Internet services providers in South Africa face a number of challenges as market growth rates subside, despite the high growth opportunities in fibre and cloud services.
This is according to a new report from ICT analyst firm BMI-TechKnowledge, entitled “SA Internet Services Market Forecast and Analysis, 2016”.
While all indicators related to Internet usage trend sharply skywards, revenue growth from connectivity services – the staple diet of the industry – remain muted as prices continue to plummet. This is great news for consumers, but not so great for the wide array of players that make a living from this industry.
BMI-T’s analysis shows that market annual growth rates have declined from over 30% five years ago, to less than 10% in 2015. Although this market includes some niches like fibre broadband services, which are growing at close to 80% per annum, they still make up a small fraction of the total market and so their influence is low.
Public cloud services represents a growth wave for telcos and ISPs, an opportunity partially mitigated by growing competition from large global “hyperscaler” players (such as Microsoft and Amazon), resulting in a forecast 18% CAGR for local telcos and ISPs, reaching more than R4-billion by 2020, says Brian Neilson, a director at BMI-T.
However, local companies are still able to benefit from this growth market, and to date system integrator players have been particularly successful, he notes.
The price pressure comes from ongoing competition in commodity connectivity services, including wholesale services such as those provided by Telkom’s Openserve division.  While these are an enabler of lower retail prices, wholesale prices are structured in such a way as to favour the largest ISPs.
Consolidation in the industry is an ongoing global and national trend, and recent initiatives focused around consolidating and acquiring wireless ISPs is clear evidence of this.
BMI-T predicts a similar trend in the fibre to the home (FTTH) market down the line, as many entrepreneurs who have started deploying fibre in suburbs will choose to exit the market when the time and price is right, while the “big guns” in the fibre market like DFA and large operators are waiting in the wings buy them out.
Meanwhile, FTTH prices have been very competitive, and are approaching those of DSL to stimulate rapid uptake and churn.
Subsiding growth rates in connectivity services are now starting to touch mobile broadband too, although this is less noticeable in the handset market.
BMI-T notes that per their latest published financial results; MTN grew data revenue in South Africa by 23,9%, Vodacom by 27,7%, Cell C by 58,5% and Telkom Mobile by 68,5%.
This is underpinned by improved access to more affordable devices and highly competitive data deals, both prepaid and contract. BMI-T observes deals well below the R50 per Gb norm and some fear that this is “a race to the bottom” in order to win market share.
Between commodity connectivity services, VPNs, hosting, and new-generation cloud services, BMI-T’s overall market growth forecast is less than 10% compound annual growth (CAGR) over the next five years, showing just how critical it is to play in the fast-growing market niches.