N THIS ISSUE:

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• Seeing red? Indeed, when I heard about my sister’s 45MBps Internet download speed...

• South Africa’s narrow band is limiting entrepreneurial innovation 

• Because we don’t know any better, my telecoms pick through 2013

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From Gareth Stokes, Editor, The Investor’s Digest 

Dear reader,

If there's one thing we need to change it's the sad state of the local telecoms industry. I started thinking about the topic after listening in on a Radio 702 Bruce Whitfield interview with Naspers CEO, Koos Bekker.

Bekker observed that the country was virtually stuck in the dark ages of the Internet due to a decade of Department of Communications bungling. Our downfall stems from a lack of decent broadband Internet.

The appalling service from local Internet Service Providers has been among my major gripes for as long as I can remember.

Why?

Well, because the Internet service I receive from Vodacom / MTN or Cell C today, costs more and delivers less than the service I subscribed to while doing a stint in the UK six years ago.

The divide between first world and third world Internet connectivity (yes, we’ll have to lump South Africa in the latter category) is unbelievable, and clearly underlined by my recent experience.

So, after discovering a nifty website called www.speedtest.net I decided to trot out my trusty Vodacom and MTN modems and put them to the test...

Wow! I must confess the download speeds looked impressive. I was getting around 3.5MBps from Vodacom and nearly 2MBps from MTN… In contrast, Telkom’s so-called ADSL Broadband solution chugs along at a mere 0.9MBps.

Rather chuffed with my personal connection speeds I sent the result to my sister in the UK and challenged her: “Beat that!” Her download speed on an ‘over-the-counter’ Internet package in that country was a staggering 45MBps…

Now if only Vodacom could spend money on upgrading their networks instead of advertising their new “red” logo...

Bekker didn’t go into this kind of detail, but he shared some other statistics which should have us hanging our heads in shame.

Going backwards as fast as we possibly can

In his interview with Whitfield, Bekker concluded that South Africa was virtually going backwards where Internet penetration and connectivity were concerned.

“South Africa is a tragic story,” begins Bekker. “In the year 2000 we had 50% of all the Internet connections in Africa. Today we have 25% and we’re still losing ground. We have been surpassed by companies like Morocco and Nigeria!”

A better reflection of our Internet development is to measure the volume of retail trade happening online. “In the UK, 8% of retail trade flows through e-commerce. In Poland it's 2%, but in South Africa it’s a mere 0.2%,” said Bekker.

SO South Africa operates at a 10th of Poland per capita and one 40th of the UK!

And the threat to the domestic economy isn’t due to limited individual user access. It’s about how this restriction affects local SMMEs, educators, researchers and even doctors.

“The problem for the economy is that the physicist can’t download evidence from MIT because the broadband is inadequate. A geologist can’t get the map he needs and an eye surgeon can’t download the procedure,” Bekker said.


How can we make money from this rather abysmal situation?

The answer stems from an age-old English phrase – “if you can’t beat them, join them.”

The pick of South Africa’s telecoms sector

We know South African broadband connectivity is shocking – but we also know local users will flock to the best service on offer. From recent telecoms results it’s clear the so-called 3G Broadband services are being lapped up by starved (for Internet) local consumers...

How to grab our slice of the action? 

A serious long-term investor will have to choose between Vodacom (JSE: VOD), MTN Group (JSE: MTN) and Telkom Limited (JSE: TKG). 

Based on recent performances I can confidently say where my money isn’t going…

Telkom – nicknamed Helkom by long-suffering consumers – has been on a hiding to nothing over recent years. Ill-advised investments in Nigeria have cost shareholders billions. And the group’s recent entrance to the South African cellular space is a case study in the “too little too late” concept.

It would take a very brave investor to bank on a major turnaround in the next 12 to 24 months.

So we’re left to pick from two cellular giants, each with their own demons to fight. Vodacom got a late start in the battle for African subscribers and has shifted recently – as far as investors are concerned – from the growth to value space…

And you’ll be excused for thinking MTN has neglected its operations of late in favour of a quick-fix super-merger or acquisition. They’ve been in talks with India’s Reliance Telecom and Bharti Airtel, and Egypt’s Orascom Telecoms, to name just a few.

If you’re prepared to hold these shares until December 2013, it’s probably safe to choose by flipping a coin… But after scanning the Profile Media consensus for earnings and dividends for each company over the next three financial years I believe MTN Group tips the scales slightly.

Buy MTN Group at around R140 today… I expect the share to be changing hands at around R210 in 30 months time. Plus, you’ll have banked around R30 in dividends!

I’ll be back with another instalment of MoneyMorning on 7 July 2011.

Until then, let the profits roll,

Gareth Stokes
Editor, The Investor’s Digest