african telecoms at a crossroad final

African Telecoms at a Crossroad

A.T. Kearney | African Telecoms at a Crossroad 2

Introduction Africa is the last frontier for the telecoms industry and has been attracting significant interest and investments. The market certainly offers attractive fundamentals: a population roughly as large as China and India, strong economic growth forecast at 6% p.a. over the next five years, an emerging middle class and still low penetration levels for telecoms services. However, after years of vibrant double digit growth, the rate of new subscriber acquisition has sharply decelerated. Intense competition is also driving a free-fall in prices and is placing pressure on margins. The African telecoms market is at a crossroad. The market will shift from being focused on upper classes and largely voice-centric, to a mass-market with a much more significant share of data services. This paradigm shift certainly offers substantial long-growth prospects. However, the transition process period, underway in most countries, might prove challenging given the adjustments required in price levels, cost base, offers and investments.

Figure 1 - The Paradigm Shift in the African Telecoms Market

Market Characteristics Today Tomorrow

Target Customers High and Middle Class

(Urban)

Mass Market (urban and

rural)

Market Segmentation Largely undifferentiated Highly segmented and bi-

polar market

Prices High (>10$c/min.) Affordable (3-6$c/min.)

Competitive Landscape Fragmented Concentrated

Share of Non-Voice

Revenues Negligible (<5%) Significant (>30%)

Networks 2G 2G/3G/4G

To successfully navigate through this transition process, we argue that industry leaders, with hopefully positive support from local governments / regulatory authorities, need to act today to find a new, robust growth path on the long-term.


Egypt

Morocco

South Africa

Nigeria

Ghana

64%

128%

80%

116%

Ivory Coast

79%

126%

Recent Developments in the African

Telecoms Market

The End of a Boom Era?

Recent growth in adoption of telecoms services has been breath-taking, largely driven by mobile voice services. There are now over 730MM mobile subscriptions, corresponding to a SIM-card penetration rate of over 65% and total revenues of US$40 Bn. Adoption of mobile services has been fuelled by increased network coverage and reducing prices for both services and mobile handsets (some now sell well under US$10).

Figure 2 – Growth in Mobile Subscribers in Africa

Growth in Mobile Subscribers (MM Sim Cards)

Mobile Penetration Rates

for Selected Countries

(H2 2012)

Source: GSMA, Merrill Lynch; A.T. Kearney Analysis

In 2011, growth in mobile penetration seems to have abruptly decelerated, with subscriber growth rates now in single digits in most countries. Industry observers attribute this to a variety of factors – including a tougher economic climate in some countries, prices still above affordability levels for the more modest socio-economic segments, and penetration rates gradually approaching so called saturation levels. Whilst all these facts are certainly relevant, they are in our view partly misleading. Multi-SIM ownership, which stands at approximately 30-50%, means that real penetration rates are in reality closer to 35%. Also, the abrupt deceleration in subscriber growth in 2011 is to a significant extent explained by the implementation of mandatory subscriber registration in a number of countries. As a result, the African telecoms market still offers ample room for growth from the current real population penetration rate of 35% to what we estimate to be saturation penetration rates of circa 60%-70%. Further adoption of data and Internet services, still in their infancy, will provide additional momentum to the development of telecoms services in Africa.

+37%

+7%

2015F

910

2014F

860

2013F

807

2012F

735

2011

620

2010

552

2009

458

2008

379

2007

283

2006

201

2005

136

2004

83

2003

53

2002

37

2001

26

2000

17


Intense Competition (and Plummeting Prices)

The telecoms market in Africa has attracted a flurry of both international and local investors. Global telecoms operators, such as Vodafone, France Telecom, Etisalat, Bharti Airtel and Millicom are particularly active on the continent. At the same time, Africa has seen the impressive development of home grown players such as MTN (South Africa), Glo (Nigeria) or Morocco Telecom (partly owned by Vivendi). The Sub-Saharan African telecoms market is largely controlled by five players, which represent over 70% of revenues. This apparent concentration is, nevertheless, misleading. The reality is that there are today over 3.5 mobile operators per market, with some countries such as Tanzania or Nigeria with over 8-9 operators. This situation is untenable given the importance of scale effects in the telecoms industry – in fact, it is incredibly rare to find a number four operator profitable anywhere in the world.

Figure 3 – In-Country Scale Effects in Africa:

The Relationship between Market Share and Profitability

Note: Data for 2008, 2009 and 2010 (depending on availability) Source: Companies annual reports; ML Wireless Matrix; A.T. Kearney Analysis

With over-supply, competitive intensity has been amplified by the deliberately aggressive pricing strategies of some players in an attempt to gain market share and grow the market. For instance, Bharti Airtel, following its acquisition of Zain’s African assets in 2010, tested its minute factory model in Kenya by halving price levels. Price reductions in the last two years have been, in some markets, quite staggering: from US$c 20/min to US$c 6/min in Nigeria for instance.

0

5

10

15

20

25

30

35

40

45

50

55

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

EB

ITD

A %

Market Share

Top Quartile

Bottom Quartile

Operatorstarget for consolidation

Operators vulnerable to liberalization

Operators to Focus on Cost Optimization

Operators vulnerable to market share loss


Figure 4 – Price Reductions in Selected African Markets

(March 2011 – Jun 2011)

Source: GSMA African Observatory, A.T. Kearney analysis

Decelerating revenue growth and price reductions are already placing telecoms operators under financial pressure. MTN Nigeria has seen its EBITDA margin drop by 4 points in one and half years, mainly driven by an ARPU decrease of 12%. Equally, from Q3 2011 to Q3 2012, the EBITDA margin of Millicom’s African operations dropped by 11%, following a decrease of 5% in ARPU. The impact of these market changes will be substantially different across markets – we expect markets with already high penetration levels and a large number of players (such as Nigeria, Ghana, South Africa) to face more challenging times than less competitive and developed markets (e.g., Togo, Zambia). The figure below provides a summary of the relative attractiveness of telecoms markets across Africa, taking into account market development and competitive intensity.

Namibia Libya Ethopia

61%

57%

35%

Togo Gabon Mali Congo Djibouti Cape Verde

Zimbabwe

17%15%

13% 13%11%

9%

26%


Figure 5 – African Telecoms Markets Heat Map

Source: ITU, Blycroft, A.T. Kearney analysis

Substantial Growth Potential for Data Connectivity and Value-

Added Services

Not all is doom and gloom however. In fact, data connectivity and valued-added services (VAS) are poised to grow strongly – starting admittedly from a particularly low base. Mobile data services (including SMS) represent on average 12% of African telecom operators’ total revenues. However, the average is skewed by a few Tier 1 markets such as South Africa and Kenya. In most other African countries, mobile data services are still at particularly low levels, with an average of 6% of total revenues. This is very substantially lower than in other emerging markets and, naturally, developed economies.

High penetration, high competitiveness

High penetration, low competitiveness

Low penetration, high competitiveness

Low penetration, low competitiveness


Figure 6 – Comparisons of data as % revenues and ARPU for Selected African and

Global Markets

1

st Tertile: Top markets in Africa in data % rev, e.g.: South Africa, Kenya

2nd

Tertile: Second markets in Africa in data % rev, e.g.: Nigeria, Ghana 3

rd Tertile: Bottom markets in Africa in data % rev, e.g.: Ivory Coast, Togo

Source: African operators, Merrill Lynch, A.T. Kearney analysis

There is ample evidence that the African consumer has significant interest in accessing Internet services, provided services are affordable and relevant. Today, ten per cent of the African population accesses the Internet on a regular basis, mainly through public access points such as cyber cafes, work or school. There are now close to 50MM Facebook accounts across Africa. However, Internet access through PCs remains quite limited, at approximately 1%, with some notable exceptions such as South Africa or Egypt. Looking forward, we expect strong growth of broadband access growth. Stronger diffusion of smartphones, with low cost versions expected to sell as low as US$30 in the upcoming future, will be the main driver of Internet access growth. However, mobile broadband will also constitute an important market and represent the bulk of PC-based access to the Internet. Broader access to the Internet will be an important enabler to develop the small VAS market in Africa – including services such as social networking, mobile content / entertainment or mobile financial services As a result, the market for Data and mobile VAS in Africa is expected to grow at 16% p.a. to reach US$14 Bn by 2016, representing close to 32% of total mobile revenues.

14%

52%

1%

5%

2nd Tertile

15%

15%

1st Tertile

33%

43%

Europe

6% 2nd & 3rd TertileAverage

South East AsiaIndia

12% Total African Average

6%

3rd Tertile

25%

28%

African MarketsARPU range(USD, 2011) $18-$20 $7-$9 $2-$6 $12-$35 $3 $4-$37

Data as % of revenues


Figure 7 – Growth of Data (incl. SMS) and VAS in Africa (2010-2016, USD Billion)

Source: Pyramid research

In summary, the African telecoms market still offers room for growth, estimated at 2% p.a. over the 2012-2016 period. This growth will be essentially driven by data / VAS services, with voice revenues eroding slightly.

Figure 8 - Growth in Mobile Revenues in Africa (US$Bn)

Source: Pyramid; A.T. Kearney Analysis

+16%

2016

14.0

10.0

1.7

2012

7.7

6.4

1.2

2011

6.4

5.5

0.9

2010

4.9

4.2

0.7

4.0

2015

12.1

9.1

3.0

2014

10.5

8.2

2.3

2013

9.0

7.3

VAS Data

2014

42.3

31.8

10.5

2013

41.3

32.3

9.0

2012

40.1

32.5

7.7

2011

38.9

32.5

43.4

2010

35.2

30.3

4.9

2009

31.2

+8%

2016

44.2

30.2

14.0

2015

+2%

12.1

32.0

28.5

3.5

6.430%

4%

CAGR 2009-2012

CAGR 2012-2016

VoiceData

16%

-2%


A Call to Action: Create the Path for

Renewed Profitable Growth With an African telecoms market at a crossroad, industry executives will have a tougher task ahead to drive further profitable growth. Growing a telecoms business in Africa is no longer just about putting up radio base stations and distribution networks faster than competition. In fact, we see six important priorities for leaders of telecoms operators in Africa.

Figure 9 – The African Telco CEO Agenda

1. Create a Sounder Economic Environment for the Industry

Escaping fundamental economics is impossible: only under exceptional circumstances do we see room for more than three mobile operators per country. With prices declining and a surge in capital expenditure requirements expected over the next few years, we anticipate that dozens of sub-scale operators will disappear. In some cases, this will be through in-country mergers, in others simply through shutting down loss-making operations. As a case in point, Telkom has recently shut-down its loss-making operation in Nigeria (Multi-Links). Beyond industry consolidation, telecoms operators face a number of regulatory and tax impediments to further profitable growth. Some governments and regulatory authorities view telecoms operators essentially as tax collection machines. They should also consider their broader role in stimulating economic growth.

CEOAgenda

Transform the Operating Model and Grow New Talent

Keep Investing in the Network

Drive a Step-Change in Operational Excellence

Sounder Economic Environment for the Industry

Drive Growth through Smarter Pricing & Value Proposition Differentiation

Accelerate the Development of New Services


To support the further growth of the industry and stimulate wider adoption of ICT services, we would encourage African governments to focus on the following initiatives:

Encourage wider and more affordable access to Internet devices. Governments should consider reducing import tariffs on devices such as mobile handsets or PCs, which amount to 20-50% in most African markets. We believe that programs to encourage computer literacy and ownership are also essential to digital inclusion and productivity improvements. For instance, the Ghanaian government removed in 2012 the import duties (10%) and import VAT (15%) on mobile handsets, which had a positive impact in increasing mobile penetration. In this case, it is expected that the increased tax revenues from a bigger mobile market will largely offset any losses on import taxes. In fact, total tax revenues are expected to be 24% higher1.

Provide access to additional spectrum to qualified operators. It is estimated that by 2016, Internet traffic in Middle East and Africa will reach 3,714 PB per month, driven mainly by Internet video2. However, spectrum allocation for mobile services is much lower than in most other regions in the world (Figure 10). In particular, essential spectrum for mobile broadband in the 800Mhz and 2.1Ghz range, has yet to be allocated. Other important spectrum bands – e.g., 2.3Ghz, 2.6Ghz and 3.5Ghz – have in many countries been attributed to a flurry of small, niche Wimax operators, which in many cases sub-utilize the spectrum;

Figure 10 Spectrum Licensed in Selected African Countries vs. International

Benchmarks

Source: GSMA

Adopt a more balanced approach to taxation of telecoms operators. Regulators / governments generate a substantial amount of revenues from the mobile industry in Africa. In 2010, the mobile ecosystem contributed around US$16bn to public funding in Africa, which represented 4.1% of total African government income. In some markets, individual operators account for a disproportionate amount of government income. For instance, MTN represented 5% of total tax income in Ghana in 20083. Beyond normal corporate taxes, operators are imposed various special taxes, ranging from revenue share, license fees, and special telecoms taxes. One specific issue which is now emerging is the high costs of recent license / spectrum attributions, which, in some cases, are considerably higher than in developed

1 GSMA, Taxation and the growth of mobile services in sub-Saharan Africa, 2012

2 Cisco Visual Networking Index, 2011

3 GSMA Africa Mobile Observatory

1662

73

70

Morocco

205

50

155

Tunisia

220

70

150

Nigeria

273

40

153

80

Mexico

360

240

120

China

395

70

110

215

Hong Kong

434

65

140

229

United States

513

108

120

285

Sweden

585

118

142

325

Germany

594

130

150

314

204

Cote d’Ivoire

3620

Botswana

94

34

60

Uganda

98

50

48

South Africa

700-900MHz

1800-1900MHz

2100-2600Mhz


markets (in relative terms). Therefore, African governments need to carefully balance the legitimate need to collect public funding with the ambition to encourage broader access to ICT services.

Encourage the development of cheaper, high bandwidth backbone capacity (national and international). US$2.8 Bn has been invested between 2010 and 2012 in building new submarine capacity in Africa. There are now eight submarine cables laid along the West and East coasts of Africa with a lit capacity of 1.57 Tbps4. Two additional cables, WACS and ACE, are expected to go live by 2012-2013, bringing the number of connected countries to more than 25. This submarine cable system offers a tremendous opportunity to finally bring a true broadband service to end-consumers in Africa at affordable prices. However, cheap access to this submarine cable capacity is not pervasive. In land-locked countries, links to submarine cables either do not exist or are priced dearly. Also, in countries such as Cameroun, mobile operators are obligated to buy national backbone capacity to the local incumbent, at particularly high prices. African governments should more actively seek to encourage the development of cheaper and higher bandwidth capacity, either through deregulation or government sponsored national / international backbone developments.

Adopt more ambitious ICT policies. ICT sector is crucial to the development of education, healthcare, agriculture and business services. Some African governments have already begun to adopt ICT policies that align with their development goals. For example, Ghana has established ICT as the cornerstone of its development of the economy:

“The Government of Ghana is committed to pursuing an ICT for Accelerated Development (ICT4AD) Vision aimed at improving the quality of life of the people of Ghana by significantly enriching their social, economic and cultural well-being through the rapid development and modernization of the economy and society using information and communication technologies as the main engine for accelerated and sustainable economic and social development.” 5

Other African governments need to adopt similarly ambitious ICT policies in order to drive the “rapid development and modernization of [their] economy and society”.

2. Drive Growth through Smarter Pricing and Value Proposition

Differentiation

Affordability of telecommunications in African countries is well below other markets – while in

South Africa one minute of work is worth half a minute on the phone, in the US a minute of

work is worth 19 minutes of telecommunication consumption. In fact, challenges in Africa are

well known with a substantial percentage of the population living below the poverty level.

However, the importance of the high and middle class has tripled over the last 30 years to

313 million people, with the correspondent increase in size and purchasing power. As a

result, a small proportion of the population is today driving the lion’s share of

telecommunications consumption, with less than 15% of the subscribers typically accounting

for 50% of the revenues.

4 Telegeography

5 Ghana Ministry of Communications


Figure 11 - High-Value Segment – A key Source of Value

Source: Client Finance Department; A.T. Kearney For telecoms operators, the structure of the customer base is critical in defining their growth and commercial strategies looking forward. The bulk of new subscriber growth will come from youth and the bottom-of-the pyramid. However, ARPU growth from greater data usage will come from high value customers. As a result, operators will need to increasingly operate in a bi-polar business model: ultra-low-cost services for the masses, combined with more sophisticated products and customer service for the higher value customers. This will require African telecoms operators to design and deliver greater value proposition differentiation. To maximize value capture, African operators will have to get smarter about pricing. On the one hand, they will certainly need to further reduce prices to maximize affordability for the masses and stimulate usage. On the other hand, they will need to move away from pure price competition on high value customers to create economic space for investing in products and customer service. In fact, in the last couple of years, we have seen African operators introducing quite innovative pricing plans. MTN Zone, a dynamic price plan – with discounts available throughout the day, depending on location and traffic per radio base station – is a clear success, in maximizing value and network usage, building customer loyalty and satisfaction (through superior network quality) and limiting competition (as tariffs are not known in advance). However, more needs to be done. It is critical to have clear and differentiated value propositions for the different segments, addressing customer needs in the right way. African operators can leverage the experience of operators in more developed markets, where outperforming operators combine different strategies such as segmentation / customer base management and innovation. A strong focus on segmentation with insights into evolving consumer behaviour has been used by several players in developed markets (e.g. Vodafone or O2). Some have even adopted a multi-brand strategy, which gives them flexibility to tackle the market and competitors in different ways.

LV

MV

HV

VHV

Total subs

100%

53%

33%

9%

5%

Subscribers MoUs

LV

MV

HV

VHV

Total MoU

100%

15%

41%

24%

21%

On-net voice revenues

LV

MV

HV

VHV

Total revenues

100%

12%

40%

25%

23%


Addressing the high value segment is not about having the lowest price – it is about having the right price for the right customer experience. Price differentiation is thus a tool to been introduced – e.g. integrated offers to increase stickiness, quality of service differentiation, smart tariffs structure (e.g. flat rates for voice and sms, etc), among others. However, the low value segment cannot be forgotten by operators while remaining competitive without further decreasing prices. The optimization of on-net / off-net price differences, carefully balancing network effects vs. multi-SIM is a key issue. Moreover, operators need to follow a few key rules:

Keep it simple as complex pricing doesn’t work in low income markets (e.g., digressive pricing where 1st min is offered at a premium to subsequent mins);

Use volume to build affordability (e.g., sell bundles with lower volume at higher price);

Base pricing on overall customer yield concept (i.e., avoid a siloed view on pricing; measuring the pricing impact from just one of customer’s many revenue streams);

Adapt to the recharging behaviour of your customer base (e.g., pricing products within the most commonly used recharge denomination limit)

As a result, we expect to see more differentiated strategies in Africa, with operators clearly moving away from largely undifferentiated offers to more sophisticated value propositions and customer management practices.

3. Accelerate the Development of New Services

As discussed in the previous chapter, data and VAS are expected to generate revenues of US$4.8 Bn and US$4.0 Bn respectively by 2016.

Data

The African data market presents two distinct segments: large and small screen.

The large screen market consists in accessing the Internet through a PC, notebook or

potentially even a television set through a 3G or 4G datacard. This is an important market for

telecoms operators, given the absence of a proper fixed network in most countries.

However, the main challenge in expanding this market will be growing the penetration of

large screen devices such as PCs. Some operators in Africa are actively selling PCs now

and, in some cases, subsidizing them.

The small screen market consists in accessing the Internet from a smartphone or tablet.

Declining prices for smartphones will help drive adoption for the mobile Internet. Retail prices

for smartphones are today on average at US$250, but entry smartphones come as low as

US$70. In the future, we expect ultra-low cost smartphones to be as low as 35$. The

combination of lower handset and data service prices will enable the mobile Internet to

become truly mass-market in Africa. We expect that 50% of mobile phone subscribers will be

using the Internet in the next five years, largely from mobile devices.


Value-Added Services

The most prominent of Value-Added Services are Mobile Financial Services (Figure 12),

which had a phenomenal growth in the continent since it was first launched in Kenya in

2007. In an effort to “bank the unbanked”, after 30 months in services, Safaricom’s M-Pesa

in Kenya had 8.5M users who have transferred US$3.7Bn (~10% of Kenya’s GDP) worth of

transactions6. Other operators have followed suit and launched mobile payment services in

several African countries. For example, Millicom launched its mobile money wallet in

Tanzania in September 2010 and reached 10% penetration of its subscribers in less than

one year later. In Ghana, Millicom launched a micro-insurance service as a loyalty tool. The

results showed a 15% increase in ARPU and 20% churn reduction. 7

Figure 12 - Sub-Saharan Africa, mobile VAS announcements, by service type, Jan

2009 – Aug 2012

Source: Informa, A.T. Kearney analysis

Other VAS opportunities that are growing in the region include entertainment (music, ring tones …), m-Health, m-Learning, and m-Agri. New entrant VAS providers, Comviva and Spice, have brought their expertise from India and are putting great emphasis on voice-based services and content such as ring-back tones and radio channels, which were very successful services in India. The success of these content services will vary dramatically from country to country depending on the local culture and taste, literacy rate and GDP / capita. In Nigeria for example, operators are making close to $150 million per year from mobile music, driven mainly by ring-back tones. MTN generated $3 Million a month in 2011 from this service and reached 4.4 million subscribers (30% of total subscriber base)8. By providing new value-added services to their customers, operators will benefit from several ways:

Increase the ARPU

Increase customer royalty and reduce churn

Increase total revenues

6 Mobile Banking: The impact of M-Pesa in Kenya. Mbiti, I. and Weil, D.N. (2011). National Bureau of Economic

Research Working Paper Series. 7 Millicom, Capital Markets Day, 2011

8 Informa telecoms & Media, 2012

Financial Services55%

Messaging13%

Entertainment7%

Web and apps8%

Other18%


Operators should carefully evaluate the VAS opportunities in their local markets and develop/invest in the most promising one.

4. Drive a Step-Change in Operational Excellence

The focus for telecoms operators in Africa has until now been on keeping up with the astounding growth of subscribers and traffic. Improving operational excellence and reducing costs is more recent on the CEO agenda, but is certainly gaining more attention as markets mature and prices decline. In fact, costs in Africa are still significantly higher than in other comparable emerging markets. For instance, costs per subscriber in Africa are 50% higher than in India. Based on A.T. Kearney’s experience in cost benchmarking and structuring cost reduction programs in Africa, the potential for performance improvement is very significant. In our recent work with several operators, we have identified free cash flow improvement potential of at least 20%-30%.

Figure 13 – Financial Performance Improvement Potential for a Telecom Operator in

Africa (Average OPEX+ CAPEX savings potential by lever)

Source: A.T. Kearney Analysis

As a result, operators active in Africa need to amplify initiatives to substantially improve their operational excellence. This is not just about reducing costs, but also improving the effectiveness of key processes (e.g., faster network roll-out, better quality of service). In our experience, some of the highest impact initiatives include:

Network. Most operators have engaged initiatives such as sustainably reducing fuel consumption (which can account for over 50% of network operating expenses in Africa in comparison with 15% in mature markets), tower sharing / outsourcing and migrating to a managed services model. In fact, a large number of tower and network outsourcing deals are currently in the pipeline. These are all necessary measures, but the real issue is that there are simply too many networks per country. Operators will now have to look at more structural ways to reduce network costs, in particular through active network sharing.

TotalOthersRoaming & Interco

SourcingMarketingSalesITNetwork ops &

deployment, optimization

Site sharing

Power

Capex

Opex

Top Line (Gross Margins)

% total

impact

20%

60%

20%

35% 30% 15%10% 15% 3% 13% 35% 5% 22%

Cost savings as % of addressed baseline


Procurement. Aside from the more global operators, regional players are still in the early stages of re-enforcing their procurement teams. Significant room for improvement exists in the procurement area and different levers can be used – from the straightforward supplier consolidation to a more complex review of specifications to generate savings of 10 to 15% of baseline spend (Opex and Capex), with a particularly high impact in network costs (which typically account for over 35% of total spend).

Distribution. Distribution of mobile services in Africa relies essentially on indirect distribution, although operators are actively building direct channels as they seek to sell a broader range of services and devices and increase market share. However, distribution costs in Africa are particularly high – 10% of revenues on average vs. 5% globally, partially driven by higher churn rates and by distribution networks with too many layers. In this context, revisiting the distribution strategy (e.g., reducing the number of intermediaries) and the commission model (e.g. focusing more and more in quality of service provided and in the ability to perform) are two key levers to optimize distribution costs, while sustaining and even increasing gross adds and retention.

Shared services. Another important change is the need to better capitalize on global scale effects. This is of particular importance in Africa where the vast majority of operators are below scale effects (close to 130 operators have less than 5MM subscribers). As a result, there is value in consolidating globally or regionally a number of activities. The most obvious candidates include procurement, wholesale services, selected product developments, and selected IT developments and infrastructure. In a second stage, one might consider centralizing other less obvious candidates - e.g., creating shared services for support functions (e.g., finance, HR).

5. Keep Investing in the Network

Telecoms operators in Africa have committed substantial investments to build networks with sufficient coverage and capacity. With more modest revenue growth and pressure on margins, reducing capital expenditures budgets has been the main driver of free cash flow appreciation for many operators active in the region. To the extent, that Capex budgets for some operators are now at dangerously low levels, at 10%-12% of revenues in some cases.

Figure 14 –Capital Expenditures of Mobile Operators in Africa

(USD per subscriber, 2012)

56

2525

16

9

14

Mature Market

Nigeria South Africa

Algeria MoroccoEgypt


Source: ML Wireless Matrix A.T. Kearney Analysis

Pressure to increase capital expenditures is mounting intensely – networks are saturated in dense urban areas, the launch of 3G/4G services requires substantial investments in new radio and transmission capacity and most operators need to embark in heavy network modernization programs, particularly for their core network. As a result, we expect a surge in capital expenditure requirements over the next three to four years.

6. Transform the Operating Model and Grow New Talent

Until now, operators’ main challenge has been to build networks and distribution channels as quickly and cheaply as possible. With limited capabilities available from external service providers, they have had to build up capabilities to large extent internally. Looking forward, telecom operators’ organizations will face new challenges, including increasing customer differentiation, selling a broader range of services, being more agile in an intensely competitive and fast moving environment whilst reducing costs. As a result, they will need to transform their operating model and improve their core capabilities. Some of the key priorities include:

Create a more customer centric organization, which could lead in some cases to re-organizing against customer segments (at a basic level consumer vs. business);

Outsource non-core activities, particularly in network, IT and call centres;

Re-enforce marketing and distribution skills / capabilities;

Attract new and different talent, to grow adjacent businesses such as mobile financial services or ICT;

More extensively rely on IT systems to automate core processes, enabling the organization to focus on higher value-added tasks;

Drive tighter and more balanced financial management, by re-enforcing management controlling capabilities.


Conclusion Ten years ago, who would have imagined the phenomenal growth the African telecom market has witnessed. We believe that the next ten years will be equally exciting and that Africa will face a digital revolution, enabled by ubiquitous and affordable access to Internet services. Telecoms operators will play a central road in making that vision a reality. At the same time, telecoms operators will face a challenging two to three year transition period which will require much stronger, precise and balanced management. Executives of telecoms operators will be faced with difficult, and sometimes contradictory, decisions. Striking the right balance between more aggressively reducing costs whilst still investing in the business will separate the winners from the losers.


About the Authors

Laurent Viviez Partner, Head of African Telecoms Practice [email protected]

Marc Biosca Partner, Telecoms Practice [email protected] Isabel Neiva Manager, Telecoms Practice [email protected]

Makram Atiyah Manager, Telecoms Practice [email protected]

http://home.atkearney.com/web/guest/globalink


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