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[Fwd: Issue 328: GSM>3G AFRICA 06: Masters of the universe face a tougher climb]

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  • Pamela McLean
    Balancing Act is a great online publication for anyone who needs to keep up with telecomms in Africa. I am sharing a recent article because it may interest
    Message 1 of 1 , Nov 20, 2006
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      Balancing Act is a great online publication for anyone who needs to keep
      up with telecomms in Africa.

      I am sharing a recent article because it may interest group members who
      want to get a better idea of trends regarding GSM phones in Africa - a
      key issue regarding how we manage to communicate, "rub minds", and learn
      from each other.

      As well as the article (Top Story- GSM>3G AFRICA 06: MASTERS OF THE
      UNIVERSE FACE A TOUGHER CLIMB)
      I have included full details of the publication.
      I have deleted all the other articles - but you can access them via the
      archives.
      Pam

      -------- Original Message --------
      Subject: Issue 328: GSM>3G AFRICA 06: Masters of the universe face a
      tougher climb
      Date: Mon, 23 Oct 2006 10:53:55 +0100
      From: Russell Southwood <editorial@...>
      Organization: Balancing Act
      To: englishlist@...


      Balancing Act's News Update 328 (23rd October 2006)
      ____________________________________________________________________

      COMING SOON: Low-cost mobile operators and the new wave of muni networks
      ____________________________________________________________________

      (snip)
      ____________________________________________________________________

      IN THIS ISSUE:
      _____________________________________________________________________

      Top Story

      - GSM>3G AFRICA 06: MASTERS OF THE UNIVERSE FACE A TOUGHER CLIMB

      Telecoms News

      - INTERNATIONAL CALLING PRICE FALLS ARE SPREADING ACROSS EAST AND
      CENTRAL AFRICA

      - TRANSCORP TO INVEST US$1 BILLION IN NITEL AND MTEL

      - BILLING SYSTEM FAILURE COSTS ETC WELL OVER 14MIN BIRR

      - RED TAPE OBSTRUCTS MTC'S GROWTH IN NAMIBIA

      - MTN SIGNS INTERCONNECT AGREEMENT WITH INTERCONNECT CLEARINGHOUSE NIGERIA

      - KENYAN POLICE SEIZE STOLEN COPPER CABLE BOUND FOR CHINA

      - SPECTRUM SPLIT ‘MUST BE BOLDER’, SAYS SIEMENS

      Internet News

      - ONLY TWO OUT OF SEVEN MOOTED COUNTRIES SIGN EASSY GOVT PROTOCOL IN
      LATEST ROUND

      - ADDITIONAL IP RANGE FOR ADSL USERS IN SOUTH AFRICA

      - ALGERIE TELECOM HOPES TO DOUBLE INTERNET SUBSCRIBERS TO SIX MILLION
      USING WIRELESS LOCAL LOOP

      Computer News

      - SOUTH AFRICAN TECH LOBBY URGES MPAHLWA TO UPDATE COPYRIGHT ACT

      - SOUTH SUDAN EYES RWANDA'S ICT EXPERTISE

      - ELECTRONIC TICKETS TO BE TESTED IN LUANDA BUSES

      - SHUTTLEWORTH BACKS KDE DESKTOP ENVIRONMENT

      On the Money

      - SOUTH AFRICA NEDBANK EMPOWERS SMALL BUSINESSES THROUGH MOBILE TECHNOLOGY

      - ORASCOM EGYPT WANTS CONTROL OF HTIL

      - DATATEC'S LONDON LISTING FALLS SHORT

      Web and Mobile Data News

      - LAUNCH OF ONLINE NEWS SERVICE IN ZIMBABWE

      - HIGH WEBSITE COSTS HURT ORGANIC DEALERS IN UGANDA

      - CELLICIUM IMPLEMENTS SONATEL MOBILES’ USSD BROWSING SOLUTION

      _____________________________________________________________________

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      Russell Southwood, Balancing Act, 71 Crescent Lane, London SW4 9PT
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      - > WEEKLY PUBLICATION DEADLINE: 12 pm GMT Sunday

      (snip)
      TOP STORY: GSM>3G AFRICA 06: MASTERS OF THE UNIVERSE FACE A TOUGHER CLIMB
      _____________________________________________________________________

      For the past ten years Africa’s mobile operators have walked on water.
      They have connected hundreds of millions of people incredibly quickly.
      They have extended coverage to places where there are no roads or power,
      making Africa’s telco incumbents look like flat-footed dinosaurs. They
      literally got Africa talking to itself. Almost everything they touched
      seemed to turn to gold. But as the growth curve tails off, these new
      African masters of the universe are facing some fairly serious
      challenges. At the end of the industry’s annual talk-fest GSM Africa >
      3G Russell Southwood looks at the trouble ahead.

      The mobile operators have become masters of the universe in a short
      period of time and they dominate the “mind-space” of the continent.
      Their branding and media spend in most African cities means that few
      people can ignore them and it is a visible sign of their seeming
      invincibility. They have gone from being insurgent challengers to
      becoming the new incumbents. But new challengers are going to enter the
      market and want to take a pop at them.

      Although it’s difficult to generalise across a customer base in the
      millions, the African consumers on whom they rely are beginning to go
      from being deeply grateful for any service to becoming more demanding,
      particularly on price and quality of service: they are noticing the
      leads and lags in network investment.

      Maybe when the histories are written in ten years time, it will be this
      year that will be seen as the high water mark of the mobile operators’
      success. If you listen carefully, you can identify a number of pressures
      that are beginning to crowd in on them. Whilst it would be foolish to
      think they won’t be able to respond to them, they certainly have a much
      tougher climb ahead of them.

      The challenges that they will have to get to grips with include:

      Low levels of competition on price:
      Although there are often three competitor companies in a country, there
      is usually only a very small percentage difference in price between the
      cheapest and the most expensive. In countries with two operators, the
      price difference is almost non-existent. For example in Botswana, you
      could not put a piece of paper between the rates offered by Mascom and
      Orange. All of this is obscured by a blizzard of tactical marketing
      offers. But to rework the famous phrase from the Godfather movie, this
      is a case of “make me an offer I can’t understand.”

      There is now a dawning awareness amongst key African regulators that
      they have a role to play in protecting the African consumer and that
      price and quality of service are two issues they will have to tackle.
      Some are using investigations into interconnect pricing as a proxy for
      achieving this aim. The mobile operators are increasingly seen as the
      well-resourced new incumbents who resist greater levels of competition
      and technological innovation. This shift in positions was crystallised
      for me by watching a year ago a senior regulatory staff member from a
      mobile operator browbeating a regulatory CEO about his desire to open up
      his country to competition. In the event, the mobile operator was not
      successful in resisting change but the point is that the major mobile
      operators are now in a defensive rather offensive mode in terms of
      competition.

      Price relative to income:
      African mobile prices mean that consumers spend a far higher percentage
      of their income on mobile communications than their developed world
      equivalents yet they earn so much less. This used to be a factor to
      marvel at: it just goes to show how important communications is to
      Africans, people used to say (including myself) in a sage sort of voice.

      But the truth is that high prices are actually blocking further market
      development. If you want your subscribers to spend money on other
      “value-added” services, then you have to free up that spending unless
      incomes grow much faster than at the current rate. If you want users to
      stop “beeping” and talk, rates have to come down.

      A survey in an informal settlement in Nairobi called Kibera (that has
      0.75m people living there) found that a single mobile was shared by five
      people. Again we all marvelled at how Africans found a way in the face
      of adversity. But actually what this is saying is that the mobile
      operators have failed to reach some significant portion of a potential
      customer base. If those who live in Kibera sell their tin shacks to each
      other, there’s money in there but the mobile operators are not reaching it.

      The truth is that the mobile operators have not yet reached the bottom
      of the price elasticity curve. Rates need to come down to reach whole
      sections of Africa’s rural and urban populations. As we will see, the
      dilemma for the mobile operators is whether they will make the same from
      lower rates (as people talk more) or whether they can devise a way of
      lowering their rates for particular groups of people.

      Even the normally sober-minded Informa Principal Analyst Devine Kofiloto
      was moved to observe that there have been few benefits to
      consumers:”It’s largely the shareholders who are smiling.” Celtel’s CEO
      Martin Pieters was sufficiently stung by this to point out that his
      company had not paid shareholders a dividend for ten years.

      The other part of the pricing puzzle is the mobile fixed paradox. Once a
      mobile network is established and the CAPEX has largely been paid back,
      it’s much cheaper to connect a mobile subscriber than it is to connect a
      fixed line customer. Yet it is more expensive to use a mobile phone than
      it is a fixed phone. In the early days of mobile phones this could be
      justified by the fact that consumers were being charged a premium for
      mobility. However, when mobiles are the majority device for voice on the
      continent, it is significantly more difficult to sustain this argument.
      And fixed/ mobile convergence must surely mean that the two rates come
      together and disappear over time: rates based on technologies are
      certainly not technology-neutral.

      Falling growth and lower ARPUs:
      In his introduction to the conference, Informa’s James Barker told
      delegates that subscriber growth was slowing down: there had been two
      quarters with growth below 10%. Devine Kofiloto reinforced this gloomy
      message by showing projections that identified overall growth flattening
      in 2009. But in East Africa, growth flattens in 2008, which is only two
      years away.

      However, the picture is not all gloom and doom. For example, Nigeria
      will surpass South Africa as the largest market on the continent in
      2007. Nevertheless operators now have to face a slowing pace of
      subscriber growth and the newer subscribers will also be more costly to
      acquire.

      ARPUs are falling as the hill gets steeper. A selection of pre-pay ARPUs
      from the second quarter of 2006 illustrate the point: Sonatel, Senegal
      ($15.42); Spacetel, Benin ($13.90); Vodafone Egypt ($10.41); UTL,
      Uganda ($9.07). Headline blended ARPUs often disguise this sharp-end
      reality.

      The lowest overall ARPUs are found in East and Central Africa and it is
      East Africa where the uphill growth road is running out fastest. The
      highest decline in ARPUs has occurred in West Africa from where some of
      our examples above are taken.

      Indian ARPUs have in some instances gone as low as $4-7 in some parts of
      the major networks and this is probably somewhat nearer the bottom of
      the pricing elasticity curve. But there are significant differences
      between India and Africa in terms of population densities: typically
      rural areas may have around 200 plus people per sq km against 100 or so
      people found in Africa’s uncovered areas.

      The question is really what operating profit margins operators can
      sustain. The case of Zantel is illustrative. In 2005, operating only on
      Zanzibar, its ARPU was $10. It now has 320,000 subscribers but Zantel’s
      CEO Noel Herrity refused to reveal current ARPUs. Like the dog that
      failed to bark in the Sherlock Holmes story, we can reasonably deduce
      that the current ARPU is lower than $10 or there would be a lot of
      barking about it. And this is achieved in part through a roaming
      agreement (leasing the network, if you will) with Vodacom on the
      mainland. If the margins are there to lower prices (and thus ARPUs)
      while leasing a network, what might the network operator Vodacom achieve
      in price terms if it were so minded?

      The more optimistic are looking to data to at least partly fill losses
      in income. However, whilst technology push is delivering ever more
      sophisticated services it is not clear how the majority of Africa’s
      hard-pressed mobile customers will afford these services. But for all
      the problems of literacy, SMS text messages remain the main driver of
      data revenue growth. And the story here is the same as for voice: where
      prices for SMS are low, as in Lesotho, usage goes up. African consumer
      communications spend may not be entirely a zero sum game (where one kind
      of spending will inevitably replace another) but there is little sign of
      a wave of rising incomes.

      Competition from low-cost, mobile VoIP operators:
      As African countries like Algeria, Kenya, South Africa, Tanzania and
      Kenya become more competitive, several of the continent’s hard-pressed
      ISPs are re-inventing themselves as VoIP service providers: sitting on
      the services and applications layer and offering voice services to their
      customers. A few have seen the light of day and more are in the wings.
      Initially they will offer fixed wireless services but even these
      services have a degree of in-built mobility: “locked to one cell” will
      become a largely negotiable space. Mobile operators would do well to
      remember the history of Reliance where it parlayed its fixed wireless
      presence across India into becoming one of continent low-cost mobile
      operators. And it is only a one to two year “skip, hop and a jump” to
      mobile VoIP.

      Jamal Ramadan, Group Vice President, Special Products, MTN recently gave
      the following rather revealing comment on low-cost operators:“Community
      phones using VoIP over fixed wireless Internet connections will have
      some negative impact but it can be managed through data pricing and
      interconnect.” The last five words can only mean of two things. Either
      we will work closely in partnership with these kinds of operators or we
      will fix data pricing and interconnect to their disadvantage.

      You do not need to be a cynic to imagine that the latter is more likely
      but the mobile operators may not be in a position to choose the
      interconnect. If in more competitive African countries, the telco
      incumbent’s network is used at a carefully established, cost plus price,
      why will it be any different for mobile operators? What’s sauce for the
      goose is sauce for the gander. So mobile operators will either have to
      go to the edges of the market themselves or help others to do so.

      The operators rightly complain about the high level of Government taxes
      and how this prevents them from extending services and lowering prices.
      And Pieters of Celtel pointed out:”We expect (the roll-out) of power and
      roads to be in the interest of the Government but we see little
      happening there.” Of course, he’s right but this is a log-jam with
      blame-calling at high volume.

      Why not turn the problem into the solution? An alliance of leading
      operators could negotiate time-limited “tax-breaks” for serious
      roll-outs of integrated packages of roads, power and telephony. Such a
      programme would easily attract international support. The mobile
      operators could use their considerable reputation to insist that there
      were independent power operators and privately commissioned road
      contractors. Does any one of them have the courage to turn this problem
      into an opportunity?

      Falling international rates and roaming charges:
      International calling and roaming revenues are a minor but significant
      revenue stream for mobile operators. The small percentage of their
      post-paid customers contribute a disproportionate amount of high-margin
      revenue. Unfortunately this is beginning to change: see the story below
      in Telecom News - International calling price falls are spreading across
      East and Central Africa.

      The lower end of fixed and mobile operator international calling rates
      are now between 20-25 cents a minute down from previously much higher
      levels. Part of this reduction has been the liberation from monopoly
      international gateways but the rest is driven by VoIP service providers
      in competitive markets. However, there is a silver lining as lower rates
      mean that traffic goes up. But even with a considerable increase in
      traffic, you are probably back where you started in revenue terms. Good
      for bandwidth sales, less good for operator revenues.

      In addition, roaming charges will come down as operators follow Celtel’s
      lead in lowering them for its neighbouring countries in East Africa.
      MTN’s CTO Karel Pienaar said they would follow suit although he couldn’t
      quite bring himself to say the word follow. He pointed out that in West
      Africa MTN now has a series of contiguous countries with only a gap in
      Togo. He observed that if they could connect these then rates could come
      down because there would be no expensive sending of calls to the USA and
      Europe to connect with African neighbours. Given how relatively small
      Togo is to cross, this is again a political problem that must find a
      commercial solution.

      Increasing deal competition:
      Fierce deal competition will put considerable pressure on those who
      raise their money in the market rather than from petro-dollar rich Arab
      investors. Those loaning money or investing are typically looking for
      12-15% return on their investment, higher if there are risks attached.
      Riding on the wave of relatively high oil prices, Arab investors are
      willing to look at lower returns and longer time scales. Celtel’s
      Pieters pointed out that the Dubai Investment Authority typically looked
      at 50 years:”The shareholders I’ve worked with would be very happy with
      3 years.”

      These rather different assumptions about investment have driven up
      acquisition prices to stratospheric levels. In places as diverse as
      Egypt and Mauritania, Arab investors have paid “top-dollar” for
      licences: the price paid for the third mobile licence in Egypt was
      higher than the market cap of the number one operator. And as Celtel’s
      Pieters kept reminding his audience all this money “just for a piece of
      paper.” But financial markets behave in strange ways.

      The current ramp of mobile shareholder value is built on the expectation
      of increasing capital value: what happens when this ceases to be true?
      What happens when the steeper climb produces lowered expectations
      reflected in lower subscriber growth and ARPUs? What goes up, must come
      down.

      But the game’s not over yet as 57% of Africa’s operators remain outside
      the ownership of the big four: MTN – 15%, Vodacom – 14% , Celtel – 7%,
      and Orascom – 7%. Celtel’s Pieters foresaw a day when 4-5 players would
      control 60-70% of the business. But there are two potential challenges
      to this “onwards and upwards” narrative.

      If Arab investors have deep pockets, Celtel will do well but what about
      Vodacom that has already said acquisition prices are largely too high
      for it? And surely Arab investors will think about buying MTN? MTN’s
      Pienaar said he was “not aware of anything like that happening at the
      moment” More intriguingly the issue of whether Cell-C would be bought by
      Celtel was raised. Celtel’s Pieters said: “Jeff Hedberg and I go back a
      long way. It would work easily at a management level.”

      The other possibility is that someone will go round and gather up
      existing failing operators at relatively cheap prices and build
      themselves an entirely new brand. Unfortunately for the existing mobile
      operators any insurgent competitor will almost certainly challenge on
      price. But there are also a couple of CAPEX “down-steps” out there that
      may make this an even more difficult prospect. CDMA is cheaper than GSM
      particularly now as operators are putting in the full alphabet soup of
      data capability. What if someone had the nerve to bring together a group
      of CDMA networks?

      But beyond that, there is the ground zero option: a fully IP mobile
      operation. If you’re a unified licence operator starting from scratch,
      you will build yourself a largely IP-enabled network. This might be
      extended out into the mobile network as the elements come into focus
      over the next three years. A greenfield IP mobile operator might have
      real cost advantages over the slower moving mobile incumbents. And
      arguably until recently not all major mobile operators have been
      characterised by high levels of technology innovation.

      You take the high road, we’ll take the hot-spots:
      Except for sales reps and similar professions, most people spend only up
      to 10% of their time on the road. The new wireless challengers in the
      voice space – Wi-Fi and Wi-MAX – will have difficulty taking the road
      but may acquire an interesting share of everything but the road. And
      where would this leave the mobile operators?

      This was the implicit pitch being made by London-based South African
      Niall Murphy, CTO of the Cloud. Whilst apologising for bringing European
      experience, it was not too difficult to do the translation for Africa.

      The Cloud operates Wi-Fi hot-spots in 8,500 locations across Europe,
      with the majority in the UK. It has worked hard to make this network of
      coverage as seamless as possible for data users and has recently added
      IP voice to its service offerings. Its partners are a revealingly
      eclectic mix of new wave challengers and incumbents: Telenor, O2,
      Vonage, Skype, Nintendo, Vodafone, Bengo, Sprint, iPass, CredeCard, BT
      Open Zone. It is tapping into the growing wave of municipal networks and
      recently won the contract to wire the City of London, the capital’s
      financial centre.

      And this precisely because it allowed any device or service to connect
      and did not offer an “only our service” approach. And here lies the
      difficulty for the mobile operators. You can argue that MTN with its
      developing understanding of Wi-MAX might position itself in this market
      but how will mobile operators make sense of so many devices and services?

      His European argument is that increasingly people are acquiring wireless
      enabled devices (particularly laptops) they want to be able to use
      anywhere. He is not selling it as a premium product but offering
      packages for between 10-15 euros for users. A small but significant
      proportion of traffic by kilobits is now coming from voice.

      So let’s translate the proposition into African. There are two
      potentially different markets: the business or professional person who
      needs to be connected wherever they are and the person who might simply
      want a cheaper phone service. The latter might have to wait for Wi-Fi
      enabled phones but they will be here in volume before too long. The
      former is almost exactly a mirror-image of the European customer with a
      certain amount of price adjustment. Add in the roll-out of muni networks
      in African cities and the proposition slowly comes into focus. Speaking
      of which, the tender for doing this to Cape Town will be decided soon
      and there is already a study for a city-wide muni network north of the
      Limpopo.

      It is at this point one might utter the Chinese curse to mobile
      operators:”May you live in interesting times.” The only problem with
      this is when I actually talked to a Chinese person about this well-known
      saying, he gave me a blank look and told me no such curse exists. So
      maybe that’s a lucky sign for Africa’s Masters of the Universe.

      (snip)
      _____________________________________________________________________

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