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
-------- Original Message --------
Subject: Issue 328: GSM>3G AFRICA 06: Masters of the universe face a
Date: Mon, 23 Oct 2006 10:53:55 +0100
From: Russell Southwood <editorial@...
Organization: Balancing Act
Balancing Act's News Update 328 (23rd October 2006)
COMING SOON: Low-cost mobile operators and the new wave of muni networks
IN THIS ISSUE:
- GSM>3G AFRICA 06: MASTERS OF THE UNIVERSE FACE A TOUGHER CLIMB
- INTERNATIONAL CALLING PRICE FALLS ARE SPREADING ACROSS EAST AND
- 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
- ONLY TWO OUT OF SEVEN MOOTED COUNTRIES SIGN EASSY GOVT PROTOCOL IN
- ADDITIONAL IP RANGE FOR ADSL USERS IN SOUTH AFRICA
- ALGERIE TELECOM HOPES TO DOUBLE INTERNET SUBSCRIBERS TO SIX MILLION
USING WIRELESS LOCAL LOOP
- 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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- > WEEKLY PUBLICATION DEADLINE: 12 pm GMT Sunday
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
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
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
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
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
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
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
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
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
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
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.
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