Just as the power of the incumbent fades, the vertical integrators are on the march again

Top Story

Africa’s incumbent telcos have for so long dominated the discussion about where the market’s going that it’s hard to spot the moment when their ability to dominate slipped below the water line. The mobile operators are now the incumbents and as contenders for the title are seeking to secure their new-found position on the top of the heap. Not surprisingly, they are exhibiting many of the old incumbents’ tendencies towards vertical integration in the search for long-term security. Russell Southwood tries to make sense of what’s happening as they remake themselves.

Recently a regulator from one of East Africa’s more competitive countries pointed out to me that his country’s incumbent – which has no mobile operation – now has only 10% of the customers in the market and 20% of the revenues. It was, in his words “largely irrelevant”.

Even where the incumbent has a mobile operation, the story is not much better. For example, in an analysis prepared for Balancing Act’s forthcoming report African Telecoms and Internet Markets – Part 1: West Africa, it identifies that in 10 out of the sixteen countries under review, just three companies are emerge as market leaders in each: Celtel, MTN and Orange. Where Government-owned mobile operations (of which there are 11 out of a total of 52 operators) are market leaders, it tends to be because full competition has not been introduced: for example, Cape Verde (CV Movel), Guinea Bissau (Guinetel) and Togo (Togo Cellulaire).

The incumbents have also been hit be the collapse in international calling rates. In an analysis carried out last year for our African VoIP Markets report, it identified a clear trend: rates to main international destinations were coming down to US20-25 cents a minute and were likely to go lower in the next two years. The incumbents may have won a few local battles with the grey market but show little sign of winning the war. In the more competitive markets, mobile rates have followed fixed rates down or have become part of wider country roaming schemes at local rates.

It used to be that policy-makers and incumbents talked earnestly about the need to rebalance rates. But domestic rates cannot realistically be adjusted upwards enough to compensate for these international losses. For what we are seeing are competitive pressures finally sinking their teeth into the over-fed body of the incumbent. The young mobile operators have started from scratch with new networks and workforce levels that are considerably smaller than the elderly incumbents.

Workforce levels in the old incumbents are a political “hot-potato” so no matter how bold the Government would like to be when making cuts, the decisions always are taken with a glance over the shoulder to the electorate. Management in incumbents is increasingly political with a small “p”. For how do you make substantial changes whilst dealing with a workforce accustomed to historic privileges? Talking to disenchanted Nitel managers last year gave us some sense of the mountain that has to be climbed. All of which distracts from doing business effectively.

The only pool of light in this growing gloom has been the success the old incumbents have had with DSL broadband. Here their advantageous access to copper and infrastructure network has completely reversed the balance of power in their struggle with the troublesome independent African ISP. So much so that it has literally sucked the oxygen out of the market and led to mergers and closures. The Kenya story in Internet News below, the Cote d’Ivoire item in In Brief in the same section and our recent visit to Mali all confirm this picture.

Being a national operator is now a distinct disadvantage in a world dominated by regional operators. There are no savings of scale at the national level: when buying network equipment and when buying bandwidth or minutes. So the only wealthy incumbent not in multinational hands – South Africa’s Telkom SA – is trying to buy itself a regional position and get into content production through pay-for IP-TV.

The new incumbents have arrived in the lighted uplands with strong revenues and good margins made on mobile voice. Now able from this position higher up the feeding chain to survey the valleys below, they are thinking about how they can protect their market position. Understandably, they want to be able to create a position from which they cannot be dislodged by controlling access to the strategic parts of the layered market. Like Microsoft with Windows or Apple with iPod, you want to be able to get such a jump on the market so that everything competitors do subsequently is either a pale reflection of your activity or just eats away at the edge of what you’re doing. If you take the content analogy, this is the “walled garden” approach compared to more open forms of access.

Orange is the brand offspring of former monopolist France Telecom. It has thought hard about the emerging competitive market and has decided that the formula pioneered in France, suitably reversioned for local African realities, is the way to go. Customers are not interested in the technology: you could be delivering voice and data using gas-filled balloons for all they care. They just want it to be cheap and for it to work. Their strategy draws on the ideas of the brand’s originator Hans Snook: customers don’t want to know what the kilobyte wibbly-wooper does. They want it to work out of the box. They want to feel good about your service and the nice things you sell them.

So Orange in Africa at the retail level is introducing its Livebox product that it uses in France to sell “triple play”: the combination of VoIP voice, Internet and TV. It also can offer wireless access in the home. Because of legal restrictions, it is unable to offer the VoIP part of triple play and is struggling to get much purchase on rights to show compelling TV content. However, its main strategy is that if it’s about communications, Orange supplies it. Whether you want a fixed or mobile phone doesn’t bother them because they can supply either or both and know that one day the difference will be irrelevant. In this world, emerging disruptive technologies like mobile VoIP become just another product line.

In most but not all countries it is adopting a “low-price, high-volume strategy” both at the retail and wholesale levels. For example, at US$1,600 per mbps, its prices are the lowest on the SAT3 system in both Cote d’Ivoire and Senegal. At a national level, the strategy is underpinned by building IP-based networks to main markets and beyond. It is ambitious to take this formula outside of the francophone countries and will emerge as a bidder for Anglophone former incumbents in the coming months.

The home-grown continental version of this type of strategy is being pioneered by MTN and it only emerged after a fierce discussion at Board level. The company wants to be able to offer both voice and data in whatever form, particularly to its high-value customers. In order to do this effectively, it needs to build itself an infrastructure (with key elements in fibre) that will support its ability to dominate both corporate and high-value individual markets. It has decided to build some of its own fibre routes in South Africa. It has been trialling Wi-MAX in Cameroon, Rwanda and Uganda. It already has experience of running fixed operations through its SNO in Uganda. It has quietly bought ISPs in Cameroon and Nigeria and has plans to link up its mobile operations with a local roaming scheme as Celtel did before it.

The announcement that it was in talks with Telkom South Africa brings its “softly, softly” approach into sharp public focus. A merged company or a strategic partnership is unlikely to fly for competition reasons in South Africa but elsewhere on the continent, where competition authorities are weaker, this could prove a killer combination.

Africa’s mobile operators are not temperamentally “market-makers”. Until recently, there have been few of the kinds of competitive pressures that create this kind of inspiration. True to form, Vodacom appears to be following MTN into data markets. It has bought a share in the South African proprietary Wi-Fi technology company iBurst, although it is unclear how this will be linked into its the core business. Also to be fair, it has emerged as the winner in South Africa’s mobile data market by progressively dropping prices.

But Celtel has thus far steered clear of entering the data game and product lines beyond the core mobile voice product. However, we note that its parent MTC (now rebranded Zain) is rolling out nationwide Wi-Max coverage in Bahrain and offering voice and high-speed Internet access up to 2 mbps. The voice service is nomadic so the user needs only one number for fixed or mobile phones.

The desire by the new incumbents to go off and grab new markets comes from probably a number of insecurities: they know that mobile markets are likely to get more competitive as that is the steady trend across the continent; more competition will drive prices lower; therefore the question is: how do you continue to stand upright on a rolling log as it goes downhill?

There are two potential obstacles to this new strategic approach, neither of which is insuperable but both offer real challenges. There is the real issue of what African users can actually afford. European users spend an average of 3-5% a month on mobile communications. The African equivalent is 10-20% on a much lower set of incomes. This week the Ugandan Bureau of Statistics released its Consumer Price Index and revealed that Ugandans spend more on communications than they do on food, 27.2% of the total index.

In the almost “arms-race” style in which operators have introduced 2.5 and 3G outside South Africa, little consideration seems to have been given to this potential brick wall. All operators talk the talk about 10% of revenues coming from data (including content and SMS) but few seem to have much focus on this particular ball.

To be fair, some part of the blame for high prices can be laid at the door of Government which seems in effect to have sub-contracted a large part of tax collection to the mobile operators and is loving it too much to give it up. But if the market is to grow so that people can afford other products like mobile content services, broadband and IP-TV then something has to give. There will be economic growth to increase wealth levels in some markets but this alone will not do the trick.

The second challenge is that if you wish to be a new incumbent and control both the physical and transport layers, this is an expensive business. MTN’s fibre network in Uganda was financed when there were only three competitors. It was, of course, the one that brought prices down and introduced pre-paid cards but nonetheless this was before more new operators entered the market. Whilst mobile voice networks now cover slightly over 60% of Africa’s population, broadband data networks (depending on how compact the geography of a country is) only cover between 10-20%. Closing even a small part of this gap will prove to be a costly business.

And if the new incumbents build significant network infrastructure, they will, as dominant market players, be forced to share it with other operators. They are perhaps gambling that many of Africa’s policy-makers and regulators will be too slow to spot this or to do anything to enforce their will. But the current networks of the new incumbents are not really set up for sharing except with other mobile operators.

So in the words of the Chinese curse, may you live in interesting times…