A new business model being born – Exit, stage left some of the Masters of the Universe
Prices for wholesale bandwidth are dropping across the continent but particularly in the more competitive markets. These price drops will shake up how wholesale bandwidth is delivered and undermine some existing business models and no-one will be exempt from this process. The price falls are necessary to deliver the cheapest possible prices to households and individual consumers but current business models may need to be sacrificed to achieve this goal. Russell Southwood looks at how these changes will affect the business.
The logic of some changes is absolutely straightforward. If it costs more to send a meg of bandwidth from Lagos to London than it does to send the same meg from Lagos to Abuja, the latter will almost certainly come down in price. Nevertheless, although this logic was sound over three years ago when I started saying this, it’s taken that long to work its way through the system.
After a round of visits both more competitive and less competitive markets in West and East Africa, it’s clear that prices have fallen considerably in the international and national parts of the delivery chain and although metro/local access prices have to some extent been immune to these falls, new, independent metronet operators are offering competitive prices in some countries.
One East African operator told me that the problem was that they had both bought international fibre capacity and laid national backbone on the assumption of certain prices. Unfortunately, now the prices in the market were lower than their assumptions and there was a danger they would lose money unless the prices went up again. They complained that new entrants were unfairly undercutting their prices.
But here’s the thing…That operator was in a fabulous piece of real estate and its competitor was in a less palatial office off the beaten track. I don’t know the respective employee headcounts but I would bet money that the competitor was employing less people delivering its bandwidth. Whilst waiting in another operator’s offices, I lost count of the number of top-of-the-range Herman Miller office chairs and everything from this relatively trivial CAPEX element to larger ones has to be paid back to someone.
One of the operators I spoke to was talking about a 40% margin on the sale of bandwidth in order to make things stack up for its shareholders. Wholesale bandwidth has to perform financially alongside all the other product areas. Globally mobile operators are wont to complain about not wanting to end up as a “dumb pipe” but what if in future, the margin falls to between 10-20%? To sharpen the question, what if wholesale bandwidth delivery no longer makes sense as a separate business for mobile operators?
Let’s trace the logic of this position though and see where it goes. An operator with a large national fibre backbone probably has sufficient volume going through the network to make a return even with lower margins. The capital’s already sunk and you’re stuck with it. (Unless you take a radical view and write it down and sell it off.) Reasonable profitability on low margins may be assured if the operator is one of the new mobile incumbents with a 50-60% share of a country’s wholesale business.
However, those mobile operators with something less than a national network who are only getting a minority share of traffic from others will struggle to stay upright. Even the few carriers’ carriers on the continent will need a significant market share for things to make financial sense.
So what are the options? For those without sufficient volume to operate on lower margins, the choices are as follows: if you’re lucky enough to be in a place where you can, buy all your bandwidth from a carriers’ carrier; or form consortia with other operators to deliver wholesale capacity as cheaply as possible; or expect the Government to finance all or part of it as a public interest commitment to using broadband to modernize the economy.
Safaricom and Airtel have gone into a consortium in Kenya to share national fibre. The former took bids to build its own national network and once the numbers were in , decided against it. If you don’t’ already have a national fibre network, it’s not going to make much sense to build one now. From a similar logic, several of Tanzania’s mobile operators are in a consortium to deliver metronets and if the Government hadn’t decided to make TTCL’s national backbone arm a de facto monopoly provider, you sense they might also have gone the consortium route to deliver national backbone. (Airtel has outsourced the operation of its network to contractors but obviously remains in the driving seat for investment decisions like what network it needs.)
The Government-financed national backbone option has had mixed success. The Uganda national fibre backbone tops the disaster poll stakes. Money has gone in but it’s unclear who will manage it and what there is to manage. The Kenyan backbone apparently does not all knit together well but is at least operational. The World Bank has sponsored an operator consortium in Burundi but it’s early days. I remain open-minded but not blind to the risks.
So once you need to put your network into a consortium or buy it as service from others and you’ve sold off your towers to the tower leasing companies, what exactly is it that you do as a mobile operator? Well, of course, you manage the relationship with the customer, build the brand and develop new service propositions that will make money. But all this takes the new, non-vertically integrated mobile operator a skip and hop away from being effectively an MVNO which not unlike many ISPs, rides on the networks of others.
Voice income which was the financial backbone of the Masters of the Universe is not what it was in many of the Africa’s bigger markets. Data requires content and services. One operator told us of the relatively large amount that it’s now making from music sales. But a combination of social media and increased Internet use on phones will not make this kind of pay-for content a horse to bet the farm on. Alternative “over-the-top” operators like Spinlet have only to gain a little traction in some markets and the income drifts away. Why pay for news headlines and football scores when the Internet’s free?
So imagine a world if you will in which only a few vertically integrated mobile operators survive and the rest are much smaller MVNO or MVNO-style operations. The distinctions between active and passive infrastructure make less and less sense. Both MVNO and MVNO-style operations can and are making money around the world but their employee headcounts are considerably smaller than those of current operators. This is where I think the logic of the market will take us…but the last time I opened my mouth, it took over three years to happen.
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