We recently returned from a visit to South Africa where we attended the NG Telecom Summit, a conference that brought together Telecom operators from across the continent, and private enterprises, to discuss the current state of the Telecom industry in Africa. While research on mobiles in Africa can be done from our home base in Paris, nothing can replace market research on location. What quickly became clear is that the Telco industry is undergoing a major transformation. We heard from operators who shared their struggles, and possible solutions to the challenges Telecoms are facing.
Africa’s Surprising Numbers
A continent undergoing rapid transition
- Smartphone penetration is not as high as you might think. For example, in Egypt which is considered advanced, smartphone penetration is 30%.
- In most Sub-Saharan countries smartphone penetration is 10-15%
- Out of that 15%, many forego data plans because they are too expensive
- Some only have a smartphone to keep up social appearances, utilizing only a fraction of the phone’s capacities.
- Number of internet users grew at 7 times the global average between 2000 and 2012
- Africa has the lowest percentage of the population accessing the Internet: 28.6% in 2015
(for more stats on Africa, see our blog post Bringing Mobile Connectivity to Africa)
The Challenge for Telcos
Telecom operators are faced with revenue pressures, serious competition, increasing infrastructure costs, and clients whose needs are rapidly evolving. Telecom operators have no doubt that connectivity is the #1 goal. Mobile infrastructure has become as important to country development as road or energy infrastructure.But the challenge is that Telcos are tasked with (sometimes literally) paving the road to make connectivity possible, while not guaranteed stellar returns. It’s no secret that services such as Whatsapp, Skype, and the like, have cut into Telco revenues. Some say that it’s time for Telcos to reinvent their business, others see promising opportunities, but everyone agrees, Telcos are under pressure. This is a global phenomenon that has grown hand-in-hand with increasing digitalization. Telcos face serious disruption. In Africa, Telcos are looking at how to turn these challenges into opportunity.
The Telco Perspective
What Telcos are facing right now is a squeeze from both sides: their competition, looking to increase their own revenues, are cornering Telcos into more of a pipe provider position, and their users, are resistant to spend money. To combat this, Telcos are choosing to look to the longterm with a view of connectivity everywhere. Despite revenue pressures, they see a clear increase in smartphone uptake. For operators, looking forward to a future with a 100% smartphone penetration is realistic, because they know the desire is there, and smartphones are becoming more affordable.
OTT’s and the Market Outlook
If Telcos are sensitive to anything, it’s the OTT growth within Africa (Google, Facebook etc.). The more other content providers find ways to make money around their network, without including them, the more their own revenues are threatened.
To Build or Not to Build?
Operators are faced with the age-old business dilemma: build out in anticipation of future clients, or stick with the status quo and risk losing the race. They are choosing to build for the future. They want connectivity for all, because there is no question in their mind that telecommunications is a priority for all. But the issue here is that returns on infrastructure investment are minimal. It makes sense when you think about it: any expanded infrastructure is being brought to the rural areas, where income is lowest, so sometimes gaining one additional user costs a great deal in infrastructure. Meanwhile right now, ARPU goes down the more subscribers there are, because the majority of new users are those with less money. Telcos are not building for short-term revenue, but for the long-term vision of a world connected.
The Bigger Picture: Government, Economy and Politics
The African population, the smartphone users, are sensitive to declining oil prices. When the user’s economy declines, they spend even less money on their phones. Meanwhile infrastructure costs remain steady for Telcos who still have to buy antennas from foreign providers, such as Huawei for example.
At the same time, outside companies are making huge sums of money that doesn’t necessarily get recycled back into the local economy. While Telcos have to pay for local license fees, pay local taxes, and employ people locally, the OTTs pay no taxes locally, do not have to pay for infrastructure, and employ only a few people locally, keeping most employees based at the home country headquarters (outside of Africa).
Competition among Operators
In Africa, subscriber base is quite small and there are often too many operators on the market. The countries, relatively speaking, are not very big, and not everyone has smartphones. As an example, in Uganda there are 5 operators for 37.5 million people. Five is a high number if you look at the size of the country. France, a country of 66 million inhabitants, is struggling with the number of operators within the country. Before 2012, there were only 3 operators (Orange, SFR and Bouygues Telecom), and in 2012, a 4th came onto the market (Free). Recently there have been talks of a buyout, which would bring the number back down to 3. This is in part because there is simply too much competition for the size of the subscriber base. To return to African numbers, in Tanzania there are 5 operators for 49 million inhabitants. Nigeria is perhaps more adjusted: with a population of 173 million there are 6 MNOs. In small markets, there can be intense competition. There was a general feeling among the operators that they too feel they are too many, but what’s the solution?
As a whole in Africa, literacy is increasing, and smartphones are going to play a big part in the upswing in economic and social inclusion, as well as financial participation at a new level. Smartphones are very socially important (as proven by people owning smartphones just to keep up social appearances). Joining the worldwide community online is becoming another level of social involvement that holds importance, especially the ability to have instant communications and access to information. The Telcos determination to provide full connectivity to the continent in recognition of the importance of smartphone communication will result in 100% penetration. To speed usage, Africa needs to increase the amount of local content available, and to do this most efficiently, Telcos should continue to collaborate on how to come out of this disruption most effectively: working together, and partnering with service providers outside of the OTT bubble will strengthen their chances.