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A new report on the internet in West Africa has two key findings. First the good news: VoIP telephony has been largely illegal in Africa but a new breed of telecoms regulators will open up its use and this is most likely to happen in West Africa. Now the bad news... The growth of the internet in West Africa is being held back by the slow pace of liberalisation in the market.

When Mauritius launched a number of legal, international VoIP calling services at the beginning of 2004 it became the first African country to take this major step. Although Mauritius is very different from every other African country, its first move into VoIP is the opening round in the steady legalisation of VoIP services throughout the continent. The question is no longer if it will happen but when will it happen?

West Africa has particularly large VoIP grey markets and the incumbent telephone companies in two of the larger markets have put numbers on its size. Rein Zwolsman, CEO of Nigeria's Nitel estimated that before he put in place cuts in international calling rates, that a staggering 90 per cent of international calls were in the grey market. Oystein Bjorge, CEO of Ghana Telecom put the value of the grey market in Ghana at somewhere between US$15-25 million a year in 2003: "(These are) ball park figures. It depends on the rates you apply and the volumes". In other countries, the grey market is estimated at somewhere between 10-20% of the overall market.

According to one of the report's author's Russell Southwood: "Grey markets in international VoIP calling have grown up almost everywhere in Africa because of the large difference between the price charged to the African customer by monopoly incumbent telephone companies and the much cheaper cost at which they buy that call on the international market. Grey market operators like ISPs and cyber-cafes can offer the calls more cheaply and still make a profit."

The legalisation of VoIP will change the structure of both the internet and telecoms industries and the report looks at how this might occur and the type of new operators that will emerge, offering VoIP calling both domestically and internationally.

Liberalisation has already come to seven out of the 22 countries in West Africa covered in the report and the majority will follow in the next three years. Without the need to protect the incumbent telephone company, VoIP can be seen as a technology for gaining competitive advantage in liberalised national and international markets.

The authors of the report conclude that it is more likely to be legalised quickly in West Africa for a number of reasons. Several of the incumbent telcos have already made "under-the-counter" deals to allow companies to operate. For example, Mali's Sotelma has made VoIP agreements with four local companies. The agreements make the four companies in effect retail VOIP sellers, using Sotelma for their bandwidth at an agreed rate.

The CEO of the leading regulator in the region ­ the Nigerian Communications Commission's Ernest Ndukwe ­ has already adopted a progressive stance on the issue. He has said clearly that it is not about trying to make a technology illegal as regulation should be "technology-neutral". If people want to offer services (VoIP or otherwise) then they must obtain a licence. And if you want to offer international VoIP calling then you have to connect to the backbone of Nitel or the SNO, Globacom.

For these reasons, it seems that VoIP will be legalised first on the mainland of the African continent in West Africa and when it is, both the internet and telecom industries will change considerably in the wake of it happening.

Only seven of the 22 countries have more than 10,000 dial-up subscribers: Nigeria, Ghana, Cote D'Ivoire, Togo, Guinea, Cameroon and Senegal. The biggest is Nigeria, which is the third largest market on the continent after South Africa and Egypt.

According to one of the report's author's, Russell Southwood:" In most countries of the countries covered, the number of internet subscribers is growing very slowly or has hit a plateau and without significant changes in the state of the economy (coupled with deregulation) the number will stay the same. Nevertheless there are significant growth opportunities in some markets, particularly those coming out of civil war, the newly-oil rich and Nigeria."

Only seven countries of the countries covered have ended the monopoly of the incumbent telephone company (Cote D'Ivoire, Ghana, Guinea-Bissau, Mali, Mauritania, Nigeria and Senegal) if those ending the monopoly in 2004 are all included. In only three cases (Ghana, Mali and Nigeria) are there second national operators but in the case of Ghana, the SNO is largely ineffective in providing competition to the incumbent.

One of the report's author Southwood believes that growth has often been held back by the behaviour of the incumbent telephone companies. "Almost all incumbent telcos run their own ISPs and often have significant unfair competitive advantages. Burkina Faso's Onatel only gives access to a local call number for internet subscribers to its own ISP. In the case of Senegal's Sonatel it has achieved a market share that would almost certainly be the subject of anti-competition action elsewhere". In Chad, Niger and Sao Tome and Principe, the incumbent telephone companies still have a monopoly over internet supply and will do so for several years to come.

The success story has been the growth of the number of cyber-cafes. With this explosion in numbers has come a fairly vigorous price war to the point where many businesses are uneconomic. However the prices offered in many countries are now extremely low and it is through these cyber-cafes that most Africans in the countries covered experience the internet.

Although estimating the numbers of internet users who are using a cyber-café or something other than a dial-up subscription is notoriously unreliable, it is clear that there are now hundreds of thousands of people using cyber-cafes in West Africa's larger internet markets. In the largest market, Nigeria, there are probably somewhere between 0.5-1 million users and this figure continues to grow rapidly on a year-on-year basis as more cities are connected.

The majority of users tend to go to cyber-cafes to send or collect e-mails and this is borne out by a survey in Nigeria that shows Yahoo and Hotmail as the most popular sites used. However, there is not yet a large amount of local content and services in most markets and this pattern will change in the next five years.