Zain vs Vodacom row in Zambia hits a raw nerve over Africa’s 3G anxieties

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Vodacom Zambia has taken out an injunction against the country’s regulator CAZ over a trial 3G authorisation it gave two years ago to Zain. All this might be a storm in a tea cup were it not for changing attitudes to 3G and what it might be used for in Africa. Russell Southwood looks at why 3G matters to operators and why some countries will upgrade, whilst others may be left behind.

Two years ago the Communication Authority of Zambia (CAZ) issued a test authorisation to Zain Zambia to conduct trial 3G services. On hearing of this recently, Vodacom Zambia chairperson Enoch Kavindele issued an injunction against the regulator to try and stop Zain making use of the already issued test authorisation. Kavindele, a former Republican Vice President in the country is clearly a man of many opinions and enough lawyers standing by to try and enforce them. He is also threatening to sue the Government over the sale of a 75% shareholding in the financially distressed incumbent Zamtel (see On the Money below).

Both legal actions look like a bad case of bluster and if so, why is Vodcom Zambia so wary of either of these things coming to pass? The sale of Zamtel would see Vodacom, MTN and Zain getting more competition from Zamtel’s new owner, something it has clearly failed to give in Government hands. The granting of a 3G authorisation of no commercial value must surely be something that Vodacom could avail itself of rather than rushing off to the courts.

Like fixed broadband Internet, 3G (in either WCDMA or HSPA flavours) in Africa went from being something operators would say was “not wanted in my village” to becoming part of an upgrade arms race in a very short period of time. Once one operator started to install 3G, others felt they had to follow. Once one operator had got it in place at the airport and in the business district of the capital, others felt they had to follow. And before long, it began to be rolled out to a wider range of cities in some countries.

When 3G started in Europe, licences were sold for humungously large sums of money. Later some of this licence money was refunded when everyone realised that 3G services were not going to generate the kind of revenues required to pay back this kind of down-payment.

There are few precedent for valuing 3G licences in Africa. At one end of the continent, several of the North African countries have taken an almost European view and sought to extract the maximum operators will pay. At the other end of the scale, one large West African operator has been trying to persuade its regulator that 3G is simply a natural network transition and should not be licensed separately.

So where does the value of 3G lie for the operator? For the latest generation of operators – like QCel in Gambia which launched last week – it offers a way of differentiating themselves from the GSM pack and allowing them to extend their Internet role to offering mobile Internet. But mobile Internet is a comparatively modest part of any operator’s overall revenues. Indeed Vodacom has few countries where data revenues (including SMS) exceed 10% of overall revenues.

Nevertheless it has a key role to play in stemming falling ARPUs which will expand as the number of mobile Internet subscribers increases. It has also pitched mobile operators into becoming ISPs and where they have got the pricing right, they have seized the major market share.

3G also creates network efficiencies which are not much talked about but may be another good reason why 3G coverage is spreading. But the competing demands of voice and data on the mobile operator’s network do not make for good bedfellows. It only takes a few heavy Internet users to start eating into the bandwidth available for voice and mobile Internet users (particularly of the post-paid variety) are picky creatures who like to have the service they paid for.

So having just got 3G, a number of mobile operators started installing a workaround to this congestion problem, using various varieties of WiMAX which again required more spectrum and more base stations. The thin-pipe creation that is GSM was not designed to be the multi-lane highway for voice and data.

That said, it is the mobile operators who are steadily extending their data coverage (through 3G and GPRS/EDGE) and are actually putting in place the network coverage that will be able to offer Internet to a growing percentage of people in African countries.

It is not the traditional Government-owned incumbents who talk a good game on universal service but are usually so financially embarrassed that they are unable to match commitments by mouth with their cheque-writing hand. Sadly, it’s also not Africa’s ISPs who have almost without exception stayed put in the capital cities or urban areas. Arguably, mobile operators are the ones who are making this investment. Zain Zambia (see later in this newsletter) are investing in their own fibre network because it will be cheaper than Zamtel’s over-priced national network.

But it’s clear that 3G is not something that so far is likely to happen in every African country. If you have a particularly small middle class and/or literacy levels are very low, then there is not much of a case for rolling out 3G. The new smart phone users will be there in lower numbers and will not justify the costs involved. So as in so many fields, Africa is becoming a continent of two speeds: those in the fast lane with 3G (and WiMAX) connected to international fibre and a small number of countries in the slow lane with GPRS/EDGE and no early sign of an international fibre connection.

Therefore regulators and operators need to ponder the difficult question of what is a 3G licence actually worth? Those in the slow lane where market potential is low might up their chances of joining a faster lane by almost giving 3G licences away. Whilst those countries who are better favoured will be able to get revenues from one more licence category. However, in the long term, since a new operator would be unlikely to build just a GSM network any more, there is perhaps a grain of (inconvenient) truth in the argument that 3G is simply the natural upgrade transition.