Let the games begin

With the high cost of communications still the biggest bugbear among SA`s telecoms consumers, there had been hopes that the arrival of Virgin Mobile would spark instant cuts in overall mobile tariffs. But it seems dramatic call cost drops are not to be - or, not yet, anyway.

Virgin Mobile says its main target market will be those who use a lot of talk time, and its most compelling sales offering is the fact that it has set rates, no long-term contracts and no built-in handset costs. The "transparent" package means there are no hidden costs to cover the price of a new handset when a consumer signs up for a contract. Anyone wanting a new handset can buy it from Virgin Mobile separately, and pay it off over a period of up to 24 months.

A NEW SERVICE PROVIDER, NOT AN OPERATOR

Richard Hurst, telecoms analyst at BMI-T, notes: "The issue of Virgin making its entrance into the market is that as we all know it will be a virtual mobile network, using the infrastructure and systems of Cell C, which is a 50% shareholder in the venture. In addition, the Cell C network uses the infrastructure of Vodacom when coverage is not available. This is likely to have an impact on the overall network quality offered by Virgin. Virgin and Cell C will have to be able to effectively deliver on subscriber expectation in terms of both quality and price if they are to stay in the market and gain any foothold in terms of subscriber market share."

Donovan Smith, general manager, Consumer Segment, MTN SA, says it`s important to note that Virgin Mobile is not a GSM mobile operator like MTN is. "Virgin Mobile is a service provider, selling airtime on Cell C`s network. So strictly speaking, Virgin Mobile cannot be compared to SA`s three mobile operators," he says.

However, Smith adds: "The launch of Virgin Mobile in SA is good for the credibility of the cellular industry and will, ultimately, benefit all mobile customers."

NO CUT-RATE TALK TIME

Those who assumed that Virgin Mobile`s arrival would spark sudden cuts in call costs were disappointed. In many cases, the new service provider`s charges are similar - if not higher - than those of the other players.

However, its new model was quickly followed by the arrival on the market of other handset-free, short-term contracts.

Marnus van Niekerk, MD of SA VOIP Network, says: "Having looked at the V100 and V500 pricing models introduced by Virgin Mobile, I am of the opinion that most users, and especially high-end users, would actually pay more and that the only real benefit to them would be the absence of a long-term service agreement.

"I do not believe mobile pricing in SA will drop in the foreseeable future because too many customers are already locked into long-term contracts with huge subsidies," he says. "Unless ICASA steps in and forces the MNOs to change their business strategy, this is set to continue."

Hurst says Virgin`s arrival should spark some price-based competition, but adds that the existing mobile operators clearly have a strategy in place to counter any price move. This, he notes, is underlined by "the wave of special offers and new packages being offered by the operators and the fact that they are making their SIM cards available at ridiculously low prices."

Mike van den Bergh, Group CEO of Gateway Communications and chairman of CUASA, points out that price is not the only area in which to compete.

Says Van den Bergh: "Virgin Mobile will not survive by simply offering the same as the existing service providers, so it will have to innovate via more creative packaging, and this will, in turn, stimulate the market."

Van den Bergh notes that a "proper" licensing structure is necessary for SA`s mobile virtual network operators (MVNOs), to allow more players to enter the market and stimulate true price and service competition. "I think Virgin Mobile is a trail blazer for this kind of model, but not the last word on the subject."

So, if Virgin Mobile alone can`t catalyse a dramatic drop in mobile call costs, what can? Van den Bergh says more competitors and service providers using technologies such as WiMAX and VOIP could make the current mobile market more cost-effective.

Van den Bergh says another area needing attention is the introduction of a proper wholesale interconnect regime, for calling both fixed and mobile phones. "This would also allow alternate service providers to aggressively bring the cost of telephony down. At the moment, the lack of such a wholesale interconnect regime is keeping the price of calls to both fixed and mobile phones artificially high."

LOVE THOSE HANDSETS

On the question of whether customers will rush to sign up for a contract with no free handset thrown in, Van Niekerk says: "I think South Africans are already used to the culture of handset subsidies, so simply doing away with subsidies and suddenly expecting subscribers to buy phones for cash would not be feasible. A better approach would be a transparent approach, similar to Virgin Mobile, where subscribers pay independently for the mobile service and the handset but then the MNO must pass the savings from the subsidy onto the subscriber in the way of reduced call rates."

Hurst adds: "Having initiated the operation of the subsidies, South African users and network operators have become accustomed to this to entice and retain customers and it seems that the user will not be keen to be rid of this incentive unless something more attractive comes their way."

This is backed by last year`s study, The Impact of Mobile Technologies on the South African Consumer by World Wide Worx, which found that more than half of the respondents cited free or cheap phones as the reason for choosing their form of contract.

Says Van den Bergh: "I think the handset subsidy model has worked well to help grow the market, and should not be `outlawed`, but I do think that consumers would like to have a choice."

RISING TO THE CHALLENGE

With World Wide Worx finding the average expenditure among contract users was R384 per month, and market players like Van den Bergh estimating that the average business user spends over R1 000 a month on call costs, there is clearly a lot to be made from the "talk-a-lot" market.

So other players in the market aren`t likely to sit back and take the competition unchallenged.

For example, Vodacom announced last week that effective 1 July, customers had ten new monthly package options to choose from, without a 24-month contract commitment and without a free cellphone.

Vodacom noted that it had launched SA`s first month-to-month contract option, the 4U contract package, in October 2001, offering customers per second billing without the need for a 24-month contract. Peter Matlare, executive director, Commercial, Vodacom SA, said: "Vodacom is ever aware of its customers` changing needs, which is why we expanded our 4U month-to-month contract package to extend this option to all current per second contract packages."

Donovan Smith says it`s business as usual for MTN SA, in the face of a changing telecommunications landscape and under competitive market conditions.

"That said and with the launch of mobile number portability on 18 September this year, MTN SA remains committed to providing competitive, cost-effective mobile solutions and services that are simple, reliable and innovative as well as offering customers real value for money on a continuous basis.

"For example, MTN recently announced the reduction of its cellphone costs by up to 40%. MTN Pay As You Go subscribers are now enjoying lower local rates during standard times of 5pm-8pm, on weekdays.

"The introduction of a standard rate to all local networks has seen all call rates drop to R1.99 per minute (including VAT) for all customers on the Call Per Second package, as opposed to the previous price of R3.20."

Virgin Mobile CEO Sajeed Sacranie issued a media release last week, saying: Virgin Mobile "welcomed the current scramble by its competitors to retain customers by offering better deals".

"The fat cats have become copycats," said Sacranie. "They`re still nowhere close to offering our value...but at least they`re trying and customers will benefit."

Sacranie said that since the arrival of Virgin Mobile, the Sunday newspapers have been "carpet bombed" with advertisements of new products.

Sacranie said he welcomed the "advertising razzmatazz" in the market created by competitors. "They still haven`t addressed the fundamental issues that brought Virgin Mobile to SA`s shores, but there are clear signs that the party that has seen our competitors enjoy stratospheric profit margins is about to end. "And that means we`re doing our job."