East Africa’s mobile competition cauldron grinds up new entrants and spits them out

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With news that Tanzania’s seventh mobile operator Sasatel is entering the market, East Africa is proving to be a testing ground for high levels of mobile market competition. Those countries with four or more operators have been extremely good for consumers but are exacting a heavy toll on new entrants. Russell Southwood looked behind the smoke of this battle to see what’s actually happening.

With Essar announcing that it will become the sixth mobile operator in Uganda, the last wave of new entrants and some of the more established players must be wondering what happens next.

Uganda currently has five mobile operators: MTN, utl (owned by Libya’s Lap Green), Zain (2.5 million subscribers), Warid and Orange. MTN remains the dominant player with 4.3 million subscribers and a 56% market share. On the data side it has 72 WiMAX sites across 60 districts. However, what was once a fairly cosy three-way tussle between MTN, utl and Zain is turning into a grinding war of attrition for all but the leader player.

Warid Telecom bought together Pakistani expertise with Gulf money. Warid Pakistan (which is partly owned by the SingTel Group) persuaded a group of Gulf investors that it could use its Pakistan experience to launch a mobile voice and data company in Africa. What had been proven elsewhere would be a winning formula in Africa. The other new entrant is Orange which acquired Hits Telecom (another vehicle floated on Gulf money) before it launched.

Since its launch last year Warid has been very confident and has announced that it has crossed the 1.3 million subscriber mark with 60% population coverage. However, both Warid and Orange are desperate to see the introduction of number portability as it has been hard to persuade existing subscribers to leave existing providers if they can’t take their number with them. Both are collaborating closely on infrastructure sharing with both sharing channels on base stations. For a number of reasons, including interference between FDD and TTD, Warid has only rolled out its Motorola wireless offer to 29 sites Kampala, 1 in Jinja and 1 in Mokono.

Orange launched more recently but is claiming 200,000 subscribers with a 0.5 million target by year end. People who know the industry well find it hard to believe that either of these sets of figures from the new entrants tells the whole story or that any of the operators (except probably MTN) is making any money at this point. The usual wild rumours are circulating that Warid’s investor has called a halt to further investment.

Whilst all operators are anxious to avoid mentioning a price war that is actually what has been happening under the cut and thrust of tactical marketing offers. The MTN Zone offer has been particularly successful. It operates airtime like a budget airline: if you’re at a busy base station, the price of calling goes up and if it’s less busy it goes down. People have waited before going into work (through Kampala increasing traffic jams) to make calls more cheaply at home. Besides attracting use, the other joy for MTN is that it evens out network use and helps ease network congestion.

By contrast, Warid Telecom’s extremely generous promotional offer has attracted lots of users but made them a great deal less money. Indeed a side-effect of the promotion has been the closure of a number of its channel dealerships who found it difficult to make new customer sales when it was running.

Even before Orange entered the market, ARPUs had already gone down. In 2006, they ranged between US$8.3-12.7 and fell at the end of last year to between US$6.34-9.50. So new entrants are faced with lower levels of income and eye-wateringly high initial levels of marketing and network roll-out spend.

But if you think this is bad, pity the poor new entrants in the Kenyan market. Although Orange was able to announce it had reached 1 million subscribers, this position was bought at some considerable cost. CEO Dominique St Jean also said that ARPUs had sunk as low as US$2.67, a level at which it can hardly be profitable. Essar, the other new entrant, who is also raring to go into Uganda, has only 200,000 subscribers.

Safaricom which has around 80% of the market also saw falling ARPUs but with this level of market dominance it can afford to play “last man standing” with a much greater chance of success than the other operators. Even before there was this level of competition, Zain’s last annual report dolefully noted that Zain Kenya was the worst performing of its Kenyan subsidiaries.

This grinding competition has its costs to those involved. Zain Kenya seems to go through CEOs on a fairly regular basis. Orange CEO Dominique St Jean is leaving after only 18 months. There are probably good reasons that have nothing to with that ARPU figure but you can’t help wondering. The dilemma is particularly acute for Orange as it has “bet the store” on seeing growth out of Africa.

Everyone has bowed down before the gods of market share because as it goes, this is a volume business. Perhaps now is the time for shaky new entrants to wonder how they can make money on a permanent 5-10% market share? Also, network sharing and number portability are essential ways of keeping the cost base in check. Maybe in future regulators and operators need to look at how an MVNO might work in these circumstances. That said, it would be wrong to fear a company going out of business and as long as there are investors willing to enter the market, bring it on.