Seasons Greetings from Balancing Act's News Up-date

Dear readers, contributors and advertisers

The telecoms and Internet sectors in Africa have come out of 2011 with greater confidence but there’s that nagging feeling that things will never be the same as they were in the earlier golden years.

The telecoms and Internet sectors in Africa have come out of 2010 with greater confidence but there’s that nagging feeling that things will never be the same as they were in the earlier golden years.

Next year will see the opening of the WACS and ACE cables and their arrival will help drive down the cost of data access on the continent to something approaching best global levels. E5 (financing closing in January 2012) and WASACE are chasing the elusive business model for an Africa-Brazil link. It may be based on global transit traffic but not much else this side of 10-15 years? Prices on the west coast of Africa for international fibre will converge with those on the east coast. Satellite resellers are picking themselves up and moving on to new niche territory (see video here).

However, operators are not passing on international wholesale price reductions to their customers as quickly as they should. Take the examples of Ghana and Kenya. The price of Internet access for individuals and households has come down more quickly in Kenya and as a result, the number of data subscribers has gone up faster. These are both “fast lane” countries so the comparisons with less developed markets on this issue are even less helpful for market development.

    * Still blockages in the value-chain: The whole “value chain” for delivering to the customer includes: cross-border transit charges (pity the poor landlocked countries); national backbone charges; and local access charges. All of these charges are still too high. It becomes worn by repetition but is still true: it costs more per kilometer to send traffic from Lagos to Abuja than it does to send it from Lagos to London.

      Ah, the operators say but these are different things and you can’t make that kind of comparison. So will somebody explain how their national backbone and local access rates are calculated so that there can be a little daylight in this particular room? And at the end of the process (from the figures we see), the rates will inevitably come down. Selling shortage is the past, tomorrow is selling to lots of users, not just corporates, although the latter are becoming increasingly curious about how the premium rates they are charged are made up.

      But it’s not just about price. Too many of the value chain blockages are to be found because there is no competition at the national or local access level or no price control over dominant operators.

      Paradoxically, as prices come down, there is now more of a focus on service. Key African cross-border and national routes are offering 80% up-time. That’s just over two months in every year when the link is down: this is not a fibre service but the equivalent of a motorway that is closed every 5 days of the year. On one route we are familiar with, the Government-owned national incumbent (a failed privatisation candidate) fails to make the repairs so the neighbouring incumbent crosses the border and makes them. Africa has many challenges that are difficult but service up-time is one that is soluble but it requires a different kind of management to that offered by monopoly incumbents. The story of more competitive markets is largely better up-times and greater redundancy choices.

      The challenge for all operators (mobile or otherwise) now is to attract enough users to create a “critical mass” for Internet and data to get the prices down as low as possible.

    * Here comes the content moment: Nollywood Love offers a free-to-the-user service for Nollywood movies and pays the content owners. It makes its money through You Tube online advertising and employs 47 people. Most of its users are Nigerians in the diaspora and it has only 35,000 users in Nigeria. However, 60% of its search enquiries come from mobile users in Nigeria. As a proxy for potential users, there were 3.8 million Facebook users in Nigeria in October 2011.

      So the challenge is three-fold. Firstly, to get through the value-chain blockages described above and get the price of access down as low as possible. Secondly, to promote smart and feature rich handsets that have enough access to bandwidth at affordable prices to download content like movies. Thirdly, the most difficult of the three challenges – to open up business models that will allow existing and new content owners to provide the local online content that will compete with the international brand software.

      Parts of the solution to these challenges are on the table: the late lamented Snaptu and biNu offer smart-phone style interfaces for affordable feature phones that operate on relatively low bandwidth, cloud-based connections. For text-based local content, these provide a useful way for accessing anything from news, football scores and more complicated things like books.

      The argument here is not that the whole African market will have access to these kind of handsets but that there will be three markets: smart phones, feature phones and basic phones. So more complicated content delivery will focus on the first two (perhaps 40-50% of the overall handset market), leaving the lower end of the market to traditional SMS.

      This makes local content a challenging road to travel for at the mass end, it will need to be multi-platform, including growing tablet access. If the overall market for local content is say 1 million users, it will then be split two to three different ways. Then you need to factor in that only a percentage of users take up content and services. So the number of potential users becomes – in the short-term – smaller again. The answer in the medium-term is to focus on getting the widest possible critical mass amongst those who are likely to be able to afford these services.

      And what’s the business model? Well, it’s really very simple but also very difficult: either a lot of users pay a little for it (as they currently do for the existing rather limited SMS services) or advertisers pay to be seen and sell to users. The reality of growing online numbers (particularly on mobiles) makes this a possible route. African advertising agencies (we have talked to many over this year) are quite conservative about making the switch but it will come.

      For all the i-Hub and developer support activity (like G-Days) to succeed, these types of challenges will have to be overcome in the next year to 18 months. In our view, mobile operators are not content companies and should leave this part to those who know what they’re doing. There will be good money to be made out of data but those days have not yet arrived.

    * M-money – Getting to the interconnect thing: When mobile operators first started, none of them connected to each. The argument was that if you got lots of subscribers, you held on to them better by keeping in isolation on your network. Eventually some persuaded another network to interconnect and the rest is history. You are likely to spend more calling people if there are more people to call.

      The same is true for M-money services like m-Pesa, Airtel Money, MTN Money and Orange Money. Outside of M-Pesa, these services have been making slow but steady progress: it is often forgotten that m-Pesa itself was remarkably slow burn at the beginning. In order to accelerate the development of the “ability to pay” “critical mass”, operators need to be persuaded or compelled to interconnect.

      For outside of this growing core of people using m-Money to transact, the realities of e-commerce are still fairly chilly. MIH was early into the market with Kalahari.com but was forced to close this year as the sites were only attracting hundreds rather than tens of thousands of users. That said, where physical goods are not involved, things are moving much faster. The Nigerian regional airline Aero Contractors apparently sells 60-70% of its tickets online.

    * Spectrum, spectrum everywhere:The oft-repeated line about spectrum (even in Africa) is that it is a rare commodity. We have to confess that we might even have said it ourselves a few times.

      However, in a recent report written for the African Telecommunications Union looking at the spectrum dividend from the transition to digital broadcasting, we discovered that actually there was only really any spectrum pressure in a relatively small number of countries with developed broadcast sectors and/or more developed national television coverage.

      In most markets, if agreement can be reached with the broadcasters, there is an already existing, extensive digital dividend. To take an extreme example, Liberia is currently only using one channel for television broadcasting in the environs of the capital Monrovia. Some of this spectrum needs to be offered at low or no cost in un-served rural areas as an incentive to new and existing operators to roll out services.

      This year saw the first TV White Spaces event on the continent and this may lead to a pilot project being under taken in South Africa (See video here).

    * Going green makes business sense: The price of oil continues to go steadily upwards with the usual lurches downwards for periods. The entire mobile industry is like the car industry because at its heart it runs on generators and diesel.

      In wealthier countries in slightly more inflationary times, the answer would be to put up prices. This has happened in countries like Kenya and Tanzania. But African mobile users at the bottom of the market are very price-sensitive and you will lose large numbers of them if you sustain this as a regular pattern.

      So there is really no other answer than to look at reducing the cost of base station operation, both in CAPEX and OPEX terms. There are a series of vendors (VNL, Range Networks and Altobridge to name a few) who are focused on things like driving down energy and satellite costs. Reductions are being made but perhaps are not yet dramatic enough. Operators are conscious of this as an issue but have not yet made as much progress as they should have given the likely impact of energy costs.

      A radical thought for you. If the remote base station can cost re-engineered (made cheaper), why not look at changing how other base stations in the network are provisioned: take these cost advantages into the core network. However, with increasing numbers of operators selling their base stations to tower operators, will these new players have the foresight to make this happen?

    * Too many pilots, not enough flying: On the push side of the critical mass equation, donors have continued to pump money into pilot projects designed to improve the effectiveness of vital Government services like health and education. Within our collective memory, this has been going on for over a decade.

      A recent report called Scaling Up Mobile Health has the telling statistic that there were 23 m-Health projects in Uganda in 2008 and 2009 that did not make it beyond the pilot stage. In another part of the forest, large donor institutions have been giving Governments money to take online key services like revenue collection. There has been some progress but not a lot. The vested interests of not terribly productive civil servants make this a hard road to travel.

      So on the one hand you have some donor pilot projects that demonstrate how better service can be delivered (Grameen’s project with pregnant women and nurses in Ghana) but governments who are incapable of taking these services and “mainstreaming” them in the jargon.

      So why not roll-out these services in some more innovative? Government gives a contract to an external provider who runs the services? A public-private organization that runs it on behalf of Government? There has to be a way to achieve this if the benefits of ICT are to happen in Africa’s public sector. Change the incentives in the system: stop paying for four wheel drives and start paying for delivered services.

      Next year we will publishing: an updated version of Africa’s first detailed report on data centres (African Data Centre Markets); an overview of the mobile advertising market; and finally, African Telecoms and Internet Markets – Part 4: Southern Africa.

      Balancing Act has added to the information we provide. There is a regular Twitter feed (@BalancingActAfr) which is a combination of a news stream and provider of occasional market rumours. We’re still refining what works best so let us know how you find it. But if you have to have up-to-the-minute information, you should be subscribed.

      There’s also a You Tube channel which contains 10-15 minute video clips with industry figures talking about what’s happening in the market. Again you should subscribe because it contains a lot of information and insights not found in the print version of News Update. Click here to subscribe.

      This year we have carried out many different research and consultancy projects - both large and small - for a range of clients including operators, equipment vendors, investors and policy bodies. Because we operate discreetly, you may not be aware that we offer these services. If you think you have needs or requirements of this kind, talk to us about them. In what will be a year of great change, we will have both data and ideas to help you change your circumstances.

      A big thank you to all those who have helped News Update keep ahead of what was happening in 2011. Without your help, we would not have been able to bring you your weekly dose of information and new opportunities.

      News Update will return in the New Year with issue 586 on 6 January.

All the best

Russell Southwood
CEO
Balancing Act

Isabelle Gross
Senior Analyst
Balancing Act

Sylvain Beletre
Senior Analyst
Balancing Act

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