International Peer Benchmarking Study on South Africa’s ICT Sector

Department of CommunicationJune 2009

Introduction

The Department of Communication Commissioned the BMIT to analyse

– telecommunications voice, data and broadband services and product prices at

– international, national, retail, business and residential levels in

– South Africa, Brazil, Chile, Korea, India and Malaysia to assess its relative performance in respect of

– Cost , usage, access and quality

This booklet contains the PEER BENCHMARKING RESULTS for the International Peer Benchmarking Study on South Africa’s ICT Sector.

Policy Environment (1)

Major events that significantly transformed the regulatory regime for the

telecommunications sector in South Africa were:

•The corporatisation of Telkom in 1991

•The licensing of two mobile operators in 1993

•The enactment of the Telecommunications Act of 1996

•The sale of a 30% shareholding in Telkom to Thintana17 in 1997

•The subsequent amendment of the Act in 2001 making provision for the

licensing of an SNO and

•The enactment of the Electronic Communications Act and the ICASA

Amendment Act in 2006.

Policy Environment (2)

Other significant events included:

•The issuing of a third mobile licence in 2001

•The merging of the separate broadcasting and telecommunications regulatory

authorities to form ICASA in 2001

•The issuing of a Multimedia Services Licence and Carrier of Carriers License to

Sentech Limited in 2002

•The public listing of Telkom SA in 2003

•The licensing of the Second Network Operator in 2004

•The coming into effect in 2005 of a ministerial determination expanding

commercial opportunities available to several types of market participants,

notably VANS providers permitted to offer voice telephony services

•The declaration of submarine cable landing stations as essential facilities, and

•The decision to expedite the local loop unbundling process for completion by

2011.

Brazil IndiaSouth Africa

Chile Malaysia South Korea

Benchmark countries

Purchasing power parity (PPP)

• Takes into account differences in the relative prices of goods and services

• Measured in current international dollars which are calculated to have same purchasing power as a dollar spent on GNI in the U.S. economy

• “Big Mac” example from The Economist magazine (July 24, 2008):

– Price of Big Mac in USA: US$3.57

– Price of Big Mac in South Africa: US$2.24

– Difference between South Africa and USA: -37%

– Adjusted PPP South Africa exchange rate to US dollar: 7.56 * -1.37 = 4.75

Basic indicators Sou

rce: Wo

rld B

ank (Po

pu

lation

, urb

an p

op

ulatio

n an

d su

rface area). IMF (G

DP

).

The benchmark country with the largest population is India with a population over five times

bigger than the next most populated nation, Brazil. South Africa’s population is in the middle

of the benchmark countries, similar to Korea and larger than Chile and Malaysia. Gross

domestic product (GDP) per capita is in current United States dollars and in purchasing

power parity (PPP)

Taxes

All countries levy a Value Added Tax (VAT) or sales tax on telecommunications services.

The rates are shown below.

Fixed telephone market

• Fixed line access generally dominated by incumbent operator:

– Brazil: Regional domination (Telesp, Brasil Telecom, Oi) with some Wireless Local Loop (WLL) competition

– Chile: CTC with some regional operators– India: BSNL with MTNL in Delhi and Bombay and competition from WLL– Korea: Korea Telecom (90%) of lines, one other nationwide competitor– Malaysia: Telekom Malaysia– South Africa: Telkom; new competitor with Neotel

• Domestic & international long distance markets generally open; indirect domestic long distance competition from mobiles

• Brazil, Chile, India and Korea pretty competitive with a number of facilities-based long distance operators

Fixed telephone penetration

• Growth in fixed lines has been stagnant in most of countries

• Only Malaysia & South Africa with less fixed lines at March 2008 than December 2000

0

10

20

30

40

50

60

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Ma

r-0

8

Korea

South Africa

Malaysia

BrazilChile

India

Fixed telephone line subscribers per 100 people

Fixed connection charges

$28

$32

$54

$77

$82

$93

$105

$0 $50 $100 $150

Malaysia TM

India BSNL

Telkom Prepaid

Brazil TELESP

Korea KT

Telkom Postpaid

Chile CTC

Connection charges include:

-Subscription charges (Residential & Business)

-Call charges

Findings

•No distinction between residential and business

• Most alternative operators do not charge for connection

• In Brazil, connection varies by region

• Telkom South Africa does not charge connection for “Closer” Plans

Fixed line connection charges, August 2008, PPP

Fixed monthly subscription

• Big range in subscription charges among benchmark countries

• Subscriptions vary by residential or business and whether free or discounted calls / minutes included

$0

$10

$20

$30

$40

$50

$60

$70

$80

Bra

zil T

ELE

SP

Bas

ic*

Chi

le C

TC

Are

a 1

Indi

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One

*K

orea

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Hig

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Kor

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Hig

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Residence

Business

Monthly fixed line subscription charges, August

2008, PPP

* Includes free minutes or calls or discounted call prices.

Fixed local call

• South Africa has the highest fixed local call charges (i.e., fixed local call to another fixed line)

$0.00 $0.05 $0.10 $0.15

Korea KT

India BSNL

Malaysia TM

Chile CTC

Brazil TELESP

Telkom Postpaid

Telkom Prepaid

Price of a one minute peak rate fixed local call, 2008, PPP

Fixed to mobile call

• South Africa has second highest price

• Along with Brazil, significantly above other countries

$0.00 $0.20 $0.40 $0.60

India BSNL

Korea KT

Malaysia TM

South Africa Telkom

Brazil TELESP

Price of a one minute fixed to mobile call, average peak/off-peak, 2008, PPP

Domestic long distance

• Influenced by mobile telephony (e.g., single price for national call) and VoIP

• Chile, Korea, South Africa & India only have one long distance band

• South Africa has second lowest prices

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

Ma

laysia

Bra

zil

Ch

ile

Ko

rea

So

uth

Afr

ica

Ind

ia

Band 4

Band 3

Band 2

Band 1

>30

km

>50

km<50

km

<150

km

>150

km

<50

km

<100

km out

side

local

exch.>50

km

<300

km

>300

km

Average price per minute domestic long distance, PPP, August 2008

International long distance

$0.12

$0.17 $0.17

$0.26 $0.27 $0.29

$0.19

$0.23

$0.47$0.50

$0.38 $0.36

$0.0

$0.1

$0.2

$0.3

$0.4

$0.5

$0.6

South

Africa

Chile India Malaysia Brazil Korea

US$ per minute

PPP per minute

• Despite the lowest level of facilities-based international telephone call competition, South Africa has the cheapest tariffs

• This is partly due to extensive tariff rebalancing but is still surprising

• There is not more of a competitive threat from VoIP in South Africa since it is legal in all the other countries also (to various degrees, either full VoIP or PC-phone)

Price reflects calls placed from fixed lines of incumbent operators. Peak and off-peak have been averaged.

So

urc

e: O

pe

rato

r’s p

ub

lish

ed

ta

riffs.

Price of one minute call to USA, August 2008

Public payphone

• Price of calls from payphones important for those without telephone or with mobiles looking for cheaper call prices

$0.06

$0.10

$0.13

$0.25

$0.27

$0.48

$0.00 $0.20 $0.40 $0.60

Malaysia

Korea

India

Brazil

South

Africa

Chile

3 minute call from public payphone, average peak/off-peak, August 2008, PPP

Fixed line Quality of Service (QoS)

• The only fixed QoS indicator available for all countries is the number of faults

• On average, one of out of every two fixed lines have a fault in South Africa each year compared to one in 100 in Korea but almost 9 out of 10 in India

86

54

49

29

17

1

0 50 100

India

Chile

(06)

South

Africa

Malaysia

Brazil

Korea

(03)

Faults per 100

lines per year,

2007

Fixed telephone usage

• Local usage low in South Africa compared to benchmark countries

• Long distance usage relatively high 377

318

206

8221

701 5 12

0

50

100

150

200

250

300

350

400

Brazil Chile South Africa

Local

National long distance

International long distance

Minutes of use per subscriber per month, 2007

Fixed telephony - Summary

• Long distance – international and domestic – relatively cheap in South Africa compared to other benchmark countries

• However other fixed charges are relatively high in South Africa and it has rebalanced more sharply than other countries

• Fixed penetration is lower today in South Africa than in 2000

Mobile market

1,593

2,265

3,4383,687

3,868

4,318

South

Africa

Korea Chile Malaysia Brazil India

Others

Operator 3

Operator 2

Operator 1

3 3 3 3 8 12

Number of facilities-based

mobile operators

Market share

• South Africa has the most concentrated mobile market

• Most of the benchmark countries, like South Africa, have 3 nationwide operators

• Brazil and India have a larger number of mobile groups although not all operate nationwide

Herfindahl-Hirschman Index

December 2007

The Herfindahl-Hirschman Index (HHI) is a measure of market concentration calculated by squaring

the market share of each firm and then summing the resulting numbers. The closer the HHI is to

zero, the less concentrated the industry.

Mobile penetration

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005 2006 2007 Mar-08

South Africa

Korea

Brazil

India

Chile

Malaysia

Mobile penetration December 2007

• Although South Africa has the highest mobile penetration among the study countries, this should be treated with caution:– South Africa has the highest

penetration of pre-paid subscribers with lenient recharge “windows” and likely multiple subscriptions

– In terms of household penetration, South Africa has a lower rate than other countries for which data is available

• Therefore, except for India, likely that other benchmark countries are equivalent in terms of mobile penetration

1321

2

87

14 14

53

63

18

3

72 77

73

88

74

0

10

20

30

40

50

60

70

80

90

100

Brazil Chile India KoreaMalaysiaSouth

Africa

Pre-paid penetrationPost-paid penetrationHomes with mobile phone (%)

66

84

20

9086

92

Pre-paid handset prices

• “Nokia 1200 is a very basic phone with the feature set from last century…Nokia 1208 is a little better with the addition of 65K color VGA screen”http://www.unwiredview.com/2007/05/04/nokia-1200-and-nokia-1208-cheap-phones-to-share/

• In Malaysia, model not available (only 3G phones!). In Korea, Nokia 1200/1208 not available.

• South Africa has highest pre-paid phone price even though cheaper model (1200). Furthermore, offers no incentives to purchaser unlike other countries (e.g., installment payments, free calls, free SMS).

$0

$32

$45$48

$56

India Brazil USA Chile South

Africa

Pre-paid phone prices including taxes. Converted to US$ using 2007 annual average exchange rate. India & South Africa refer to 1200; Brazil & Chile refer to 1208.

Nokia 1200/1208 handset prices, US$, August 2008

Can

be

paid

in

install

ments

Incl.

10

on-

net

calls

Incl.

US$

19 of

calls

& 50

SMS Sou

rce:

Op

era

tor

web

sit

es.

Prepaid mobile pricesPeak rate, August 2008, PPP

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

Bra

zil V

ivo

To

da

Ho

ra

Bra

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i

Ch

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Ch

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aim

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Ind

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irte

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Ko

rea

SK

Te

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Ma

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om

Ma

lays

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axi

s H

otli

nk

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Afr

ica

Vo

da

go

So

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Afr

ica

MT

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ay

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Go

Cla

ssic

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ica

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llC e

asy

cha

t

sta

nd

ard

On-net

Off-net

Fixed

A selection of rates for illustration purposes.

Does not include all plans in each country.

SMS

• Second highest SMS prices in South Africa

• Usage is higher in South Africa than Chile or Brazil

• Malaysia has highest usage by far35

222

28

6

17

8

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

Ko

rea

SK

Te

leco

m

Ma

lays

ia M

axi

s

Ind

ia B

ha

rti A

irte

l

Ch

ile E

nte

l

Vo

da

com

Bra

zil V

ivo

0

5

10

15

20

25

30

35

40

45

Price of SMS SMS/MON/SUB

Price of SMS, PPP, August 2008, number of SMS per subscriber per month refer to 2007

International call from mobile

• While South Africa has cheapest international calls from fixed line, the situation is reversed with mobile

$0.41

$0.43

$0.55

$0.61

$0.64

$0.00 $0.50 $1.00

India

Brazil

Malaysia

Chile

South

Africa

Price of one minute call to USA from mobile phone, August 2008, PPP

Note: None of the sampled operators has a different off-peak rate.

Minutes of Use (MoU)

0

50

100

150

200

250

300

350

400

450

500

$0.00 $0.20 $0.40 $0.60

Revenue per minute (US$)

Mo

U/S

ub

scri

ber/

Mo

nth

India

Korea

Malaysia

South Africa

Chile

Brazil

• Mobile usage declines as revenue per minute (ARPU/MoU) goes up

• South African mobile operators have highest revenue per minute of benchmark countries

• South Africans talk less on their mobiles than any of the other peer countries

Mobile quality of service

• Mobile quality fairly similar across countries except for India

99.95%

99.70%

99.73%

93.57%

90% 92% 94% 96% 98% 100

%

Chile

South

Africa

Malaysia*

India

Mobile call set-up success rate, 2007

Data refer to largest operator. * 2002.

3G mobile subscribers

• All countries except India have launched mobile broadband networks (WCDMA, EVDO or HSDPA)

• Except for Korea, share of 3G subscribers in total mobile users is low

• However, most 3G subscribers are using 3G for fixed-like broadband access (e.g., 400,000 in Brazil)

2% 1% 0%

56%

4% 3%

Brazil Chile India Korea Malaysia South

Africa

3G as percent of

total mobile

subscribers

3G Broadband tariffsHSDPA networks, PPP, August 2008

41

55

63

71

76

79

Korea

Malaysia

MTN

Brazil

Vodacom

Chile

41

55

71

79

85

98

Korea

Malaysia

Brazil

Chile

MTN

Vodacom

41

55

71

79

230

Korea

Malaysia

Brazil

Chile

Vodacom

41

55

71

79

449

Korea

Malaysia

Brazil

Chile

Vodacom

1GB 2 GB

10 GB

Note: India has not launched HSDPA. In Brazil & Chile speed is reduced when reaching 1 & 3 GB volume caps respectively.

5 GB

Mobile communications - Summary

• Mobile penetration has grown impressively in South Africa. It has risen from the fourth ranked country among the benchmark nations in 2000 to first in March 2008.

• South Africa top ranked despite relatively high tariffs

• However usage in South Africa is low

• Mobile broadband tariffs for high volumes (>2GB) expensive in South Africa due to lack of uncapped plans which are available in the other benchmark countries

Internet market

• Only Malaysia has less competitive broadband market than South Africa

• In Brazil, Chile, India and Korea there is intra-modal competition among DSL providers and inter-modal competition with cable modem, wireless and 3G providers

Internet access

0

10

20

30

40

2000 2002 2004 2006

Korea

Malaysia

Chile

Brazil

South Africa

India

0

20

40

60

80

2000 2002 2004 2006

Korea

Malaysia

Chile

Brazil

South Africa

India

4

7

17

20

31

80

0 50 100

India

South

Africa

Brazil

Malaysia

Chile

Korea

Households with Internet access at home, 2007, %Internet subscribers per 100 people

Internet users per 100 people

Distribution of Internet subscribers

• In Chile & Korea, almost all Internet subscribers are now broadband

• In India & Malaysia low dial-up rates discourage broadband adoption

100%

97%

59%

52%

30%

26%

Korea

Chile

Brazil

South

Africa

India

Malaysia

Percentage of Internet subscribers using broadband, 2007

Internet tariffs

• Other countries have variety of plans and different speeds compared to South Africa

• All except South Africa offer unlimited plans

• Benchmark around South Africa speeds & caps

• Includes ISP portion (only relevant for Brazil and South Africa)

DSL PricesMonthly tariff, August 2008, PPP

$0

$10

$20

$30

$40

$50

$60

Ma

laysia

Bra

zil

Ko

rea

Ind

ia

So

uth

Afr

ica

Ch

ile

1GB

2GB

10

hours

per

month

cap

No cap

No cap

No cap

1

GB

cap

2

GB

cap

No cap

10

Mbps

256

kbps

$0

$20

$40

$60

$80

$100

$120

$140

$160

Ko

rea

Ind

ia

Bra

zil

Ch

ile

So

uth

Afr

ica

Ma

laysia

3GB

cap

No

cap

No

capNo

cap

4.5

GB

cap

No

cap

10

Mbps

3 GB

384 kbps 4096 kbps

Broadband speeds

• All of the countries have maximum broadband speeds faster than South Africa

• Korea offers 100 Mbps fiber optic/LAN connections whereas Brazil offers 30 Mbps

• In contrast, the fastest DSL speed in South Africa is 4 Mbps

0 10,000 20,000 30,000

Korea

Brazil

Chile

Malaysia

India

South

Africa

Range of slowest & fastest broadband speeds available, kbps

100 Mbps

Wi-Fi hotspot

• All telephone operators have Wi-Fi plans. Some offer prepaid cards or monthly subscriptions

• Ideal for those who do not have Internet access at home

• Proxy for public access

0.020.03

0.05 0.05

0.07

0.13

$0.00

$0.02

$0.04

$0.06

$0.08

$0.10

$0.12

$0.14

Ma

laysia

Ind

ia

Ko

rea

Ch

ile

Bra

zil

So

uth

Afr

ica

Price per minute Wi-Fi hotspot, US$, August

2008

Internet summary

• South African tariffs consistently high

• Unlike other countries, no uncapped plans in South Africa

• Level of South African access relatively low and slower growth than other countries

WHOLESALE

Fixed termination

• South Africa has highest fixed termination rates

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

MalaysiaChile India Brazil Korea South

Africa

Fixed termination rates, PPP cents per minute, 2007

Mobile termination

• All countries except Brazil and South Africa regulate mobile termination rates

• Brazil & South Africa have the highest rates

1.97

4.56

5.02

26.49

27.06

28.49

0 10 20 30

India

Malaysia

Korea

Chile

South

Africa

Brazil

Mobile termination rate, PPP cents per minute, 2007

International incoming calls

• International incoming calls to fixed lines and mobile phones align fairly closely with termination rates

• It costs about 8 US cents to call a fixed line in South Africa using Skype

• It costs over 3 times more to call a South African mobile phone from abroad using Skype

$0.02

$0.02

$0.02

$0.03

$0.04

$0.06

$0.07

$0.08

$0.08

$0.24

$0.25

$0.27

$0.11

$0.00 $0.10 $0.20 $0.30

Chile

Malaysia

Korea

Brazil-Sao Paulo

Brazil-Rio de Janeiro

Brazil

Malaysia - Mobile

South Africa

Korea - Mobile

India

Chile - Mobile

Brazil - Mobile

South Africa - Mobile

Termination

rate

International calls to benchmark countries using Skype, US$ per minute including VAT, August 2008

Source: Skype.

Domestic leased lines

• India has the cheapest domestic leased line prices

• South Africa compares favorably compared to Korea and Malaysia

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

India South

Africa

Korea Malaysia

2 Km

200 km

Price of 2 Mbps domestic leased line, PPP, 2008

International leased lines

• South Africa has the highest price for an international 2 Mbps leased line to the USA

• It is more than twice as much as the next most expensive country

2,654

4,041

5,275

6,939

7,000

15,009

$0 $5,000 $10,000 $15,000 $20,000

Chile

Korea

Malaysia

Brazil

India

South

Africa

Price of 2 Mbps international leased line to USA, half-circuit, PPP, 2008

International bandwidth

• South Africa lags other countries in international Internet bandwidth.

• The relative shortage of bandwidth in South Africa partly explains higher broadband and leased line prices

20 20

42

49

40

3

147

100

4

122

11 7

Bra

zil

Ch

ile

Ind

ia

Ko

rea

Ma

laysia

So

uth

Afr

ica

Gbps

Bits per person

Note: Figures for Brazil and Chile refer to Embratel and Entel only. Figure for South Africa refers to IS, Verizon and Telkom.

International Internet bandwidth, Gbps, 2007

Wholesale summary

• South African fixed and mobile termination rates high

• International leased lines expensive

• Very low international bandwidth compared to benchmark countries

Conclusions

• South Africa more often than not aligns with high cost countries (Brazil & Chile) in tariff comparisons

• South Africa expensive for fixed local access but inexpensive for fixed domestic and international long distance

• South Africa and Malaysia only two countries with less fixed lines today than in 2000

• South Africa has most concentrated mobile market

• South Africa has relatively high mobile penetration

• Mobile tariffs expensive in South Africa

• South Africa has lowest mobile usage

Conclusions (II)

• South Africa has low Internet penetration and market has grown slowly compared to other benchmark countries

• Lack of uncapped broadband plans in South Africa compared to other benchmark countries

• Mobile and DSL broadband expensive at high usage (>3GB)

• Wholesale fixed and mobile termination expensive in South Africa

• South Africa compares favorably for domestic leased lines

• International private leased lines (2Mbps) expensive in South Africa

• Dearth of international bandwidth in South Africa