Going virtual - Africa’s maturing markets offer new wholesale and retail service opportunities

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Africa’s larger maturing markets are offering new opportunities to providers whose services are either partly or completely run over someone else’s network. As some of the continent’s less well developed markets head towards dominance of all services by two or three mobile operators, this might be a way to keep things competitive. Russell Southwood looks at three different types of virtual operators and what needs to be in place to help them succeed.

Nigeria’s Layer Three started operations in 2005 and was initially an ISP with a base of customers in the capital Abuja. After about year, it refocused and decided to concentrate on just corporate customers. So far, so predictable. But Layer Three found a niche where it could provide a better service. CEO Oyaje Idoke told us:”We started using the VNO (Virtual Network Operator) model to provide services for banks, particularly VPNs. As a result, 70-80% of our business comes from the financial services sector.”

In 2008, it followed its clients by opening a Lagos office to service the many bank headquarters in the city. It did not take long for them to conclude that they needed to have their own fibre capacity to connect the two cities directly. So it leased capacity from Zain, starting with an STM1: each of its banking customers needs a minimum of an E1 and some significantly more. According to Idoke:”We want to test the market and an STM1 will be adequate to start with.”

After technical testing, the link will go live next week:”If things go well, we will extend the service to other cities for financial companies and other corporates.” The cost of the STM1 is quite high but Idoke believes that prices will come down as new infrastructure competitors (including Zain and Phase3) enter the market.

But Layer Three’s plan is not entirely virtual. It is planning to invest between US$5-10 million (the precise sum depends on how much the Naira devalues) in a metro fibre network in Abuja and later elsewhere and to provide value-added services like a hosted PABX, a data centre for external backup and data recovery.

All of these services are bandwidth intensive, hence the company’s need to ramp up its capacity. It has also become Juniper Networks first certified partner in West Africa and this will enable it to sell network security solutions as part of its data centre services.

This kind of development potentially poses a competitive threat to the major mobile operators who are assuming that corporate data traffic will come their way as they roll out their fibre infrastructure offers. Well-focused, customer responsive smaller organisations may well be a more attractive option for a corporate IT manager, particularly if they offer a whole range of data centre-based, value added services. The question from the corporate IT manager that should make the large mobile operators nervous is: does my account manager have the power to get things done when things go wrong?

At the retail level, those with their own customer base have the opportunity to provide things like Internet and VoIP calling services to them. South Africa’s First National Bank has just launched FNB Connect to do just that, offering its customers cheaper pre-paid Internet and VoIP calling services. Its pitch is that pre-paid offers customers freedom and flexibility and being a bank, they can already organise payment transactions easily.

ADSL users can get a Gb download for US$8.25 and users can put the software required on a PC or cellphone. Calls to international destinations start as low as US4 cents a minute.

The other retail category is MVNOs of which the continent has had only really two, one almost by design and another by default. Virgin Mobile in South Africa cannot for various regulatory reasons be described as an MVNO but that’s what it is. Its services sit on the Cell-C network and it uses its branding power and insurgent challenger status to give the weakest player in the market a higher level of network use. However, it has not been remarkably successful: it had a tiny 495,000 subscribers in June 2008 but was claiming a fairly high ARPU of US$25 a month. This compares with MTN’s US$16.24 (see Telecom News below) so Virgin may not have lots of customers but they are spending more than the market leader’s subscribers: the implication is that margins are considerably better. Other virtual players in the market at the same point last year had 671,000 subscribers (Nashua Mobile) and 917,000 subscribers (Altech Autopage).

Other African countries like Botswana have talked about encouraging MVNOs but have tended in the end simply to increase the number of players in their market. The MVNO by default was Zantel, which when it migrated to the mainland in Tanzania was an MVNO on Vodacom’s network. Since then, it has constructed its own network.

If this can all work in larger mature markets, why can’t it work in smaller markets? The principle of other service providers using other people’s infrastructure is well established through interconnect agreements: the only obstacle are those that operate the networks wanting to keep out or slow down new entrants coming into the market.

But in order to keep a level playing field, it will be important to have a clear and transparent separation of retail and wholesale functions, to prevent larger players giving undue advantage to their own service operators. Also access to networks is important and the Nigerian regulator NCC has insisted that the fibre networks being built by mobile operators will be open to other service providers on a non-discriminatory basis.

Interestingly none of these wholesale or retail virtual players probably needs to have the same approach to market share. They are focused on niche customers, whether high-end corporates with particular needs or the wealthier mobile voice and data users. Or if they really had ambition, they might focus on low-end customers who don’t want anything more than basic SMS and mobile voice services.

So the future’s bright, the future’s virtual.