Introduction For years South Africans didn’t have access to mobile phones and since mobile telephony was launched in South Africa in 1994, mobile phones have become an integral part of people’s lives. It doesn’t matter what your age, race, religion, literacy and occupation is, mobile phones are owned by a large variety of people. The technological developments within the mobile phone industry have drastically changed over time as well as the reasons why people buy mobile phones.
The reasons range from safety need to always be in touch, status, business as well as entertainment. With the technological developments mobile phones can be used for emailing, listening to music, banking, taking photos as well as accessing Internet to mention a few. Background According to the Telecommunications Act of 1994, the mobile telephony industry was first launched in South Africa in 1994.
Vodacom (Pty) Ltd and MTN (Mobile Telephone Networks (Pty) Ltd were incorporated in terms of the Companies Act, 1973 (Act 61 of 1973), and awarded licences to provide mobile cellular telecommunications services in accordance with the terms and conditions of the telecommunication licence and multiparty implementation agreement published under General Notice 1078 of 29 October 1993. Furthermore a third licence was offered in June 2001 to the Cell C Consortium, whose mobile services were launched on 17 November 2001 as the third mobile operator in South Africa.
South Africa has a vibrant mobile market that has seen rapid uptake of mobile services since competition was introduced to the sector more than 10 years ago. BMI-T (2004) stated that “subscribers to the three networks operated by Vodacom, MTN and Cell C exceeded 20 million during 2004, compared with less than 5 million fixed-line connections” (BMI-T 2004:15). The market has mainly been driven by the prepaid sector, which accounts for around 85% of all mobile phone users. The entry of a third operator, Cell C, in November 2001 and introduction of mobile-based Internet and data services have greatly contributed to growth in this sector.
Third generation (3G) services were introduced in December 2004. When the mobile industry was launched in 1994, the only service that was available was the voice service. More than ten years later consumers are faced with a variety of products and services to choose from within the market place. The mobile operators have added data services in the form of mobile banking, short message service (SMS), wireless access protocol (WAP), email, multimedia message service (MMS), mobile content and 3G, giving access to the downloading of video clips as well as access to the Internet.
Text based adult content has been in existence for sometime but the launch of MMS and 3G has raised issues around the availability of adult content on mobile phones. The constant evolving and changing mobile industry has always made the mobile network operators to keep revisiting their business and marketing strategies. 2. 2 Marketing and business strategy According to the South African Pocket Oxford Dictionary (2003:898) strategy is defined as the plan designed to achieve a particular long term aim, art of planning and directing military activity in a war or battle often contrasted with tactics. Technology affects marketing in two basic ways with new products and with new processes (ways of doing things), the world has moved from an industrial society to an information society” (Perreault and McCarthy 2005:106). The technological change opens up new opportunities but also poses challenges for marketers. The success of some companies highly depends on how quickly new ideas can be brought to the marketplace but at the same time marketers need to help decide what technological developments are ethically acceptable. Market segmentation and target marketing
Market segmentation and target marketing are critical factors within a marketing strategy. Mullins et al (2005) defines market segmentation as the process by which a market is divided into distinct subsets of customers with similar needs and characteristics that lead to respond in similar ways to a particular product offering and marketing program. Different market segments have different wants and needs both tangible and intangible. Positioning and differentiation of the company All companies position themselves in the market place so as to take or create a space in the minds of the consumers.
Marx and van der Walt (1989) define positioning as the way consumers perceive a product or company in terms of its characteristics and advantages and its competitive position. Positioning comprises of both competitive and customers need consideration. Differentiation relates to the reason why customers prefer one product or company over another Consumer or societal readiness Before a company introduces a product in the market it needs to gather information to determine whether the market is ready for that product or not. For example the introduction of WAP which was seen as a next step from SMS did not take off as was expected.
The expectations of the consumers surpassed the product that was introduced with most of the WAP not functioning property. According to Condos et al (1998) WAP usability left much to be desired and the usability was very poor because the product didn’t meet the consumer expectations. The South African market in the past few years has gone and is still going through a lot of changes politically, economically and socially. Socially the country is faced with a number of challenges ranging from crime, drugs, poverty, child pornography, child and women abuse, scourge of HIV/Aids pandemic to mention a few.
All these issues contribute to the well being of the society and what products are being consumed as well as how these can impact or affect the youth. Corporate reputation Company’s reputation in the marketplace is a valuable asset that should be protected because it has significant value and use to the entity. Stewart (2002) defines corporate reputation as an intangible associated with and derived from the following: the standard of the goods and services an entity supplies; the quality and reputation associated with an entity’s: • business name(s); • trade marks, e. g. brand position and evolution; and domain names; market position and strength and the confidential information an entity has, i. e. some confidential information if released or released at the wrong time may damage reputation, e. g. executive salaries, joint venture proposals and controversial marketing plans. Furthermore he argues that corporate reputation has been referred to as a strategic asset that can: be used to; maintain and build,- brand names, customer trust; and public trust, manage crisis and adverse publicity; maintain share price/investor confidence; and determine or change an entity’s strategic direction and culture to deal with new markets.
This study questions whether consumers really care about corporate reputation when it comes to purchasing decisions (choosing a product or company to purchase from)? According to Page and Fearn (2005), it is argued that consumers do care, but for most consumers it is just not top of the agenda when shopping. Corporate reputation is related to brand equity and sales. It is clear that while a weak reputation has serious implications for brand perceptions, a good reputation merely creates the opportunity to develop stronger brands, not a guarantee.
Maintaining a strong reputation for leadership, innovation, success, and fairness to customers will have a much stronger direct effect on brand equity and sales than ethics. Being seen to fail, or to rip consumers off, is of much more direct relevance to consumers and will have strong effects on the business. For many companies, the budget for consumer communications on ethics may be better spent ensuring the brand experience delivers, or fair pricing, or marketing the individual brands themselves. The Brand
According to Keller and Aaker (1990) a brand is defined as an asset, simply stated, is a property, with an assumed value that should be consistently maximised by an organisation. A brand is a perceived image residing in the mind of consumers. He furthermore states that a brand has positive (negative) customer-based brand equity if consumers react more (less) favorably to the product or company. Below is an overview of the South African mobile industry. This overview specifies the players, number of users and how much the industry is worth. This information gives an indication of how the industry has grown and evolved in the past decade.
Anon (2004) on the cellular online website gave an overview of the mobile phone industry: • Market size as of June 2004 was 18. 7 million users • Potential by 2006 is 19 million users • The market is dominated by Vodacom and MTN who operate at GSM 900 Mhz. A license was awarded in June 2001 to the Cell C Consortium (live from Nov 17 2001). It operates at GSM 900 and 1800 Mhz. Cell C has 3m users. Some 84% or 1. 6 million of its subscribers were prepaid users and 16% contract. – Market share: Vodacom 54% (9. 7m), MTN 30% (5. 22 m); Cell C 16% (3m) as of June 2004. • More than 90% of all new connections are prepaid customers. Over 9000 users sign up per day (mostly prepaid). • The SA market is currently worth R23 billion and will grow to around R54 billion by 2007. • Together the three GSM networks cover more than 71 % of the population « People in previously under-serviced areas are making over 35 million calls (65 million minutes) per month from Vodacom’s 2 135 community phone shops. The mobile content industry which is a part of the mobile industry in South Africa is made up of mobile network operators (MNOs), content providers/aggregators and wireless application service providers (WASP). MNOs are the three main operators – Vodacom, Cell C and MTN.
WASPs are any person(s) engaged in the provision of a mobile service, including premium rated services, who signs a WASP contract with the MNO for bearer services enabling the provision of such services e. g. Clickatell, Exactmobile. Content providers or aggregators are individuals or companies that create mobile content and they can sell it to MNOs or to WASPS. These players are providing consumers with mobile content which is supposed to enhance the consumers’ lifestyles and offer entertainment. The content ranges from ringtones, sms content, music, games, adult content to name a few.
Czemowalow of IT Web (2005) stated that the mobile industry generates R500m revenue in South Africa with 10% of that coming from adult content which equates to R50m. 2. 4 Internet and mobile phones penetration in SA Mobile phones and internet penetration is on the increase in South Africa with mobile phones penetration surpassing internet penetration. The Community Agency for Social Enquiry (CASE) 2000 Report which is a study of youth in South Africa, states that about 15% of young people have access to the Internet compared to 44% who have mobile phones.
The ability to use the Internet is particularly low in rural areas equating to 2% whereas in urban areas 25% of the youth are more likely to have access to a computer and the Internet whereas mobile phones are used by a large number of the population in the rural and urban areas. SOUTH AFRICAN MOBILE PHONE MARKET AS AT THE END OF JUNE 2004 • Market size as of June 2004 18. 7 million users (Note: only 80% of these are active users) • Potential by 2006: 19 million users • Dominated by Vodacom and MTN which operate at GSM 900 Mhz. • A licence was awarded to the Cell C Consortium in June 2001.
Cell C operates at GSM 900 and 1800 Mhz, and has 3 million users of which 1. 9 million are active users Approximately 84 percent, or 1. 6 million, of its subscribers were prepaid users and 16 percent were contract users. Average revenue per user (ARPU) for prepaid was R62 and R409 for contract users, with a blended ARPU of R110. • Vodacom 60% (9. 7 million), MTN (5. 22 million) 40% market share; Cell C (3 million) – as of June 2004 • More than 90% of all new connections were prepaid customers. • Vodago is Vodacom’s prepaid package and was launched in November 1996.
It now accounts for more than 90% of all new connections to the Vodacom network. • Over 9000 users sign up per day (mostly prepaid) • The South African market is currently worth R23 billion and will grow to around R54 billion by 2007. This presupposes an exchange rate of: US$1 = R 6. 52 €1 = R 7. 44 • More than 5 500 Vodacom base stations are in place to provide coverage to 60% of the geographical area of the country. • Together the three GSM networks cover more than 71% of the population. People in previously under serviced areas are making over 35 million calls (65 million minutes) per month from Vodacom’s 2 135 community phone shops.
THE BUSINESS ENVIRONMENT The business environment has many definitions in existing literature. Marx, Van Rooyen, Bosch and Reynders (1998:38) quoted in Ali (2003:31) define the business environment as “ the sum of all the variables or forces that have a positive or negative effect on the establishment, survival, growth and goal achievement of the enterprise. ” The definition of the business environment by Cronje, Du Toit, Marais and Motlatla (2004:85) is given as “all those factors or variables, both inside as well as outside the business organisation, which may influence the continued and successful existence of the business organisation. The business environment as applied to the mobile phone industry includes: • The micro-environment of each mobile network operator (MNO) which consists of the business itself over which management has control. The key variables in this environment are the goals and objectives of the mobile network operator (MNO), the ownership structure, market share, products and services offered and the network coverage of the MNO. • The market environment is encountered immediately outside the business organisation. The key variables in this environment are: consumers, competitors, intermediaries and suppliers. The macro- environment is external to both the organisation and the market environment and consists of the technological, economic, social, physical, institutional-political and international environments. MARKET ENVIRONMENT -The market, consisting of consumers, their needs, purchasing power and behaviour – Suppliers – Intermediaries – Competitors – Opportunities and threats MACRO-ENVIRONMENT – Technological environment – Economic environment – Social environment -Physical environment – Institutional-political environment -International environment MICRO-ENVIRONMENT (of each MNO: Vodacom, MTN and Cell C) Market share – Ownership structure – Products and services offered – Network coverage – Mission and objectives of the organisation MICRO-ENVIRONMENT OF THE SOUTH AFRICAN MOBILE NETWORK OPERATORS The micro-environment, also known as the internal environment, consists of variables within the organisation and over which management has complete control. These include the objectives and goals of an organisation, the various functions of management (such as the ownership structure) and the resources of the business (such as products and services offered and network coverage) (Cronje et al. 2004:85). Each of these variables is linked to the external environment in some way, be its influence on the market by the strategy it employs to increase or maintain market share or through the goals, culture, structure and resources that have certain interfaces with the external environment. The internal environment of each of the mobile network operators (MNO’s), namely Vodacom, MTN and Cell C will be explored next. South Africa’s mobile network operators
The mobile phone industry in South Africa, with the mobile network operators Vodacom, MTN and Cell C, is one of the fastest developing in the world and plays an important role in the development of the South African economy. It will be argued that the South African mobile market can be classified as an oligopoly, or even a duopoly, with two organisations, namely Vodacom and MTN of more or less the same size dominating the market (Theron, 2005:28). On the one hand, Theron (2005:28) argues that both Vodacom and MTN have market shares that exceed 35 percent, have similar cost and pricing strategies and control the market resulting in a duopoly.
On the other hand, Cant and Machado (2005:4) describe the competitive mobile situation in South Africa as an oligopoly. An oligopoly is described as a competitive situation where there are few suppliers of the service and the strategies of the suppliers are based on what the competitors are doing. Market share In March 31, 2005, there were an estimated 23 million mobile communications customers in South Africa, which represents an estimated penetration rate of 49. percent of the population (Telkom Highlights, 2005:88). Data from MTN’s latest published figure show that they have 8 million subscribers in South Africa. The comparable figure for Vodacom is 12. 8 million and subscriber figures for Cell C are estimated at 2. 3 million (Theron 2005:36). Vodacom had approximately 55 percent market share of total reported customers in the South African mobile market, MTN had approximately 35 percent market share while Cell C had an estimated 10 percent (Telkom Highlights, 2005:14).
The three mobile network operators have adopted different market strategies to accomplish the market share given above. Market strategies Kotler’s (2003) product/market expansion grid is used to position each operator and assess its performance in relation to the overall South African market. This grid has two marketing positioning dimensions, mainly markets and products, and the operator positions itself in the market accordingly depending on the products and services it offers, and when it chose to enter the market. There are four positioning choices (Kotler, 2003): Market Development Strategy: identifying and developing new markets for current products/services • Market Penetration Strategy: more sales to current customers with unchanged products/services • Diversification Strategy: new products/services in ‘new’ markets • Product Development Strategy: offering modified or new products/services to current markets Vodacom Mobile Network Operator Vodacom has experienced substantial growth in its mobile customer base since its inception in 1994 increasing its market share from 54 percent in 2004 to an estimated 55 percent in 2005.
Vodacom is the leading mobile network provider in South Africa based on the total estimated customers. (Telkom Highlights, 2005:88). Vodacom has grown fast in terms of revenues, profits, and subscribers and this is largely attributed to the first-mover advantage it had when commencing with mobile services on 1 June 1994 (Cant & Machado, 2005:4). Its early access to large amounts of capital and its main shareholder, Telkom, are two of Vodacom’s key advantages when it captured the market.
Furthermore, a number of innovative new products, services and technologies were introduced during last year, such as Third Generation technology (Vodacom was the first operator to introduce 3G to its customers in South Africa), Vodafone live! , the GPRS (General Packet Radio Service- Internet connection that is always switched on) Blackberry and prepaid product offerings, which included fully itemised billing, prepaid passport, a new 4U Super Six starter pack, enhanced Vodago Super Six starter pack and airtime transfer (Telkom Highlights, 2005).
Vodacom’s market share As depicted in Figure 2. 1 market share is the first component of an MNO’s micro-environment. Vodacom has retained its leadership in the highly competitive South African market but although Vodacom has been highly successful in retaining its market share, the strong competition in the market and the sheer volume of gross connections have inevitably resulted in a margin squeeze (Vodacom, 2004). However, despite this margin squeeze, Vodacom has recorded a strong growth which is illustrated in Figure 2. . Vodacom’s customer base grew from 9. 7 million customers in 2004 to 12. 8 million customers in 2005 (See Figure 2. 6). Although Vodacom has been highly successful in extending its market, it has experienced mounting competitive pressure, especially from the third placed operator Cell C, which has grown its market share largely at Vodacom’s expense. As Figure 2. 7 shows, Vodacom’s total subscribers grew from 29. 7 percent to 11. 2 million subscribers in the year 2004 (Cant & Machado, 2005:5).
At this stage, Vodacom has 15. 5 million customers in South Africa alone, an increase of 38 percent for the year (Vodacom Group Annual Results, 2005). Vodacom ended March 2005 with 56 percent market share as illustrated by Figure 2. 7 (Vodacom Group Annual Results, 2005). Vodacom’s ownership structure As depicted in Figure 2. 1 the second component of an MNO’s micro-environment in is the ownership structure. Vodacom Group’s shareholders include (See Figure 2. 8): • Telkom SA Ltd (50%) • Vodafone Group Plc (35%) Venfin Ltd (15%) of which Vodafone now owns 99. 8 percent, making Vodafone a 50 percent shareholder in Vodacom In November 2005, Vodafone agreed to acquire Venfin Ltd for approximately R16 billion. It would then shed Venfin’s other assets but retain the 15 percent Vodacom stake, making it a 50 percent joint owner with Telkom (Wikipedia, 2005). Vodacom’s products and services The success of Vodacom can further be attributed to the introduction of prepaid packages marketed under the Vodago brand name (Cant & Machado, 2005:5).
When Vodacom and MTN first launched their services in 1994, they only offered contracts. However, when Vodacom introduced Vodago (a prepaid package) in November 1996, the industry had seen a segmentation approach of the market where lower income users were now targeted. Vodacom’s market strategy Vodacom, as discussed above, is the dominant mobile leader in the mobile communications industry and tries to position itself as the ‘biggest and the best’ (Finnie, Lewis, Lonergan, Mendler & Northfield, 2003:145).
Vodacom has used traditional incumbent tactics, exploiting its advantage in terms of distribution channels to attract mass-market prepaid customers, and using its established relationship with business customers to attract high-end postpaid users. Vodacom has an estimated 70 percent of business postpaid customers, compared to 53 percent of the total market. The result is that Vodacom has a higher postpaid average return per unit (ARPU) than MTN, but a lower prepaid ARPU than MTN.
In order to achieve continued growth, Vodacom continues to focus on expansion on the African continent and is consistently evaluating new investment opportunities (Vodacom Group Annual results, 2005:8). Vodacom currently targets four market segments, namely (Telkom Highlights, 2005): • Corporate Market: services to corporations and enterprises • Developed Market: services to customers in the higher income groups • Developing Market: services to customers in under-serviced areas and lower income groups, who increasingly participate in the economy; and • Youth Market: services specifically designed for the needs of the youth.
As with most leaders in a particular market, Vodacom has lost market share to a new entrant, but has focused on delivering higher value to customers by introducing new services that lead the way in product development. This is a diversification strategy (see Figure 2. 4 for Kotler’s Product/Market Expansion Grid). Vodacom is thus prospecting and developing new markets for its products and services (See Figure 2. 10). Vodacom’s mission and objective in the short to medium term is to retain market share and attract new customers through attractive products. Loyalty and retention programmes played an integral role in achieving this objective.
Vodacom also sought to increase its contract customer base by migrating appropriate high-end prepaid customers to contracts in the 2005 financial year (Telkom Highlights, 2005). According to Cant and Machado (2005:5) Vodacom has redirected its strategy by pursuing technological advances in its quest to maintain growth rates of the past. Vodacom is working closely with Telkom in the areas of wireless Internet and also testing the next generation of mobile technology known as 3G. The micro-environment of the second mobile network operator, MTN, will be discussed in the next section. MTN Mobile Network Operator
Launched in 1994, MTN (formerly M-Cell) was the second service provider in South Africa but the first service provider in the world to have a mobile coverage of 60 000km? , obtain a mobile licence in Africa and launch prepaid packages. MTN ’s GSM network coverage in South Africa -exclusively provided by Ericsson- embraces almost 90 000km? of land, consists of 4000 base-stations, and has now around 9 million subscribers (African Cellular Statistics, 2005). In October 2000, MTN was the first operator to launch HSCSD (High Speed Circuit-Switched Data: switched wireless data transmission for mobile users at data rates up to 38. Kbps) in South Africa. It followed this in July 2002 by beating rival Vodacom by three months in introducing GPRS. By the end of March 2003 MTN had approximately 30. 000 active GPRS users. MTN has been a leader in the development of advanced data services and has developed a number of web-based portals. MTN’ s MTNICE (MTN Information, Commerce and Entertainment) portal for WAP (Wireless Activated Protocol) and SMSbased entertainment boasts a community of around one million users (Finnie et al. , 2003:130). MTN’s market share
MTN has gradually seen its market share decrease since the beginning of 2000 from 41 percent to 33 percent despite of its consistently increasing customer base. As illustrated by Figure 2. 11, the decline in MTN’ s market share is even more apparent in the fourth quarter of 2001 when Cell C was first launched. Whilst Vodacom lost eight percentage points of market share when Cell C entered the market, MTN also suffered disproportionately at the hands of this newcomer, losing six percentage points of market share to date (Finnie et al. , 2003:131). In 2005, MTN had approximately 35 percent of the market share (Telkom Highlights, 2005:14).
MTN’s ownership structure MTN is 100 percent owned by holding company MTN Group. MTN has followed Vodacom in attracting foreign investment- MCell owns a 72 percent stake of MTN, Transnet (the public transport utility) owns 23 percent, a variety of empowerment groups own 3. 5 percent and the National Empowerment fund owns a 1. 5 percent share (Marine et al. , 2001). In addition to its domestic operations, MTN Group – through its MTN International subsidiary – has wireless subsidiaries in Cameroon, Lesotho, Nigeria, Rwanda, Uganda and Swaziland whereas Vodacom has wireless subsidiaries in Tanzania, Congo, Lesotho and Mozambique .
MTN’s products and services MTN was quick to follow Vodacom in the prepaid market with its competing prepaid packages. It has implemented three prepaid packages as shown in Table 2. 7: • Pay as you Go Classic (PAYG Classic): ideal for consumers who receive more calls than they make and who make most of their calls in the evening or on weekends • Pay as you Go Call Per Second (PAYG Call per Second): charges consumers only what airtime they’ve used up • Pay as you Go Call Per Second Plus (PAYG Call per Second Plus): Cheaper peak time call rates and cheaper SMS rates during peak and off-peak times.
MTN’s market strategy When MTN commenced its services a few months after Vodacom, it initially followed a classic follower strategy (Cant & Machado, 2005:5). MTN is now following a different growth strategy and focusing more on an international growth strategy. Whereas Vodacom strives to be the ‘biggest and the best’, MTN’ s strategy revolves around attracting high-value consumer users. As illustrated in Figure 2. 1, MTN’ s main focus and objective is on the higher-end prepaid and contract section of the market.
Its success in targeting these sections of the market is illustrated by its disproportionately high-contract market share, and the fact that its prepaid ARPU is 20 percent higher than main rival Vodacom. As shown in Figure 2. 13, MTN’ s market position strategy is a combination of market penetration and product development and innovation MTN has placed a lot of emphasis on ongoing reward schemes as a customer retention tool. With “eBucks” users receive reward points for incoming and outgoing calls and sending text messages. Further points are also awarded based on subscriber longevity.
These can be exchanged for airtime or non-mobile goods and services. There are even more loyalty schemes available for prepaid customers- the “Big Bonus” plan is an example of such a loyalty scheme and consists of two main parts (Finnie et al. , 2003:135): • Daily Free SMS Bonus: users receive one free SMS for every chargeable call of over one minute, although the SMS must be used on that day; • High Usage Bonus rewards: users with airtime for spending over R500 or R1000 per month will see their rewards ramping up the longer the subscriber stays with MTN.
MTN has had some success in adopting a “services not technologies” approach to non-voice applications. In promotional literature there is no mention of GPRS or HSCSD, instead being substituted for brands such as MTNdataFAST and MTNdataLIVE. The terms SMS (Short Message Service) and MMS (Multimedia Message Service) are used, but these have already entered common parlance to a significant degree (Finnie et al. , 2003:136). Cell C Mobile Network Operator The country’s third cellular licence, Cell C, was issued in June 2001.
Cell C was awarded a dual-band GSM-900/1800 MHz license in February 2001 and launched in November 2001 with a 084 prefix number range (See Table 2. 9). Initially Cell C provided services via a 15-year commercially negotiated roaming agreement with Vodacom as it rolled out a network of base-stations. It has the intention to solely rely on its own access network in the future and this will reduce Cell C’s interconnection fees to Vodacom. The company is making extensive use of local organisations and contractors to ensure that funds are injected in the South African economy. Revenue increased by R357 million (38. %) in 2005 compared to 2004 (Laham, 2005:16). Cell C has generated real price competition, and forced Vodacom and MTN to focus more on best-value pricing and customer service. “For the South African market, Cell C has been an important step towards creating a mobile communications sector that is as competitive as any in the world, and creating real choice and value for consumers” (Finnie et al. , 2003:129). Cell C’s market share Cell C has achieved a good level of success since it first entered the mobile phone market and it now has approximately a 10 percent share of the South African market (Telkom highlights, 2005:14).
This growth has been fuelled by some enhancements to its media advertising campaigns and an increase in its distribution channels (See Figure 2. 14). By April 2004, in the Business Report section of The Star, Cell C was estimated to have reached the 3 million subscriber-mark of which 1. 9 million were active and aims to achieve a 15-25 percent of the market share by 2006 (African Cellular Statistics, 2004). At present, Cell C has just over 2. 5 million active subscribers (Cell C, 2005).
However, it is important to note that Cell C did enter the market at a time when mobile service penetration was relatively low, and new customers were being added very quickly. It should also be stressed that Cell C does carry a significant number of inactive customers in its reported customer base numbers. It has been estimated that the inactive proportion may be as high as 22 percent of the total. This is based on the definition that a customer is considered inactive if they have not used the service for three months or more (Finnie et al. , 2003:126). Cell C’s ownership structure
As illustrated in Figure 2. 15, Cell C (Pty) Ltd is 100 percent owned by 3C Telecommunications (Pty) Ltd (which in turn is 60 percent owned by Saudi Oger), 25 percent by CellSaf unencumbered (CellSaf represents over 30 black empowerment companies and trusts), and 15 percent by Lanum Securities. Furthermore, the network operator and the service provider have different functions (See Figure 2. 15). Cell C’s products and services Cell C, like its rivals Vodacom an MTN, offers two groups of products namely prepaid and contract to corporate, business, consumer and youth markets.
Cell C offers three pricing options for Easy Chat Prepaid: All Day, Standard and Per Second, allowing the consumer to choose between a flat rate for all calls or variable billing based on peak and off-peak periods respectively. Incoming calls are unlimited, and discount call rates to regularly dialled numbers are two of the features that Cell C Easy Chat Prepaid offers (See Table 2. 10). Cell C also created a youth brand, known as CY, which increased the overall market share within the targeted higher ARPU segment. CY, as shown in Table 2. 10 and Table 2. 1, is targeted at the 18-24 market (Generation Y users) of all races, male and female. The brand value of CY is that it is “young, cool and different”. CY’s initial offering is a uniquely branded starter pack, additional lifetime value (10 SMS’ s per month for free forever), R20 worth of airtime, free logos and ringtones, and two movie vouchers (See Table 2. 11). Cell C’s market strategy Cell C adopted a traditional new-entrant approach by competed on price when it first entered the mobile phone market undercutting its established rivals in order to win market share quickly.
While it claims to be targeting low value postpaid and high-value prepaid, evidence suggests that it has been more successful in attracting new low-end prepaid customers. Cell C has achieved this by trying to keep prices at 10-15 percent below those of its rivals. It is difficult for a new operator like Cell C to compete on service differentiation hence the reason why Cell C persuaded customers to adopt its operator by giving them benefits in the form of cheaper calls. Cell C has adopted a market development strategy as is highlighted in Figure 2. 16 below. There are both advantages and disadvantages with this market strategy.
The advantage of initially competing on price, as stated above, is capturing and building market share as a strong market share indicates good value. The clear disadvantage however is that Cell C secures a largely low-spending prepaid customer base (Finnie et al. , 2003:127). Overall, Cell C’s strategy is based on positioning itself in the market as an innovative company that provides simple, value-for-money services. It is the one operator that targets the youth market strongly. For example, it offers text-only service packages that are clearly targeted at younger customers, especially Generation Y customers.
Furthermore, Cell C was the first South African operator to introduce per-second billing for voice calls. Soon afterwards its rivals followed suit and introduced per-second billing. According to Finnie et al. (2003:128) Cell C’s mission and objectives (See Figure 2. 1) are: • Having a fairly basic service portfolio • Reflecting its status as the company targeting relatively low-spending customers, with simple, value-for-money services In summary, the three mobile network operators have adopted different market strategies in order to position themselves successfully.
Vodacom focuses on a diversification strategy by retaining market share and attracting new customers through new attractive products, MTN focuses on a combination of market penetration and product development and innovation, and Cell C focuses in market development by providing simple, value-for-money services. Products and services offered by the three mobile network operators were also compared and it was found that (See Figure 2. 7): Vodacom and MTN often have the same prices especially in the category ‘calls made to other mobiles’ • Vodacom and MTN’s prices are very similar for contracts • Cell C is always priced below Vodacom and MTN
SWOT analysis of mobile network operators It is also important to conduct a SWOT analysis in order to understand the market positioning of Vodacom, MTN and Cell C according to their strengths, weaknesses, opportunities and threats. According to some authors (Du Plessis, Jooste & Strydom, 2001; Cronje, Du Toit, Marais & Motlatla, 2004) a SWOT analysis is a widely used approach that provides a structured framework for evaluating the strategic positioning of a business organisation by identifying its strengths, weaknesses, opportunities and threats.
The three MNO’ s, namely Vodacom, MTN and Cell C, and their main strengths, weaknesses, opportunities and threats will be highlighted in the table below (Table 2. 14). POTENTIAL STRENGTHS POTENTIAL OPPORTUNITIES Vodacom • Likely to retain 50% of the market share • Retains largest share of high-end postpaid and business users • Best placed to extract further value from existing customers through advanced data services and convergent fixed-mobile services • Dominant and powerful brand • Extensive distribution channels • Benefits from its relationship with Telkom and Vodafone
VODACOM • As the South African market matures, Vodacom’s operations in other African countries will become increasingly important • Will capture 30 percent of revenues outside South Africa in the future • Will introduce more targeted low-end packages • Develop a sub-brand aimed at the prepaid market in order to stem the loss of users, traffic and revenues to Cell C MTN • Well defined position in South Africa • Maintained a market share of 43 percent of postpaid customers with launch of Cell C • High ARPU- targets high-end users and focuses on new innovative ervices MTN MTN has 40 percent of new postpaid customers in 2003 • If it can maintain its strong showing among low-spending contract customers then it can expect to pick up a high percentage of future prepaid customers • Increasing presence in other African countries (37% of revenues came from outside South Africa in 2003) • If a second fixed line operator enters the telecommunications market, this would benefit MTN in the following ways: 1) MTN will carry its on backhaul traffic rather than rely on Telkom 2) Lower interconnection fees ) Decreasing operating costs: MTN would be in a position to pass these savings onto customers in the form of reduced tariffs resulting in a higher market penetration CELL C • When Cell C entered the market, it built market share quickly as mobile penetration was rising • Differentiation from its rivals • Well positioned as the low-price network operator • Roaming agreement with Vodacom allowed Cell C to deploy its own network . CELL C Cell C can capitalize on development within the South African mobile phone market • 45 percent of Cell C’s customers have been captured from Vodacom and MTN and 55 percent are first-time users • By differentiating on price, Cell C can continue to grow market share at current rates • Cell C is now targeting 25 percent market share • As it builds its own network, it will rely less on Vodacom and it will reduce its interconnection fees • Cell C will continue to benefit from the faster than expected growth in the mobile phone market
POTENTIAL WEAKNESSES POTENTIAL THREATS VODACOM • Lost some market share with launch of Cell C (Vodacom is thus sensitive to entrance of price competitive competitors) • Postpaid market share decreased from 56 percent to 47 percent • Overall ARPU is lower than MTN • 15-year roaming agreement with Cell C will expire in some regions, and Cell C will aggressively build out its own network VODACOM • Will face greater competition outside South Africa (particularly from MTN) • Political, regulatory and currency risk If a second fixed line operator enters the telecommunications market, this will place pressure on Telkom which in turn will impact Vodacom: 1) Lower interconnection rates offered to Vodacom’s competitors will result in mobile price competition 2) Less investment by Telkom as it will focus on defending its fixed market share 3) Competitive fixed/mobile blended service introduction • Loss of Vodafone as an international partner would be severely detrimental to Vodacom if Telkom and South African government relinquish majority control MTN Lost six percentage points of market share when Cell C was launchedMTN • Price war sparked by Cell C • Aggressive price tactics could significantly reduce MTN’ s ARPU • MTN would go into defensive price reduction if Cell C decided to target MTN’ s core demographics CELL C • ARPU low (90% prepaid customers) • Smallest market share • Roaming agreement with Vodacom could also be a weakness. Cell C is unhappy with interconnection terms negotiated and would prefer more regulatory intervention to set lower interconnection rates that are based on Vodacom’s costs CELL C Greatest challenge faced by Cell C: achieving long-term financial viability based on improved ARPU, lower churn rates, and lower operating expenses • Cell C must therefore play a long-term game, by building market share aggressively in the short term and improving ARPU, and churn rates in the medium to long term • The introduction of limited mobility services targeting less affluent regions and individuals will clearly pose a competitive threat to Cell C. • Cell C must therefore promote the main, unrivalled differentiator that its service provide and that is full mobility
As illustrated in Table 2. 14 above, each mobile network operator has its own strengths and weaknesses, opportunities and threats. Vodacom’ s strength lies in the fact that it has a dominant and powerful brand, MTN has high ARPU whereas Cell C is well positioned in the market as the low price network operator. Vodacom’ s main weakness lies in the fact that its overall ARPU is lower than that of MTN’ s, MTN lost market share when Cell C entered the market, and Cell C has the smallest market share.
Potential opportunities faced by all three operators are operations in other African countries, and introduction of innovative product and service offerings. Disposable income of South African consumers The South African consumer market is not represented only by the number of inhabitants, but also by the buying power of consumers specifically by consumers’ disposable income. Personal disposable income is that portion of income that remains after deducting taxes plus credit repayments that can be used to purchase consumer products and services (Strydom et al. 2001:45). According to Cant and Machado (2005:5) a large amount of the disposable income of consumers is spent on mobile phones, the lottery (Lotto), and gambling. Furthermore, increasing mobile phone bills, higher medical and education costs, gambling expenditures and higher fuel prices have reduced the disposable income of the average South African consumer (Cant & Machado, 2005:7). Some interesting findings by Van Wyk from BMR (2005) regarding disposable income reveal the following (See Figure 2. 8): • The total buying power of blacks (as measured in terms of personal disposable income) will be just more than 46 percent of the buying power of the total population of South Africa in 2005 as opposed to the 41. 4 percent of that of whites (Van Wyk, 2005). •The per capita disposable income of blacks will still only amount to 15. 8 percent of that of the average white in 2005. •In 2005 the average Asian’s disposable income will be 52. 4 percent of that of the average white and that of the average coloured 25. 9 percent. •The share of whites in personal income (i. e. ncome before income tax is deducted to arrive at personal disposable income) is expected to decline from 70. 4 percent to 44. 6 percent between 1960 and 2005 while that of blacks will increase by 22. 5 percent to 43. 1 percent. •The growth in the per capita disposable income of blacks and Asians remained positive throughout the nine five-year periods between 1960 and 2005, although growth amounted to only 0. 1 percent per annum for blacks between 1985 and 1990. •Whites’ personal income per capita is expected to amount to R86 884 in 2005 as opposed to the R11 862 per capita projected for blacks
Fixed-line phone and mobile phone ownership It is also interesting to note the total number households that have access to a telephone or a mobile phone within their dwellings. A total of 22 percent of South African adults were reported to have a fixed-line phone at home, and 41 percent have access to a mobile phone. In 1996 the corresponding figures were 30 percent and 2. 4 percent (AMPS 2005; AMPS 1996). A little over 70 percent of mobile phone users do not have a fixed-line phone at home, up from 65 percent in 2003. AMPS 2005) The census conducted by Stats SA in 2001 showed that 32. 3 percent of all South African households owned a mobile phone (Cant & Machado, 2005:6). Furthermore 31. 1 percent of Black African housing units have a telephone and/or mobile phone within their dwelling, 57. 2 percent have access to a phone nearby, and 11. 7 percent have access that is not nearby or no access. A total of 95. 4 percent of White housing units have a telephone and/or mobile phone in the dwelling, 4. 4 percent have access to a phone nearby, and 0. percent have access that is not nearby or no access (Stats SA, 2005). A total of 24. 6 percent of Black African households own a mobile phone and 74. 6 percent of White households own a mobile phone (Stats SA, 2005). Fixed-line penetration has fallen from 13 percent in 2000 to 10 percent in 2004, and mobile penetration increased from 12 percent in 2000 to 39 percent of the population in 2004. Suppliers A business organisation also requires inputs from the environment so that it can convert them into outputs for sale in the market environment.
Suppliers form part of the market environment as illustrated in Figure 2. 1. The inputs provided by suppliers are mainly material (raw materials), equipment energy, capital and labour (Cronje et al. , 2004:91). The interaction that exists between a business organisation and its supplier is critical for it to achieve any success in the competitive market place. Porter’s 5 forces model According to Porter (1980, 1985) and Porter and Millar (1985) an organisation develops its business strategies in order to obtain competitive advantage (i. . , increase profits) over its competitors. It does this by responding to five primary forces (Shin, 2001). These forces will help identify the presence of potential returns. If Porter’s five forces are weak, the greater the potential exists for organisations to experience higher profitability and thus the better the chances for success. Since the mobile phone industry dramatically affects these competitive forces, mobile network operators should take these forces into account when formulating their strategies (Shin, 2001).
In his recent study, Porter (2001) reemphasized the importance of analysing the five competitive forces in developing strategies for competitive advantage. “Although some have argued that today’s rapid pace of technological change makes industry analysis less valuable, the opposite is true. Analysing the forces illuminates an industry’s fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future.
The five competitive forces still determine profitability even if suppliers, channels, substitutes, or competitors change” (Porter, 2001:66). The competitive forces are strong in most areas when applied to the mobile phone industry; there is a constant threat of new entrants as government controls the number of licenses in a particular country. Both the bargaining power of suppliers and buyers are strong in that the network operator has a strong influence over the service provider and the service provider and retailers in turn have a strong influence over the consumers.
There are a couple of substitutes for mobile phones such as the Telkom fixed lines and rivalry within the mobile phone industry between the service providers is very strong resulting in price wars. Threat of new entrants Potential new entrants are organisations that identify the opportunities for making excess returns to enter the respective market. New entrants are likely to increase competition subject to the entry barriers. High barriers exist in the mobile phone industry due to government policy but the threat of new entrants is always real.
This threat became real when the Independent Commission Authority of South Africa (ICASA) awarded Cell C the third mobile network licence. The South African mobile market has become more competitive as a result of the third license and each company must thus consolidate and retain its position in the market place. There is fierce competition between Vodacom and MTN for market share but with Cell C entering the market, market share was redistributed amongst the three networks. At the moment, it seems that the threat of potential entrants is quite low when looking at the overview of the mobile phone industry.
High set up costs and government regulations regarding the operation of a licence are the main reasons for a low threat of potential entrants (Van der Wal, Pampallis & Bond, 2002). Recently however, the Ministry of Communications announced in September 2004 new policy directives aimed at opening up the mobile phone market and said it has completed a feasibility study for the allocation of a fourth licence. A fourth licence would have to battle two firmly entrenched players in Vodacom and MTN and a relative newcomer in Cell C.
The attitude of Vodacom towards new entrants has baffled many. Vodacom welcomed the entry of Cell C in 2001 saying greater competition would stimulate the market and that it would even be content if there were five operators in the country (Sewsunker, 2004). Furthermore, one of the potential benefits of introducing competition in the fixed-line telecommunications market would be for operators to be able to build out their own links to base-stations, or to secure those services from an alternative provider and to create competition for Telkom.
The introduction of competition should in turn drive down network operating costs (Finnie et al. , 2003:67). 2. 4. 4. 1. 2 Threat of substitutes Substitute products are products that offer similar utility to customers according to their needs. The threat of substitute products depends on (Du Plessis, Jooste & Strydom, and 2001:46): • Buyers’ willingness to substitute (landline phones for mobile phones) • The relative price and performance of substitutes • The advantages that substitutes offer over traditional products • The cost of switching to substitutes The image/identity of substitutes The most important option for consumers in terms of product substitution in the mobile phone industry is Telkom’ s fixed lines. Both Telkom fixed line phones and mobile phones satisfy the user’s need for communication. However, mobile connections in South Africa far exceed those of fixed line connections. Furthermore, Telkom’s fixed line monopoly expired in February 2005 and new role players are likely to enter the market and offer new services they were never allowed to be launched before.
Telkom’s monopoly has long prevented other players from flourishing and bringing with them better and more innovative services to the public (Business Day, 2005b). Findings further reveal that the number of mobile phones being used in Africa outstripped the number of fixed-line phones and many analysts agree that fixed-line phones are in a declining stage. Furthermore, the lack of fixed line facilities and Telkom’s history of poor service delivery has been a major cause of customer dissatisfaction. Telkom is aiming to prove everyone wrong by operating in other African countries.
With its streamlined organisation, cash flows of R9 billion in financial 2004, years of technical experience, Telkom is eager to embrace cheaper modern technologies such as the amalgamation of fixed-line services with mobile services- for example, introducing mobile services that allows individuals to send SMS’ s over a fixed line phone. This will be priced competitively, possibly at 10 percent cheaper that the mobile equivalent, enabling Telkom to compete with the mobile operators on cost, as its fixed-line traffic is connected on its own network (Business Day, 2005b).
Furthermore as a result of Telkom being a major shareholder in Vodacom, Telkom is receiving income from a competitor making it less vulnerable to competition from substitute products. Another substitute for mobile phone services is the emergence of wireless satellite telephony. This refers to telecommunication networks that use radio and satellite equipment as the chief component of their infrastructure, in order to provide telecommunication services (Ali, 2003:99). As a result of the convergence of telecommunication and information technology industries, voice and data traffic will be carried on new worldwide-integrated technology platforms.
The convergence of voice and data into a next generation industry is creating new challenges for the telecommunication industries as well as for cable and Internet providers (Van der Wal et al. , 2002). 2. 4. 4. 1. 3 Bargaining power of buyers and suppliers Whereas competitors have the ability to influence an industry by either demanding increased quality, forcing prices down or ultimately engage competitors against each other, suppliers and buyers can use their bargaining power to affect the profit margin of the organisation (See Figure 2. 0). The profit margin of the organisation would be reduced if suppliers demand high prices for their supply and buyers ask for a relatively low price for the final product. Buyers can enjoy a position of strength over the firm from which they purchase products by superior bargaining power. Suppliers have the ability to influence an industry by either reducing the quality of their offerings, raising their prices or withholding access to key technologies such as in the case of the mobile phone industry.
Currently, South African mobile consumers are price-takers, in other words, they do exert not much influence on the determination of price for products and services. 2. 4. 4. 1. 4 Degree of rivalry amongst existing competitors Industry rivalry in Figure 2. 20 refers to the industry players that are competing for market share. Degree of rivalry refers to the competition within the industry. The battle for market share has been fought head to head by Vodacom and MTN and by a relative newcomer Cell C in an attempt to attract subscribers and roll out networks.
The Independent Commission Authority of South Africa (ICASA) has drafted new regulations to support a more relaxed regime after the communication department announced a liberalisation of the market where competition can benefit all (Business Day, 2005a). The pace at which Cell C achieved its market share indicates that before its launch, the South African mobile market lacked sufficiently high degree of competition. The introduction of further competition has clearly had a positive impact, driving the Herfindahl- Hirschmann Index down from 5. 262 in September 2001 to 4. 106 two years later (see Figure 2. 21). Opportunities and threats
An interaction between a business organisation and its customers, suppliers and competitors can result in opportunities and threats to a business within the market environment. According to Kotler (2003) an environmental threat “is a challenge posed by an unfavourable trend or development that would lead, in the absence of defensive marketing action, a deterioration in sales or profit. ” He further defines an opportunity as “an area of buyer need in which a company can perform profitably” (Kotler, 2003). South Africa has a strong mobile phone industry that includes the largest and most sophisticated mobile network operators in Africa.
However, like any industry in the world, it faces opportunities like the liberalisation of the telecommunications market, the convergence of ICT products and services (superior technology available through 3G) and the penetration into new markets in Africa. In the spirit of convergence, new partnerships will emerge between different sectors of the market creating opportunities emerging between these players. Potential threats could come in the form of competitors, environmental risks (e. g. disposable phones), health effects (e. g. radiation), telecommunication regulations and global economic changes.
A fresh wave of competition into the market, like any change, could pose a threat to the existing organisation but could simultaneously bring opportunities to those can successfully exploit them (Ali, 2003). MACRO-ENVIRONMENT The third and last component of the business environment is the macro-environment. The macro-environment includes more general forces and consists of six distinct sub-environments: the technological, economic, social, physical, institutional, and international or global environments which impact on the mobile phone industry in various ways (Cronje et al. , 2004:87).
Although these forces do not directly affect the activities of an organisation, they do influence its long-run decisions: • The technological environment includes the technology responsible for innovation and introducing change • The economic environment includes interest rates, inflation rates, exchange rates and trade and budget deficits that influence the prosperity of the business organisation • The social environment includes people’s lifestyles, values and lifestyles that make demands on the business organisations • The physical environment comprises natural resources such as mineral wealth, flora and fauna and man-made improvements such as roads and bridges • The institutional environment includes governmental rules and regulations • The international or global environment includes all the world market trends where local and foreign political trends and events affect the business organisation’s micro-environment as well as the market environment For decades, South Africa has been isolated politically, economically and socially from the rest of the continent (South Africa’s business presence occasional paper, 2004). In the early 1990’s, South Africa reintegrated itself at a time when the global environment boomed with the explosion of ICT. This caused an increase in flow of information and a new ease of global communications between people and countries.
Each of these macro-environment forces will be discussed in detail in the next sections. Technological environment Technology is one of the variables in the macro-environment that has the most direct effect on the mobile phone industry as this industry relies on technology for its survival. Technology is the driving force behind the developments of the mobile phone as mobile phones can be used not only for voice communication but also as multimedia devices. The technological environment is responsible for innovation and change, and technological innovation is occurring at different speeds and with different benefits and risks in both the developed and developing economies.
Furthermore, technology has always been a driving force in community development and plays a critical role in the success of an organisation; it allows for access to information flows and is the bridge for the digital divide between people, organisations and countries. In understanding globalisation and the effect this has on the mobile phone industry, it is important to sort out the different effects of exploitation of technology. This implies changes in perceptions of time and place where technological developments drive globalisation and globalisation stimulates the need and adoption of technologies. There is widespread agreement that convergence occurs at the technological level. Convergence will change how one conducts business, interacts within society and this can been seen to be a viable commercial success that is changing the way people behave.
As technology convergence proceeds, this allows both traditional and new communications to be combined- whether between broadcasting and telecommunications, fixed and wireless and voice and data. The mobile phone industry is already converging at different levels with several other industries like entertainment, news, imaging and Internet services. It is this convergence that industry players and regulators should focus on if they are to benefit from the full range of opportunities that will be presented by the mobile phone industry over the next five years (Finnie et al. , 2003:35). Economic environment The second variable after technology is the economy.
The economic environment plays a vital role in a particular industry and determines the success or failure of an organisation. The South African economy has undergone rapid structural change in the last ten years as a result of the dramatic change in the political environment which brought about the end of economic and political isolation. In 2005, South Africa’s economy appears to be experiencing one of its best periods in many years; it was characterised by rising GDP growth, increased investment, robust local business confidence, low inflation and interest rates, and signs of improvement in formal employment levels (Telkom Highlights, 2005:10).
The recovery in the pace of the South African economic growth (measured quarter on quarter) has continued throughout 2005 and relatively strong growth is expected throughout the forecast period, until 2007 (Absa, 2006). Social environment The social environment is likely to be the environmental variable that is the greatest influenced by technology and the economy. The reason is that communities shape people’s behaviours and ways of life through language, values, expectations and customs. Social change is unavoidable and this affects management indirectly in the form of consumers and directly in the form of employees (Cronje et al. , 2004:102).
Rapid technological changes in South Africa make it difficult to quantify social change yet it is essential for marketers to understand the social environment and the effect this has on consumer behaviour. Physical environment The physical environment refers to the physical resources that businesses need to support life and development. The environment is affected by the operations of businesses as businesses obtain its physical resources and discharges its waste in the environment (Cronje et al. , 2004:109). The mobile phone industry is constantly changing with new high-tech mobile phones and leaves old mobile phones for waste. Mobile phone waste has been found to have harmful effects on the environment and collecting old phones and recycling them is an option that needs to be taken into account.
There has also been widespread concern around the health effects of long-term human exposure to radiation and magnetic fields from mobile phones. Concerns have been raised about the normal mobile phone, which has the antenna in the handset. In this case, the antenna is very close to the user’s head whilst he/she is on the mobile phone and there is concern about the level of microwave emissions to which the brain is being exposed. These concerns all fall under the physical environment and business organisations respond to the vulnerability of the physical environment by trying to limit any harmful effects on the community by giving a sense of social and environmental responsibility (Cronje et al. , 2004:111).
Institutional-Political environment As a component of the macro environment, the government and political pressures also greatly affect the management decisions of a business organisation. The government intervenes on a large scale and influences the macro-environment of a business organisation by means of legislation, annual budget, taxation, price controls, and can further influence the market through government expenditure (Cronje et al. , 2004:112). Business organisations need to a