Current total [1] CAPEX investment growth is outpacing retail telecoms revenue growth – and there are no signs that this will change over the short term.  Unless telecoms operators change their business model, their ability to sustain such investments will become increasingly squeezed.  In the future, we expect to see a range of innovative network sharing deals done between telecoms operators, as they strive to alleviate the increasing CAPEX pressure.

[1] CAPEX includes all categories (e.g. plant, property, intangibles) reported by the telecoms operators. It excludes investment in companies.

2018 Annual CAPEX Growth

The total annual CAPEX of telecommunications operators in South Africa grew by 4.6% YoY, to reach R35.10bn for the year ending March 2018.

In 2018, three telecoms operators – MTN SA, Telkom Group and Vodacom SA – accounted for 78.6% of the total annual CAPEX. MTN SA, with 32.6% CAPEX market share, continued to be the largest investor.

Three-year CAPEX Review

Over the past three years (2016-2018), a cumulative total of R100bn has been invested in the various networks by the telecoms operators. More specifically:

  • MTN SA has invested a total 9bn in its network;
  • Vodacom SA follows with a total investment of 1bn;
  • Telkom Group has invested 8bn; and
  • Cell C and Liquid Telecom SA (formerly Neotel) have invested a combined total of 6bn.

Interestingly, over the same three-year period the new telecoms operators – Dark Fibre Africa, FibreCo, Vumatel, and the rest of fibre market operators – have invested an estimated total of R8.2bn in their respective networks.

The Challenge

Annual CAPEX growth is greater than the retail service revenue growth.

Over the past five years, retail revenue earned from telecoms services only grew at a CAGR of 2.2% (2013-2018). Over the same period, total CAPEX invested grew 3.4x faster, or with a CAGR of 7.5%.

The expected CAPEX investment in telecoms networks shows no sign of slowing down. Operators plan to continue to invest in their respective networks. For example, investment is planned for fibre deployment, 5G and the overall capacity to deal with the ever-growing data demand. This implies a continued strong annual CAPEX investment programme.

The growth in telecoms services revenue, however, is currently forecast to grow at around real GDP growth.  Thus, if telecoms operators do not grow profitability to generate larger free cashflows, then these operators will experience a growing decline in free cashflow to fund network investment.

New Approaches to Network Buildout Needed

This growing gap will require telecoms operators to seek out innovative approaches to fund CAPEX and/or seek out better network sharing deals.

Some telecoms operators have already acknowledged that the current level of CAPEX investment is not sustainable.

Lastly, the demand for CAPEX investment will likely see some of the smaller telecoms operators exit the market.