by Irnest Kaplan - 27 June 2006
The weekend was filled with excitement on the launch of SA's first mobile virtual network operator, Virgin Mobile. Its a 50:50 JV with Cell C.
While the Virgin brand is undoubtedly a powerful one, we believe they're going to find it very tough to compete against the establishment of Vodacom and MTN.
Virgin's marketing material thus far seems to focus on a few key things. Simplicity of their tariffs, no contractual lock-in period and value for money.
We have examined the current three "offerings" from Virgin and conclude that they're hardly better and in some cases more expensive than similar offerings from the incumbents.
Lets take a look at their pure prepaid product, or "V0" as they refer to it. It is a true per second tariff, so we have compared it with Vodacom's 4U per second, MTN's Pay as you Go per second and Cell C's EasyChat per second products. The Virgin product has a single tariff for the first five minutes per day (235c) and a reduced tariff thereafter (155c). If one compares using the first five minute tariff, we calculate that Virgin is 8% more expensive than the average of the incumbents across an equally weighted basket of all call types. If one uses the reduced tariff (after five minutes), Virgin is around 29% cheaper.
But we don't think that this product will appeal to the masses of prepaid users in South Africa. The reduced tariff only kicks in after five minutes per day of call time which translates to a spend of ZAR 352 per month. This is way above what average prepaid users spend in SA.
Virgin's next product, the V100 requires a minimum monthly spend of ZAR 100. For that, the tariff is reduced. We believe that this product will compete more favourably with similar incumbent products. Our analysis involved calculating the monthly bill for a fictitious subscriber that makes 150 outgoing minutes (spread evenly in peak and off-peak times) and sends 30 SMS messages per month. We chose the Vodacom Talk 100S, the MTN ProCall 120 and the Cell C CasualChat 100 for comparison. Our calculations showed that the Virgin monthly bill was ZAR 310 or 10% cheaper than the average bill from the 3 incumbent packages. However, one must bear in mind that the Virgin product does not offer a subsidised cell phone upfront. We feel the monthly savings from Virgin in this calculation are more than made up by the free mid-range cell-phone offers from incumbents.
At the high end, we compared Virgin's V500 product with Vodacom's Talk 500, MTN's ProCall 600 and Cell C's BusinessChat400. We used a fictitious subscriber that makes 600 minutes of outgoing calls and 90 SMS messages per month. Our analysis shows that Virgin comes out at around 4% more expensive per month than the average from the incumbents. Also, on these packages, incumbents usually offer top-of-the-range handsets for free. In our opinion, Virgin will therefore not appeal to the high-end users. I certainly won't switch!
In summary then, we find it difficult to say that SA's cell phone users will find Virgin Mobile the sexy alternative. Low-end prepaid users should stay away. Middle volume users may find some benefits, but will probably not want to give up the opportunity of upgrading their cell phone every 18 months. We do not believe high-end users will be getting a better deal by switching, and certainly, most will not consider it until mobile number portability is adopted.
Overall, we believe that the entry of Virgin Mobile with their current offerings will have little impact on Vodacom and MTN.
Further analysis with different usage patterns:
We have done further analysis on the comparison between Virgin Mobile and the incumbents. In particular we wanted to see how the comparison changes if one assumes a different usage pattern. In our analysis above, we assumed an even spread between peak and off-peak usage.
However, some subscribers may use their phones more in peak-times (e.g. business users) and some will use more off-peak minutes.
The only change to our analysis from above is that the Virgin Mobile prepaid product ("V0") competes more favourably as more peak time is used. Above, we used a 50:50 split and concluded that for the first five minute tariff, Virgin was 8% more expensive when compared to similar incumbent packages. However, if 60% peak time is used, the pricing is almost identical. If 70% peak time is used, Virgin is 9% cheaper and so on. Thus we conclude that their prepaid product will appeal to those prepaid users that spend most of their time on the phone during peak hours.
For the V100 and V500 products, varying the split between peak and off-peak doesn't change our conclusions from above. V100 is cheaper by 10-15%, but we make the point that the incumbent handset subsidy will more than make up for this discount. The V500 product still comes out more expensive despite increasing the peak time usage percentage. Without a free top-end handset, we still can't see why high-end users would switch.
The diagram above shows the relative cost of Virgin versus the average of the incumbents for different levels of peak time usage. As can be seen, the relative expense of the pure prepaid product (V0) is the most sensitive to the usage pattern. V500 is the least sensitive.
Telkom Network Ops Centre in Centurion 
Talaat Laham (CEO), Moira Sheridan and Vincent Raseroka in Sandton 
Telkom Network Ops Centre in Centurion