Internet Matters :

The Quiet Engine of the South African Economy 2012

Founded in 2000, World Wide Worx is South Africas leading independent technology research and strategy organisation, with a focus on technology in business strategy. It offers a range of independent reports as well as custom research and strategic services. It provided the first benchmarks in Africa for evaluating online presence, and continues to innovate in this arena as the digital economy extends beyond the Internet. In offering strategic insight into the hi-tech economy, World Wide Worx also provides a powerful platform for decision support. For more information, please visit www.worldwideworx.com.

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Internet Matters:
The Quiet Engine of the South African Economy

By Arthur Goldstuck for World Wide Worx Commissioned by Google South Africa

 World Wide Worx, 2012. All rights reserved. For information or permission to reprint, please contact World Wide Worx at: E-mail: Telephone: Postal Address: arthur@worldwideworx.com + 27 (0) 11 782 7003 PO 752 Pinegowrie 2123 South Africa

CONTENTS
Preface Executive Summary Background: A Connected Country The Internet Economy in South Africa What is the Internet economy? E-commerce Internet access and presence Online advertising Investment in data infrastructure Government spending Total value of Internet economy and GDP Implications of infrastructure investment The SME Sector in South Africa Definitions Contribution to economy SME Survey 2012 methodology Impact of the Internet on SMEs Segmental variations Contribution of websites to survival Other contributions of websites Contact with customers Updating inventory Company sustainability Business growth Competing for market share The benefit bouquet Case Studies: SMEs on the Web Party Platters Rolling Rehab SMEs across the Web Growth of the Internet economy The Five-year gap The Experience Curve proven The Digital Participation Curve South Africans on the curve Digital Participation as a marketing framework Impact on the Internet economy Contribution to GDP globally Internet Contribution to GDP growth in South Africa Conclusions and recommendations Government and policy-makers Communications industry SMEs and entrepreneurs Ordinary individuals ii iii 1 3 3 3 5 6 7 7 7 8 9 9 9 9 10 10 11 12 12 13 13 14 14 15 16 16 17 18 19 19 19 20 20 21 22 23 24 25 25 26 26 26

PREFACE

It has long been believed that South Africa has the largest Internet economy in Africa. However, just how much of a contribution the Internet makes to the overall economy has never been quantified. There have been numerous studies of the Internets contribution to the economies of most advanced and developed nations, and almost none for developing countries such as South Africa. In order to understand the impact of the Internet on the South African economy, Google South Africa commissioned World Wide Worx to prepare this independent report. The report is the first ever in-depth analysis of the Internet

economy of South Africa, and will hopefully pave the way for discussions on how African countries can leverage their respective strengths to use the Internet to accelerate economic growth. While the results of the report have been discussed with Google South Africa, World Wide Worx is responsible for the analysis and conclusions. Both World Wide Worx and Google South Africa are pleased to present these findings in order to foster a better understanding of how the Internet is the silent engine that is driving the South African economy.

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EXECUTIVE SUMMARY

It has long been believed that South Africa has the largest Internet economy in Africa. However, just how much of a contribution it makes to the overall economy has never been quantified.
Now, an Internet Economic Impact Study conducted by World Wide Worx has revealed that the Internet economy contributes 2 percent to South Africas gross domestic product (GDP). Moreover, this contribution is rising by around 0.1 percent a year, meaning it should reach 2.5 percent by 2016. The total spent by consumers, small and medium enterprises (SMEs), and Government on products and services via the Internet, as well as on Internet access and infrastructure, is R59-billion. The biggest contributor to this slice of the economy is not, as is often assumed, the investment made in fibre and other data infrastructure by the mobile networks. Although this comes to R13.5-billion, it is surpassed by the amount spent on Internet presence and access, at R29.2-billion. These two categories are followed by Business-to-Consumer e-commerce (B2C e-commerce). The single biggest subsector in B2C e-commerce is the airline industry, which has fully embraced e-ticketing and is rapidly migrating ticket sales online. In 2011, these sales came close to R9-billion. E-commerce is growing at a rate of around 30 percent a year, with the growth showing no signs of slowing down. Indeed, with many major consumer brands and chains not yet having devised comprehensive online retail strategies, the scope for future growth is even greater. In comparison to these numbers, Government spending on Internet infrastructure and access is relatively low, coming in at a little more than R1-billion, although general ICT spending runs into several billion Rand. Considering the impact the Internet has on the emergence and sustainability of small and medium enterprises, and the contribution these SMEs make to economic growth, it can be expected that Government spending will grow substantially in the coming years. According to SME Survey 2012, which is the original

representative survey of small and medium enterprises in South Africa conducted by World Wide Worx, 410,000 SMEs in South Africa have a website, representing 63 percent of active, formal SMEs. Sectors with a particularly high likelihood of SMEs having a website include Information Technology (89 percent), communications (76 percent) and tourism (77 percent). The research shows that SMEs with a website are far more likely to be highly profitable than those without. Of those with a website, 27 percent are strongly profitable, while only 11 percent of those without can claim the same. Only 5 percent of those with a website are running at a loss, while 16 percent of those without a website are in the red. The full impact of these websites on the economy is placed in perspective by the number of SMEs that would not have survived without a website. Approximately 150,000 SMEs in South Africa would not be able to survive without their Web presence. With SMEs accocunting for about 7.8-million jobs in South Africa, this means as many as 1.56-million jobs would be in jeopardy were it not for the Internet. This is an indirect impact of the Internet on the South African economy, but one that is as significant as the direct impact. The impact will increase significantly in the coming years. It will be fuelled not only by growing awareness of the significance of the Internet by both business and Government, but also by rapid growth in the number of Internet users. This will be stimulated partly by the smartphone explosion currently taking place in South Africa. Mobile networks report 63-million active accounts, making for cellular penetration of 126 percent; a consequence of widespread use of dual-SIM cards. World Wide Worx research shows true individual penetration to be about 80 percent, with 40-million South Africans using phones. These users represent the future potential of Internet growth in South Africa. Around 10-million phones are sold in South Africa every year, and it is expected that, by 2013, smartphones will account for half of this number. Smartphone users, in turn, eventually become Internet users, a trend that already began in South Africa in 2010. Prior to that, in 2008, the Internet user base had already started growing at an accelerated pace due to falling

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wholesale bandwidth costs and the emergence of a new generation of Internet Service Providers (ISPs). However, according to the Digital Participation Curve, a model developed by World Wide Worx, it takes up to five years before new Internet users gain the confidence and experience in the medium to become active participants in the Internet economy. Consequently, with the number of Internet users having accelerated from 2008, the number of experienced users will begin accelerating in 2013, and will continue to do so for the following five years. The result is that an Internet economy worth R59-billion in 2011 and making up 2 percent of the South African economy will grow to as much as 2.5 percent of the economy by 2016. This compares to the largest sector, currently finance, real estate and business services, which at R565-billion makes

up 21.2 percent of GDP, and the manufacturing industry, at 13.4 percent. The data also shows that the Internet economy in 2011 was almost as large as the agricultural sector, which made up only 2.2 percent of GDP in the last quarter of 2011. Does this mean Internet access has become as important as food? Hardly! But other comparisons reveal its growing significance as a contributor to the economy: it will over time begin approaching the size of the construction sector (an estimated R120-billion in 2011), suggesting this is potentially one of the new building blocks of the South African economy. Given the fact that, for most organisations, the Internet functions as an enabling tool for communications, collaboration and transactions, it could well be described as the quiet engine of the South African economy.

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BACKGROUND: A CONNECTED COUNTRY

Nothing sums up the potential of both the current and future impact of technology on Africa better than the insatiable appetite for connectivity.
Today it is about the connections between human voices; in future it will increasingly revolve around the data stream that is made possible by these connections. At the end of 2011, South Africa had approximately 8.5-million Internet users.1 This represented no less than a 25 percent increase over the 2010 figure of 6.8-million, maintaining a high growth rate fuelled by the explosion of smartphones in the South African market. This growth brings Internet penetration in South Africa to approximately 17 percent. Despite rapid growth, however, it lags significantly behind the biggest Internet user bases of Africa. Nigeria, with 45-million users, has 29 percent penetration, while Egypts 21.6-million users gives it 26 percent penetration and Moroccos 15.6-million users represents 49 percent penetration. Kenya claims 10.4-million Internet users, for 25 percent penetration.2 In each of these countries, the high Internet penetration is a consequence of heavy use of the Internet on cellphones, but it should be borne in mind that physical Internet access infrastructure is less developed in these countries, and quality of access is relatively poor. Nevertheless, this pushes South Africa into fifth place in terms of number of Internet users, but even further back with regard to penetration: Cape Verde, Mauritius, Reunion, Sao Tome, Seychelles and Tunisia all have greater percentage penetration.3 A core reason for low penetration in South Africa is price. The rental charge for ADSL, for example, comes on top of phone line rental, which is now around R140 a line. World Wide Worx research into mobile consumers has shown that lower-income South African cellphone users spend an average of R100 a month in total on their phones. The mere rental component of a line is beyond the reach of most South Africans, let alone using it for calls or adding ADSL on top.4 While these costs are not directly comparable to other African countries, due to the varied structure of broadband services,

their negative impact was recognised by the regulator, Icasa, when it announced in April 2012 that the component of ADSL charges paid by ISPs for delivering data across the Telkom network to end users, had to be reduced by 30%.5 ISPs welcomed this requirement as a step towards lower broadband costs.6 Access infrastructure is also still limited to major urban areas, although this is being addressed by the roll-out of new fibre grids by several network operators, as shown in this report. The picture for cellular penetration is somewhat different. In South Africa, according to World Wide Worx, 63-million SIM cards are in use, giving 126 percent SIM penetration (the definition used for cellular penetration by the International Telecommunications Union). However, the true user base is around 40-million, and penetration for unique users at 80 percent.4 At least 20 percent of SIM connections are from dual-SIM usage, switchboard systems, or asset management, where GSM signals are used to track fleets or livestock. The numbers in the rest of Africa are not as impressive as for South Africa, but the continent is catching up fast. According to research by Informa Telecoms & Media, on 30 September 2011 the African continent became the worlds second biggest region for cellphone use, reaching 616-million users and overtaking both Western Europe and North America. Asia-Pacific remains the bigger mobile-using region today.7 The implications are staggering: on the surface, it appears that more than half of all Africans are using cellphones. This means, in turn, that at least half of the population of Africa has access to voice and text communications. This also opens the way for migration to Internet use. Beneath the numbers, however, lurks the reality that many of these users - as many as a third have dual-SIM cards. Especially in Nigeria, it is common for business people and ordinary consumers alike to have two phones, each with a SIM card from a different provider. This way they avoid the prohibitive additional cost of the interconnect fee for making calls between different providers.

1. World Wide Worx, Internet Access in South Africa 2012 2. InternetWorldStats, 31 December 2011 3. InternetWorldStats, 31 December 2011 4. World Wide Worx, The Mobile Consumer in South Africa 2011 5. Icasa, Media release, The first step towards local loop unbundling in South Africa:

a 30 % reduction in the existing IPConnect Price from 1 April 2012 6. http://www.bandwidthblog.com/2012/04/02/ isps-welcome-telkom-ip-connect-cost-reduction 7. Informa, Press release, 3 November 2011: Africa is worlds second most connected region by mobile subscriptions

Internet Matters

Nigeria, a country of 158-million people, is expected to reach 100 percent SIM penetration in the next five years. Egypts 81-million people will reach 150 percent SIM penetration. However, even when a billion SIMs are connected in Africa, it is expected that fewer than 600-million people will be actual phone users. Cynical observers have been deeply critical of these figures, correctly arguing that they obscure the reality of the connectivity of Africa, and absolve governments of responsibility for fostering and promoting access. But a massively positive trend also emerges from the numbers. If half of all Africans are using phones, it means that more Africans than not have in their hands a communications device they can use almost anywhere. It gives them access to family, friends and information on an unprecedented scale. This provides the foundation for what happens next. One word sums it up: data. While Africans are not yet rushing to sign up to data services, they are slowly being pulled into the world of Internet connectivity by the phones they use. Next year, for the first time, smartphone sales in South Africa will overtake those of ordinary phones.8

an unthreatening context. But once they build that comfort and confidence in the use of the phone, they begin exploring other capabilities, like browsing and social networking. Fast forward five years, and more than half of those using phones will be using smartphones: one in four Africans. This brings Internet access, social networking, market information, job seeking and entertainment within immediate reach of almost every economically active person in Africa. The amazing aspect of this trend is that most of these users will not think of it as using technology; it will be a device they will take for granted as an everyday tool. It has been shown in the past across Africa that, when presented with tools of defined capabilities, creative and innovative ways are found to turn them into even more relevant tools for local communities. Throughout Africa, mobile money transfer services are enabling ordinary individuals to manage their financial lives and enter the formal economy.

FAST FORWARD FIVE YEARS, AND MORE THAN HALF OF THOSE USING PHONES WILL BE USING SMARTPHONES: ONE IN FOUR AFRICANS.

That trend will follow in the rest of Africa in the coming years. Where the dominant smartphones in South Africa are highend devices the BlackBerry and Samsung Galaxy ranges the phones likely to achieve equivalent sales proportions in other Africa countries are low-cost smartphones using the Android operating system. Already, one single model, the Huawei Ideos phone, has taken a dominant share of the smartphone market in Kenya through positioning itself as a Google phone, offering access to both Internet browsing and social network access.9 Social networks are the entry point to the Internet for many, even in rural areas. A fascinating trend observed by World Wide Worx in South Africa is that the use of games on a phone is higher among rural than urban users.10 This indicates not that they have more time on their hands, but that they are exploring their phones and learning their capabilities in
8. Pienaar, K., Regional Strategies for the Next Stage of Growth in Africa, AfricaCom Conference, 10 November 2010 9. Goldstuck, A., Tech trends shaping the future, World Wide Worx presentation, December 2011, 10. World Wide Worx, The Mobile Consumer in South Africa 2011

One of the key factors behind the mobile push onto the Internet is the low penetration of both computers and fixed line Internet access in South Africa. Of 105-million people on the Internet in Africa in 2011, only 31-million had broadband access, i.e. while 12.8 percent of the population had Internet access, only 3.8 percent had broadband.11 For fixed broadband, the number is dramatically lower: around 1-million, fixed line broadband subscribers, and most of these are in South Africa. This is to a large extent a factor of low computer penetration: only 7.9 percent of households in Africa have a computer, and half of these are in South Africa. The total number of computers in use in South Africa, largely in business, is around 9.5-million.12 This low level of broadband penetration represents a major barrier for access to online services by small businesses and consumers. Yet, despite these limitations, in South Africa close to two-thirds of active small and medium enterprises have established a presence on the Internet. As this report will show, this presence has been a critical factor in the survival and growth of SMEs.
11. ITU: World Telecommunication/ICT Indicators Database 12. ITU: World Telecommunication/ICT Indicators Database and World Wide Worx: Internet Access in South Africa 2012

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THE INTERNET ECONOMY IN SOUTH AFRICA

What is the Internet economy?

The Internet economy comprises access to and use of the Internet, investment in infrastructure and expenditure in Internet activity in a country. These include Internet infrastructure, money spent on online retail and online advertising, and business and Government engagement with the Internet.13 The size of the Internet economy is not officially measured in South Africa, and has to be estimated based on a range of available expenditure measures. This is an indication partly of the lack of awareness of the significance of the sector, as well as the lack of maturity of Internet use in business and Government.

This report makes use of the Expenditure Method of calculating GDP, broadly based on the approach of the Boston Consulting Group but also taking advantage of primary research conducted by World Wide Worx to quantify various aspects of the industry.

The following estimates are based on a wide range of measures and sources.

E-commerce
B2C e-commerce
Business-to-Consumer (B2C) e-commerce comprises both traditional retail conducted in the online space and intangible products like air ticket sales, fulfilled online. The total spent on online retail goods in South Africa in 2010 passed the R2-billion mark for the first time, growing by 30 percent to reach R2.028-billion. In 2011, this high growth rate was maintained, with a further 30 percent increase, to R2.636-billion. The following figure shows the Rand value of online retail each year since 1996:

13. Boston Consulting Group: The Connected World: The $4.2 Trillion Opportunity, March 2012

Internet Matters

Figure 1 excludes travel, which is not traditionally classified as retail. However, online retail is dwarfed by the sale of air tickets online. As figure 2 below shows, online air ticket sales have come close to the R9-billion mark, growing by 24 percent in 2011, suggesting it will pass the R10-billion level in 2012.

Table 1 below provides a comprehensive picture of growth in retail and air travel ticketing sales online, separately and in combination. It is abundantly clear that online ticketing of air travel will continue to dominate B2C e-commerce in South Africa for at least the next five-to-ten years, given present growth trends in conventional online retail.

Table 1 does show, however, that the growth rate for online travel booking is slowing down slightly, but off a very high base.

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B2B e-commerce

In line with equivalent studies of the Internet economy conducted globally,14 Business-to-Business (B2B) e-commerce is not included in this study, as it does not fall under the THE TOTAL DATA generally accepted definition of what REVENUE FROM constitutes the Internet economy, namely consumption, investment and TELECOMMUNICATIONS exports.

The total revenue from these services, for the six months to the end of September 2011, was R5.114-billion.16 Annualising this, i.e. using it as the basis for estimating revenue over 12 months, this study estimates Telkoms Internet revenue for 2011 at R10.2-billion. Vodacom and MTN, the two major mobile networks, include in their annual and interim reports their revenue for data services, which in effect comprises their Internet access services. For the six months to September 2011, Vodacom reported R3.7-billion revenue.17 This is annualised to R7.4-billion.

Separate research by World Wide Worx WAS AN ESTIMATED has quantified B2B e-commerce at more than R30-billion. However, expenditure R24.874-BILLION is already incorporated within several MTN reported in its annual report for sectors making up GDP, and inclusion in the full 2011 year, that it had generated R4.464-billion in an Internet economy figure would constitute substantial revenue from data services.18 double-counting. Further, much of it is conducted over closed, proprietary networks; it is not seen as e-commerce Neotel does not publish a detailed breakdown of revenue in the context of the OECD definition, which states that since it is not a listed entity, but it does provide its annual Electronic commerce refers to commercial transactions revenue numbers in media briefings and interviews. The occurring over open networks, such as the Internet.15 figure it expected to report for 2011, it said, was R2-billion.19

OPERATORS, THEN,

Internet access and presence

It is probably impossible to quantify the entire Internet access, presence and equipment market in South Africa. However, a number of estimates have been extrapolated

iBurst reported 70,000 subscribers in 2011.20 At an estimated average subscription of R250 a month, minimum revenue would be around R210-million. Cell C does not release figures on data use, but a submission to the regulator, Icasa, by the Society of Professional Engineers, claimed a figure of 250,000 data subscribers.21 The most typical data account, a 1GB/month package, costs R2,400 year. This indicates data subscriber revenue of at least R600-million. The total data revenue from telecommunications operators, then, was an estimated R24.874-billion.

Inevitably, the biggest contribution comes from the major telecommunications operators, specifically Telkom, Vodacom and MTN. A substantial contribution also comes from the smaller telcos, such as Neotel and Cell C, along with a range of large and small Internet Service Providers (ISPs).

Internet Service Providers

Only the largest Internet Service Providers (ISPs) are included, and can be assumed to make up at least 80 percent of the market: In the last year in which Dimension Data issued an annual report before its acquisition by Japanese telco NTT DoCoMo in 2009, it reported that its subsidiary Internet Solutions had made up 6 percent of its $3.973-billion revenue.22 This works out at $238-million and, at the lowest exchange rate of R7.50 in 2009, comes to R1.785-billion.
19. Mochiko, T., Business Day, Neotel re-hiring soon after firing, 20 April 2011 20. Engineering News, Burger, S., iBurst focuses on affordability with new offerings, 29 September 2011 21. Society of Professional Engineers, Submission of Complaint Form, Icasa, 11 March 2012 22. Dimension Data, Annual Report 2009

from revenue data, user numbers, average costs, and related services data that is publicly available or researched by World Wide Worx. Telkom, in its annual reports, breaks its Internet revenue down into five categories, namely: data connectivity, leased line facilities, Internet access and related services, managed data network services, and multi-media services.
14. Boston Consulting Group, The $4.2 Trillion Opportunity: The Internet Economy in the G-20, 2012 15. http://stats.oecd.org/glossary/detail.asp?ID=4721 16. Telkom SA Limited, Group Interim results for the 6 months ended 30 September 2011 17. Vodacom, Interim results for the 6 months ended 30 September 2011 18. MTN Group Limited, Audited results for the year ended 31 December 2011

Internet Matters

MWEB, as a subsidiary of Naspers falling within its Pay 2011. Excluding Telkoms share of that revenue, this TV Division, effectively as part of MultiChoice, does not would add R50-million to Internet expenditure. reveal separate revenue figures. However, at the time that it was briefly up for sale, in 2008, it was reported to have Afrihost, a 12-year-old ISP, claims a subscriber base of generated revenue of R1-billion the previous year.23 An 50,000 customers and also reports over R100-million a year insight into current turnover is provided by a valuation in turnover.28 Excluding Telkoms share of that revenue, this of MultiChoice South Africa compiled by Religare as a would add R50-million to Internet expenditure. guide to shareholders in Phuthuma Nathi Investments, an empowerment company that holds 20 percent of Other well-known independent ISPs, like Axxess DSL, MultiChoice. It indicated a turnover for Imaginet, OpenWeb, and Cybersmart, Other (including MWEB) of R1.913-billion TOTAL ISP REVENUE: probably between them account for a similar in 2011.24 Based on the 2008 revenue figure, revenue total. Numerous smaller ISPs also R4.325-BILLION and subsequent industry growth ranging provide access services, and ascribing a similar from 15 percent to 25 percent a year, it total to them would probably be conservative. can be assumed that MWEB and other Internet activity The rest of the ISP industry, then, is estimated to generate in South Africa, within the Pay TV Division, generated about R100-million in additional Internet expenditure. around R1.7-billion in 2011. Total ISP revenue: R4.325-billion. Altech describes its business as converged which, for the purposes of this report, means that it is almost impossible to separate out its Internet revenues and investment. Its public statements regarding activity in this arena tend to Total Internet expenditure: be focused on its investments in East Africa. One division that is strongly focused on data and connectivity services in South Africa, Altech Technology Concepts, generated Telecommunications operators: R24.874-billion R27-million in the six months to end August 2011.25 This Internet Service Providers: R4.325-billion can be annualised to R54-million. Vox Telecoms does not break out revenue for its Internet services (Vox DataPro and Vox @lantic) in its annual report, but provides an indication in its interim report. For the six months to end February 2011, group revenue was R925million, with Vox DataPro contributing R210-million and @lantic R93-million, for a total of R303-million and almost one third of group revenue.26 For the full year, revenue was R1.76-billion. If the contributions were the same, the turnover from the Internet service divisions amounted to approximately R586-million. For the following service providers, where the biggest portion of their revenue comes from selling data over Telkom-installed ADSL lines, at least half of their revenue can be assumed to be accounted for by Telkoms own ADSL rental charges.

Total:

R29.2-billion

Online advertising
The size of the online advertising market tends to be researched only every three years or so, due to the difficulty of extracting accurate data from advertisers and online media. In 2009, World Wide Worx estimated the online advertising market size for that year at R419-million among conventional online media entities.29 The growth forecast for the following two years was 35 percent a year, indicating online advertising revenues of R565-million in 2010 and R760-million in 2011.

Web Africa is a relatively small, privately-held ISP with big ambitions, forecasting turnover for 2011 of R130-million. 27 This suggests that, at an overall industry subscriber growth rate of 30 percent, it can be assumed to have turned over R100-mllion in

ONLINE ADVERTISING MARKET WORTH R1.52-BILLION IN 2011

A general consensus in the market is that the conventional online media sites are matched in revenue by Google ads appearing on South African sites. Since Google does not provide regional breakdowns of revenue this remains the best estimate for its contribution

23. Muller, R., MyBroadband, MWEB Auction, 3 June 2008 24. Religare Institutional Research: Naspers Limited, 15 December 2011 25. Altech Investor presentation for the six months ended 31 August 2011 26. http://www.sharedata.co.za/\sensad.asp?id=171188

27. http://bit.ly/Hj61BD 28. http://bit.ly/HjbNUj 29. World Wide Worx: Online Media in South Africa 2009

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to the market, hence an online advertising market worth R1.52-billion in 2011.

state-owned enterprises), investment in 2011: R1-billion. SEACOM has invested R100-million in additional South African infrastructure to link its undersea cable to terrestrial networks.35 Total investment in data infrastructure: R15.5-billion.

Investment in data infrastructure

This section only takes into account the investment made by the large telecommunications operators into major infrastructure projects. As a result, it can be regarded as a conservative estimate:

Government spending

Telkom has not released figures for investment in data According to the Estimates of National Expenditure infrastructure for 2011, so the figures contained in its 2011,36 published by the South African Government, a 2011 annual results for the year prior are used as a basis. It total of R2-billion was budgeted for the Department of invested R917-billion in its next generation Communications for 2010/ 11. Of this network the industry term for an alltotal, R1.289-billion was allocated to TOTAL INVESTMENT IP network, i.e. one that functions on ICT enterprise development. The only the Internet Protocol. It has stated that indications of further breakdowns within IN DATA investment in this network would continue this figure point to it being allocated INFRASTRUCTURE: in 2011 and 2012 in order to replace its to Broadband Infraco and Sentech for legacy network. A further R369-million was investment in broadband and fibre R15.5-BILLION spent on its fibre network. infrastructure. Total investment: R1.286-billion. MTN invested in its network, primarily for fibre infrastructure, 3G base stations and Internet Protocol (IP), in 2011: R4.105-billion. For 2012, R4.599-billion has been budgeted, i.e. a 12 percent increase over 2011.30 Vodacom in the six months ended 30 September 2011, invested close to R3.5-billion in its network infrastructure, primarily expanding 3G and fibre networks. While this included expansion to improve quality and stability on the voice network, most of an annualised figure of R7-billion can be assumed to be geared towards data infrastructure.31 FibreCo Telecommunications, a joint venture between Cell C, Internet Solutions and Convergence Partners, invested R1-billion in the first phase of a national fibre grid during 2011. A total of R5-billion will have been invested upon completion of the project.32 Neotel says that it spends R500-million every year in capex, of which 80 percent is committed to expanding the network.33 West Africa Cable System, landed on the South African coast in 2011: total cost $650 (approximately R5-billion).34 Assuming cost is spread over three years, and 60 percent of the cost carried by South African companies (excluding
30. MTN Group Limited, Interim results for the 6 months ended 30 June 2011 31. Vodacom, Interim results for the 6 months ended 30 September 2011 32. Press release: FibreCo awards contract to technology giant ZTE, 22 September 2011 33. Speckman, A., Business Report, Neotel on profit trail as sales rise, 26 March 2012 34. MTN press release: Broadband windfall in the offing for millions of MTN

Total budgeted on broadband and Internet access by Government: R1.2-billion While there are doubtless many other areas of Government spending on Internet infrastructure and access, these are the only figures that could be directly identified as such in the budgeting breakdown.

Total value of Internet economy and GDP

Total estimated value of the Internet economy in 2011, based on the above totals: E-commerce (B2C): Internet access and presence: Online advertising: Investment in data infrastructure: Government spending on broadband infrastructure: Total: R11.5-billion R29.2-billion R1.5-billion R15.5-billion R1.28-billion R58.98-billion

subscribers as WACS cable lands, 30 April 2011 35. Mail & Guardian, SA land infrastructure gets R100m boost from Seacom, 25 July 2011 36. National Treasury, Estimates of National Expenditure 2011, 23 February 2011

Internet Matters

South Africas R2.964-billion.37

total

GDP

is

approximately

corporates is a 100Mbps connection, and that is becoming a standard expectation for FTTH as well. However, outside of office parks and gated complexes that have been planned with fibre infrastructure from the start, few have access to it. For an individual installation, the figure bandied about is R20,000 for installation - if the customer is already near an existing fibre line. Nevertheless, it can readily be argued that the contribution the Internet economy makes to GDP today would have been substantially smaller had the regulatory environment not been eased in 2008, and its continued growth would have been stalled. This presents a clear challenge to policy-makers and Government to re-examine their approach to constraints on the Internet economy. On an access level alone, it calls into question the continued delays in spectrum allocation, the continued regulatory freeze on reallocating spectrum that is not being effectively utilised, and the lengthy process toward digital terrestrial television migration, which in turn holds back the digital dividend of broadcast spectrum that can be freed up for broadband access. At an infrastructure level, it poses a challenge to major operators to lower the cost of use of their services, which are made up of multiple components, each of which presents an obstacle to users. These range from access devices, to line rental, to usage constraints like data caps and cost of ad hoc data. Cost is also added by inability to plan due to foot-dragging by regulators over long-awaited relaxation of obstacles. These include Local Loop Unbundling (LLU), which is designed to give other service providers access to lastmile infrastructure owned by the incumbent but originally funded by the taxpayer. On an enterprise and entrepreneurial level, it poses a challenge to any individual or entity that believes the Internet can make a difference in their effectiveness, productivity or opportunity, to push for enablement of these opportunities. As the next section will show, this is of special significance for small and medium enterprises (SMEs) in South Africa.

The Internet economy, as a proportion of GDP, is therefore estimated to make up 2 percent of the South African economy. This is a dramatic figure, but matches up to that projected separately by the Boston Consulting Group, which indicated the South African Internet economy to amount to 1.9 percent in 2010, and growing to 2.5 percent by 2016. This suggests growth of 0.1 percent per year, and an identical 2 percent figure for 2011. It underlines the fact that the Internet in South Africa is in a phase of rapid growth, which is reflected in the extensive and highly visible activity of laying down network infrastructure to support demand. Many of the high-profile investments in infrastructure are not one-off events, but part of ongoing programmes of development in order to meet an anticipated continued growth in demand. The potential growth of the sector, then, will be a factor of growth of demand. The next section elaborates on the significance of this growth.

Implications of infrastructure investment

Aside from the network built by Telkom, most current investment in data infrastructure in South Africa has come subsequent to a January 2008 High Court ruling that Value Added Network Services, as Internet Service Providers and related communications network operators were known then, may build or self-provide their own networks.38 The ruling loosened the regulatory logjam that had created massive pent-up demand for data services, both at a physical infrastructure level and in terms of the services leveraging this infrastructure. Many of these logjams remain, however. For example, many are pinning their hopes on Fibre To The Home (FTTH), which is regarded as the natural consequence of Fibre To The Building (FTTB) going mainstream in the business environment. There is almost no limit to the capacity of a fibre strand: speed and bandwidth is constrained by the equipment on either end of the fibre line, and what the customer is willing to pay. The typical FTTB offering to

37. Statistics SA, Quarterly gross domestic product by industry at current prices, 4th Quarter 2011 38. World Wide Worx, Internet Access in South Africa 2012

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THE SME SECTOR IN SOUTH AFRICA

Definitions
The definition of SMEs used by World Wide Worx is based on the National Small Business Act 1996, as amended in 2004, which stipulates varying definitions for each industry sector, including number of employees, turnover, and value of assets. For each sector, the definitions differ, except in the case of number of employees, where all sectors except agricultural have an SME size-limit of 200 employees (in agriculture it is 100). A small enterprise is generally defined as having up to 50 employees, and a medium enterprise from 51 to 200. Companies with up to 20 employees are defined as very small enterprises.

Considering that around 12.8-million people are employed in South Africa that would account for about 7.8-million jobs.

SME Survey 2012 methodology

World Wide Worx has conducted South Africas original and largest annual study of success factors and competitiveness of SMEs since 2003. Each year a focus area is identified and developed into a core research question or hypothesis. The findings are then published in a report that is made available to clients, while headline findings and executive summaries are made publicly available.

Contribution to economy
According to data previously produced by the Companies and Intellectual Property Registration Office (CIPRO) and its current replacement, the Companies and Intellectual Property Commission (CIPC), the number of companies registered in South Africa ranges from 1.2-million to 2.4-million. However, it has been found that the number of active entities is substantially smaller, variously estimated at between 600,00039 and 675,000.40 World Wide Worx currently bases its estimates on a total of 650,000 active SMEs in South Africa.

The core research question in 2012 was: What impact does a website have on the competitiveness, profitability and sustainability of an SME? The full findings will be published in a report entitled SME Survey 2012. However, the findings relevant to the role of the SME in the Internet economy, and vice versa, are published in this study, in association with Google.

SME Survey 2012 is based on 2,000 interviews with a According to several academic studies41 and research randomly selected sample of decision-makers at South 42 papers, SMEs in South Africa contribute African small and medium enterprises, between 52 percent and 57 percent to consisting of companies with 1 to 200 ACCORDING TO SEVERAL GDP and provide about 61 percent of the employees. countrys employment. ACADEMIC STUDIES AND The Department of Trade and Industry offered a further breakdown in 2008, indicating that micro-enterprises (1-5 employees) provide employment for 17 percent of the workforce, small enterprises (21-50 employees) for 21 percent, and medium sized enterprises for 18 percent of employment, for a total of 56 percent. Large enterprises make up the balance. 43

RESEARCH PAPERS, SMES IN The sample was generated from available

available in South Africa. The sampled respondents matched the research requirements for understanding AND PROVIDE ABOUT 61 the impact of various factors on the PERCENT OF THE COUNTRYS competitiveness and survival of SMEs in general, in particular Internet access EMPLOYMENT and a Web presence. The random nature of the sample ensured that it would be However, Deputy Minister of Trade and possible to compare the financial health of companies with Industry Elizabeth Thabethe has more recently reiterated and without a website. the 61 percent figure for SME employment in South Africa.44

SOUTH AFRICA CONTRIBUTE companies, and was as representative as all the major small business databases BETWEEN 52 PERCENT AND 57 PERCENT TO GDP

databases comprising more than 70,000

39. http://www.southafrica.info/business/trends/newbusiness/smetoolkit.htm 40. SME Survey 2009 41. Abor, J., and Quartey, P. Issues in SME Development in Ghana and South Africa, International Research Journal of Finance and Economics, Issue 39, 2010 42. Kongolo, M., Job creation versus job shedding and the role of SMEs in economic development, African Journal of Business Management Vol. 4 (11), 4 September, 2010

43. Annual Review Of Small Business In South Africa 2005-2007, Dept of Trade and Industry, RSA, 2008 44. Speaking at the launch of the Woza Online project, 19 January 2012.

Internet Matters

Impact of the Internet on SMEs

Almost two-thirds of SMEs in South Africa have a website. While this figure is impressive in its own right, it is the impact that the website makes for these SMEs that is the truly impressive statistic. As the following section reveals, an SME with a website is ALMOST significantly more likely to be highly profitable TWO-THIRDS than one without. For those without a website, the implications are clear.

As many as 79 percent of SMEs with a website report that they are profitable, with 30 percent of these stating they are strongly profitable. Of those without a website, only 59 percent report profitability and just 14 percent of these claim to be strongly profitable. A common argument made by these companies is that there are not enough people online to justify a Web presence. However, as has been shown in this report, a critical mass of consumers is already online, and the growth in users is accelerating.

Over a third of SMEs are in danger of making themselves irrelevant to their customers. This is because, with an ever-increasing number of people searching online for service providers, the 37 percent of SMEs in South Africa that do not have any kind of Web presence are losing out on a major channel of potential communication.

OF SMES IN SOUTH AFRICA HAVE A WEBSITE

This translates directly into having more people going online to find services. This means the market is reaching the point where a companys website will become the glue that holds together all of its other marketing efforts and activities.

Segmental variations
The great irony highlighted by the SME Survey 2012 is the fact that the financial services sector, supposedly one of the most high-end areas of business, has one of the lowest percentages of website use. Less than half (41 percent) of all auditors, accountants and insurance brokers can be found online. This is particularly troubling in light of the fact that the major banks all have a significant presence online and a vast array of

This is perhaps the most important statistic to come out of SME Survey 2012. As figure 3 below shows, while a high 63 percent of formal SMEs in South Africa have a website, this leaves more than a third of SMEs without an online presence. Other results from SME Survey 2012 have shown conclusively how having a website correlates with increased profitability.

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Internet-based tools available for their customers. More and more people who are familiar with the banks websites will, when looking for an auditor or accountant, expect to at least find them online. The reason many of these professionals are not yet online is that 78 percent currently maintain a fairly high level of profitability. Therefore, they do not feel the need to stay with the times. However, as the Internet becomes the single most important means of searching for a service provider, these SMEs will find themselves at an ever-increasing disadvantage.

In fact, the only sector with a lower percentage (36 percent) of websites is that of education largely because many training institutions and specialist schools and colleges are targeting the mass market. Their failure to develop a website is an extreme example of the perception that not enough people in South Africa use the Web, and only 19 percent of respondents to the Survey in this sector claimed to be profitable. It is hardly surprising that the sector of SMEs with the highest percentage of websites is the IT and telecoms sector, with a massive 89 percent of companies on the Web. These are clearly companies that are fully aware of the importance of a website, since this is the space in which they do business.

SMES WITH THE HIGHEST PERCENTAGE OF WEBSITES IS THE IT AND TELECOMS SECTOR, WITH A MASSIVE 89 PERCENT OF COMPANIES ON THE WEB

Tourism is also well developed from this perspective, with some 77 percent of SMEs in this sector having websites. This is an industry that clearly recognises the fact that their customer base is likely to search for them online. They also understand how important it is to utilise every available channel to attract customers. One finding from previous surveys that has been borne out by the latest results is that the larger an organisation, or the longer it has been around for, the more likely it is to have a website. Thus a newly formed SME that immediately creates an online presence can give potential customers the impression that it has been established for much longer, or that it is a much bigger business.

Regardless of the vertical market the SME plays in, or the size of the business, the Survey clearly shows that the growing ubiquity of connectivity means that a website is fast becoming a must-have. After all, when the customers come looking, the company had better be there.

Contribution of websites to survival

Another core question of SME Survey 2012 was the impact of a website on a companys ability to remain in business.

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A full 30 percent of those companies with a website stated that their business would not have been possible without the website. Figure 4 represents a full 20 percent of formal, active SMEs, accounting for approximately 150,000 small, medium and micro enterprises (SMMEs) in South Africa. Extrapolating from the figures referenced above, that SMEs account for about 7.8-million jobs; this would suggest

that, had the 20 percent for whom the Web has been key to survival not had websites, as many as 1.56-million jobs would have been in jeopardy.

Other contributions of websites

Contact with customers A high proportion of active SMEs, 39 percent, regard their websites as a key tool for contacting customers, while

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an even higher proportion, 41 percent, regard it as key to customers contacting them. The inbound role of the website is thus seen as marginally more important than outbound. Updating inventory The process of using the website to showcase the latest products available from the company was acknowledged

by 39 percent of respondents as an important benefit. Company sustainability Figures 8.1, 8.2 and 8.3 reveal the impact of a website on four areas of competitiveness. For general sustainability, a proxy for profitability, 40 percent of SMEs have found their websites to be key contributors.

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Business growth Contributing to business growth was a benefit reported by 42 percent of SMEs, the same as for growing revenue.

Competing for market share The same proportion of companies reported that competing with equivalent businesses was an important benefit of their website: 40 percent for SMEs regard the website as an important contributor. Just 14 percent saw a website as unimportant in competing against similar businesses.

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The benefit bouquet

It is clear that, not only does the small business experience a bouquet of benefits from having a Web presence, but the economy as a whole benefits enormously. The conclusions from SME Survey 2012, taken in combination with an examination of the contribution of the Internet to the South African economy, lead to the clear signal that a Web presence is a priority for the SME sector.

The policy imperatives that flow from these findings go further, however. Given that the Internet itself is making a growing contribution to the economy, and that it is a critical element in the sustainability of small businesses and hence of employment, it is vital that the Government introduces policies that promote both growth of Internet use and of SME access to the tools of the Internet.

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CASE STUDIES: SMES ON THE WEB

In January 2012, Woza Online was launched as a joint venture between Google, the Department of Trade and Industry, Vodacom and the Human Resources Development Council with the aim of enabling South African SMEs to create their own websites quickly and at no cost.
In the first two months following the launch of Woza Online, a total of 11,200 SMEs created their own websites.45 Naturally, these vary widely in terms of scope and purpose. Two examples of SMEs with limited resources are profiled to show what they have achieved using a website.

Party Platters
http://www.partyplatters.wozaonline.co.za Lianne de Beer started her from-home catering service, Party Platters, to take advantage of her passion for food. I enjoy trying new ideas and am always looking for a delicious recipe to add to my selection, she writes on her website. She offers a wide variety of customised platters of freshly-made food, delivered to your door. When Lianne started out, she depended on friends, family, word-ofmouth referrals and flyers. Business was good, but not spectacular. I would have on average of four jobs per month with an average of two-to-four platters per job. In the first month of my website going live, I had 18 individual jobs, with an average of five platters per job. She told her story to the Mail & Guardian, which reported:46 For Lianne de Beer, owner of a six-year-old business called Party Platters in Edgemead, Cape Town; the main reason for delaying getting a website is cost. Before Woza Online, a professional-looking website would have set her back at least R10,000 - out of reach for her home-based business, she says. De Beer says the response from website partyplatters. wozaonline.co.za has allowed her to scale up her business from the part-time service she kept going while raising her toddlers to a full-time pursuit, now that her children are slightly older. The results have astounded Lianne. She says that she initially registered the partyplatters.co.za domain just to secure a professionallooking e-mail address, and had planned to broach the website when she had the funds to do so. But the biggest problem currently with a website is the exorbitant costs of custom development and design work. I figured I would get to this in due course as I got busier to be able to afford these costs. Now, with the Google Site builder, I have been able to do what I wanted to without costs and still have something that looks really professional.

45. http://leadsa.co.za/?p=8179 46. Terblanche, B., Google lures small business online, Mail & Guardian, 23 March 2012

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Rolling Rehab
http://www.rollingrehab.wozaonline.co.za Caroline Rule has a mission. She wants to show people who live with a disability how to gain the independence that comes with being able to drive a vehicle. She launched Rolling Rehab to help people who have lost limbs or the use of limbs, as well as people who have suffered strokes or traumatic brain injury. It offers a range of assessments, including a driver ability assessment, passenger needs assessment and a vehicle adaptations assessment. Caroline also helped set up a driving school called Driving Ambitions, with the QuadPara Association SA (QASA). Avis donated a fully adapted vehicle to accommodate a wide variety of people with different disabilities. They now assist people who are unemployed with a disability, or who earn very low salaries, and source funding to provide free or subsidised driver training, and assist them with getting a driving licence. We believe that by helping a person to get their licence, we are making them more employable. Public transport is not wheelchair accessible, so it is extremely difficult for anyone with mobility impairment, particularly wheelchair users, to get to work. In many government positions they can only get promoted if they have a licence. So, by providing this service, we are hoping to make people more independent and less reliant on hand-outs. At the Rolling Rehab premises in Hennopspark outside Pretoria, visitors are sometimes startled to see a vehicle pull up and a disabled person alighting from the drivers seat. Usually, the driver would have returned from a driving lesson in an especially adapted car, donated by Avis, under the guidance of one of Carolines expert instructors. Until recently, however, much of Carolines time was spent offering telephonic guidance. People would hear of her through word of mouth, make contact, and spend as much time on the phone as it would take Caroline to run through the many options available to them. Then she heard about Woza Online, and began putting together a website in her spare time. Suddenly, all the information she spent so much time imparting is available at the click of a mouse button. I have put a lot of the most commonly needed info on my website, so now instead of answering long e-mails or taking long telephone calls, I can refer people to my website, where they can find the relevant information, she says. But that was only the most obvious benefit. Within days of the site going live, she was contacted by a company that had been trying to identify an appropriate beneficiary of their corporate social investment programme. Theyd come across her site, and instantly decided that Rolling Rehab should be the beneficiary. This was purely because they had been able to read about what I am doing. Although Rolling Rehab is not registered as a charity, it functions as a charity as there is not much money to be made in this business. As a result, I never felt that I could afford a website, although I knew that I desperately needed one. So this approach suited me perfectly. I have got my basic information on the site, and I can grow it as I get the time. I believe it is a perfect tool for many people with disabilities as they are often forced into an entrepreneurial position, so I have been spreading the word.

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SMEs across the Web

Many services provided by SMEs simply could not have existed before the arrival of the World Wide Web and interactive database queries. For example:

Thinkmoney (www.thinkmoney.co.za) Price comparison services would, in the past, have used printed guides that were not only out of date the moment they were published, but only allowed specific comparisons that were worked out prior to publication. Now, a site like Thinkmoney is able to provide direct comparisons of financial services like credit cards and insurance, across a large number of criteria. It can add new services as they are made public, and it can change the prices, benefits, and features the moment these are altered by providers. Visitors are also able to leave their own reviews. As a result, a site run by a small team of entrepreneurs generates more than half a million page views per quarter.

Then there are services that, thanks to a website, have instantly transformed local knowledge about them into global awareness. Kruger Sightings (www.krugersightings.com) There are few sectors that have been as dramatically transformed by the ability to create a Web presence as tourism. From bed and breakfast establishments to tour operators, the Internet has taken them national and global. Kruger Sightings is a powerful example of how a single, young entrepreneur can leverage the passion for game viewing among both local and international visitors to create an online service that has become an SME in its own right. The website provides a live blog-type update of sightings in the Kruger Park. All sightings are provided by visitors, whose enthusiasm for the service has made it one of the most popular game viewing resources in South Africa. The site has also spun off a Twitter feed and mobile app.

Clearly, long before Woza Online, many success stories in South African retail would not have been possible without the Web. These include the online flower sellers Netflorist, the wine information and purchasing site Cybercellar, the books websites Kalahari and Loot, the online auction site Bid or Buy and electronics sites like Take 2, Have2Have, Wantitall and eDreams. All of these online SMEs are among the top 20 online retail sites in South Africa and, along with the websites of major retailers like Pick n Pay and Woolworths, make up the bulk of online retail in South Africa. Their websites are not only such organisations own gateway to the Internet economy, but provide their customers with the vehicles to contribute to that economy. Clearly, as more SMEs are empowered and enabled with a Web presence, their contribution to the Internet economy will rise. As the next section shows, South Africa is about to see an unprecedented rise in the number of Internet users with a propensity to shop online. The ability to leverage this propensity, and convert it into actual shopping behaviour, will make a critical contribution to the Internet economy.

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GROWTH OF THE INTERNET ECONOMY

World Wide Worx has developed a model for forecasting Internet uptake, called the Digital Participation Curve. It carries five year forecasts for engagement in commercial aspects of the Internet, and will be used as a formula for estimating growth of the Internet economy five years ahead.
The concept was developed after South Africa suffered its own version of the Internet bubble bursting, despite not having the same frenzy around Internet stocks as in the developed world. Instead of an Internet boom fuelled by start-ups, South Africa saw established businesses throw tens of millions of Rand at their online presence. Despite these investments, the Internet-using public almost entirely ignored the offerings of these businesses, mainly financial institutions and retailers.

Internet access rose more dramatically than at any other time from 1994 to 2008. In just two years, it increased from 1.8-million to 2.8-million. In the face of such growth, massive investment was thrown at e-commerce ventures by major institutions, including Standard Bank, Old Mutual, Liberty Life, Woolworths, Saambou and Primedia. Their respective online innovation brands, BlueBean.com, FundsNet, MyLife, inthebag, 20Twenty and Metropolis, were expensive disasters even when, like 20Twenty, they attracted fanatically loyal customers. Why, if they inspired such loyalty, did the brands not capture the imagination of all Internet users, and set the market alight? How could such major institutions fail to attract a reasonable proportion of such a large Internet population?

Simple: they failed to segment the market. Many blamed the failure of these ventures on the bursting of the tech stock bubble in the United States. But South Analysis of customer numbers supplied to World Wide Africa never had the venture capital industry Worx by online retail owners suggested that, that made the bubble possible; and it did not WORLD WIDE WORX rather than the 2.8-million people who were have the flood of bizarre business models online, the real audience for advanced online from start-ups that attracted huge attention HAS DEVELOPED services was between 300,000 and 400,000 but minimal revenue. people. In fact, only 357,000 individuals had registered with online shopping services. What it did have was a rapidly growing FORECASTING Internet user base, and a complete lack Comparing this with historical data collected INTERNET UPTAKE, of understanding of that user base. No in World Wide Worx Internet research, it research was conducted into the makeup of CALLED THE DIGITAL became clear that those who were ready to that base, partly because decision-makers in shop online and engage with more highlarge organisations often believe they know PARTICIPATION CURVE end services were, by and large, those who best and see research as a sign of weakness. had been online since 1996, when precisely To be fair, some did conduct research, but they asked the 354,000 South Africans had access to the Internet. wrong questions. In almost every case of a major online investment at the turn of the millennium, the investors A coincidence? Hardly! ignored one of the prime rules of traditional go-to-market strategies: they failed to segment the market.

A MODEL FOR

The Experience Curve proven

The key moment in online business in South Africa was not 2006, when online retail began to take off, but 2001, when early investments in e-commerce collapsed. The reason this was such an important moment was not so much because of what could be learned from failure, but because of what could be learned about the makeup of the online market. Those learnings still guide online strategy a decade later.

The correlation of the 1996 user number and the 2001 online shopping registration total suggested that five years on the Internet was a key level of experience for users to engage in transactional behaviour in particular, and to participate in the digital economy in general. This ranged from participating in e-commerce, to launching businesses online, to creating personal websites or elaborate blogs. And this meant that, by 2006, those 2.8-million people everyone had been targeting in 2001 would finally be

The Five-year gap

From 1999 to 2001, the number of South Africans with

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ready to be targeted. This concept was initially termed the Experience Curve by World Wide Worx. The model enabled World Wide Worx to forecast that 2006 would see the beginning of the recovery in online retail, among other sectors. When the trend line for online retail showed ever-slowing growth from 2001 through to 2005 the growth rate reached 20 percent off a very low base the prophets of doom were out in force. But it was clear that their timing was just as bad as that of the 2001 spendthrift corporations. While strict following of the trend lines at the time suggested that online retail growth would drop to 15 percent the next year, the Experience Curve suggested a turnaround. And indeed, a dramatic turnaround occurred, with 30 percent growth recorded in 2006. This seemed to fly in the face of common logic, since the trend line for growth in number of Internet users remained almost flat, at around 3 percent a year. However, the Experience Curve made it clear that it was time on the Internet, rather than numbers on the Internet, that dictated its usage. The model was proven again in 2007. At a time when growth in Internet numbers remained relatively flat, at 6 percent, online retail grew at 35 percent.

This evolution up the Internet Hierarchy of Needs does not happen overnight. According to the Experience Curve, it takes at least five years for the average individuals Internet usage to develop from a physical Internet connection to online self-actualisation. By the end of 2008, 3.2-million South Africans had been online for five years. The number grew to 3.75-million in 2011. The online market is suddenly real, the online user is suddenly experienced, social media like blogging, which took off in 2008 is mainstream, social and business networking sites like Facebook and LinkedIn have taken South Africa by storm, and it all appears to have happened overnight. In the process, it became clear that the Experience Curve was not only about Experience, but also about Participation. It showed that, once people were confident enough in the online environment, they would become active participants in that environment. This led to the understanding that the curve was not only about experience of the digital environment, which is a somewhat passive concept, but about participation in that environment, which is the active expression of that experience. The model thus became the Digital Participation Curve. It looks like this (see figure 9). The upper curve is the growth curve of Internet users in South Africa, while the lower curve shows the number of those who have been online for five years or more.

The Digital Participation Curve

It is now clear that there is a powerful relationship between length of time an individual has been on the Internet, and that individuals willingness to bank online, shop online, engage in social media and specialised social networks, and generally strive for online self-actualisation. That is the same term used for the peak of Abraham Maslows well-known Hierarchy of Needs.47 It begins with basic physiological needs, like food and shelter, works its way up through social needs like love and belonging, and peaks with self-actualisation. The Internet Hierarchy of Needs is almost identical. It starts with physical needs, such as getting connected and quality of that connection, works it way up through social needs like communication and networking, and peaks with selfactualisation, such as user-generated content, interaction with websites, and leisure shopping.

South Africans on the curve

In 2008, the success of the Digital Participation Curve in explaining the anomalies of growth in that year finally saw it accepted broadly in the corporate world as a predictor of online activity. Many South Africans were puzzled by what they saw happening that year in e-commerce, online banking, online advertising, website traffic and social networking. In particular, they were taken by surprise by the sudden takeoff in all these areas from 2006 to 2009, when common logic told them that we should have been entering an Internet slump, in line with the Global Financial Crisis. The problem with all logic, however, is that is does not take into account underlying factors, historical forces and the nature of trends.

47. http://www.abraham-maslow.com/m_motivation/Hierarchy_of_Needs.asp

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The long-term implications are tremendous. Since 2008, for the first time since the 1990s, we have seen a sustained increase in the rate of growth of number of Internet users in South Africa. This largely comes off the back of five factors: 1. The explosion in the use of smartphones, and the ability to access the Internet on these phones. 2. The growth in ADSL connections in small and medium enterprises in South Africa. Where previously an office relied on a dial-up connection, typically only one person in that office was able to use the Internet. ADSL is not only cheaper than dial-up for an office, but it also allows for everyone in that office to be connected, at the same cost, and at far higher quality. 3. The explosion of new services and service providers, increasing competition, bringing down prices, and building greater awareness than ever before. 4. The wild popularity of social networking in South Africa, which is now penetrating the mass market at a rapid rate. 5. The explosion of local content on the Internet. These phenomena are transforming access, and will continue to do so. However, that is hardly the end of the story. Based on the five-year lag, it is clear that, if growth in the number of users began accelerating in 2008, then by 2013 the Digital Participation Curve must reach an inflection

point, i.e. a point on a curve or chart at which significant change occurs in the shape of the curve, or a coming together of events that change our way of thinking. Both meanings apply here: all those who began coming on board the Internet from 2008 onward, will become fully engaged with it from 2013 onward. And that will mark the beginning of the most sustained acceleration in the Digital Participation Curve that we have yet seen, as figure 10 reveals. In other words, businesses that missed out on the 20062009 Internet boom in South Africa, can set their watches now for the beginning of the next boom, only a year from now.

Digital Participation as a marketing framework

It should be obvious by now that the Digital Participation Curve is also a framework for evaluating marketing models. It shows what proportion of the market is ready to participate in the digital economy. While this does not mean all of these people, say the 3.75-million experienced Internet users at the end of 2011, will actually participate or buy or sell; it does mean they have the propensity to do so. The actual participation will be dependent on both their peer groups, i.e. the social word of mouth that often guides our decisions, and on how successfully they are targeted by businesses or organisations.

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This highlights the importance of social networking and social media as vehicles through which people move from propensity to participate, to actual participation. It therefore underscores the importance of social networking and social media as tools for organisations to target individuals. However, there is no no one-size-fits-all strategy. Once the Digital Participation Curve has been acknowledged, the market of ready customers must now be segmented further. For every industry sector, for every product category, and for every specific product, the segmentation will be different. For example, airline tickets need minimal segmentation, but specific airlines with specific value propositions need further segmentation. Electronic goods in general need little further segmentation for selling online, but specific product categories and products need careful and detailed segmentation. Digital content like paid downloadable music and access to articles needs even more detailed segmentation to explain why there is almost no propensity to purchase yet. Once that segmentation is arrived at, the Digital Participation Curve explains when and at what rate that propensity will grow enough to make it a viable area of e-commerce. It is important to note here that the Digital Participation Curve is not only about e-commerce and selling online. It is more generally applicable, and relates to the extent

to which individuals are willing to engage online with companies and organisations with which they have a relationship. This means that, once an organisations entire client base begins to be represented on the Digital Participation Curve, it can expect that its entire client base will wish to interact with it online. This places a massive challenge before corporate South Africa and small and medium enterprises to be ready for their customers by 2013. If companies do not do so, their customers may well defect to the alternative providers that do meet their online needs and expectations. At the very least, they will find their brand value and image undermined by their inability to serve their customer base in the environment where it expects to be served. In short, if South African organisations are not ready to serve their customers online by 2013, their customers will find organisations that are ready.

Impact on the Internet economy

Given the direct relationship between the Digital Participation Curve and e-commerce, it can be assumed that intensified digital participation will result in an equivalent increase in data demand, and consequently in infrastructure investment to meet this demand. This effect can be expected to be felt across all segments of the Internet economy.

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Consequently, as we see a 15-30 percent rise in the number of experienced Internet users each year over the coming five years, we can expect to see an ongoing increase in the size of the Internet economy at least double that of the general economy, i.e. at around 7-8 percent a year. This will translate into the Internet economy making up a steadily increasing proportion of GDP, which means that the 2.5 percent forecast for 2016 is not only possible, but a highly likely outcome of current growth trends.

(1.3 percent, growing to 1.5 percent). It is on a par with Russia, but will fall behind soon (1.9 percent, growing to 2.8 percent), and is catching up with Brazil (2.2 percent, growing to 2.4 percent). The fifth member of the BRICS grouping,48 India, has one of the fastest growing Internet economies, at 4.1 percent in 2010 and rising to 5.6 percent in 2016. That will make it, jointly with Japan, the fourth biggest Internet economy in terms of contribution to GDP. What makes Indias Internet economy different? The BCG analysis reveals that a high proportion is made up of exports, which is almost non-existent in South Africa, to the extent that imports into the Internet economy make this a negative figure in terms of contribution to GDP. Further, Indias online retail sector is expected to grow rapidly and will make up close to half that countrys Internet economy by 2016.

Contribution to GDP globally

Research conducted by The Boston Consulting Group across 20 economies has shown that South Africas Internet economy, as a proportion of GDP, does not compare well to either leading industrialised nations or developing countries. Across the G-20, a group of 20 major economies, the average contribution of the Internet economy to GDP in 2010 was 4.1 percent, expected to grow to 5.3 percent by 2016. The average for developed markets was 4.3 percent, growing to 5.5 percent by 2016, while for developing markets it was 3.6 percent, expected to grow to 4.9 percent by 2016. This compares to South Africas 1.9 percent in 2010, 2 percent in 2011, and an expected 2.5 percent by 2016. The leading Internet economies are those of the United Kingdom (8.3 percent, growing to 12.4 percent by 2016), South Korea (7.3 percent, growing to 8 percent) and China (5.5 percent, growing to 6.9 percent). South Africa is ahead of only two of the countries measured, namely Turkey (1.7 percent, growing to 2.3 percent) and Indonesia

The key message for South Africa, in terms of growing the Internet economy, is to loosen the logjams constraining this economy, to promote ubiquitous and affordable access, and to take a more active embrace of open competition. This will, in turn, ensure that the economic benefits of the Internet are enjoyed sooner rather than later, and by the many rather than the few.

48. Comprising Brazil, Russia, India, China and South Africa.

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INTERNET CONTRIBUTION TO GDP GROWTH IN SOUTH AFRICA

The growth of the Internet economy has an impact not only on GDP in itself, but also on the growth rate of GDP. If the Internet economy adds an additional 0.1 percent to GDP each year, its contribution to the growth in GDP each year will be above 5 percent, as table 2 shows.

At an average growth of around 8 percent a year, suggested by the Digital Participation Curve, the Internet economy can be expected to reach R79-billion by 2015, contributing close to 2.4 percent to South Africas GDP. Equally significantly, it will contribute 5.71 percent to the growth rate of GDP. It is once again clear, then, that the Internet economy has become a key component of the South African economy, and a boost for the Internet economy would translate readily into a boost for the overall economy. The message to Government is equally clear: invest more actively in the Internet economy, and the benefits will spill over directly into the overall economy.

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CONCLUSIONS AND RECOMMENDATIONS

The findings of this study provide a number of pointers and calls to action for all segments of society: individuals, small and medium enterprises, large businesses, the communications industry, policy-makers and Government. All have a role to play in either improving access and participation in the digital economy, or leveraging it to best economic and productive effect. With all parties playing a role, a robust Internet ecosystem will evolve to the benefit of all role-players.

Government and policy-makers

Governments have a central role to play in ensuring universal access to Internet services, an enabling environment for infrastructure development and competition, and a policy framework that allows for the lowering of costs, the promotion of digital literacy and innovation. Based on the findings in this report, it is recommended that regulators and Government policy-makers apply the greatest urgency to removing obstacles in the way of Internet access evolution in South Africa. This includes the following key steps:

y y

y y y

y y y y y y

Allocating spectrum for high-speed wireless access, in particular 4G or Long Term Evolution (LTE), according to ability to make such access available to the highest proportion of the population, in the shortest possible time. Ensuring that licensing of new broadband technologies, such as LTE, be treated with urgency, in order that South Africa not be seen to be falling behind, or in reality falling behind, in the roll-out of those technologies that make the Internet more efficient and effective. Harmonising contradictory, conflicting or constraining national, provincial and municipal laws regulating communications infrastructure roll-out, such as way-leaves and other right-of-way laws. Immediately withdrawing spectrum allocation from entities that have owned it for many years without using it, and reallocating such spectrum. Refining the broadband policy framework developed by the Department of Communications to ensure that the definition of universal access takes into account the need for Internet access in every home, rather than at a community level. Ensuring that roll-out of high-speed technologies, such as Fibre-to-the-Home and LTE, is not constrained by regulatory delays and unrelated priorities or agendas that result in inaction. Assisting in the lowering of costs of access devices and equipment, through lowering or removal of duties and taxes relating to these products. Removing all bottlenecks in the way of digital terrestrial television migration, and providing a clear framework for utilisation of the digital dividend of broadcast spectrum that will be freed up subsequent to this migration. Provide more incentives for investment in Research & Development. Provide greater funding for centres of technological excellence and entrepreneurship. Provide greater incentives to small enterprises to engage with the Internet economy. Reduce the red tape and paperwork required to leverage these opportunities. Provide easier and more transparent access to Government tenders, both in terms of the initial tender opportunity and the eventual tender award. Make as many Government services as possible available online.

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Communications industry
It has been shown that the cost of access to the Internet is a major obstacle in the way of ordinary individuals participating in the Internet economy. Based on these findings, it is recommended that major operators and suppliers:

SMEs and entrepreneurs

All businesses can benefit from an enhanced Internet presence. SMEs and entrepreneurs in particular can leverage the opportunity represented by the Internet by:

y Simplify their communications offerings, enabling consumers and businesses not only to compare these offerings, but integrate these services more effectively into their own budgeting frameworks. y Lower the cost of core services, such as line rentals or connection costs, to ensure that these do not become a barrier to entry and therefore to ongoing usage. y Lower the cost of access equipment that is unobtainable on the open market, such as data modems, and for which profit margins are often artificially high due to unavailability on the open market. y Focus on reducing usage constraints, such as data caps and the cost of ad hoc data usage which, for example, represent the major obstacle to smartphone users taking advantage of Internet access on their handsets. y Reach out to underserved areas, regardless o f l e n i e n c i e s p r ov i d e d by l i ce n c i n g requirements. y Support digital literacy efforts of Government. y Support SMEs in their efforts to leverage the Internet economy, with programmes similar to Woza Online. y E n h a n c e I n t e r n e t s e c u r i t y, a n d t h e consumers sense of being protected, by acting aggressively with regard to digital crime and fraud, and introducing additional programmes to prevent recurrences of harm to the public. y Educate the public on Internet security, in order to enhance consumer confidence.

y Embracing the Internet in terms of creating an online presence with a website. y Adopting and investing in new technology, such as cashless payment options, customer relations management and supply chain management tools. y Becoming educated in the opportunities available on the Internet, such as access to Government tenders available from some departments. y Where leveraging public and business services is constrained by cost and lack of access, businesses and entrepreneurs must demand accountability from their elected representatives at municipal, provincial and national level.

Ordinary individuals
Even the ordinary citizen can help build the Internet economy simply through attitude. Some of the simplest examples of this kind of contribution include good digital citizenship, respect for copyright laws, supporting local artists and content, and buying goods and services online when it is more cost-effective and convenient. This means, in turn, that individuals also have a responsibility to themselves to become better educated about what the Internet can do for them, and how they can best leverage it.

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