Connecting Africa: The next 10 years of mobile growth

The rapid growth of Africa's mobile telecommunications market over the past decade has had a huge impact on African consumers, on operators that do business on the continent, and on governments that have benefited from collecting license and service fees. There are now more than half a billion mobile phones in use in Africa, representing one of the biggest dramatic surges in usage in mobile telecom's three-decade history, according to a new study by Booz & Company. "The past decade has seen a mobile revolution sweep Africa. Operators have invested in networks and coverage, and launched new services, while national governments and regulators licensed operators and established and regulated markets," said Karim Sabbagh, senior partner and the global leader of the Communications, Media and Technology practice with Booz & Company. "The result is that in just 10 years, a mobile market of more than 500 million customers has flourished, and governments have collected substantial license and service fees." The needs of both operators and governments have largely been met by this robust growth, with African and multinational operator groups and their shareholders enjoying high-growth returns with the support of governments and regulators - who, in turn, have benefited from lucrative tax opportunities. However, with a disciplined and effective regulatory and political approach this growth might have been even more impressive. Now this symbiotic relationship is under increasing strain and could be in danger of disintegrating just when it needs to be at its strongest. Seasoned investors are taking an increasingly hard look at further investments in Africa because of extreme pricing pressure, an increasingly unattractive investment environment, and continued regulatory risk. Hesitancy on the part of investors could jeopardize Africa's next wave of telecommunications investment and growth, the rise of 3G-enabled mobile broadband, or the widespread adoption of the Internet in Africa. "If the relationship between operators and governments holds, the African telecommunications success story will drive forward. If it fails, Africa will miss a critical opportunity for economic and social development as the telecommunications industry and its investors move on to more accommodating markets," said David Tusa, partner with Booz & Company. Mobile phone use in Africa is now prolific, with handset prices dropping as low as $10 for a basic GSM due to the accelerated growth experienced in the 2000s. Network equipment prices have also dropped, allowing operators to build coverage and capacity while gaining access to new markets. That left operators positioned to compete for subscribers, mainly using service price as a powerful lever to attract and retain customers. As price-sensitive traffic volumes grew, operators invested in network capacity and coverage, expanding markets further, attracting yet more customers and the cycle continued. There have been three distinct growth phases of mobile penetration in Africa from 2000-2010. In the initial tentative growth phase (2000-2002), penetration rose from 2 percent to 6 percent, followed by a period of accelerated growth from 2003-2005 that saw a surge at a 52 percent annual rate with 21 percent penetration. From 2006-2010, penetration expanded to 51 percent, however growth decelerated slightly to a 26 percent annual rate. Even adjusting for non-addressable market, which can exclude 25 to 35 percent of the population, Africa's growth has been nothing short of remarkable. Several operators have driven the surge in growth in Africa and reaped the bulk of its benefits. MTN stands out as the dominant African operator with a portfolio that comprised 21 operating companies serving 141 million subscribers at the end of 2010. The South Africa-based company - which posted revenue of approximately $16.7 billion and EBITDA margins of 44 percent in 2010 — has almost 20 million subscribers in South Africa and approximately 40 million in Nigeria. Another example successfully tapping into the African market is Etisalat; the Emirati telecom's growing specialization in Africa's hypercompetitive markets is paying dividends as the group shares techniques and approaches across its Asian and Middle East portfolios. Both Etisalat and Orange, also having taken up a broad position in Africa, have invested in submarine cable systems on the East and West coasts. Despite the decade-long surge, Booz & Company has determined that today's African mobile sector faces three obstacles that threaten to constrain future growth; pricing pressures, high investment costs and uncertain and uneven regulation. Failure to quickly and effectively address these challenges could seriously undermine the development of next-generation mobile systems' potential on the continent. Many of Africa's operators have deployed GSM/GPRS/EDGE networks, relying on highly standardized network components to drive down capital costs and operating costs. Although there has been some competition based on innovation and value-added services, most operators have relied on pricing and promotions to differentiate themselves from competitors. A new and value-destroying race to the bottom in pricing has taken hold in most markets, with operators using short-term promotions to entice rapidly churning customers. "The likelihood of persistent pricing pressure makes investing in African telecommunications a high-risk undertaking. Although Africa's operators have gained some scale advantages by operating across multiple territories, they have not lowered costs as dramatically as they have in other markets," said Tusa. "Africa's operating companies have not managed to gain the scale that Asian operators have achieved; cost factors, when coupled with the relatively steep costs of capital, are causing investors to become increasingly skeptical about ongoing capital commitments." Investors remain concerned about the structure of regulatory frameworks overall. License fee setting is frequently unpredictable. Regulations regarding pricing and service launch frequently prove cumbersome, and involve unnecessary and lengthy processes that hinder operators' flexibility in bringing competitive and innovative propositions to the market. Restrictions on product bundling prevent value-led innovation, while in some cases gateway access restrictions or obligations create structurally higher costs for competitors than are borne by state-owned incumbents. Lastly, infrastructure-sharing approaches vary considerably, at best creating additional barriers that operators must hurdle if they are to gain cost benefits that can be passed to consumers.