Currency Storm is the looming shadow over Africa’s operators – Getting out from under it
Africa’s above average growth over the last decade has lulled everybody into the thinking it would continue forever. But as the Chinese economy has slowed and the oil price dropped, big and unpleasant changes are coming. Russell Southwood looks at why currency exchange shifts are a coming storm for operators.
It has not been a good week for telecoms investors and operators in Sub-Saharan Africa. Whatever the rights and wrongs of it, the decision by the Nigerian regulator to impose a massive US$5.2 billion fine on MTN sends the worst kind of message at the most delicate time financially.
Over the last three months I’ve been listening to a variety of investors and operators telling me that things are getting much harder. At the heart of the problem is the decline in the value of many of Africa’s currencies. Put simply, what 1000 units of a local currency buys now compared to what it bought in the year 2000 has fallen dramatically in many of Africa’s bigger telecoms markets – see table below:
A number of caveats about this table first. It is based on Oanda exchange rates and may not reflect the kind of exchange rates a large corporate might get. Three years have been included to show that in some countries the currency has simply gone up and down in value. The countries selected are some of the main telecoms markets by value and these are almost all are Anglophone except Angola. Senegal is included as a francophone market to demonstrate that although there is a strong single story developing, there are exceptions.
For international companies that have to remit their profits in dollars or buy equipment to invest in their network, the money they are now earning from their operations in these selected countries is worth considerably less than it was 5 or 10 years ago. As those with the biggest revenues, it should come as no surprise that this will hit mobile operators hardest: for example, if you look at the loss of value of the Naira you can see how this will affect MTN.
There are already straws in the wind that support this line of argument. Millicom has pulled out of the Think Incubator in Rwanda: by one account its main shareholder said revenues have to be significantly better before it can support non-core activities. Wherever I travel, people tell me that Airtel is in poor financial shape and that Bharti may quit the continent within a year. Two of its main markets remain loss making and are included in the table above: the currency losses are considerable.
So what are the implications of this situation for the mobile operators? They would seem to me to be three places worth starting:
1. They need to continue to cut the cost base: Mobile operators were born into a time of plenty and their costs were set during this period. Some operators (like Airtel) have chased costs down and have less room to manoeuvre. All operators have lived with the assumption that they need to spend large sums on high profile marketing.
In any country where marketing spend is tracked, mobile operators are always in the top five. Perhaps now is the time to rethink this approach and spend more on keeping customers loyal than chasing elusive new customers. Most of Africa’s have got used to shopping between offers: Glo in Nigeria is currently running an absurdly generous offer where whatever you use paid today (voice, SMS, data) you get free tomorrow to all networks. This cannot last….
2. Caught in the data CAPEX grinder: Data may well be future but it costs more to upgrade networks for revenues than are significantly less than for voice. Legacy mobile networks have like topsy just grown and grown and their quality is not the better for it.
There are solutions but they are not very palatable to the traditional mobile incumbents. Firstly, the fibre network you’re operating will not make money except in uncompetitive markets where rates are kept high by restrictive market rules or monopolies. In these circumstances, operators need to consider outsourcing their national fibre networks and/or sharing infrastructure with other operators. This sharing mentality needs to go right down to the duct level.
African Governments risk losing future investment unless they apply themselves to making it both easier and cheaper to obtain Rights of Way and access to existing ducts: they need to create “one-stop” shops.
In the transition to data, operators need to make the speediest possible transition to using digital voice on data (what we used to call VoIP in previous days) as it is significantly cheaper than analogue networks. Apropos of which, Smile in Nigeria has been testing its VoLTE product as it announced it would and will be launching it before too long.
3. Tax and LTE Auctions: African Governments have long been committed to taxing mobile operators for all they are worth. They are now caught in a dilemma: they will need these taxes even more as their economies weaken but if they continue to keep them in place they may well contribute to mobile operators going into the red. In the good years these kinds of levels of taxation – whether wise or not – could be borne. In bad times they may be the straw that breaks the camel’s back. However, the case for lower taxes will not be helped by controversies over tax avoidance through transfer pricing.
Some African Governments struggling with the paying for the digital networks in broadcasting for DTT transmission have announced that they will auction LTE spectrum to raise the funds. These auctions may or may not raise significant sums of money for the process but they will add costs that the operators will then have to pass on to users. This approach does nothing to lower data costs that are a significant barrier to widening the data market. Indeed, Government should give this spectrum for free in those areas where there is currently no mobile coverage on the condition that a data service is provided.
There are tough times ahead but as the saying goes, no-one repairs a roof while the sun shines and no-one can do so when it’s raining heavily. Now is the time to change mindsets and find new business models that will weather the storm.
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