Free or heavily subsidised handsets dished out to cellphones users in SA are an anomaly that could disappear if the country’s three cellular operators could trust each other to end the practice.

Every year, customers are given a flashy new phone that would cost them dearly if they lived in any other country. That is costing the operators heavily, delegates to the GSM Africa conference in Johannesburg heard last week.

When Cell C entered the market as SA’s third player, it would have loved to provide starter packs without any handset subsidies. But that would have been commercial suicide when MTN and Vodacom both give phones away. So Cell C had to absorb the cost itself, eroding its ability to make money.

Now that all three players are well established, there is more leeway to sit down and discuss a unified end to the practice.

"The SA market is somewhat spoilt," said MTN’s CEO, Phuthuma Nhleko. "Our industry is almost 10 years old and every 18 months we still buy people a brand-new handset. It is an enormous cost that could be better used for the development of the industry."

It was probably only a matter of time before such subsidies were phased out, agreed Andrew Mthembu, MD of Vodacom International.

"We need to recognise that we are going against the tide . In countries such as Germany and Hong Kong, subsidies on handsets are prohibited by law because it distorts the market significantly," he said.

Customers in SA were offered all sorts of cheap deals on very expensive phones, but it had put the operators in a vicious circle. It was very difficult for them to recoup the cost of subsidising those handsets before it was time to upgrade them again, Mthembu said.

The operators were also undermining their profitability by giving clients discounts on air time that looked "extremely exorbitant" compared with discounts in other countries, he said."We tend to subsidise the higher end subscribers too much to bring them on board, regardless of what kind of profitability we expect."

Two factors are forcing cellular operators to rethink their collective strategies. One is that average customer spending is falling each month in SA as cellphones reach less wealthy users. The other is that operators are expanding into Africa and taking on enormous and costly debts to finance that growth.

Getting the costs right was particularly important in Africa, where the perceived risks of doing business meant that financiers were charging heavily for the cash they loaned to cellular operators, said Mthembu. In response, operators had to look seriously at the cost of acquiring each new customer when so much of their income was absorbed by interest payments on their debts.

"Until we look at those costs collectively as operators going into Africa, the high cost of capital will make those businesses marginal from a profitability perspective.

"As we go into Africa we need to rethink the manner in which we structure our costs." Operators also needed to work together through forums such as GSM Africa to resist too much pressure from governments that saw cellular networks as cash cows and slapped all sorts of tariffs, taxes and duties on those businesses, he said.

The temptation to scrap handset subsidies is in line with a shift in strategy that has already seen cellular networks abandon their quest for massive subscriber numbers and place more emphasis on profits. Operators no longer wanted 10million subscribers and would prefer 5-million wealthier customers, said Richard Addington, the head of telecoms financing at the Standard Bank in London.

"The first question used to be how many subscribers you have and your share price went up on that. That’s not important now. Bankers are looking for cash flow rather than customer numbers. A lot of good businesses have gone bust because they don’t have cash flow," he said.

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