthuma Nhleko acknowledged that more needed to be done in South Africa for the operator to shore up its market share. "I think it has been a tough six months, particularly for South Africa," Nhleko said. "We still see meaningful growth in the operations. “There is room for us to take down the cost base quite a bit and churn out more efficiencies out of the Group." Despite being the smaller player, Cell C has been determined to match its larger competitor's moves technologically, stroke for stroke and in December introduced EDGE services as part of its mobile broadband strategy, to provide appropriate bearer services for clients depending on their location data speed and application requirements. The operator reported that its research indicates that the "sweet spot" for data usage for accessing the internet and downloading content is around 120kbps, which is the average data speed that users will experience by using EDGE. The operator has rolled out the EDGE network in metro areas where the vast majority of mobile broadband users are based and the operator expects to see the technology ensure that accessing the internet, communicating via email and downloading content such as songs and video clips is a faster due to the greater speed of access. The launch of Virgin Mobile South Africa around the same time as the introduction of mobile number portability later this year is set to have a significant impact on the continued direction Cell C takes. After four years of operation, an open question remains when the shareholders will decide to take the entity public and how the differing interests from across all the different parts of the world will continue to make for a successful cocktail. ||**||

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