Alan Knott-Craig

Waging war on SA’s mobile duopoly

Over a decade down the line, will SA’s third operator finally manage to mature and emerge as a major player in SA’s saturated mobile telecommunications market under the leadership of telecoms luminary Alan Knott-Craig?

It is a little over three months since the man largely responsible for bringing mobile telephony to SA in the early nineties assumed the helm of Cell C, and already the industry is on tenterhooks as it awaits Knott-Craig’s next move.

The former Vodacom CEO’s appointment in April, as head of SA’s third mobile operator, which faced a tall order from the word go as it entered an entirely duopolistic playing field in 2001, has piqued the interest of industry observers and consumers alike. Knott-Craig has been described as “the man with the golden touch” and is seen by many in a community long beset by high telecommunications costs as the harbinger of a new economic era.

It was not long before media headlines carrying the news “Knott-Craig to head up Cell C” earlier this year were followed by a cascade of those conveying the beginnings of a “price war” started by Knott-Craig in the mobile telecoms prepaid, contract, data and international tariff sectors – epitomised in the headline: “Cell C ups mobile pricing stakes”.

And the landscape has already started morphing under Knott-Craig’s incipient leadership, with the introduction of unprecedented price cuts. For example, a Cell C subscriber can now make a mobile phone call to the UK for less than the cost of a local call by a subscriber on any of SA’s other networks.

Speaking to iWeek about his new venture, Knott-Craig outlines the rationale behind the moves he has made thus far, alluded to those he is yet to make and affirmed his ultimate goal: that of raising Cell C from the ashes.

AMBITIOUS ASPIRATION

Goal number one, says Knott-Craig, is to increase Cell C’s market share.

The market is still dominated by first and second operators Vodacom and MTN, respectively, with Vodacom holding almost half of the share and MTN clinging to about 35% of it. Cell C has managed to garner about 14% in the 11 odd years it has been around. Knott-Craig aims to raise that figure – to between 20% and 25%.

Analysts are both cautious about and convinced of Knott-Craig’s ability to raise the bar and position Cell C as a major player in the local mobile telecoms sector. MD of World Wide Worx Arthur Goldstuck says Cell C, under Knott-Craig’s leadership, is probably in the best position to challenge for market share that it has ever been in. He says, however, it would take “massive marketing, and not only good deals” to shift the market substantially.

“On the one hand, if [Cell C] merely breaks through the 10 million subscriber barrier, it will be a major achievement on [Knott-Craig’s] part. On the other hand, to get to 20% market share, in a growing overall subscriber base, Cell C has to get to at least 13 million to 14 million subscribers.” According to Knott-Craig, the operator currently has a subscriber base of about nine million.

While Knott-Craig is no doubt optimistic, he says there is no denying the company is in for a lot of hard work in various facets if it is to achieve its goal and gain a significant enough part of the mobile telecoms pie. “We want to be financially sustainable and a proper player in the market. One of the ways we will get there is by tackling the marketing part of the business, which comprises of products, prices, distribution channels and brand.”

He says if the market is not a market of three or four – as opposed to just two – it is pointless. “You need to have about 20% of the market share to be in the game. Until you get to that point you are just butting your head against the wall.”

Richard Hurst, Ovum’s emerging markets analyst, says Cell C has the potential to be a “disrupting force” in the market. “The interesting point that Alan Knott-Craig makes is that he wants 25% of the mobile telecommunications market and has further qualifi ed this by saying that this is 25% of the total mobile revenues of the country. This implies that the operator is going to be looking at wallet share and adding value wherever possible. This is a very ambitious target and if achieved will certainly affect the other operators in a negative manner.”

Dobek Pater, of Africa Analysis, has adopted a far more cautious school of thought. He says he is dubious as to the realisation of a 25% market share gain by the third operator, which has to contend with SA’s deep-rooted larger players, Vodacom and MTN. “We foresee Cell C gaining a bit more market share over the medium to long term, but nowhere near the stated 25% share that Cell C is targeting. Not to forget, there is also 8ta in the market, which wants to grow.”

That being said, Pater notes that the bigger players need to be watchful as Cell C sets out to achieve its target.

Spiwe Chireka, a senior analyst at market research firm IDC, echoes Pater – noting that the duopoly is deeply entrenched. “I do not expect this to change, given the ground Cell C needs to gain.”

Brian Neilson, a research director at BMI-TechKnowledge, says that, while Cell C has gradually been growing its share of SIMs in the market, the tactical agility of the two larger players – as well as what he refers to as their “marketing muscle” – may impede the pace and acceleration of this trend.

Knott-Craig remains resolute in his objectives and, given his track record, acute know-how and passion that has been lauded by industry observers, will pursue it relentlessly. As pointed out by Frost & Sullivan research analyst for telecommunications in SA Iyembi Nkanza, under Knott-Craig’s leadership, Vodacom went from a R1.15 billion company in 1993 to a R50 billion per annum business in 2008.

CELL C CINDERS

Knott-Craig says another challenge Cell C faces is that of recouping its brand, which he says has been absent for some time.

He says Cell C “left the market” about the middle of last year as far as presence goes, and being aggressive in terms of engaging with its distribution channels. “In fact, in terms of almost everything the company left the stage [and so] we have got to make our brand much more visible. It has been pretty much invisible for about nine months. It’s expensive to crawl back nine months of invisibility, but [Cell C] has got to do it.”

He points out that this too will be no mean feat. “You cannot achieve any of these things without first going backwards. Often people don’t do it because they don’t want to go backwards at all – and so they just never look forwards. But you have got to make those investments. Cell C has got to make those investments in the brand – in new products.

This is where Cell C’s 99c campaign comes in. Knott-Craig says he wants the symbol of “99c” to belong to the operator. “We have to own 99c. The reason being, even if someone else matches us, that still belongs to us. It has got to belong to us forever.” Light-heartedly, he remarks: “I just hope 89c doesn’t belong to someone else, because then we’ll have to make 79c ours. But that’s how consumers win in these kinds of games. That is why the players have got to be smarter if they want to stay around.”

And in this game, says Knott-Craig, price is the ticket. “We know [Vodacom and MTN] are vulnerable in terms of their bottom line and so that is what we attack, and you attack the bottom line with price. But [we must] be careful when attacking it with price [lest we] get what we weren’t looking for, which is a fight back on an even lower price. So when we build a price, we have to build a margin - but we also have to build enough margin, so that if [the other operators] were to undercut us we can undercut again.”

CERTAIN SUSTAINABILITY

In light of Cell C’s recent and substantial slashing of tariffs, the question of profit has been raised. On the sustainability of the business based on his price cuts Knott-Craig says: “This is a question that people never ask me, but yet they write about it.”

The answer, he says, is “yes” – evident in the uptake of the international call tariffs, introduced some three weeks ago. Three of the initial countries to which the 99c tariff was introduced – the UK, India and Pakistan – have proven that there is still profit to be made, says Knott-Craig.

“When you drop the prices as low as [Cell C has] you have to make up for lost revenue in numbers. We have just passed the volume where we now make more money out of the lower tariffs to [these countries] than we made on the previous tariffs.

“So this is good news. The second bit of good news for me is that people will now change to a Cell C SIM card because of the lower international rate. So it is a huge market share gatherer.”

He says sustainability of cheaper prices is only guaranteed, however, if the operator continues to get the numbers.

Bearing in mind that it is “early days” yet, since the new tariffs were introduced – Knott-Craig says the best indicator at this stage is the volume of starter packs shipped from Cell C’s warehouse to its distribution channels. “When I went to the warehouse [last week] we had shipped out 4.3 million starter packs on the new prepaid price. And that’s not too bad. Of those 4.3 million I would expect about 75% of that to actually start generating revenue from a consumer in the first five to six months.”

Analysts tend to endorse the notion that Knott-Craig’s price moves make for a sustainable business and competitive landscape – underpinned in part by the falling interconnect rates.

Goldstuck says the Cell C CEO has shown there is still substantial margin to be had from much lower costs. The disappearance of the interconnect fee as a major component of call costs, he says, also represents a fundamental shift. “From R1,25 two years ago to 40c next year means that, for many call types, at least a third of the cost has been stripped out. Yet call costs remain high. We always argued that the removal of the interconnect would not have a major impact on prices unless networks are forced to be transparent in pricing structure, and that has never happened.”

In accord, Chireka says Knott-Craig’s strategy is sustainable in that it has been a while since a large price cut by service providers has taken place, since interconnect fees started to drop in 2010. “What this means is that operators have built in capacity to handle 99c tariffs because the cost of the call is now much lower and they are not running any hefty losses through such cuts.”

Hurst notes that the price cuts can only be supported by increasing efficiency and initiating cost cuts within Cell C. “As we have seen Cell C has embarked on a retrenchment exercise to cut jobs, one of the symptoms of such cuts. The benefit that Cell C has is that it is regarded as being a smaller and leaner operation, allowing it to respond in the appropriate manner.” Pater says, “The question is: will the revenue lost through lower tariffs be replaced through higher usage?” From other examples in Africa, says Pater, this is not normally the case. He says research has shown the money a user saves through lower tariffs is not necessarily spent on telecoms through greater usage. “Some of it goes elsewhere. Therefore, any price decrease normally takes revenue out for all the operators in the market (once competitors react).”

RIVAL RESPONSES

In May, when Knott-Craig first introduced the market to Cell C’s soon-to-be trademark “99c” with a prepaid voice product that saw prepaid call rates dropping by more than 34%, Vodacom quickly reacted with a 99c deal of its own.

The difference, for one, is that Cell C’s “99 Cents For Real” deal offers per-second billing – while Vodacom’s “Freedom 99” is a per minute voice product. Secondly, Vodacom had to retract the statement it distributed via the media when the Independent Communications Authority of SA (ICASA) stone-walled the operator’s “new tariff” saying that it had not filed an application as per regulations. Vodacom put the discrepancy down to an error in its press release that mistakenly referred to the deal as a “rate cut” rather than a promotion, which would not represent a permanent tariff. Cell C’s 99c deal was filed with ICASA and has been instituted as a permanent tariff.

This incident is so far the most notable response in terms of blatantly competitive offerings by any of SA’s other three operators, including Telkom’s mobile arm 8ta. But, as Goldstuck indicates, “the industry waits to see how the major networks will respond to Cell C’s call pricing”.

Pater says the larger operators normally observe market reaction to such moves and assess the impact on their own revenues before responding. “Once they feel or see potential (or real) negative impact, they react. Vodacom tends to react sooner – sometimes immediately – to aggressive moves by competitors. MTN normally takes longer while it assesses the situation and its impact on MTN operations.”

He says the duopoly will not sit idly by and allow smaller operators to take their market share. “They will do anything they can (within the competitive framework) to prevent market loss. And they are in a stronger position to withstand any price wars.”

Hurst says, while other mobile network operators are expected to react with similar offerings, the key to Knott-Craig’s latest moves has been the simplification of the tariff structures, “allowing users to understand exactly what they are paying for”.

On paper, the operators’ responses demonstrate confidence in their own offerings and what is perhaps a defensive, rather than offensive stance.

Vodacom says the level of competition Knott-Craig has brought to the table is not a new phenomenon in the South African market. Maya Makanjee, Vodacom’s chief officer of corporate affairs, says the operator “continues to remain competitive on pricing and value”. He cites Vodacom’s average price per minute drop (14% year on year) and the 18% decline in the average effective price per megabyte as cases in point. “On top of this we continue to invest heavily in the network.”

MTN says it is natural for a new CEO to make changes to the propositions the operator offers its customers, adding it does not view Knott-Craig’s latest moves as heralding the dawn of a new era. Having said that, says MTN SA’s CFO Zunaid Bulbulia, “MTN is confident that we’ve been able to structure our current price plans to competitively and uniquely meet the needs of our customers. We are very confident that our current strategies and plans address all competitive threats.”

8ta, which currently holds only a marginal share of the market (about 2% in 2011), says unprecedented change in the mobile telecoms industry is afoot in light of recent price cuts by Cell C.

Amith Maharaj, 8ta’s senior managing executive, says the Telkom division is currently reviewing its prepaid offer, “details of which cannot be disclosed now for competitive reasons”. Maharaj says, however, as a new player 8ta tries not to offer “me too” products.

Maharaj concludes: “8ta believes that, while competing on price ultimately benefits the customer in the short term, competing on value is more sustainable in the long term. It is more about managing perceptions in the market. The challenge in the South African market, unlike other emerging markets around the world, is that South Africans are not aware of the price they pay for voice calls, so there will have to be a degree of market education that will be required by the operators who choose to compete on price before the offer takes off.”

Goldstuck says, while the other networks are able to use sophisticated formulae to show that, in certain contexts, they are cheaper than Cell C – the very nature of those formulae emphasises the complexity of their cost structures. “In that respect Cell C is far and away the market leader and thought leader.”

The industry has dubbed the barrage of price cuts made by Knott-Craig in a relatively short period of time a “mobile price war”, but the feisty CEO says the moves to challenge competitors through price reduction mirrors a tactic he employed while with Vodacom. “Actually, the first price war was 1994, when Vodacom cut its prices and MTN quickly retaliated. So we cut prices again. But then the regulator made us go back to the original tariffs.” In retrospect, he says, the authority’s intervention was probably a good thing. “It was all driven by testosterone back then.”

In this industry, as with any other, nothing changes if nothing changes – and according to Knott-Craig – Cell C and SA’s mobile telecoms landscape at large, are in for some sweeping changes. He says, unlike Vodacom and MTN, Cell C is able to take risks as it does not have a “fat bottom line” to protect. “As a small company trying to get in to the ball game we are at an advantage, in that we don’t have that much to protect. We don’t have a fat bottom line – we are trying to create one.”

Armed with the ultimate advantage of having nothing to lose and not being afraid to take risks, Knott-Craig is on a mission to level the playing field as spectators await his next pitch.