Africa’s mobile operators – are they the new incumbents?

Top Story

Mobile operators have been the making of Africa in terms of delivering widely available voice services. They have shaken up the sleepy fixed line incumbents, rapidly outstripping their user base. Indeed in some countries they will come close to covering the majority of the population within the next two years. They have been the continent’s success story, pouring money into setting up coverage and reaching out to new users with pre-pay cards.

They have bought much-needed business expertise and created new employment with very few failures over ten years. And they are arguably one of the few dynamic parts of most African economies. Although there are countries where users have been up in arms about mobile calling prices, African consumers seem largely relieved to have some reasonable form of voice communication in their hand. As a result, most of the mobile operators are basking in the warm glow of this undoubted success.

Nevertheless there is a coming downside. New competition frameworks will put most incumbents on the defensive and make some look increasingly vulnerable. And as these historic operators cease to be so all-powerful, it will become clear that the mobile operators are now the new incumbents, writes Russell Southwood.

The growth in mobile use has been staggering. Over the four year period from 1998 to 2002 there has been growth of between 100-150% a year. Estimates vary wildly as to the extent of future growth but even seasoned observers are saying that there will be 100 million users in 5 years time.

Whereas operators’ initial feasibility studies predicted user bases in the hundreds of thousands, the thirst for voice services rapidly drove user numbers into the millions. The speed with which this has occurred means that operators are often in the lucky position of having made their payback on investment in a much shorter time than they might have otherwise anticipated.

Based on 2003 data in the ITU’s African Telecommunications Indicators, the players line up as follows based on available revenues and number of countries they operate in:

Whilst most markets have two operators, a significant number still have only one operator. For example out of the 15 countries in the ECOWAS region, Cape Verde has only one operator and six countries have only two. The latter includes two of the region’s largest markets, Côte d’Ivoire and Senegal. To be fair, Senegal is tendering for an SNO that will be able to run mobile services.

Where there is only one operator, its dominance in the voice market simply replicates the monopoly position of the incumbent. Whilst much has rightly been made of the competition that the mobile operators have provided to fixed line operators, this has been effectively a one-handed fight for reasons that we will look at below.

Even with two or three operators in a country market, there is surprisingly little price competition. After the market settles down, there is usually only a very narrow band of price competition between operator tariffs. No, say the operators, there is competition: we provide a wide range of marketing incentive schemes that offer lower prices than the advertised tariffs. These are used for a number of reasons: to attract new users, to encourage higher levels of use and to reward loyal customers. Our Rates, Routes and Coverage column below provides almost weekly information on these changes. But it is all but impossible to calculate without a great deal of work whether the bewildering number of offers actually add up to much of a reduction on calling rates.

Prices for local mobile calls are between five to ten times higher than their fixed line equivalents. Although prices have dropped since initial launch, most operators continue to use the same pricing strategy found in the developed world. You pay a premium for the advantages of mobility.

However, the costs of operating a GSM network are low in comparison with fixed networks, and the cost per user drops as the user base increases. Given Africa’s reliance on mobiles for most voice communication, this situation produces a curious paradox. Estimates of the costs of connecting a subscriber in Africa are not easily obtainable and where we have found information it varies considerably.

Nevertheless it is certainly true that the cost of connecting a mobile subscriber is between a quarter to a third of its fixed line equivalent. It probably takes between USD2-500 to connect a mobile subscriber against USD1400-2000 for a fixed line subscriber. Indeed once a mobile network is fully developed the costs may be even lower. So the paradox is this: you have a mobile service where it is now considerably cheaper to connect subscribers but charges a premium for its service compared with a fixed line service where the connection is more expensive but the service is actually cheaper to use. In the long-term, this surely cannot make business sense.

To be fair, this rather simplified comparison does not describe the full complexity of what is happening. The operators have to finance the building and expansion of their networks. Where this has been completed, they are now having to get a return on upgrading to GPRS and 3G. But there are many cases where the operator is near the end of the process of rolling out network coverage and is sitting down to count a steady and almost predictable cash flow. There is also a case to be made that international and domestic fixed line tariffs have been rebalanced that the domestic rates on fixed and mobile will begin to coincide. But there will still be a significant difference and the question that hovers is: at what point can the high premium on local calls be justified?

If domestic rates are high then in most instances mobile international and international roaming rates are “off-the-scale”. But Africa is not unique in this as particularly roaming rates are the nearest legal way of printing money that has been devised in modern times. However on international rates, the mobile operators are on firmer ground when defending themselves. All too many still have to through monopoly incumbent gateways and the fibre infrastructure is not yet in place to make the distances involved largely irrelevant. Where there are fewer restrictions on international gateways and the incumbent is largely irrelevant (for example, the DRC) rates come down to point where even grey VoiP ceases to get much purchase.

Although all mobile operators have invested significantly in the roll-out of base stations, there are a small but significant number who have put hardly anything into network infrastructure, relying heavily on the incumbent’s network. Only a very small number of operators have actually been involved in building long-distance backbone infrastructure. A notable exception is Celtel that has argued for the creation of sub-regional network to connect its operations in East Africa.

Some mobile operators can justifiably respond that they have put considerable investment into infrastructure. MTN Nigeria gives some idea of the problems encountered. It has to provide security and a generator for each of its base stations because of the lack of a reliable electricity supply. This led one wag to wonder whether it was actually in the mobile or the power generation business. Indeed in some instances it has actually laid new power lines along the routes of its network.

As each mobile operator builds out its network, it becomes progressively less financially feasible for later entrants to enter the market: it becomes harder to justify building a third or fourth parallel network. In developed countries barrier to market entry has been overcome through allowing virtual mobile operators (MVNOs - for example, Virgin in the UK). However at this point in time most operators appear unwilling to open their networks for this increased level of competition.

MVNOs usually occur as markets mature and they are way for an existing operator with a near-static user basis to leverage their investment in their existing network. Typically they operate at a lower price point than the operator with which they co-exist (see forthcoming article). Virgin Mobile is interested in larger mature markets and has been reported as being in discussions with Nigeria’s V-Mobile and South Africa’s Cell-C, both destinations Virgin flies to and therefore where it has the all important brand presence from a marketing perspective. The latter has agreed to market Virgin-branded services.

Mobile operators’ networks will meet a great deal of existing voice demand but may be significantly less able to meet medium and long-term data demands without considerable capacity upgrades of their entire networks. With the introduction of a greater level of VoIP calling, data demand will continue to rise. The high costs of introducing GPRS and 3G have not deterred some operators from entering the market. However data costs via mobile thus far carry an even higher premium than those for voice.

For policy makers and regulators, the new dominance of the mobile operators represents a considerable challenge. If they are too demanding financially (in terms of putting pressure on prices or increasing the level of social “tax” for wider roll-out) they will scare away new investment. But if they do nothing, Africa will be paying one more