Land of challenges and opportunities

The prospect of consolidation among African and Middle Eastern operators has provided much fuel for the industry rumour mill in 2009, but the apparent collapse of talks involving the disposal of Zain Africa as well as those between Bharti and MTN has not diminished the appetite for expansion.

African telecoms operators have faced several challenges in 2009. The global economic downturn, a fiercely competitive landscape, and pressure to expand networks into rural areas have tested the mettle of the region’s carriers both big and small.

And yet, forecasts from Informa Telecoms & Media show that mobile subscription growth is still set to increase by 26.6 per cent year on year in 2009, with the total number of active subscriptions to exceed 473 million by the end of the year. This figure is projected to increase to approximately 800 million by 2014, by which time SIM penetration across the region should reach 70 per cent, the firm predicts.

It is this stellar growth that has attracted interest from both domestic and foreign investors. Yet progress on the region’s big M&A deals—the prospective sale of Zain Africa or a stake in Zain; and the cash and share-swap deal between Bharti and MTN—appears to have stalled.

In late September, confusion reigned as a consortium of buyers that included Indian operators BSNL and MTNL were thought to be carrying out due diligence on Zain. But nothing came of the supposed interest and at the Africa Com 2009 event in Cape Town in November, Chris Gabriel, CEO of Zain Africa repeated a number of times that “Zain Africa is not for sale. We are focused on our objective to become a top ten player by 2011 and we still have an appetite for expansion,” he said.

That may be so, but falling ARPU, rising competition and the biting recession have certainly forced investors to reappraise African markets—and some have decided that it is time to head for the exit. In Zain’s case, the company’s soaring ambition and presentational verve has not yet been matched by the performance of its operations in sub-Saharan Africa, where many of its units are loss-making.

Immediately after The Africa Com event, Zain reported that net profit for Q3 in 2009 fell almost 53 per cent year on year; a drastic fall. “The global economic crisis, unfavorable foreign currency fluctuations, particularly in many of our African operations coupled with reduced interest income and investment income plus higher financing costs, have had a significant impact on the company’s overall profit,” said chief executive Dr Saad Al Barrak.

Zain finessed the poor results by favouring the figures for the nine months to the end of September. Profits fell 17 per cent year on year to KWD195.7m ($677m), although revenues for the period were up 24 per cent year on year to KWD1.78bn. Even in the most positive light, it is clear that Africa is causing much of the financial pressure under which the company is labouring. The vast and capital intensive expansion of Zain’s network in key operations such as Nigeria, Zambia, Sudan, and Iraq, has resulted in increases in fixed costs from depreciation and amortization, with the company being further burdened by increases in financing costs.

Meanwhile, talks between Bharti and pan-African player MTN collapsed after being extended twice amid concerns on the part of the South African government that its national champion could fall into foreign hands.

Yet even Gabriel expects further consolidation within the region, led by a handful of major players. And the latest player to the table looks to be Singaporean carrier SingTel, owner of Optus. As the Africa Com event kicked off, SingTel’s chief executive Chua Sock Koong said that she was eyeing up Africa as a potential target for expansion. “Africa is a market that is definitely worth our interest,” Chua said.

The announcement came as SingTel reported quarterly financials for the three months to the end of September. Net profit at the group was up ten per cent year on year to S$956m, compared to S$868m in 2008, while revenues climbed 5.4 per cent year on year to S$4.1bn.

Singapore has a mobile penetration of 148 per cent and SingTel is looking further afield for growth opportunities. Given its 32 per cent holding in Indian operator Bharti Airtel, SingTel was one of the supporters of Bharti’s move to acquire a stake in MTN.

But this expected wave of consolidation could catch the incumbent carriers on the back foot. “The operating environment is a threat to incumbents,” says Nick Jotischky, regional research manager for Africa at Informa Telecoms & Media. “There is much more competition, new players, alternative players such as MVNOs,” acknowledging the success of Oman’s first MVNOs Friendi and Renna, the former of which notched up 100,000 subscribers in its first three months of operation.

“These MVNOs have ambitions to become regional players,” says Jotischky. “They show that there are opportunities for players big and small to enter new markets as long as the business model is good. And the MVNO business model is of interest in Africa. There are huge opportunities as many regulators would like to see MVNOs in their market. So incumbents have to ask whether they are an opportunity or a threat, but if they are an opportunity then the carriers need to make sure they have a strong brand, a focus on an underserved market, good market reach and distribution and relevant content to make it a success.”

Chris Gabriel acknowledges that the rules of the game have changed, speaking of “a paradigm shift from customer numbers to customer value (share of wallet) and business models must adapt to optimising asset utilisation through right sizing, outsourcing and infrastructure sharing.”

The Zain Africa chief believes that collaboration between regulators, industry players, carriers and vendors is key to success in creating new products, services, ventures and partnerships, and the potential for future growth remains.

Indeed, a sign of the harsh operating environment facing African telecoms firms is the need for operators to manage their costs and maintain margins. Informa’s Jotischky notes that offsetting the ongoing fall in voice revenues is becoming central to operator strategies across the world. Not only are data services important as an income generator, but they are also useful as a customer retention tool. Investing in infrastructure to provide reliable data services to corporate and consumers will also be a focus of discussions.

“Those operators that adapt to the increased intensity of competition and the evolving role of communications will be best suited to surviving a dynamic but harsh operating environment,” says Jotischky.

In fact, there is a great deal that the African communications sector can teach the rest of the world’s telecoms markets. “There is great potential and value in emerging markets—relevant, affordable and localised products and services together with a lean optimised business model are key to creating value in low ARPU markets,” says Gabriel.

It has also been noted that the arrival of new undersea cables on the coasts of sub-Saharan Africa could foster the emergence of a new generation of data services – though the terrestrial networks also need to be extended if the potential of these cables is to be realised. Figures from Informa show that data revenues in Africa increased 13 per cent in the second quarter of 2009 to reach over $1bn. But we’re not talking about mobile broadband or YouTube here, it is clear that data services have to provide timely and relevant content and information to the region’s subscribers.

A good example of this is Safaricom’s m-pesa initiative in Kenya, which analysts agree has shown the way in mobile banking, as a revenue generator as well as a customer retention tool. Themba Khumalo, CEO of MTN Uganda, said that there is increased access to bandwidth in the country because of the landing of submarine cables such as EASSy on the continent. “Prices will come down so we will have to look at our own business model and price ourselves correctly. Data is a key area of concentration, we need to deliver value and great experience,” said Khumalo. “While we still need to maintain expensive connections from satellite for some time, customers will eventually see reduction in tariffs, as attractive pricing from other developed markets is coming in.”

But on the other hand, certain markets are likely to be much slower in adopting data services. Nagi Abboud, CEO of Atlantique Telecom, based in Cote d’Ivoire, said that most of his business is still based on voice. “The cost of data is still very high, and customers are not willing to pay,” he said. “But as more cables land prices will come down.”