Billion rand mistake all South African telecoms operators made

South Africa’s largest telecommunications operators – Vodacom, MTN, Cell C, and Telkom – have all launched unsuccessful video streaming services that cost them large amounts of money.

What makes these investments unique is that there was strong evidence that it is nearly impossible for a local operator to launch a successful video streaming platform.

To understand why it is a bad idea for South African telecoms operators to take on Netflix or DStv, you have to turn back the clock to 2006 when Telkom Media was created.

At the time, triple-play – broadband, television, and telephone – was all the rage, and it was punted as the saviour of telecommunications companies whose voice revenues were under pressure.

Telkom received its commercial broadcast license in September 2007 and started to build a large company to take on DStv with South Africa’s first IPTV service.

The plan was to invest R7 billion in Telkom Media, with R3.5-billion coming from Telkom.

By March 2008, Telkom started to get cold feet, announcing it would cut its funding to Telkom Media to R2.2 billion.

Soon afterwards, Telkom said it would no longer invest in Telkom Media. It sold its stake in the media company – and its broadcast license – to Shenzhen Media Group in 2009.

Telkom decided to rather invest in other projects, like its mobile wireless network, which provided a shorter period for a return on capital.

Despite Telkom Media’s failure, the hype around triple-play remained. Consultants continued to tell telecommunications companies it is their future.

You can hardly blame telecommunications operators for believing content is a lucrative new revenue stream.

Operators were desperately looking for something new to replace voice revenue, which was under increasing pressure.

Data and broadband access showed strong growth, but building a broadband network is capital intensive and does not have the same juicy margins as voice.

They wanted to believe there was a silver bullet to replace voice revenue, and content was sold to them as that silver bullet.

Considering the circumstances, it is understandable that MTN brushed off Telkom Media’s failure and launched its video streaming service, FrontRow, in December 2014.

FrontRow offered subscribers content streaming through a web browser or Android app for R179 per month.

MTN rebranded FrontRow to Vu in December 2015 and cut its prices to compete with Showmax, but the writing was on the wall. It eventually shut down in May 2017.

MTN Vu’s failure did nothing to stop the hype.

Cell C launched its entertainment platform, Black, in November 2017. It pumped R1.5 billion into the platform, which included acquiring sports rights to air football matches played by top teams.

Cell C and Blue Label’s executives talked up Black’s potential, which they said was a core part of the mobile operator’s turnaround strategy.

The confidence in a content play was misguided, and Cell C discontinued Black in November 2019.

Cell C CEO Douglas Craigie Stevenson later admitted that thinking they could compete against players like Netflix was crazy.

Vodacom, which launched its Video Play service in August 2015 with a handful of videos from eNCA, eTV, Urban Brew, and MobiTV, was not deterred by Black’s failure.

Vodacom doubled down on its Video Play investment and added a lot of new content to the platform.

The mobile operator told investors its Video Play service was doing swimmingly with an impressive 869,000 active users and over 40 million Video Play purchases in 2019.

Many stakeholders questioned these numbers considering Cell C’s Black and MTN’s Vu’s failures, and they were proved right.

Vodacom stopped reporting on Video Play’s subscriber numbers and quietly pulled the plug on the streaming service in June 2022.

Despite the trail of capital destruction, Telkom decided to give a media service another shot with TelkomONE.

TelkomONE was launched in November 2020, offering SABC channels, news, and paid-for movies and TV shows focusing on local reality programmes.

Telkom said TelkomONE had surpassed its expectations, but we have heard the same message from all the other operators who had to shut down their streaming services.

The same plan, with the same result

To understand why South African operators invested in streaming platforms likely to fail, Daily Investor spoke to senior executives at these companies.

It quickly became clear that consultants and consulting firms had a big role to play in the strategy to launch video streaming services.

Telecoms operators derive most of their revenue from data and voice. Voice is declining, and data is a “cost-plus” product that faces significant competitive and regulatory pressures.

Moving up the value chain is attractive, especially when over-the-top (OTT) companies like Netflix, YouTube, and WhatsApp show exceptional growth.

Add to it the problem that OTT providers like WhatsApp are eating into voice and messaging revenues, and convincing an operator to launch its own OTT services becomes an easy sell.

Despite their poor track record, consultants continued to advise South African telecoms companies to invest in video streaming. It is what operators wanted to hear.

Reality looked very different to the promise of video streaming punted by consulting firms.

Acquiring quality content is expensive and complicated, and producing your own shows costs even more.

Netflix, for example, is expected to spend around $17 billion (R280 billion) on content this year. To put it in perspective, it is higher than Vodacom and MTN’s market caps.

Another challenge is the technology platform. Netflix has invested billions of dollars in creating a great user experience on all devices.

To replicate the Netflix experience is virtually impossible, but that is what users demand.

As if these challenges are not enough, video streaming is not the core business of a telecommunications operator. It is typically a side project to dip their toe in the water.

To limit the financial impact of the service failing, the company de-risks the project by limiting its investment. The funding is never enough to take on Netflix or DStv.

Considering the headwinds faced by operators to launch a successful streaming service, it is no surprise they have a high failure rate.

The only surprise is how hard it is to learn from another company’s mistakes.