Upcoming Commercialization of 5G in South Africa

Upcoming Commercialization of 5G in South Africa

The Republic of South Africa is moving slowly towards the commercialization phase of 5G. Rain, the small data-only operator, started fixed-wireless 5G service during September 2019. The rest of South Africa’s mobile operators are waiting for the spectrum auction expected to take place in 2020 as they do not have enough frequencies to launch 5G.

Recommendations

For effective commercialization of 5G, the following steps should be considered:

  • Long-term roadmap is needed to shut down 2G and 3G services. The regulator and industry have to collaborate to streamline this tedious and time consuming process.
  • Market consolidation is required as South Africa is not a big enough market for five players (four major mobile operators and Rain, the new data-only mobile operator), considering that revenues are on the decline for some operators.
  • Regulators should put a strong emphasis on enabling vertical markets.
  • Cost effective execution of spectrum auction for 5G/IMT (International Mobile Telecommunication) service by the regulator during the first half of 2020 (1H20) is a must.
  • Digital switchover cutoff date is needed which will allow the use of 700 and 800 MHz bands for IMT.
  • Effective implementation of regulator’s Radio Frequency Migration Plan 2019 is needed to ease the investment decision strategies of the shareholders.

Country overview

South Africa is situated at the southern tip of the African continent and has a population of about 58 million.. Lesotho, an independent country, is an enclave in the eastern part of the republic, entirely surrounded by South African territory. South Africa has a coastline on both the South Atlantic Ocean in west and the Indian Ocean in east (Figure 1).

South Africa is one of only a few countries with more than one capital city: Pretoria (administrative capital); Cape Town (legislative capital); Bloemfontein (judicial capital). Each of these capitals host a separate segment of the government.

Figure 1

Source: Nations Online

Telecom Market Overview

Government

The Independent Communications Authority of South Africa (ICASA) regulates the telecommunications, broadcasting and postal sectors. ICASA issues licenses to telecommunications and broadcasting service providers and manages the effective use of radio frequency spectrum. It also monitors the post office in relation to customer-care standards and universal service obligations.

Telecom industry overview

The telecom industry was opened up to the private sector with the partial sale of the state-owned enterprise Telkom in 1997.  There has been steady progress since then with five mobile players now serving over 100 million mobile subscribers, nearly twice the population.

Operators

Vodacom, of which Vodafone owns a 69.7% stake, leads the market with more than 43 million mobile subscribers. Vodacom is followed by the MTN Group (MTN Group) with 29 million customers. Cell C ranks third in the market with just under 16M subscribers. Telkom is the incumbent wireline and wireless telecommunication provider, serving more than 11.5 and 2 million mobile and fixed-line customers respectively. Rain is the fifth operator, but only provides data services and started its operations in 2018 (Figure 2).

As of late November 2019, Telkom was in talks to acquire “heavily indebted” Cell C, after a similar effort in 2017 did not succeed. A Telkom-Cell C combination would be similar in size to the MTN Group.

Figure 2

Fixed line voice and fixed line broadband services are provided by operators such as Telkom, Supersonic, Afrihost, and Axxess. Total subscriptions ended September 2018 at 4.7 million. Fixed broadband is currently provided through a mix of DSL, FTTx, and fixed-LTE. As of October 2019, though, Telkom is in the process of decommissioning its copper network and moving users onto FTTx (FTTC, in general) and fixed LTE.

Infrastructure.

Fast mobile broadband networks and devices have become widespread in South Africa over the last few years. According to the regulator’s annual “State of the ICT Sector” (March 2019), 3G networks covered over 98% of the population as of late 2018 (2G: 99%). Coverage for 4G/LTE increased from 76.7% in 2017 to 85.7% in 2018 (Figure 3). Smartphone penetration doubled to 80% between Sept. 2016 and Sept. 2018. More than 12 million LTE devices out of 91.7 million subscriptions indicate a reasonable penetration of wireless broadband services.

Figure 3

South Africa has multiple landing stations for undersea cable connectivity. The most recent one is the Africa-1 cable system, which is expected to land in the coastal town of Mtunzini in the next two to three years. It will be the third cable system after SEACOM and EASSy on the eastern side, and 12th overall.

The infrastructure sharing business is at a rudimentary stage. Out of 30,000 towers only 10% are owned and operated by independent tower companies. Helios Towers is one such company; Helios recently acquired SA Towers and its 500 existing towers. There is much room for growth in the passive and active infrastructure sharing business.

Vendors

Ericsson, Huawei and Nokia are the three major telecom equipment providers in South Africa. ZTE has a small position.

Market leader Vodacom has a tight relationship with Nokia, which built most of its 4G network. Nokia has also worked on 5G trials with Vodacom SA, and supplied gear for Africa’s first (per Vodacom) 5G network in Lesotho, rolled out in August 2018.

The MTN Group has used both Ericsson and Huawei gear to build out its 4G network in South Africa. Last month Ericsson announced a big win with the MTN Group: a three-year deal for a 3GPP-compliant 5G non-standalone build, also including transport and core products. The MTN Group also awarded a 5G trial to Huawei last month, but has not committed to a commercial rollout.

Cell C relies on a mix of Huawei and ZTE for its 4G network, while Telkom also has multiple suppliers.

New operator Rain uses both Huawei and Nokia. In February 2019, both vendors appeared to take credit for the “first” 5G network in South Africa: Nokia in Cape Town, and Huawei in Johannesburg.

Spectrum

Operators have been facing a shortage of spectrum for the last few years. There are constant disputes between the regulator and industry on this unresolved matter. Table 1 shows the breakdown of spectrum assignments which clearly highlights that except the new entrant Rain, other operators do not have enough spectrum to offer high quality 4G/5G wireless broadband service. Additionally, the 2300 MHz assigned to Telkom is not the preferred band for 5G.

Table 1

Operator Spectrum Holdings
Spectrum Band Vodacom MTN Cell C Telkom Rain
900 MHz 22 MHz 22 MHz 22 MHz
1800 MHz 24 MHz 24 MHz 24 MHz 24 MHz 34 MHz
2100 MHz 30 MHz 30 MHz 30 MHz 30 MHz
2300 MHz 68 MHz
2600 MHz 15 MHz
3500 MHz 28 MHz 142 MHz
Total 76 MHz 76 MHz 76 MHz 150 MHz 191 MHz

 

The regulator recently published an information memorandum (auction process document) for the licensing of spectrum which can be used to offer IMT services. The auction is expected to take place for 700, 800, 2300, 2500 and 3500 MHz bands in 2020. One lot (block of spectrum) will be reserved for a national wireless open-access network (WOAN), and the remainder will be auctioned to industry (no further details determined yet). The WOAN is applicable to 400 small scale operators that do not have access to spectrum and through this initiative the regulator hopes to boost competition and lower communication costs.

In next year’s (expected) auction, a number of lots are available in each frequency band and operators are allowed to bid for any of the lots. A key feature of the regulator’s auction plan is the availability of 116 MHz in the 3500 MHz (3400-3600) frequency band, which is part of one of the most prominent bands for 5G.

Besides the upcoming auctions, the pursuits of other holders of scarce spectrum resources will be interesting to watch. Gauteng-based Liquid Telecom is one such company that is on the radar. Liquid provides fiber optic, satellite and international carrier services to operators, ISPs and enterprises. It holds 56 MHz in the 3.5 GHz band, inside 5G’s most prominent frequency band. While this spectrum alone may not be enough to offer 5G services, but other operators’ lack of adequate spectrum could make Liquid Telecom a potential buyout target, or at least an attractive partner.  Any significant delay in the upcoming 5G auction will most likely be good for Liquid Telecom’s business.

5G in South Africa

While more spectrum is needed, South Africa has already joined the 5G bandwagon with the inauguration of fixed-wireless 5G by the data-only provider Rain. It started this commercial fixed-wireless 5G broadband service in selected areas of Johannesburg and Pretoria using Huawei equipment in September 2019. Rain is the only operator that is offering 5G for the time being in South Africa.

The MTN Group selected Ericsson for end to end delivery of 5G, including radio, transport and core products. This agreement was reached in November 2019 with commercial rollout expected to start in 2020. The focus for now is on Enhanced Mobile Broadband, Fixed Wireless Access, and the Internet of Things (IoT) applications. The companies are also working to develop additional use cases that will contribute to the digital transformation of industry verticals.

Vodacom is also eager to show early 5G progress: it recently showcased a live 5G data session using LG’s mobile phone and Nokia’s equipment which the operator termed it as “Africa’s first live 5G data session.”

Nearby Lesotho has played a role in South Africa’s 5G development. In August 2018 Vodacom turned up Africa’s first (per Vodacom) commercial 5G service in Lesotho, on pre-assigned 3.5 GHz spectrum.  Vodacom did this in part to push regulators elsewhere. Its CEO noted at the time that, “What we’ve accomplished in Lesotho is an example of what can be achieved in Africa, should the requisite spectrum also be made available.” South African regulators were likely the intended audience for this comment.

Key Challenges

South Africa’s key telecom challenge is the transparent and timely execution of spectrum auctions for the enablement of 5G. Another challenge is the presence of five mobile operators in a country of 58 million, and where close to 50% of the population lives below the upper-bound poverty line of $83. Market consolidation is essential.

Spectrum availability is also a bug hurdle faced by the operators. The 3600-4200 MHz is ideal for 5G but this band is currently used for satellite services. It has not been put up for auction as the compatibility between satellite and mobile operations remains a big challenge. Along the same lines, 700 and 800 MHz bands defined in auction process document are currently being used for broadcasting. Their availability for IMT in a timely manner is a daunting challenge.

Operators’ declining revenues remains a challenge.  Cell C reported a net loss after tax of more than R8 billion (over $544 million) in the 12-month period ended May 31, 2019 as compared to a loss of R656 million (over $44 million) for the previous comparable period. On a similar note, Vodacom’s service revenue declined by 1.2% to R12.6 billion (over $856 million) from June 30, 2018 to June 30, 2019. Subscribers’ losses and declining ARPU for some operators are the other two challenges. Both MTN and Cell C have a smaller number of customers at the end of 2Q19 and May 31, 2019 respectively as compared to previous comparable periods. MTN’s ARPU dropped from $7.50 at the end of June 2018 to $6.69 at the end of June 2019.

Recommendations

The preceding sections clearly show that 2G and 3G services are heavily penetrated, 4G is the rising star whereas 5G is on the horizon. To enable a successful transition to 5G the following recommendations should be considered by the regulator and industry players:

2G and 3G Shutdown: A long-term roadmap is needed to shut down 2G and 3G services. With increasing penetration of 4G and expected commercial launch of 5G in 2020, it is prudent to have an effective plan to shut down 2G/3G. It will free up capacity, reduce the number of network elements, reduce carbon footprint, reduce operators’ annual license costs and spectrum can be returned to the regulator if needed and/or possible or can be reused for 5G if possible. In a nutshell, it will improve networks’ quality of service and overall financial health of operators. Transition issues such as QoS (quality of service) degradation and vendor contract renegotiation are manageable.

Market Consolidation: The market is not sustainable for five mobile operators in the long run. The revenue figures and subscribers’ losses speak for themselves.  In recent years operators have spent more than R20 billion on network infrastructure, some of this capital expenditure could have been avoided if sharing was implemented by operators. If physical infrastructure sharing is implemented as required for the new 5G licensees by the regulator, then it will likely improve the financial health of the operators. Spectrum sharing and active infrastructure sharing will further energize market consolidation.

Vertical Markets: The success of 5G to a larger extent depends on its enablement in vertical industries. An effective roadmap is needed to strengthen 5G in IoT (Internet of Things), AI (Artificial Intelligence), V2X (vehicle to everything – connected cars), etc., markets. The list of stakeholders is long and with perhaps many open as well as clandestine political agendas, it won’t be easy to come up with such a roadmap. The concerned governmental agencies along with the corresponding industries (education, finance, health, maritime, telecommunication, tourism, transportation, etc.) will eventually face an uphill battle.

Spectrum Roadmap: Effective execution of the regulator’s “Radio Frequency Migration Plan 2019” will assist operators and their shareholders in their decision-making process. Further holdups in upcoming auctions will definitely delay the commercialization of 5G in the country. The two key success factors of this plan are: resolution / identification of the compatibility challenges between satellite and mobile operations in the 3600-4200 MHz band and (b) timely switchover from analog to digital broadcasting which will free up the spectrum (703-790 MHz and 790-862 MHz) for IMT.

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