African Telcos need to develop local business models
The African continent is currently riding on a major wave of telecoms investments in infrastructure ranging from Mobile networks, fiber optics, satellite and last mile networks such as WiMax. But a storm is brewing: major African players, such as MTN, Vodacom, Altech and Airtel, are reassessing their corporate strategies; in-country consolidation in mobile networks and ISPs looks inevitable in several countries as too many players have been licensed; and the business case for mass market internet services is unproven. The fact that different countries in Africa have in place widely varying operating environments makes it more difficult for pan-African operators to thrive across the continent.
In this short article, I will discuss the factors that have led to the current situation where some African telcos and ISPs are now unable to meet their obligations to customers, staff, shareholders and suppliers.
Unlike Europe and the US where there is near uniformity of operating environments in the various states and EU member countries, the African continent is made up of autonomous countries that have widely varying operating environments brought about by the different Forex rates, licensing requirements, socioeconomic differences and tax regimes. considering that nearly all African countries are poor, taxes and licensing fees form a critical part of the national and regional government revenues. Because of this, operators in the continent have had to fork out huge sums of money in license fees and taxes on service and equipment. The lack of a pan-African telecoms framework means whereas an operator such as BT in the UK can wake up and set-up shop in Germany or France, the same is not true for African operators who have to overcome many obstacles to expand into other countries. These obstacles are mostly deliberate barriers to entry into those markets as protection strategies of the existing operators (who set this as a condition for them to pay the high license fees). This is a carry over from the days where most countries had a government operated incumbent operator that needed protection by the government. For example, one of the biggest problems Airtel is facing in its African expansion strategy is that unlike India where in all the 22 telecom circles that Airtel operates in use the same currency (Indian rupee), each African country has its own currency with different dollar exchange rates. In as much as they do not want to admit it, the biggest loss contributor to Airtel Africa’s operations was exchange rate loss.
The different licensing regimes that are under the whims of governments also mean that pan-Africa operators are unable to develop proper strategies for the various markets. We recently witnessed in the news President Kibaki of Kenya issuing restraints on the planned drop in cross-network call rates on which some telcos had designed their strategies around, He also recently ordered mobile operators to shut down unregistered SIM cards. The operators have to obey even if it means them losing revenues as a result of compliance.
Africa is a huge continent with a population close to 1bn and over 50 countries. Populations vary from Nigeria at 148 Million to Equatorial Guinea at 0.5 Million. Also, GDP/head varies from the oil-fuelled Libya at US$8,300 to the war-ravaged Liberia at US$130. This makes it impossible for the operators to adopt a single working business model for their African operations unlike their counterparts in other continents.
Sadly these telcos borrow the highly successful business models of operators in the US, India, China and Europe and hope that they will be successful in Africa. This has led to spectacular failure of some of the models in the continent. For example, the low-cost model adopted by Airtel faces challenges in countries where the regulator (or the president) has the final say on prices, transfer pricing rules and monetary and fiscal policies that influence inflation and Forex rates.
The other problem is that African telcos and ISPs use a ‘corporate market’ investment framework in the setting up of infrastructure but end up targeting the mass market. This is a disastrous thing to do because the networks are not suitable for mass market reach and the ROI for a network serving the mass market is longer than that of one serving the corporate segment (based on the average ARPU), this fact is compounded further by poverty levels in Africa meaning that people have other more pressing needs in life than paying for Internet or mobile phone airtime. Telcos and ISPs are therefore left running big under-utilized networks that cost them a fortune to set up and operate with no or minimal returns leading to cash flow problems. Because of the strain in cash flow, network outages become longer and customer service becomes very poor. At the end of the day, these operators cannot pay staff and suppliers and the ensuing winding up cases by suppliers leads to erosion of the little confidence the customers have in the operator. Case in point is the ongoing case where Soliton Telemec (a supplier) has applied to the Kenyan high court seeking the winding up of Kenya data networks for failure to pay for work done in laying the inland fiber optic cable in 2007. See full story here
The across country acquisitions and mergers also compound the danger of wrong business model applications. In most cases, the acquiring party ends up applying strategies that worked in their home country to the new business they have acquired in the other African country. This leads to a situation where the operator becomes out of touch with the local market realities and offers irrelevant products and pricing, targets the wrong market segment, invests in the wrong regions etc etc.
African telcos therefore need to develop localized business models that click with the local market for them to thrive. A good example was Airtel in Kenya who for a long time (as Celtel then Zain) were out of touch with the local market. Their products, tariffs and marketing was all wrong for Kenya. For example in their marketing, their adverts featured west African faces and the adverts were all in English, the day they started using local faces and Swahili in their adverts marked the beginning of the growth of their market share which has grown from 8% to 15% in the last one year. Why? because their marketing now clicked with the locals who as a result bought their service. Another example comes in the form of copying technology that has worked elsewhere in Africa to another country, a good example is the use of the unlicensed 5-5.8GHz WiMax band as opposed to the use of the lower 2.3Ghz band for wimax operators in Kampala city, Uganda. Kampala is very hilly, this makes 5Ghz reception uncertain across the city because very precise line of sight is needed for higher operating frequencies. Operators who adopted this band because it worked elsewhere in their African operations are now facing service level issues on their last mile networks. To remedy this, they have had to put up more than necessary base stations at a huge cost across the hilly city to cover it adequately.
One of the reasons why Safaricom has been very successful in Kenya is because whatever business model it adopts, it is specifically designed for this market and is not a copy-paste from their other operations in Africa (which they luckily do not have). The story of Safaricom would have been very different (in a negative manner) if it was a pan-African operator.