Competition Commission Data Inquiry Hearing

18 October 2018

MTN South Africa

Who we are• Proudly South African, born at the dawn of democracy

• 24 countries, 230 million customers (30 million in SA) – Global Head office in JHB

• Africa’s Largest telecom company by customers and revenue. Africa’s most valuable Brand

• 43.6bn in capex in SA (last 4 years)

• Listed on the JSE, Level 4 B-BBEE (36.34% black owned and 13.42% black woman owned)

• R11.7bn spent with 51% BO Entities, R22.5bn spent with 30% BWO entities (Over 4 Years)

• R3.3bn spent with SMME’s (Over 3 Years)

Who we are• Direct Tax Contributions > ZAR 4.9 billion, indirect Tax Contributions > ZAR 6.2 billion (Over 3 years)

• Approximately 5000 direct employees, and in excess of 20 000 people indirectly employed

• MTN Foundation – R728 million spend (Last 11 years)

• “Yes Campaign” – MTN to employ 1,000 youth over next 12 months

• MTN population coverage 2G (99%); 3G (99%) and 4G (90%) by end of 2018 – Today, more than 12 million people are covered by 4G, compared to October 2017

• MTN has more than 18,000km of Fibre in South Africa

• MTN has consistently dropped the effective rate of data Year on Year (27% down in H1)

The Commission has requested comments on four questions:The Commission’s questions

1. Are data prices higher than they ought to be?

2. If they are, what are the factors that cause prices to be higher than they ought to be?

3. How should these factors be remedied?

4. What is the impact of data prices and access to data more broadly on lower-income customers, rural customers, small businesses and the unemployed? How important are affordable data prices for these customers?

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1. Are data prices higher than they ought to be?

1. Are data prices higher than they ought to be?MTN believes that data prices are competitive, within the current conditions of the South African market

Perception Reality Conclusion

1. Current data prices prevent South Africa from being an African ICT and broadband leader

South Africa’s ICT and broadband performance is measured and globally benchmarked annually

South Africa remains an African leader in ICT and broadband outcomes

South Africa is a performance leader amongst SADC members and across the African continent. (See slide 9)

2.Current data prices make data unaffordable to many South Africans, especially lower income and rural South Africans

South African data and device affordability is globally benchmarked annually, with South Africa scoring as an African leader

South Africa is an African leader for data and device affordability based on average income affordability, but is hampered by extreme income inequality.

Easily available hard data can be used to fact check perceptions vs. reality.

Comparator Framework (1/2)

1. Are data prices higher than they ought to be?MTN believes that data prices are competitive, within the current conditions of the South African market

Easily available hard data can be used to fact check perceptions vs. reality.

Comparator Framework (2/2)Perception Reality Conclusion

3. Current data prices are not coming down drive cost of living pressures for poor and rural South Africans (i.e. do current data prices drive inflation? )

Stats SA CPI data shows communication costs represent a minimal (<3%) proportion of household spend for poor and rural households

Consumer Price Index data does not recognise communication spend as a major spend category or cost driver for rural households

Housing, food and transport costs represent the bulk (>60%) of rural / poorer household spend

4. Current data prices result in a “digital divide” preventing many people, and especially women, from accessing the internet

South African internet access gender gap and mobile phone access gender gap is globally benchmarked annually.

Although an access gap exists with 48% of households lacking internet access, South Africa is an African leader in household access and gender access to the internet

What drives Data adoption in a country? – It is more than just affordabilityMTN believes that data prices are competitive, within the current conditions of the South African market

Global ICT indices are designed to help policymakers and stakeholders to measure a country’s internet connectivity and inclusivity progress over time

They also provide a simple way of benchmarking progress internationally

UN / ITU ICT Development Index:

GSMA Mobile Connectivity Index: Score / 100 comprised of 39 indicators across four categories

Facebook / The Economist Inclusive Internet Index: Score / 100 comprised of 54 indicators across four categories

ICT Access [40%]

ICT Use [40%]

ICT Skills [20%]

infrastructure [25%]

affordability [25%]

consumer [25%]

content [25%]

availability [25%]

affordability [25%]

relevance [25%]

readiness [25%]

How global ICT Indices measure overall ICT & broadband performance

South Africa remains an African leader in ICT and broadband outcomesSouth Africa remains the African leader in ICT and broadband outcomes – once the non-comparable

small islands of Mauritius and the Seychelles are excluded.

Hard data sets for evidence based test SADC ranking All-Africa ranking BRICS ranking

ICT Development Index #3 / 15 #3 / 44 #4 / 5

Updated November 2017(Mauritius and the Seychelles #1

and #2 respectively)(Mauritius and the Seychelles #1

and #2 respectively)(Russia, Brazil, and China #1,

#2 and #3 respectively)

SA Score: 4.96Inclusive Internet Index # 1 / 9 #1 / 24 #4 / 5Updated February 2018 (Russia, Brazil, and China #1,

#2 and #3 respectively)SA Score: 73.9 / 100

Mobile Connectivity Index #2 / 14 #3 / 45 #4 / 5

Updated September 2018(Mauritius #1) (Morocco and Tunisia #1 and

#2 respectively)(China, Russia and Brazil #1,

#2 and #3 respectively)

SA Score: 59.9 / 100

Are people spending all their money on data? NO!

How do South African households allocate their spending? All Households Rural Households Variance Rural vs All The Inquiry may have heard claims that lower income and rural households spend significant proportions (~20%) of their income on mobile communication.

The hard data from Stats SA shows that both households overall and rural households spend less than 3% of income on overall communication; (i.e. equipment, service and postage).

Communication is a minor (<3%) part of overall & rural household spend

Observations• All Households – rural or otherwise – spend the majority of income on food, housing and transport• Rural households spend significantly more on food and significantly less on housing• Communications is a minor component of spend for both household groups – less than 3% of income• Due to the high overlap between rural households and low income households, the <3% spend seems an appropriate proxy for both rural and low income households

Source: StatsSA Statistical Release P0141 - Consumer Price Index Additional Tables July 2018

A household gap exists, but SA is an African leader in closing digital divide

Hard data sets for evidence based test SADC ranking All-Africa ranking BRICS ranking

Inclusive Internet Index

Updated February 2018

Closing the Access Gap #1 / 9 #2 / 24 #3 / 5

Internet Users % Households (Morocco #1) (Russia and China ranked #1 and #2 respectively)

SA Score: 52%

Closing the Internet Gender Gap #2 / 9 #2 / 24 #3 / 5

% gap male / female access to the internet

(Namibia #1) (Namibia #1) (Brazil and Russia ranked #1 and #2 respectively)

SA Score: 2.1%

Closing the Mobile Phone Gender Gap #3 / 9 #3 / 24 #3 / 5

% gap male / female access to mobile phones

(Botswana and Namibia #1 and #2 respectively)

(Botswana and Namibia #1 and #2 respectively)

(Brazil and Russia ranked #1 and #2 respectively)

- SA Score: 0.0%

48% of South African households lack access to the internet, indicating a significant ’digital divide’access gap issue. However, South Africa remains a household internet access leader in Africa. South Africa is also an African leader in closing the internet access gender gap.

Source: Facebook / The Economist Inclusive Internet Index

At MTN, we have identified 6 focus areas to ensure that all South Africans enjoy the internet

C H A S E R

COVERAGE

•Aim is to improve MTN LTE coverage from 88% to 90% by end 2018.

•Aim is to remedy the limited affordability and access to 3G and 4G devices.

•Aim is to improve the affordability of data services.

•Aim is to simplify and expand service bundle offerings to cater for customer segmentation needs E.g. YouTube Bundles.

•Aim to introduce data education for customers in informal markets to increase data literacy and usage.

•Aim to drive data usage through USIM penetration, and ensure 4Gdevice holders have the right 4G settings

HANDSETS AFFORDABILITY SERVICEBUNDLING

EDUCATION RIGHT SIMRIGHT SETTING

CoverageMTN has invested R43,6Bil in expanding coverage to virtually the whole population in the last 4 years.

• 4G rollout (0-90% coverage in 6 years) has been even faster than 3G rollout (0-90% in 10 years), which itself was faster than the initial 2G rollout.

• 4G coverage reached 88% in August 2018.

• MTN has refarmed existing spectrum for 3G and LTE deployment.

• This is what infrastructure competition delivers Source: MTN, https://mybroadband.co.za/news/cellular/265403-mtn-boosts-lte-coverage-and-download-speeds.html

CHASER

Network Investment – More sites in rural areas than in Metro

Rural areas account for the largest share of total sites.

MTN continues to aggressively add new sites in rural areas, having added 2,716 sites, 858 of which were LTE enabled, in the past 2.5 years alone.

Major Metro

CHASER

Network quality P3 – Best Network in South Africa. Best Network in AfricaExtensive investment in LTE has resulted in significant increase in LTE user experience.

P3 has tested more than 180 networks in 65 countries with same methodology, MTN SA has proven to be the best Network in Africa

CHASER

Handset pricing – Most affordable Smartphone @R399Handset pricing for consumers (MTN South Africa, nominal, 2013-2016)

Over a Billion Rand in Handset subsidies per year

CHASER

Data pricing – Effective Rate has fallen by 87%. Data prices have drastically reduced from 2011

CHASER

2. What are the factors that affect data pricing?

C H A S E RCOVERAGE HANDSETS AFFORDABILITY SERVICE

BUNDLINGEDUCATION RIGHT SIM RIGHT SETTING

The Commission’s QuestionsThe Commission has requested comments on Four questions

What are the factors that affect data pricing?

How should these factors be remedied?

The Commission has requested comments on Four questions

MTN believes that the factors that affect data pricing include

Spectrum Constraints Exchange Rate Volatility

Cost Factors Regulation

The adoption of the MTN CHASER Model seeks to address these factors and enable further digital and social inclusion

Cost factors

Electricity

Labour

Access to Internet Exchange Points

Capital & Infrastructure Costs

Costs of Imported Components

Theft and Vandalism

Tax Regime on Smartphone Handsets

Cost Drivers, which affect the Price to Consumers

The South African economy slipped into recession during the second quarter of 2018, shrinking by 0,7% quarter-on-quarter (seasonally adjusted and annualised).

This followed a revised 2,6% contraction in the first quarter of 2018, which affects revenues and potential growth in subscribers

Prices would be lower if we were not spectrum constrained Average spectrum per operator 2016

South African MNOs operate with some of the lowest spectrum allocations in the world.

Inefficient infrastructure investment has had to compensate for this massive disadvantage.

Cost factors – Exchange Rate Volatility

• The majority of MTN’s network infrastructure, licenses and handsets are priced in USD.• Approximately 40% of MTNs Capex Budget was eroded due to currency volatility in 2017.

Source: https://www.resbank.co.za/Pages/default.aspx

USD/ZAR exchange rate 2008 to October 2018

2007 2018

2007 2018

$499 $1,099

R3,243 R16,485

X2.2

X5.1

iPhone, Then and Now

2007: R6.50/$2018: R15.00/$

Cost Factors - FuelPrice of 95 ULP, July 2014 to October 2018

Volatile yet generally rising costs affect costs to serve.

Cost Factors – Fuel and Electricity (2)CPI electricity and fuel (Index Dec 2016 = 100), 2008 to 2018

Electricity prices, and Load Shedding resulted in an average increase of 33% in power and fuel.

Cost Factors – CPICPI all items (Index Dec 2016 = 100), 2008 to 2018

Rising CPI restricts access to credit, hampers sales, and has resulted in substantial increases in operating expenses including Site rentals, Staff costs, Cost of Sales and Insurance.

Source: StasSA

Cost Factors – Theft and VandalismWe lose over R100mil per year due to theft and Vandalism

3. What is the impact of

data pricing to the poor?

MTN Data strategy has resulted in…

High population penetration – almost 20million data users

Traffic increased by 60% YoY

90% 4G Population coverage

99% 3G Population coverage

More than 5million Smart devices sold per year

What should the regulators do

Conclusion

Critical to deliver the 4th

industrial revolution• Do not over-regulate• License spectrum now – 4G and 5G• The world of Technology will not wait for us

• Effective rates are falling fast (at double digits rates each year)• Broadband population coverage is scaling up – Universal access• Consumer choice – simple and extensive variety of offerings

• Efficient spectrum allocation – 4G and 5G• WOAN – equitable implementation, preserve the incentive to

compete• Implement rapid deployment – site acquisition• Don’t do open access at cost – preserve the incentives to invest

The state of competition