Consumer and Shopper Insights May 2011

African Telecoms: Gearing up for a new era

The hyper-fast growth of the past decade is slowing, but Africa remains a continent of opportunity for the telecommunications market.
By Ibrahim Akinci, Suraj Moraje, and Nieves Ortega

After years of scorching growth, Africa has half a billion mobile telephone subscribers. Last year, however, even as prices dropped 15-20%, growth slowed to 17%, a sharp falloff from the dizzy 40% seen during the early 2000s. Indeed, call prices in Africa have fallen by 12% a year for the past five years. The average rate per minute (ARPM) for mobile voice calls across Africa is now 11 US cents, broadly in line with high-growth regions like South America and the Middle East (although still significantly higher than in China, India and Thailand). Are the good old days already over?

of the African market; four of the top six are international operators. The technical know-how of these operators when it comes to such skills as capital expenditure management, distribution development, and product/service platforms, combined with its go-to-market sophistication have taken competition to the next level.

At the same time, regulatory pressures are increasing across markets, as authorities become better at managing competitive forces. Last year, regulators in at least six African markets intervened to lower mobile termination rates (the prices operators charge each other for calls to their networks from elsewhere) by 20% or more, sparking a

Exhibit 1:

Falling prices will bring rising penetration

Voice average revenue per minute 2010 at ppp US$

0.40 0.35 0.30

South Africa Uganda Cameroon Tanzania DRC Botswana

Globalizing under pressure

Several factors are placing pressure on the industry. Five years ago, African telecoms was dominated by regional corporations. That has changed as international operators began to look to the continent, a trend that continued in 2010 with the arrival of two new entrants, from India and Russia. Today, nine companies control nearly 80%

0.25 0.20 0.15 0.10 0.05 0 0 10 20

Nigeria Senegal Cote d Ivoire Kenya Ghana Mauritius Egypt

Morocco

Tunisia

Algeria

30

40

50

60

70

80

90

100

110

120

130

Penetration 2010 Percentage

Trend line exclude DRC, RSA & Botswana SOURCE: @ Informa UK Ltd 2011; Pyramid Research

fresh round of price competition. And the number of players has increased by a third since 2006, with most markets having three or more operators. And yet, the pressure to invest continues. Exploding volumes of data traffic require expensive upgrades to backbone networks, in a continent that has traditionally underinvested in fiber. Further, a larger share of investment is now going into rural areas. Penetration in the countryside remains low, due in part to higher logistics and infrastructure costs.

There are also big opportunities in rural Africa, where penetration is often well under 10%. Here, too, we are seeing several experiments, such as site sharing, outsourcing of rural network construction, and re-engineered sites to improve the economics. Operators are working to reduce their costs across the board, with increased focus on lean operations, global procurement, capital re-engineering, and system / process standardization. Such initiatives are likely to result in much savings. In this vein, outsourcing agreements have accelerated, with site-sharing finally becoming an accepted norm. As a result, even as competition has risen and prices fallen, profit margins have remained stable. For operators, continued healthy growth will depend on their ability to extend services to those who are left out of the communications revolution, and continually bring the customers more. Recognizing the value at stake, companies are just beginning to negotiate this balancing act. Whatever the outcome, the biggest winners will be African consumers.

http://csi.mckinsey.com Ibrahim Akinci is an associate principal in McKinseys Dubai office. Suraj Moraje is a principal in McKinseys Johannesberg office. Nieves Ortega is a Knowledge Specialist (Telecom Services) in McKinseys Madrid office.

Light at the end of the tunnel

Despite this pressure, there is significant room for operators to maintain growth and margins. Data revenues, while growing rapidly, are still well below the revenue levels witnessed in some other emerging markets. But it doesnt have to be that way. In Kenya, 24% of Safaricoms revenues come from outside voice channels; higher usage patterns in South Africa and Egypt also prove that there is latent demand for these services, if they are delivered the right way at the right price. No wonder, then, that operators are experimenting with verve. They are introducing such things as flat-rate plans, off-peak data rates, menu-driven services, and free access to specific sites to find the secret sauce for their individual markets. The entry of global Internet players will further accelerate this growth.