Nigeria: the beginning of the end for Africa’s international grey market?

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With the new Nigerian telcos offering some of the cheapest prices on the continent for international calls, the VoIP grey market in Nigeria is in a tail-spin. This may turn out to be the beginning of the end for the price arbitrage-based grey market on the continent. However before telco incumbents across the continent break open the champagne to celebrate, they need first to see the painfully low prices that have brought on this decline. Back from a recent trip to Nigeria, Russell Southwood looks at this and other trends that are emerging in this developing market.

All the telcos (including Nitel) are sending out international traffic using IP, the only difference is whether they pass on the savings made to their customers. Incumbent Nitel is currently charging N45 (US36 cents) a minute for a call to Washington DC. By contrast, one of the newer telcos Starcomms is offering the same call for N20 (US16 cents a minute). The mobile operators have replaced the fixed line operators as the new incumbents with MTN charging over N100 (US80 cents) a minute for international calls and VMobile, shortly transforming itself into Celtel, charging N60 (US48 cents) a minute. The mobile operators all have IP gateways. For example, MTN is operating IP gateways in Lagos and Abuja so it is not clear why they are charging so much more than anyone else. If the precedent set by the Safaricom IP service in Kenya is anything to go by, they will shortly be following the others with lower prices.

The impact of these falling prices has been to completely undercut the grey market. Most are small operators – like cyber-cafes or ISPs – who buy from international minutes aggregators. And the prices have now reached the point where there is little or no margin left for them to make a living.

As most are small-scale operators, they do not have the volumes needed to make sufficient income. One bandwidth seller told us:”We used to have a couple of pre-paid card wholesalers in one of Nigeria’s larger regional cities. Both have gone out of business.”

This loss of grey-market voice business seems to have been only one of several plagues to have hit the Nigerian cyber-café business. The tightening up of security scrutiny of cyber-cafes to weed out 419 scammers has also deterred legitimate customers. The net result has been catastrophic as one industry insider told us:”There has been a significant churn amongst cyber-cafes. New ones open and old ones close with a failure rate as high as 60%.”

You might have thought that all this cheaper, international IP-based voice traffic was coming about because operators were switching to cheaper SAT3 fibre prices. How wrong you would be. Those buying satellite bandwidth in the Nigerian market in volume can get below $5,000 per mbps per month duplex, a price than is still cheaper than SAT3 fibre prices. Indeed one of the Nigerian satellite bandwidth resellers told a workshop at the recent 3rd African VoIP Forum that on the basis of their research, SAT3 prices were still on average $2,000 per mbps per month higher than their satellite equivalent.

(Nevertheless we were told that a staggering 30% of Nigerian satellite reseller market consists of small, largely faceless, unlicensed operators.)

It is part of the tragedy of this story that incumbent Nitel is only now really focusing on beginning to sell SAT3 capacity as part of its roll-out of broadband. This is a full five years after it had the capacity available at its landing station and five years of lost fibre capacity that it will never get back. There are not many African telcos that can have thrown away quite so much money by not using this time-sensitive asset. The incumbent now has plans to make broadband available through ten exchanges and offer up to 500,000 new lines.

But the full awfulness of the story does not end there. Even those who have already connected are not being offered a reliable service. As another industry insider told us:” The service is hardly stable. There’s problems of motivation (amongst its engineers). People are disgruntled (by the recent privatisation).” The company has no redundancy fibre connection to the nearby landing station in the neighbouring country of Benin.

So when the fibre goes down, customers just have to wait until Nitel gets round to fixing it. So it’s hardly surprising that large corporate customers - like Shell, Total and Tara – that have gone over to fibre have hung on to their satellite capacity to use it for redundancy when there are SAT outages.

Interestingly, a SAT3 wholesale market is beginning to develop. One of the problems has been that the old-fashioned incumbents responsible for selling the fibre will not sell anything smaller than an E1. Until recently, they have been unwilling to sell the capacity on in bulk to resellers. However you can now buy SAT3 capacity from at least three Nigerian companies (21st Century, Accelon and GS Telecom) all of whom have until recently been better known for selling satellite capacity. With one 5-10 millisecond hop, your traffic goes into their local hub before being transferred via Nitel to the landing station. Expect to see more of this kind of reselling elsewhere in the future.