SA`s cellular price war is not a passing marketing fad. It`s going to be a drawn-out battle for subscriber numbers amidst declining average revenue per user. All indications are that SA is about to get a taste of the price wars that have shaped the cellular landscape in Europe and the US in the past four years.

MTN, of course, denies a head-on battle with Vodacom, which has cut rates twice in one week. MTN`s tariff review, due in the next two months, CEO Maanda Manyatshe tells Reuters, is not a reaction - its preferred strategy is to offer bundles rather than cutting tariffs, he maintains.

Whatever the terminology, the fact remains that SA`s cellular price wars have started again - and Vodacom has fired the first shots in what many expect to become a drawn-out battle for subscriber numbers amidst declining ARPU.

The stakes are high. SA`s mobile market, according to BMI-TechKnowledge, will reach about 31 million subscribers by end-2009. Meta Group expects competition will drive voice call prices down 10% to 20% per year through 2007, and data services between 20% and 40%.

Battle tactics

For now, the operators seem to be taking their cue from abroad. The first of these tactics to make its way to SA is `community-based pricing programmes`. In the US, Verizon Wireless was first to push its "IN" Network, offering subscribers free calls on its own network. Cingular followed with its own community-based pricing programme, allowing its users free calls among themselves too.

Other recent tactics employed by US mobile operators included Cingular`s Rollover plan, rolling over unused minutes in one month into the next, and Sprint`s plan that allowed changing one`s allotted minutes on a monthly basis.

Vodacom`s version of community-based pricing is its `Happy Hours` offering, launched earlier this month - calls during peak time (5pm to 8pm on weekdays) will cost R1.49 a minute for on-network calls. This halves rates for pre paid customers. Contract customers now pay slightly more than half.

MTN followed suit with the prepaid MTN WOW WOW bundle, which offers 50% discount for on-network calls between 5pm and 8pm on weekdays. But MTN went two steps further; it extended its community to include calls to landlines and included a value-added data component. With WOW WOW, users pay R1.65 for on-network and Telkom-bound calls, and R2.28 for other networks. Users will also be able to send 10 SMSs and five MMSs a month, at no charge.

Unlike its rival, MTN`s new and existing users are expected to purchase specific starter packs in order to enjoy lower tariffs for services like SMSs, voice calls and MMSs.

Vodacom responded by announcing further cuts of up to 17%, to R2.99 on all prepaid calls from 7pm to 8pm, based on per-second billing, and across calls to all networks and operators.

Despite what Manyatshe might say, this is a tit-for-tat price war like few others.

The very nature of any price war is that rivals are constantly upping the ante in their battle for subscriber mind and market share. During the heady days of Taiwan`s cellphone boom, for example, one operator was giving away a second phone number to new customers, just to inflate subscriber figures.

Since all`s fair in love and war, Vodacom and MTN (and Cell C in due course) are likely to resort to equally innovative tactics to woo customers. Don`t be surprised if one of the operators start offering free calls between subscribers on its own network.

The 3G factor

Unlike Europe and the US, where the latest price cuts followed soon after the introduction of 3G, SA`s tariff battle is influenced by multiple factors.

With subscriber growth fuelled mostly by the low-usage market segment in the dominant prepaid market, operators are banking on the fast-growing popularity of high-margin wireless data services beyond SMS to pad their bottom lines.

Blood will also be shed in the quest for mobile data revenue growth beyond multimedia applications. More innovative data bundles and pricing tactics are likely from Vodacom, MTN and Cell C in months to come.

The first shots were already fired six months ago when Vodacom dropped its 3G data rates by 95.5%. Soon after, MTN followed suit with a 96% cut. Not surprisingly, but a bit belatedly, Cell C joined the fray last week, announcing a 92% reduction of GPRS data tariffs.

At the same time, the industry may have underestimated the scale of non-voice demand, from low-margin SMS to lucrative wireless multimedia messaging on GPRS, EDGE and 3G.

But when it comes to average revenue per user, or ARPU - a very accurate measure of an operator`s financial health - voice will remain the most compelling application for some time.

In fact, according to Meta Group, enterprise adoption of 3G data services (with capacities between 200Kbps and 2Mbps) will remain limited until at least 2007. Voice will remain the dominant application until 2010 by volume, and 2008 by revenue.

But 3G, around three times more efficient than GSM in its ability to carry voice for the same amount of spectrum, also means that, if operators gradually add 3G capacity to their networks over the next two or three years, the chances are they could end up with a total capacity 2.5 times more than now.

The pressure will be on to generate sufficient growth in demand to fill it. Promising candidates are video calls, video downloads or applications like interactive gaming.

In fact, as Vodacom CEO Alan Knott-Craig points out: "South Africa today is the only country in the world where video calls and voice calls can be made at the same rate - at the lowest rate in the world for video calls."

However, few will predict 250% growth in call volume over the next three years from these applications alone. The reality is that generating growth through voice calls will be all but impossible if not through lowering prices precipitously.

Knott-Craig is also of the opinion that there will be no excess capacity as a result of 3G: "Vodacom is trying to build capacity and stay ahead of demand. We are trying to move the classic usage patterns, not trying to fill capacity."

He adds: "When the market matures, prices will move down more rapidly as operators attempt to use their market capacity most efficiently."

The battle beyond 3G

Voice`s dominance is likely to continue, according to Meta Group, even when packetised voice (e.g. VOIP) is introduced in future versions of 3G/4G networks.

The 4G mobile generation, around the corner, is mostly a collection of services combining existing technologies (including 3G and WiFi) with other kinds of wireless technologies like WiMAX and future evolutions of 3G/UMTS.

These wireless data alternatives could limit the potential for 3G - especially WiFi (2005+) and WiMAX (2007+), a very real threat.

Knott-Craig agrees that competition from other wireless data alternatives could limit demand for 3G, but he also points out that "the greatest benefit of 3G is that it is of an international standard."

WiFi and WiMAX, however, also represent a huge opportunity and potential competitive advantage - at least for the mobile operator first out of the starting blocks.

All indications are that announcements in this regard are imminent, with all of them hard at work at WiFi/WiMAX trials of some sorts behind the scenes of course. With steadily growing competition from wireless service providers, acquisitions and strategic partnerships in this market should also not be ruled out.

Two obvious acquisition candidates are perennial bad-boy UniNet, which Telkom took to task over its WiFi rollout for Knysna Municipality, and WBS with its iBurst broadband wireless solution. Let`s also not forget Sentech, which will make a worthy partner for the likes of Cell C.

As if technology advances aren`t enough to keep this industry on its toes, deregulation, in particular number portability, expected early next year, will undoubtedly prompt another spate of price wars (and hopefully improved customer service).

Decidedly one of the main reasons individuals and companies stay with a mobile network, even when dissatisfied, has been because they don`t want to lose the number known to friends and colleagues. With number portability this is a thing of the past, and the churn factor will become a far bigger threat to operators` often inflated subscriber numbers.

Vodacom`s Knott-Craig is cautiously optimistic that churn, as a result of number portability, "is not likely to change by more than 10-15% from what is currently is." He also does not believe that price wars will escalate as a result.

Regardless, with the number argu-ment no longer part of the equation, it seems likely that new market dynamics will stimulate renewed competitive antics - and with customer loyalty at stake, this round will be a much tougher battle.

It`s a numbers game

But until SA`s cellular market matures, and price wars make way for customer loyalty as the key competitive differentiator, it will be a numbers game of another kind.

ARPU aside, net (subscriber) additions remain the most important metric for unit growth. It is also the key measurement used by analysts to assess the relative market performance of mobile operators.

This is also why the immediate problems facing Vodacom and MTN, following their 3G marketing fanfare earlier this year (Vodacom in January and MTN six months later), are more around the business case and less about technology.

As BMI-TechKnowledge recently noted: "A significant lack of awareness and understanding may inhibit the spread of 3G to the broader mass-market subscriber base. The vast majority of subscribers does not understand what 3G will give them, much less why they should invest in a new device or pay a premium just to consume it."

The other challenges, according to Meta, are mainly commercial (e.g. the structure of compelling and profitable offerings such as regional or global pricing plans and flat-rate versus usage-based billing).

In this context, cutting the price of basic voice calls could be seen as cannibalistic, which is why MTN has opted for `value bundles` instead.

Vodacom and Cell C are likely to follow suit by offering larger bundles of voice or reducing the prices of data (SMS) services even more - the recent 3G data bundles being a case in point.

Similar approaches could be taken with other new applications that require significant bandwidth.

An alternative could also be to target traffic from other areas, which may result in operators adding functionality such as `push-to-talk` and guaranteed quality of service.

In the short term, falling prices on voice bundles and other applications will also reduce ARPU below expectations, putting further pressure on Cell C especially.

In the longer term, however, such pricing could act to stimulate demand for new services, and as demand grows and capacity is filled, pricing could start to move away from predatory levels. It could even result in mobile calls becoming sufficiently cheap that landlines are rarely used for voice.

In the interim, let`s hope the free market principle prevails and Icasa does not follow China`s example in regulating the tariffs that operators can charge their customers, or does what the regulator did in the 1994 cellular price wars - fix the prices.