Mobile Operators charge high tariffs
Subscribers in resource-scarce North African and Sub-Saharan countries generate the lowest Average Revenue Per User (ARPU), closely followed by Latin America and Caribbean customers (Figure 9). In contrast, subscribers in rich resource Sub-Saharan countries generate a large ARPU, around USD 13, more than in Latin America, the Caribbean, and the Asia-Pacific region in 2008. ARPU is not determined solely by income levels since the average GDP per capita in Latin America, the Caribbean and the Asia-Pacific was around 4 times larger than in resource-rich countries in Africa in 2007. Since minutes of use are fairly similar between these three regions, it is likely that ARPU is more due to higher tariffs. According to the ITU, in resource-rich countries in Africa prices per 3-minute communications for peak hours are 0.9 USD, compared to USD 0.7 in Latin America and the Caribbean and USD 0.6 in Asia and Pacific. Another interesting feature of Figure 9 is the high number for minutes of use per user in North Africa, more than twice that of other regions.
Even though the sample of countries is not large, there is evidence (Figure 10) that capital and operating expenditures in Africa are below those in Latin America, the Caribbean, and Asia. At the same time, mobile operators in Africa perform well in terms of liquidity, with larger earnings than other regions. Returns on investment are attractive for investors in African networks even if there is increasing competition (see figure 11).
The Rise of the Pan-African Mobile Operator
Mobile networks have quickly spread in recent years into once unserved areas. This has been helped by Orange, Vodacom, Zain, MTN, Moov, and Tigo all becoming players in several countries. MTN is South African, Zain and Moov belong to Middle East investors and Orange, Vodafone and Tigo (Millicom) are European-based. Zain and Tigo are present in East, Central and West Africa, Orange is present in East and West Africa, Moov is mainly in West Africa and Vodafone in southern Africa. Their strategies concentrate on lowering prices to increase market share at a time when investment growth in network expansion is slowing due to the financial crisis. A key element of the African-style communications revolution has been reducing roaming charges — applying local charges to a network user even if the individual is located abroad. Regional integration will benefit as these strategies scale-up across operators and eventually erode price differences between countries.
These six operators accounted for 52 percent of total subscriptions for mobile phones in Africa in 2008 (Figure 12). The average growth rate in Africa has been 41 percent, but two entrants, Orange (68 percent) and Tigo (82 percent) were much better as were two established operators, Zain (52 percent) and MTN (60 percent). Vodafone and Zain have lower growth rates but are in more mature markets.
Even though the competition is increasing among operators, the low penetration rates suggest considerable scope for strong growth. Orange is turning its attention to Africa after its abortive USD 40 billion bid for the Nordic operator, TeliaSonera. Orange invested in Kenya and Nigeria in 2008 where it is providing a package of mobile, fixed-line and internet services under the converged licensing regime. Orange also expects to cover 30 cities in Niger. It has a strategy of targeting markets with the potential to generate strong revenue growth with a bigger consumer base. In 2008, Orange mobile subscribers and revenue grew by 42.5 and 17 percent respectively in Africa, compared to 28 percent and 8.3 percent for the Orange group worldwide. Tigo is expected to see substantially lower growth in 2009 because of the economic crisis. In 2008, it saw lower revenue growth in Senegal, Chad, and Ghana
In 2008, Zain invested in expanding network capacity and upgrading transmission capability, particularly in Ghana, Sudan, Malawi, Zambia, and Nigeria. Most of its growth comes from Nigeria which accounts for 43 percent of its subscriptions in Africa. Zain could build on its knowledge of third-generation networks which it has deployed in Bahrain and Kuwait. Vodafone is also turning to Africa. In 2008, the group purchased 70 percent of Ghana Telecom for USD 90 million. Vodafone is largely concentrated in South Africa which accounted for about 50 percent of its consumer base in 2008. Vodafone South Africa is the largest mobile operator in Africa in terms of subscriptions per country. Both Zain and Vodafone are seeking to expand their consumer base by reducing prices. MTN has the largest number of subscribers in Africa and it seeks to consolidate this position by providing an attractive three-service package like Orange. In 2008, MTN acquired Arobase Telecom, the second fixed-line operator, and an internet service provider, Afnet, in Côte d’Ivoire. MTN’s largest mobile subscriber bases are in Nigeria and South Africa.
Operators that have larger subscriptions bases in Africa, such as Vodacom, Zain, and MTN, are those that have higher average market shares in the countries where they operate (Figures 12 and 13). The three operators each have more than 11 percent of total subscriptions in Africa. Vodacom and MTN each have an average market share of more than 50 percent of subscriptions in countries where they operate. Zain is close behind with 46 percent of market share per country. At the other end, Moov and Tigo both have a lower number of subscriptions, below 3 percent, as well as lower average market share per country, around 20 percent. Orange has a small share of subscriptions in Africa but a large market share per country. There is also a close relationship between an operator’s average market share and the number of countries targeted. Operators present in a larger number of countries, tend to have larger subscription share in each market and larger economies of scale. The only exception is Vodafone which operates in a relatively small number of countries.
Zain is seeking larger potential markets (454 million people in 2007) by providing services in countries that have a lower per capita median GDP (USD 282 in 2007). Orange and MTN are concentrating on slightly smaller potential markets, with a per capita GDP median of about USD 450.
Vodafone has access to a larger potential market than Orange even if it is present in only six countries as compared to the French group’s 14. All the countries where Vodafone is present, except Lesotho, have large populations. Vodafone is focusing on countries with a relatively high median per capita GDP (USD 452 in 2007) although this is not reflected in the average revenue per user in their networks which is USD 7.5 in 2008 as compared to Zain’s USD 11.2 and MTN’s USD 12.7. Vodafone is pursuing an aggressive pricing policy to reach lower-income households since 90 percent of its consumer base use prepaid services. As Zain and MTN are in tight competition in Sudan, Uganda, Congo, Nigeria and Zambia prices are likely to fall in these markets. Zain is already offering innovative price schemes (see Innovative Business Models) in an effort to increase market share after reporting losses in two quarters of 2008. At the other extreme, Moov and Tigo, which are present in six and seven countries, respectively, have focused on middle size countries in terms of population and with median per capita GDP of about USD 270.
The domination of mobiles hits fixed-line operators
Over the past decade, telephone traffic has switched dramatically from fixed-line phones to mobiles. Mobiles account for 64 percent of total telephone revenues and Africa is the only region in the world where mobiles outstrip fixed lines. Small fixed-line networks are suffering as a result in terms of their cost structure. Mobile network per-minute costs are fast decreasing while those of fixed-line rivals are increasing as their traffic goes down (Figure 14).
Mobile phone networks are constituted by transmission towers which make up to 70 percent of total capital costs. Each transmission tower has seven transceivers. While the number of transceivers increases linearly with the traffic, Figure 15 shows how total network investment per transceiver decreases very fast with the traffic increases.
Because of the increasing volumes, mobile phone charges could fall if the lower variable costs were passed on to consumers. The current per-minute cost of a mobile call is still four times higher than fixed-line calls (Figure 16). In Africa, a fall in the price of mobile calls would probably lead to a significant increase in traffic and further cut costs, while fixed-line costs are likely to keep rising. But taking into account that OECD countries, which benefit from substantial economies of scale with high mobile penetration rates, have prices comparable to those in Africa, it is not clear that mobile prices in Africa will fall as networks build up.
Price and choice in national networks
In 2007, there was 508 000 km of terrestrial backbone infrastructure in Sub-Saharan Africa. Of this, only 32 percent was owned by fixed-line operators, while 68 percent was owned by mobile operators. Almost all the satellite-based backbone infrastructure is also operated by mobile operators. In the past, fixed-line operators did not meet the demands of mobile operators for high-capacity transmission so the mobile operators launched their own terrestrial backbone networks to connect their transmission towers to the rest of their own network. Ninety-nine percent of the backbone network length run by mobile operators in Sub-Saharan Africa is microwave technology which can be easily upgraded, only 1 percent is fiber optic. On average, transmission accounts for less than 10 percent of the total mobile costs.
Fixed-line operators use fiber optic technology for 40 percent of their backbone networks. Only the costs of transmission equipment depend on the traffic and these are less than 10 percent of the total. Between 60 percent and 80 percent of the cost of the fiber-optic network is fixed and related to the cost of laying the cables. Since the fiber optic choice only becomes optimal when the traffic volume rises above 2 000 Mbps and it becomes cheaper than microwave technology, fixed-line operators must invest ahead of demand and so need long-term financing. Mobile networks only invest in new capacity when projected revenues are large enough to quickly pay back the investment.
Most fixed-line networks in Africa were designed only for voice services and now need major upgrading to carry data. Fixed-line operators’ staff also need to be trained for the shift from analog to digital technology. Some small operators such as Kasapa in Ghana are outsourcing this task. Neotel, the second fixed-line operator in South Africa, is a rare operator with a 100 percent digital network. Compared to analog, a digital network is 30 to 50 percent less expensive in terms of investment and 30 percent less expensive in terms of operating costs. Traditional fixed-line operators are therefore penalized, compared to mobile firms and newcomers in the fixed-line segment, unless regulators let them raise private capital and increase customer prices to cover their operating and capital costs.
With fixed-line operators experiencing financing difficulties in Africa, high retail tariffs for backbone networks are still common, a result of cross-subsidization between local and long-distance and international communications. While tariffs are changing, this has mainly been through an increase in local tariffs for voice. Indeed, local voice tariffs in Africa are close to those applied in OECD countries. Long-distance voice calls and internet services (which should have fallen) remain expensive. There is also a wide difference in price between members of the same consortium, such as the SAT-3 submarine cable off western Africa, where retail prices can vary between USD 1 316 charged by Senegalese incumbent Sonatel to the USD 11 000 by Telkom South Africa. With international backbones soon offering wholesale prices of about USD 500 for bringing traffic from the other side of the world, it will become increasingly difficult for African fixed-line operators to justify high retail prices for low distance national links. Even if international backbone capacity is accessible at low wholesale prices, African consumers will only benefit if fixed-line operators pass on these lower tariffs or use their profits to expand capacity and improve service.
High retail prices often result from countries allowing national transmission monopolies. An operator with a transmission monopoly in Sub-Saharan Africa can get 65 percent of its revenue from international traffic. In Zambia, the liberalization of international traffic transmission is being continuously delayed. Some countries seem to prefer a monopoly over international facilities even at the expense of letting in new entrants to develop domestic markets.
To maintain benefits from international traffic, some delegations at International Telecommunication Union (ITU) meetings have argued for a premium on the international traffic exchange. An ITU-T recommendation was passed at the World Telecommunication Standardisation Assembly (WTSA) in October 2008 to analyze whether such a premium should be paid for traffic passing between operators in developed and developing countries. The so-called ‘network externality premium’ is only feasible in markets where there are a transmission monopoly and no incentive to expand network access. The increase in net out payments and incoming international traffic to Africa from developed countries suggests that the premium is not needed.
There is a big difference in interconnection rates from fixed to mobile networks in Africa. In 2006, Kenya, Benin, and South Africa’s rates were almost 200 percent higher than in Rwanda, Senegal, and Uganda. These charges make fixed-line subscribers increasingly attracted by mobile phone networks that bypass these charges.
Faced with ever tougher competition from mobile operators, many fixed-line networks plan to offer broadband services to add value and attract consumers. Although fixed-line networks have a comparative advantage over wireless in terms of broadband capacity, there are doubts about whether fixed-line operators will find a large enough market in Africa.
Business models for low incomes
Operators are having to come up with new ideas to keep services affordable for a region dominated by low-income households. According to surveys in 16 countries in Sub-Saharan Africa in 2006 and 2007 done by Research ICT Africa, people who do not have mobile phones will only be brought into the market through offers of cheap calls. People who did not have a mobile phone or SIM card in Côte d’Ivoire, Ghana, Nigeria, and Uganda were only ready to pay between USD 5 and USD 10 a month and in Ethiopia below USD 2.
The same study indicated that people in seven countries did not want to spend more than USD 10 for a handset. Only two countries, Côte d’Ivoire and Namibia signaled a willingness to spend up to USD 30 for a cellphone. The average cost in the countries is between USD 16 and USD 27.
Low-cost handsets can be easily obtained on the second-hand market. But the survey indicates that a small reduction in the cost of equipment and services could bring increased uptake and significant growth in revenue for operators. Charges for call time in peak hours are also coming under pressure in places like South Africa where Virgin Mobile has recently begun offering the same flat rates to consumers for peak and off-peak hours for data and SMS. In Kenya, Zain has also begun offering the same flat rates for both peak and off-peak hours.
The reluctance to pay for mobile equipment and services can be understood from figures from 17 countries on the average monthly mobile expenditures of subscribers as a percentage of monthly disposable income (Figure 20). For the top 25 percent income earners in Zambia and Rwanda, the percentage exceeds 40 percent. In another seven countries, the percentage was between 30 and 40 percent. Turning to the bottom 75 percent earners, the percentages are larger – in six countries it was between 60 and 80 percent. This explains why market penetration rates remain low — only a small fraction of households can afford these services – and why pre-paid phone deals are preferred.
Banana Cellular introduced prepaid mobile phone services in the United States in 1993. By 2008, 71 percent of mobile subscribers throughout the world were using this kind of service, in Africa, it was 96 percent. This ‘pay as you go’ service has also been adopted by electricity and water utilities, notably in South Africa. After new meters have been installed in a home, credit can be purchased by phone or internet. The consumer is given a code that can be used on a meter.
Other ideas to tempt lower-income households in Africa include micropayment accounts — consumers can use SMS to put a few cents on their accounts — microfinance funding for handsets and subscriptions and phone sharing.
SMS messages that were intended by their inventor to enable communications between operators’ staff were soon to alert people to a voice mail message with the first commercial service launched in Sweden in 1993. To adapt to the lower incomes in Africa, a mobile instant messaging service, MXit, is set to expand across the continent with the cost of sending an SMS falling below a fraction of one cent (ZAR).
With such small amounts of money spent on phone calls, Africa has become a leader in advanced mobile advertising. Vodacom in South Africa has launched one service aimed at the high-end market, “Vodafone Live!”, and two services for low-income consumers, “Ad-Me” and “Please Call Me Back”. The “Vodafone Live!” site has about 20 million page impressions per month and has about 1.5 million customers per month, making it the largest digital advertising property in South Africa. In addition to running banner ads, Vodacom offers branded content. In its “Ad-Me” service, a subscriber signs up, provides limited amounts of personal information and then receives targeted advertising messages. In return for receiving advertisements, discount vouchers, free competitions, special offers, and giveaways are offered. The most successful service has been “Please Call Me Back” with 20 million messages a day in a country of 48 million people.
The roaming phone war
Roaming allows customers to use their mobile phones while outside their home network. This is made possible through agreements between the customer’s phone service provider and at least one network provider in the country visited. Now several operators in Africa are providing free roaming services. Celtel, which was founded by the Sudanese Mo Ibrahim, launched the world’s first borderless network across East Africa in September 2006. Under this initiative, customers can make and receive calls and send SMS messages at local rates, they can also use recharge cards bought in any of those countries. Prices are still not the same in each country. It still costs twice as much to call a Celtel customer in Tanzania or to send an SMS from Tanzania compared to Uganda. But new initiatives are coming. Zain has launched a strategy in Kenya with the same price for local peak and off-peak calls and for local communications to subscribers of all networks. The ‘Vuka’ tariff undercuts the competition by 68 percent for a local call to another network. Zain is applying a preferential rate for international calls to Zain subscribers in East Africa, and a slightly less advantageous rate for non-Zain subscribers in East Africa.
Zain’s model is being copied by competitors. In East Africa, Vodacom Tanzania, MTN Uganda, and Safaricom Kenya established reciprocal free-roaming agreements in 2007. But as of 2008, Vodacom prepaid consumers had only restricted access to roaming. MTN Rwanda recently joined this roaming agreement, which now covers 15 million subscribers on four networks. MTN is scaling up the offer by providing a free-roaming service, ‘MTN One World’, in all 21 countries where it is present in Africa and the Middle East. It has already started in Cameroon, Ghana, Nigeria, and Benin.
With these free-roaming agreements, Africa is showing technological and business innovation. It is also an example of how telecommunications operators and regulatory authorities can work together to develop cost-effective solutions. Regulation concerns have prevented similar arrangements in the European Union when for example Vodafone and Mannesman sought a merger in 2000. It was approved on the condition that the merging parties provide roaming tariffs to affiliated and unaffiliated mobile operators. As a result, the new entity had no incentive to offer pan-European services with low or zero roaming charges. The fact that African operators are present in a large number of countries and that regulatory intervention is limited has enabled the expansion of these pan-African networks tariffs.
Renewable Energy Phones
Solar panels are increasingly being used in Africa to power telecommunication networks. Orange has used this to extend affordable coverage to remote areas. Traditional fuels had to be brought by trucks, often over huge distances. Fossil fuels are expensive and unreliable since there can be blackouts when supplies run out. Orange has substituted traditional power by solar panels at 200 radio stations in Africa where there is no electricity grid. Energy costs account for up to 25 percent of total costs. Solar radio stations have two generators, one permanent and the other on backup. Solar base stations do not need air-conditioning and consume little. Batteries to stock solar energy can last up to four days. These radio stations are currently producing excess energy eleven months of the year and it is given to local communities to recharge mobile phones. About 1 000 solar radio stations are planned for 2009 in Africa in line with Orange’s target to have 25 percent of its energy based on solar technology by 2015 and to attain a 20 percent reduction in its CO2 emissions by 2020.