The Year of Living Dangerously – how to survive in a low growth world

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Whilst Africa has as yet been largely untouched by the apocalyptic financial meltdown, everything is now connected. So less sales of Chinese clothes and shoes in developed countries (witness the awful Christmas retail figures) means lower raw material and food sales from Africa. At the very least some of the air is going to come out the market for African operators and the “worst-case” scenarios look pretty grim. Russell Southwood looks at what operators can do to keep business flowing.

For Africa, the global economy is a bit like a dinosaur: it takes a long time for messages to get from the head to the tail. So the consequences of the shrinking developing economies have not yet really reached African shores. But there’s doubt that they will in the coming year. The news will be very mixed: whilst exports may be down so are some costs like energy. Currency re-adjustments as the dollar strengthens will feed through into higher levels of inflation.

But beyond these macro economic factors, at the “sharp end of the pencil”, all operators – Internet or mobile – could face a drop in revenues between 10-20%. Obviously this pain will not be evenly distributed but there’s no reason to suppose that anyone is especially exempt. So the first question is: do you have a plan B that can deal with a drop in revenue of this sort of magnitude?

Although the market is very price sensitive, African operators have become very used to selling at relatively high prices and often at a fairly low level of quality. There’s been such a thirst for communication that much has been forgiven by consumers. However as the market develops they are becoming both more knowledgeable and discerning. Pressure on finances will make them more rather than less demanding.

So what can you do to stay upright as the going gets tougher?

Finding the bottom of price trough – More competition brings lower prices. The only mitigating factors are coverage and quality. Everyone knows the theory of price elasticity. The lower the price, the higher the number of users and the higher the volume of use.

What is much harder to predict is the point at which the number of users no longer produce sufficient additional income to justify dropping prices. Balancing Act has a price elasticity methodology which will allow you to look at where this point lies and to plan your commercial strategy around that knowledge. If you don’t know where the bottom of the price trough is, it’s a bit like crossing a busy road with your eyes closed.

Africa’s mobile operators have made tactical pricing offers a central part of their marketing strategy without always understanding where it leads. As some will admit privately, they are making it up as they go along and this results in (to mis-paraphrase the mafia don in The Godfather) “making you an offer you can’t understand”. There will always be niches that require tactical offers. But why not make “price promises” that are comprehensible (and put your competitors at a disadvantage) in a more central position in the market? Straightforwardness with your consumers will become a central brand value.

Getting them to love you more – A very small number of subscribers produce a large part of your income. Whereas loyalty schemes started to appear when markets got saturated, there is now a very good argument that it makes better sense to trade some of your external marketing costs for “below-the-line” spending on high-revenue customers, whether pre-paid or post-paid.

These customers should feel special but there’s not much sign that operators are going the extra mile for them. In too many countries operators “brand value” does little to make users make an emotional commitment: usually it’s a cynical shrug of there being “nothing better” or a pragmatic “least worst” choice.

Competitive African markets have high levels of churn and occasional users stop paying or downsize when other payments – like school fees – have to be made. Operators need to be able to even out the up and downs and ensure that users have enough confidence to continue spending on communications on a regular basis. Selling multiple SIMs to single users may produce a comforting bump in your subscriber figures when you present them to the outside world (suitably time extended to create the biggest number). But this parallel universe makes a mockery of ARPU figures and margins within your business. Of course, the carrot is that the entry barrier needs to be as low as possible but take them out of the reckoning for ARPU calculations.

Changing old assumptions – Mobile operators used to be resigned to having low volumes of international minutes because the premium for mobility meant that rates were always too high to compete with fixed lines or VoIP in the grey market. Over the last 18 months there has not only been a fall in international rates in most competitive markets but as a result, there has also been a convergence between fixed and mobile international rates. Schemes for international roaming at local rates have simply reinforced this trend. Mobile operators now have the opportunity to create a pricing structure that will take away most international business going to the large-volume countries like France, the UK and the USA. Other diaspora routings offer similar but smaller opportunities. Fixed operators will need to box very clever to retain any ability to control the market and to keep their price advantage.

Not tied to anything – Africa’s urban areas in key markets are increasing covered by data as well as voice wireless networks. Wi-Fi networks are popping up everywhere. Out of the estimated 150 WiMAX implementations worldwide, 100 are in Africa. 2008 was the year of touch screen smart phones with the iPhone, the Blackberry Storm and Nokia’s more staid contribution the 5800. Each of these phones allows its user to access VoIP calling through a variety of client softwares, the most prominent of which is Skype. Now’s the time to start thinking about how to actually turn this potential revenue hole into something by embracing a VoIP future. Start creating cost and price plans that as a mobile operator allow you to retain revenue and as an insurgent challenger ISP allow you to compete with the new vertical integrators.

But defending revenues is only half of the game and probably not the important half. The other part is driving down costs:

The costs of being vertically integrated – Africa’s mobile operators have been expanding their areas of operation and have had considerable success at getting mobile data subscribers. Some are even getting ready to offer DSL as part of a “we do everything” strategy. However, if the take-up figures in the advanced markets are anything to go by, there will be a morning after cost hangover.

Take up rates of 8-12% in Europe are leading to reductions in EBITDA margins of 1.5-3%. African take-up rates are much lower but the costs of provisioning for decent data services alongside voice may well impact the bottom line in the same sort of range. Hence the popularity of WiMAX in Africa but which is much less loved in other parts of the world. You either have to provision separate data networks for high-intensity use areas and/or look at combining you fixed and mobile offerings (see LINKdotNET story in Internet News).

But whenever you think you’ve made the decisive last move, there’s always one more person who shows up. Who would have thought that Fibre-To-The-Home would be offered in Lagos? (Again see story in Internet News below). Whether or not it’s successful, it provides yet another thing that will take the jewels out of the high revenue customers’ disposable income. Once present, it won’t cease to be present.

The transition to IP backbone – High national backbone rates across Africa make it between 30-50% cheaper in most countries to build your own backbone. The same is also often true at the local loop level but these cost-savings are less accessible for operators, particularly in less competitive markets.

If fixed operators behaved with any commercial logic, they would lower their prices to defend their positions but they are largely caught in the political headlights with large workforces to support: this uncomfortable position does not make them commercially decisive. Mobile operators have tentatively begun to discuss sharing infrastructure and although the discussion is complicated, it have significant advantages if capital is hard to find. Likewise sharing towers in more commercially marginal areas has to make sense: if the business becomes too good for one tower, you can always break out again.

An overlooked opportunity are inter-country connections. For example, over the next two years Nigeria’s banks will have expanded to a wide range of countries, not all will be connected by marine fibre. These new trans-national African businesses will be the foundation for the next ramp-up of corporate business.

Scaling your overheads – Because mobile operators have so much smaller staffs than the historic incumbents doesn’t mean they can’t adjust staffing costs. Outsourcing key functions like network operations and maintenance has to be attractive as a way of both cutting and stabilising cost expectations. There are a number of different companies – some are equipment vendors and others are not – who will increasingly offer this kind of service, taking on the costs and difficulties of finding effective staff.

One of the biggest costs is supply diesel fuel to base stations. You may breathe a sigh of relief that oil prices have sunk from their previous highs but don’t go to sleep yet. It used to be said of Northern Ireland’s politicians that when it rained they couldn’t fix the roof and when it didn’t, they did nothing about it. You do not want to be in the same position in terms of dealing with energy issues. There are a number of products coming on the market that are both greener and more-cost-effective better to work out which works well now than when oil prices go back up.

Greener? There are those that say this is not a word in the African dictionary but they could be wrong. Lagos residents in one area of the city disconnected a mast in protest at it being sited in the middle of a residential area and there is a consumer group in Cote d’Ivoire protesting about the impact of microwaves on those living nearby. You have been warned and this simply reinforces the need to look at energy issues and sensible sharing of towers even in urban areas.

Those who prepare themselves well in the hard times of 2009 and maybe 2010 will be the ones who continue to make decent margins as better growth re-asserts itself. Will you be one of them?