AFRICAN TELECOMS - Busting the downturn
The growth in the African telecommunications market over the past five years has 
been nothing less than phenomenal. Although growth rates are expected to slow, Julia Lamberth and Serge Thiemelé explain that Africa should continue to be the fastest growing market in the world for the next five years
The growth in the Arican telecoms market has turned the telephone from a luxury item to a basic necessity in many countries. However, the expansion has not been universal across the continent. Some countries, such as South Africa and Libya, have already passed the 100 per cent mobile penetration rate, while others, such as Ethiopia and Eretria, still have penetration rates under 10 per cent.
According to Ernst & Young's recently released Africa Connected survey, the growth up until now has been driven almost entirely by GSM voice. While voice should continue to be the largest component of the market for the foreseeable future, it is expected that data is going to be an ever-increasing component of operator revenues in the future.
Internet penetration on the continent is still substantially lower than any other part of the world, with only nine countries on the continent having penetration rates above one per cent. It is expected that the construction of submarine cable systems, the first of which should be operational by the middle of the year, is likely to be the catalyst for accelerated growth in African Internet penetration. Alongside the construction of the submarine cable systems, which should, to a large extent, address the problems posed by inadequate international connectivity, there has been significant investment in terrestrial fixed line infrastructure.
This investment has been made by both private operators, especially in countries such as Nigeria and South Africa, as well as by governments, in countries such as Angola, Malawi, Botswana and the Democratic Republic of the Congo. While the impact of this investment will not be felt immediately by consumers in many countries, it will provide the basis for cheaper and more reliable telecommunications in the next few years, particularly in rural areas. It is likely that the vast majority of the next wave of African Internet users will not connect to the Web through services that rely on fixed networks, but instead use the infrastructure provided by mobile and fixed wireless service providers.
One of the reasons for the slow pace of telecommunications growth on the continent in the past has been the historical lack of basic infrastructure. Poor infrastructure was one of the areas identified by operators as a key challenge to the development of telecommunications. This weakness has manifested itself in a number of ways, including limited access to core telecommunications infrastructure, as well as a lack of a reliable electricity network needed to keep networks up and running. This weakness in the basic services has a negative impact on the ability of operators to rapidly deploy their own infrastructure. Having to make contingencies for these weaknesses is something that has a significant cost attached. Safaricom, in Kenya for example, reportedly spends more than a million Euros a month in diesel to power the generators it needs to keep its network running.
This situation has resulted in operators exploring alternative sources of energy such as wind or solar power to supplement other power generation options.
Operators identified the issue of attracting and maintaining talent as the largest operational issue. This issue applies both to the technical and management skills, with operators struggling to fill vacancies across the spectrum. While they acknowledged the importance of training, the issue of staff being poached by rivals was identified as an ongoing challenge.
The increased vigilance of regulators on the continent has heightened the need of ensuring network reliability as regulators are taking a more active consumer protection role. Examples of this include operators being barred from marketing their services in Nigeria until the quality of service reached an acceptable level.
In addition, operators interviewed voiced concern over the perceived political interference in the regulatory process. It is this lack of consistency that creates difficulties for operators, as they are unsure of how changes in the local regulatory framework will impact their businesses, especially if these changes are being driven by a political, rather than a pure regulatory agenda.
Operators highlighted the high rates of taxation they are subjected to, with the average across the continent coming in at over 30 per cent. Governments across the continent have chosen to place a heavy tax burden on mobile operators by taxing profits at a higher rate, instituting mobile specific taxes or raising license fees. Operators also raised the issue of excise taxes on imported handsets, making them less affordable to consumers and hampering the ability of companies to reach potential customers in lower income brackets.
In order to succeed in the African market, scale is considered one of the key elements of future success, and competition for new licenses and existing operations is keen. It is likely that we are going to see significant consolidation in the next few years, as smaller operators feel the effects of increased competition.
The global economic crisis is not likely to leave the African market unscathed, as many operators may find it more difficult to raise the funding needed to continue the level of investment needed to remain competitive. Especially in key markets such as Nigeria where the multinational operators are investing heavily in network expansion, the smaller operators may find it difficult to keep pace with either the network coverage or the technological innovation of the large regional and multi-national operators.
The issue of infrastructure sharing and outsourcing of parts of the business is one way for operators to cut the costs of doing business. However, operators surveyed were resistant to this, preferring rather to have control over the infrastructure and services that they consider their competitive advantage. More recently, however, some operators have said that they are looking to cooperate with competitors wherever possible to bring down the cost of deploying new infrastructure.
Operators, specifically in more developed markets, are also starting to look at broadening their set of services to include targeting the wider ICT market. This has seen operators acquiring companies in the information and communications technologies sector. This broader focus is setting the stage for a divide in the market between operators that choose to create a converged services offering and those that focus on offering voice and basic data services at a lower cost.
The rollout of these converged services, which include fixed and mobile services as well as offerings that have traditionally been the reserve of the Internet service providers, such as hosting and business continuity, will further drive the development of the African ICT market. While the initial focus of these services will be in the developed markets, it is expected that these services will rapidly be driven out to corporate customers in all the territories in which these companies operate in Africa.
This investment by operators, as well as the infrastructure that is being deployed will set the stage for the rapid adoption of more data-focused services for both governments and corporates across the continent. While these types of organisations are likely to access these new networks via new fixed-line networks, consumers should benefit from the deployment of high-speed wireless services with the attendant increase in bandwidth and broadband.
It is anticipated that networks based on 3G will dominate the market for broadband wireless access with CDMA EVDO and WiMax offering some competition as well as providing access where the GSM-based service is not suitable.
We expect the next five years to see a continuation of the growth in African telecommunications, with increased Internet and broadband penetration across the continent. At the same time the market is likely to undergo a period of considerable consolidation with the existing African operators expanding their reach and continuing to expand their reach across the continent. It is our view that operators who do not already have an African presence could have a difficult time in challenging both strong, regional and global operators (MTN, Vodafone, France Telcom, Zain - for example) and a plethora of new licensees (more than 40 per cent of the market is still in one per cent market share slices). Operators launching as the fourth or fifth license holder in countries may face challenges in generating profits, especially in countries where one operator already has a dominant position. Countries such as Angola and Ethiopia where none of the large regional players have established a presence are being viewed as real opportunities for future expansion.
Julia Lamberth and Serge Thiemelé are co-leaders of the Ernst & Young Global Telecommunications Center - Africa.
The Africa connected survey was compiled from interviews conducted with operators from across Africa. For further information please visit www.ey.com/telecommunications or contact globaltelecommunicationscenter@uk.ey.com
Share this article with others
Post to del.icio.us
Printed from http://www.eurocomms.com/features/112863/AFRICAN_TELECOMS_-_Busting_the_downturn.html
Comment on this article
Skip to comments
We encourage users to analyse, comment on and even challenge European Communications's articles, including the one above - 'AFRICAN TELECOMS - Busting the downturn'
User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site.
Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. We will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site.