SOUTH AFRICA: An Introduction to IT & Telecommunications

Chambers’ Overview 

Introduction to the Landscape 

The IT and telecoms industry in South Africa is a dynamic and evolving sector. The industry has seen steady growth, creating a competitive supplier landscape and introducing new technologies into the market. The year 2022 has seen some emerging trends and the effects of increasing inflation and competition influencing the way the industry operates.

The industry is regulated by the Electronic Communications Act 36/2005 (ECA) in conjunction with the Independent Communication Authority of South Africa (ICASA). ICASA is the official regulator of South African communications, broadcasting, and postal services, and in that role oversees the IT and telecoms industry.

The SA landscape has generally evolved in line with the global IT and telecoms industry, including in relation to increased innovation, cross-border transactions and diversification of services and service providers. The diversification of the service landscape has created room for providers to enter the market and encourage competition. This is clearly illustrated by the increase of video on demand streaming services which appear to have peaked during the COVID-19 pandemic. The fragmentation of the market has been driven partly by service providers’ desire to create additional revenue streams. This culture of innovation within the sector, and the enthusiastic adoption of new solutions by both B2B and B2C customers, has spurred an influx of telecoms start-ups.

The diversification of suppliers continues to put pressure on traditional telecoms providers to collaborate and consolidate with other industry players to increase the quality of, and gain access to, emerging IT and telecoms services.

Enabling Innovation: Radio Frequency Spectrum 

In the last 25 years, the South African IT and telecoms industry has evolved from a state-owned monopoly to a liberalised, converged sector undergoing major transformation, including with the advent of digital media and big data. All of this allows suppliers to model customer behaviour, monitor supply demand equilibrium, and provide consumer-tailored products.

In 2022, ICASA successfully auctioned state-owned radio frequency spectrum licences with proceeds of over R14.4 billion ($967.49 million), from a pool of six participating bidders: Telkom, Cell C, Vodacom, MTN, Rain and Liquid Telecom. The success of the auction, and release of the radio frequency spectrum, will result in the following:

• some operators having access to frequencies below 1 GHz;

• expansion of internet broadband throughout South Africa; and

• increased likelihood of lower data and voice costs as well as efficient 5G roll-outs and expansion of 4G technology.

Following the radio frequency spectrum auction in 2022, and in line with its mission statement, ICASA has also recently proposed regulatory amendments to make provision for an extension of the radio frequency spectrum for Wi-Fi broadband.

Market Movements 

Consolidation between industry players has presented an opportunity for the telecoms industry to:

• explore new strategies for growing demand;

• share and purchase assets within the sector;

• consolidate assets for investment purposes;

• raise the providers’ liquidity and share value or expand fibre assets;

• acquire additional customer bases;

• infiltrate new markets; and

• explore business partnerships and opportunities.

This typically enables industry players to secure financial stability and adjust to competition.

Notwithstanding the positive aspects of consolidation, there are inevitable associated risks. Attempted transactions between MTN/Telkom and Telkom/Cell C illustrate this point. Had the MTN/Telkom deal gone through, the acquisition would have allowed MTN to hold the biggest share value in the South African telecoms market, and increased MTN’s fibre assets together with its customer and coverage base. Instead, the transaction failed and both Telkom’s and MTN’s share prices suffered. It is anticipated that more industry players will be inclined to consider consolidation in order to maximise benefits, lower costs, and expand telecoms infrastructure, assets and clientele.

In a bid to carry out its debt restructuring plan, Cell C secured a recapitalisation loan from Blue Label Telecoms in exchange for shareholding, interest on the loan and other debt-related terms. If properly executed, this recapitalisation will improve Cell C’s shareholder value and secure existing lenders and investment value.

Telecoms and IT Developments for B2B Customers 

There continues to be a shift away from single-sourced telecoms providers, who manage an organisation’s entire IT and telecoms ecosystem, towards a multi-vendor market where organisations engage directly with multiple service providers for a range of IT and telecoms needs. The driving factors in this migration have been a push for more agility in IT and telecoms solutions along with cost savings. For suppliers to remain competitive, they need to present modular and extensible solutions. The ability to achieve agility and strategic advantage for customers is more possible in a diverse service provider landscape. However, this also opens organisations to more risk due to a loss of end-to-end responsibility on service providers for the entire IT and telecoms ecosystem.

As a result of this multi-vendor landscape, spend on individual supplier contracts is decreasing. This means there is less bargaining power for customers, including in trying to impose customer standard contract terms. Increasingly, these agreements are negotiated from the service provider’s standard contract terms, which typically contain a more conservative approach to risk allocation. This increases the need for effective contract management and tools to manage the customer’s landscape of suppliers.

Emerging Technologies 

SD-WAN and related technologies continue to drive transformation and procurement in the voice and data network services space. The software layer in SD-WAN solutions directs and prioritises WAN traffic across an organisation’s IT system and enables organisations to improve performance by creating a tool for centralised and simple management, while increasing bandwidth use efficiency. This in turn decreases overall network costs and provides a centralised view of performance and security controls across the organisation’s network. SD-WAN is designed to support cloud and real-time applications by linking the WAN system directly to the cloud and optimising bandwidth, resulting in a better user experience. With the growing list of advantages and competitive costs for SD-WAN solutions, it is anticipated that many organisations will veer away from traditional Multiprotocol Label Switching (MPLS) and start investing in SD-WAN.

A challenge with SD-WAN is obtaining effective service level commitments from providers in respect of the overall network performance. Contractual recourse may be against the network service provider, rather than the SD-WAN provider, and SD-WAN providers often resist complete end-to-end responsibility for the solution on this basis.

Wider Economic Factors 

The South African IT and telecoms industry is not immune to economic, geo-political, regulatory and other external factors which affect the industry’s viability and profitability. In the near term, industry players will experience inflation and cost of living challenges, including:

• budgetary challenges, such as increased expenditure, interest on debt and restricted cash flow; and

• decrease in subscribers, eg, for subscriber video-on-demand services, due to consumers re-evaluating their expenses.

Telecoms companies will have to be innovative in order to balance opportunities with these challenges. This balance may include increased efficiencies through digitisation, increased customer trust and data security, and revisiting supplier agreements to negotiate cost reduction.

Conclusion   

The opportunities presented to the South African IT and telecoms industry by the prevailing macro-economic environment in the last few years have resulted in steady growth within the sector. This growth in turn has spurred new technologies, a more competitive service provider market and speculation surrounding the consolidation and diversification of key role players. With the current downturn and imminent global recession, it will be interesting to see how the IT and telecoms sector adapts to new challenges and finds innovative ways to decrease cost, while still remaining at the forefront of technological advances and driving modernisation.