Africa Connected A Telecommunications Growth Story

Africa
connected
A telecommunications
growth story
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Contacts
Vincent de La Bachelerie
Global Telecommunications Leader

Tel: +33 1 4693 6205
vincent.de.la.bachelerie@fr.ey.com
Marc Chaya
Global Telecommunications Markets Leader

Tel: +33 1 4693 8515
marc.chaya@fr.ey.com
Holger Forst
EMEIA Telecommunications Leader

Tel: +49 221 2779 20171
holger.forst@de.ey.com
Julia Lamberth
Global Telecommunications Center – Africa

Tel: +27 11 772 3385
julia.lamberth@za.ey,com
Serge Thiemelé
Global Telecommunications Center – Africa

Tel: +225 2030 6050
serge.thiemele@ci.ey.com
Jonathan Dharmapalan
Global Telecommunications Center – Beijing

Tel: +86 10 5815 2821
jonathan.dharmapalan@cn.ey.com
About Ernst & Young’s Global Telecommunications Center
In a rapidly changing environment, telecommunications operators are facing

challenges of growth, operational efficiency, convergence, technology and
increasing regulatory pressures. Ernst & Young’s Global Telecommunications
Center brings together a worldwide team of professionals to help you achieve your
potential a team with deep technical experience in providing assurance, tax,
transaction and advisory services. The Center works to anticipate market trends,
identify the implications and develop points of view on relevant industry issues.
Ultimately, it enables us to help you meet your goals and compete more
effectively. It’s how Ernst & Young makes a difference.
ey.com/telecommunications
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Foreword
Welcome to Ernst & Young’s Shifting markets in global telecoms has seen Africa becoming a significant market for
first telecommunications study international operators. Recognizing the increasing importance of telecommunication
focused on the African region. investments in Africa and the fast growing telecommunications industry on the
This is one of the ongoing continent, Ernst & Young has conducted its first industry study on the region.
series of major studies
conducted by Ernst & Young to Senior executives from 28 major telecommunications operators right across Africa
participated in the study by giving us their first-hand industry perspectives. We
monitor and analyze the
conducted in-depth interviews with all these participants, supported by research,
evolving views of business
analysis, and insights from our global analyst team and industry professionals.
leaders across the global
telecommunications industry.
We hope you find this report relevant and thought-provoking, whether you come to it
as a participant in the African telecommunications market or as a customer, investor,
regulator, or informed observer. We would like to thank once again all the participants
who have given their time to help us produce it.
Vincent de La Bachelerie
Global Telecommunications Leader
Africa connected - A telecommunication’s growth story

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Contents
Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
African telecommunications in context . . . . . . . . . . . . . . . . . . . . . . . . . .4
Challenges in the African market . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Telecommunications industry response . . . . . . . . . . . . . . . . . . . . . . . .22
The way forward in the African telecommunications market . . . . . . . .32
Key success factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
2 Africa connected A telecommunications growth story

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Research methodology
About the report

This research is based on in-depth, questionnaire-led interviews conducted in the third quarter of 2008 with 28 senior figures and
decision-makers active in the African telecommunications industries who have country-wide, regional or pan-African
responsibilities. The respondent organizations include telecommunications operators at a local, regional and global level. The report
is a synthesis of our interviewees’ perspectives, and the analysis and insights of our Ernst & Young telecommunications industry
professionals. All comments have been kept unattributed to enable respondents to speak freely.
Participants
Michel Aka-Anghui Percy Grundy Nazir Patel
Chief Financial Officer, Managing Director, Group Executive: Finance,
Atlantique Telecom Millicom Ghana Limited MTN Group Limited
Heiko Schlittke Zul Javid Justin Ramayia

Acting Managing Director, Country General Manager, Warid Telecom Chief Executive Officer,
Zain Tanzania Ltd Multilinks Telecommunications
Macsud Ismail
Nigel Williams Finance Director, mCel Dominique Despoisse
Finance Director, Zain Uganda Ltd Chief Financial Officer, Sentel
Steven Jurgens
François Couturier Cluster Manager, French Africa, Mamudo Ibraimo
Chief Financial Officer, Millicom International Cellular Chief Executive Officer,
Côte d’Ivoire Telecom Telecomunicacões de Mozambique
Leonidas Skarlatos
Dag-Finn Werner Chief Financial Officer, MTN Ghana Ltd Deon Fredericks
Vice President Central Africa, Acting Group Chief Financial Officer,
Detecon Consulting Noel Meier Telkom South Africa
Chief Executive Officer, MTN Uganda Ltd
Christophe Eouzan Malick Gueye
Finance Director, AMEA, France Telecom Pablo Guardia Chief Executive Officer, Teylium Telecom
Chief Executive Officer,
Brefo Kwakye Millicom Tanzania Limited Abdulbaset Elazzabi
Marketing & Communication Officer, Managing Director,
Ghana Telecom Tumba Bob Matamba Uganda Telecom Limited
Chairman, TIGO,
Christian Serriere
Democratic Republic of Congo And four other African operators.
Chief Financial Officer, MTN Congo Ltd
Zhu Linlang
Chief Financial Officer, Congo Chine
Telecom
Africa connected – A telecommunication’s growth story 1

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Executive summary
Telecommunications has transformed Africa

From a continent where you would struggle to find a phone ten years ago to one that is
on the forefront of a telecommnunications revolution, Africa is very much the mobile
continent.
During the period from 2002, the French telecommunications market grew at a
compound annual growth rate (CAGR) of 7.5% and the Brazilian market at 28%,1 while
the African market experienced 49.3% growth.
This growth has been powered by an African economy that has been thriving on the
back of the commodities boom and increased liberalization. Even with the current
economic downturn, it is expected that the African telecommunications market will
continue to grow faster than any other region over the next three to five years.2
Data set to make an appearance as a revenue

generator
Voice services should remain the largest contributor to operator revenues in the
medium term, but data could start to play an important role. The catalyst of this
change should be the arrival of the new submarine cable systems.
These cables are expected to be a force for change in both the voice and data markets
for the countries that the new cables reach. At the same time, many operators and
governments are building national and metropolitan fiber networks to enable easy
access to the new services.
The low average revenue per user (ARPU)

market beckons
Operators are looking at two areas to continue revenue growth. The first is delivering
services to people that have not had access to mobile services before. Profitably
addressing this low-ARPU market is a challenge for most operators across the
continent. Some have dedicated programs to offer communications in underserviced
rural areas, while others are relying on their standard offerings to target this market.
The second area that operators are targeting to increase revenues is the introduction
of value-added services, with mobile banking at the forefront of these applications.
1 International Telecommunications Union

2 Wireless Intelligence
2 Africa connected – A telecommunication’s growth story

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| Exexutive summary
Competition escalates, innovation is key

The telecommunications market is becoming ever more competitive. Despite the
global slowdown, the number of new licenses issued and mergers and acquisitions has
continued apace in Africa during the last year. As competition increases, operational
efficiency should take on added importance for telecommunications operators
Multinational operators are on the lookout for acquisition targets to enable geographic
expansion. Consolidation seems inevitable, with moves into new segments being a key
defensive strategy for many players.
Operators are using innovation to maximize market share and the stage is set for a
contest between converged, value-added operators and low-cost voice-focused
operators.
Networks in more mature African markets are starting to reposition themselves as

broad spectrum information and communication technology (ICT) providers rather
than simply telecommunications providers.
Still a challenging environment

While an understanding of how to effectively operate telecommunications companies
in Africa is growing, significant challenges still need to be overcome by operators.
These include regulatory and political uncertainty. While political stability in Africa on
the whole has improved, Operators are wary of the ability of governments to interfere
in the regulatory process. The need for regulatory independence has never been
higher.
Operators continue to be challenged by infrastructure problems, including unreliable

electricity supply. Also, the reluctance of some governments to relinquish their hold on
international gateways has made it difficult for non-state owned entities to get equal
access to bandwidth in certain countries.
Operators are struggling to find and retain talent. This is not a challenge unique to
African operators, as across the globe operators are struggling to attract talent to fill
key technical and management positions.

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African telecommunications in
context
“Markets in Africa are not African markets are at different stages of

uniform. There are markets
where significant market evolution
deregulation and liberalization
African markets are at differing stages of evolution, not just in the telecommunications
has taken place. Other
field, but across the broader economic and social spectrum. From countries like South
markets in Africa continue to
Africa and Egypt, which have the largest economies, to countries like Somalia, which
have restrictive regulation
has a limited formal economy, the differences are significant.
with very limited competition
or even market monopolies” In telecommunications, the pace of development has been equally varied. In 2008,
Libya became the first African country to pass the 100% mobile penetration mark, with
Fixed line operator South Africa not far behind at 98%. (See Fig 1.1)
A deeper look into these figures reveals that only 6 countries (Libya, Tunisia, Algeria,
Gabon, Seychelles and South Africa) have penetration levels higher than 80%, while
24 fall below the 20% penetration mark and 17 have mobile penetration levels of less
than 10%. (See Fig 1.1)
Demographics have a key influence on the speed at which penetration increases.

Countries like Seychelles (108% penetration) and Gabon (91% penetration), which
have smaller populations (82,000 in the case of Seychelles and 1.4 million for
Gabon), will typically have elevated penetration levels. Larger countries such as
Nigeria, with almost 150 million people, should take longer to reach high penetration
levels. (See Fig 1.1)
In the sub-categories of developed, emerging and virgin markets, there are still
substantial differences between individual countries. However, the potential for
additional growth even in the developed markets remains strong, as operators move to
broaden the set of services that they offer.
Countries in the emerging market category are currently the source of greatest focus,
as operators look to enter these markets or aggressively entrench their positions to
fend off competitors and new entrants. Licenses in this segment are at a premium and
attract the attention of many of the prominent regional players. This is evidenced by
the recent attention garnered by the privatization of Malian incumbent operator
Sotelma.
Angola has seen an annual GDP growth rate of 20%. Mobile penetration in the country
3 BMI-T Communications Technologies Handbook
2008 has grown from 14% in 2006 to 31% in 2008.4 It is expected that the Angolan market
will double from its current penetration rate over the next two years. With only one
GSM operator dominating the market, this could become a key battleground in the
next 12-18 months should the regulator license another GSM operator as expected.3
4 Africa connected - A telecommunication’s growth story

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| African telecommunications in context
“The African market has a Countries in the virgin sector may present some of the greatest risks as well as some of
lower penetration rate, leading the greatest opportunities. The reasons for their slow development are varied. Some,
to higher opportunities for such as Ethiopia, have been characterized by slow liberalization of the market, while
growth” others, such as Somalia, are marked by political uncertainty.
Other virgin markets have simply been neglected as operators focus their attention on
Mobile operator
more potentially lucrative markets. As these more lucrative markets reach penetration,
smaller markets, such as Mozambique, Tanzania and Mali are beginning to receive
greater interest.
Fig 1.1
Developed4 Emerging4 Virgin4

Over 50% penetration 20 to 49% penetration Less than 20% penetration
• Lower mobile net additions • Highest net additions per month • Highly regulated or politically unstable
• These include: • These include: markets
Algeria Mauritius Angola Liberia • These include:
Botswana Morocco Benin Mali Burkina Faso Eritrea
Gabon Namibia Cameroon Nigeria Burundi Ethiopia
Libya Seychelles Congo Sao Tome & Central African Madagascar
Mauritania South Africa Egypt Principe Republic Malawi
Tunisia Equatorial Guinea Senegal Chad Mozambique
Gambia Sierra Leone Comoros Niger
Ghana Sudan Djibouti Rwanda
Guinea Republic Swaziland Democratic Somalia
Guinea-Bissau Tanzania Republic of Congo Zimbabwe
Ivory Coast Togo (DRC)
Kenya Uganda
Lesotho Zambia
4 International Telecommunications Union;

Ernst & Young Analysis

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Fig 1.2: African mobile markets – 2007 penetration(%)5
ia
Tunis
co
oc
or
M
Algeria
Libya
Egypt
Western Sahara
Mauritania
Cape Verde Mali
Senegal Niger
Gambia Eritrea
Chad
Guinea-Bissau Burkina Faso Sudan
Guinea
Djibouti
Togo
Sierra Leone Nigeria

Benin
Ivory
Ghana
Coast
Liberia Ethiopia
Cameroon Central African Republic
Equatorial Guinea Somalia
da
Congo
an
Ug
Sao Tome & Principe Gabon Democratic Republic Kenya
of Congo
Rwanda
Burundi
Key
Tanzania Seychelles
Less than 20%
20% to 50% Comoros

Angola
Malawi
Above 50% Zambia
Zimbabwe r Mauritius
sca
Namibia
ue
ga
mbiq
da
Botswana Reunion
Ma
Moza
Swaziland
South Africa Lesotho

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Regional snapshot
West Africa has seen its growth driven primarily by development small markets, are moving aggressively to use
in its largest market, Nigeria. 2008 saw Nigeria overtake South telecommunications as a catalyst for broader economic growth.
Africa as the largest mobile market on the continent. The region
is expected to continue to be the fastest growing region with The Horn of Africa remains under-penetrated. Because of
Nigeria and Ghana showing the strongest subscriber growth. political uncertainty in Somalia, mobile penetration remains low.
In Ethiopia, limited competition has resulted in mobile
Growth in Southern Africa, however, is beginning to slow as the penetration remaining below the 2% mark.
South African market starts to reach saturation point. The more
liberalized markets in both Southern and Eastern Africa have North Africa has a reputation for having the most mature
made these regions attractive to investors and both have markets on the continent but the delayed privatizations in
experienced high levels of foreign direct investment. Algeria and Tunisia are holding them back. The closure of the
second fixed-line operator in Algeria in late 2008 is testament to
With the South African market aproaching saturation, operators the status of competiveness in that market.
are working quickly to broaden their offerings and move into the
enterprise services field. The greater than 100% penetration in Libya, along with the
political dispensation, may limit the options for
East Africa is moving ahead, with countries such as Kenya and telecommunications growth in the territory.
Tanzania reporting rapid growth. Kenya, with the resurgence of
Telkom Kenya under the ownership of France Telecom, and the The slow deployment of 3G services has put most countries in
launch of Econet’s Yu service, is one of the most competitive the region behind a number of other African countries, in terms
markets on the continent. Uganda, Burundi and Rwanda, while of technical advancement.
Fig 1.3: Mobile penetration by African region6
60%
50%
40%
30%
20%
10%
0%
Q2 06 Q2 07 Q2 08
Northern Western Central Eastern
6 Ernst & Young Analysis

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“The opportunity for sustained Africa is the fastest growing mobile market in the
growth in Africa may be higher
than those in other emerging world
markets”
The last five years have been a golden age for mobile telephony on the continent. Between
2002 and 2007, the mobile phone market in Africa grew by 49.3% (CAGR) as opposed to
Mobile operator
Asia which grew at 27.4%.7
“Strong growth is still Even with the great disparities between individual African countries, the average mobile
expected in the telecom penetration for the continent stands at 37% and this is expected to rise to 61% by 2012.8
market: first with voice, then Compared with Asia, where mobile penetration is already at 53% and Europe, where
with data when voice becomes penetration has topped 125%, it is clear where the fastest growth is likely to be over the next
more mature” five years.8
Mobile operator Pre-paid mobile services continue to be the dominant form of transaction on the continent
accounting for 96% of users.8 Only South Africa, with a 13% contract customer base, has
less than 90% of its market on pre-paid.8 As operators strive to bring low APRU subscribers
onto their networks, pre-paid should continue to be the preferred method of payment.
Telecommunications growth should continue to be driven by voice services, but within a few
years, data is expected to become an increasing part of the income of operators across the
continent.
While the GSM family of technologies – based on wideband CDMA (W-CDMA) – are likely to
dominate the market, there are challenges in the form of CDMA EVDO and WiMAX. At
present, there are only 14 W-CDMA networks on the continent, with three of these in South
Africa. This is clearly a market still in its infancy, but it is estimated that by the end of 2012
there will be 63 million W-CDMA connections on the continent as opposed to 7.6 million
CDMA EVDO connections.9
Fig 1.4: African mobile subscribers 2000-1210
700,000,000
600,000,000
Medium growth High growth
500,000,000 phase phase
400,000,000
300,000,000
200,000,000
7 International Telecommunications Union 100,000,000

10 Wireless Intelligence 0
Q4 000
Q4 001
Q4 02
Q4 03
Q4 004
Q4 05
Q4 006
Q4 07
Q4 008
Q4 009
Q4 10
Q4 011
12
20
20
20
20
20
20
2
2
2
2
2
Q4

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“Our main investment is going The “digital divide” still needs to be crossed
for geographical coverage
(from big cities to rural areas) With 70% of the population of sub-Saharan Africa still living in rural areas, the challenge
rather than for new to operators is to reach remote pockets of potential consumers in a cost-effective way.11
technologies” Figure 1.6 illustrates how low the overall coverage of the population remains across the
continent. While North Africa or countries like South Africa are approaching 100%
Mobile operator population coverage, the average across sub-Saharan Africa is just over 50%. This
figure has only increased by 10% in the last four years, at a time when penetration
levels have more than doubled.11
Until now, operators have been able to concentrate their efforts on urban areas, but as
growth from these areas starts to slow, there is likely to be a need to look further afield.
These rural initiatives carry their own challenges, with the provision of infrastructure to
support telecommunications services especially pertinent. The focus has been on
ensuring that communities, rather than individuals, are connected and this is unlikely to
change in the short term. Governments across the continent are particularly concerned
with driving telecommunications into areas that have not had access in the past. Many
of the public projects underway at the moment, including the deployment of fiber in
Botswana, Malawi and Rwanda, are about increasing accessibility to rural communities.
Fig 1.5: Proportion of rural population by region 200711 Fig 1.6: Mobile population coverage in Africa 200612
% population % population
90 100
80 90
70 80
60 70
60
50
50
40
40
30
30
20 20
10 10
0 0
es
Ar rica
a
ia
a
a
sia
ia
Sub-Saharan Africa North South

ric
ric
ric
ric
As
As
at
lA
Af
Af
Af
Af
Af
Africa Africa Africa

st
n
ra
er
ab
rn
n
rn
e
nt
er
dl
st
he
he
Ce
id
st
Ea
rt
ut
M
Ea
No
h
So
ut
ut
So
So
11 State of World Population 2007 UNDP


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“We also expect an increased Fixed line is seeing increased investment

deployment of fiber optic
network for national and Historically, protracted under-investment in public telecommunications has rendered
metropolitan area fixed line telecommunications largely insignificant. Egypt, with the highest fixed line
transmission networks” penetration on the continent, only has a 15% penetration, while mobile penetration
rates approach 100% in some countries, as illustrated by figure 1.7. Mobile phones
Fixed line operator outnumber fixed lines by 10 times in Africa, with the gap widening.
This figure is unlikely to change dramatically, as fixed line services will not be in a
position to challenge mobile services as the preferred method of connecting
consumers to networks in the short to medium term.
However, the investment into new fixed networks to provide backhaul and core
network services is seeing rapid growth. This investment is coming from individual
operators looking to access more cost-effective and reliable networks. These next-
generation networks also provide the foundation for delivering high-speed network
access for businesses and consumers.
Fig 1.7: Africa fixed and mobile penetration levels 200713

% fixed line penetration
15
Egypt
Tunisia
10 South Africa
Botswana
Namibia
Morocco
5 Gambia
Swaziland
Senegal Gabon
Ghana
Tanzania Nigeria Ivory Coast
Chad Kenya
Mozambique
0
10 20 30 40 50 60 70 80 90
% mobile
penetration


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“Broadband does have a The fixed broadband market remains small

future in Africa… because
there will be strong Africa has the lowest internet penetration in the world at 5.4% with only 12 countries
competition among big having a penetration rate of over 1%. In comparison, Asia only has five countries below
companies which will the 1% penetration mark.14 Broadband adoption is also low, with Egypt having the
eventually drive the price highest penetration at 8%.14
down”
Various efforts to address this issue, such as the NEPAD eSchools initiative to provide
Mobile operator computers in schools, with pilot projects in 17 countries, have met with mixed success,
mainly due to the high cost of bandwidth within almost every African country. In
Angola, for example, the cost of the cheapest broadband package is equivalent to 78%
of the gross national income (GNI) per capita.15
The high cost of bandwidth is often a result of the reluctance of some countries to
deregulate their international gateways, and the reliance of many countries on satellite
links for international connectivity. Most of the countries in the eastern region of the
continent are completely dependent on satellite as a backhaul mechanism, as is almost
every landlocked country. It is this dependence that has stimulated the participation of
operators and governments in the laying of submarine cable systems.
Fig 1.8: Internet and broadband population penetration 200716

% population penetration
16 Internet users
14 Broadband subscribers
12
10 Africa average
internet penetration
8 5.4% (2007)
0
Egypt Algeria South Kenya Botswana Cote
Africa d’Ivoire
14 www.internetworldstats.com
15 World Bank, Ernst & Young Analysis

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“We are noticing the Mobile licensing has helped to unlock growth
emergence of a number of
countries who have adopted a The initial wave of GSM licenses issued during the 1990s, such as Vodacom and MTN
converged/unified license in South Africa and Safaricom in Kenya, ignited the mobile flame in Africa. However,
regime. This blurs the old our research shows that it wasn’t until the second wave of licenses were issued in the
distinction between fixed and late 1990s and early 2000 that mobile penetration across the continent started to
mobile services” become a mass market phenomenon.
Fixed line operator The awarding of new licenses in 2009 is likely to be dominated by the license
conversion process in South Africa which should see a substantial number of value-
added network services providers permitted to run their own networks. The number
that actually launch services is likely to be much smaller.
As regulators across the continent look to increase competition, the awarding of new
licenses will continue. Already the governments of Morocco and Mozambique have
indicated that they intend to issue a license for an additional mobile operator during
the course of 2009.
The introduction of unified licenses in countries such as Ghana, Uganda and Nigeria
has resulted in greater opportunities for operators. These licenses allow operators to
choose the technology most suited to their needs and allow mobile operators the
opportunity to venture into the fixed line environment, as well as offering value-added
services.

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Drivers of the African growth story Telecommunications is pivotal to

African economies have benefited significantly from the recent African economics
boom in commodity prices, driven largely by demand from
Growing at an average of 14.5% since 2003, Africa’s economy
China. Much of this additional revenue has been re-invested into
has seen substantial development since the turn of the
infrastructure projects, including improving healthcare and
century.17
education.
As a critical element of the modern information society,

Increased government expenditure has seen a corresponding
telecommunications has a direct influence on the performance
increase in disposable income.17 This increase in consumer
of an economy. It is estimated that a 10% increase in telephone
spending has been mirrored by a period of relative political
penetration results in a 1.2% increase in GDP in emerging
stability on the continent, with Africa more open to business
markets, and a 0.6% increase in developed markets.18
than at any point in the past.
The introduction of private mobile operators to the continent has

Consolidation in the telecommunications market and the growth
unlocked new growth opportunities for many African economies.
of regional operators has driven efficiencies, enabled economies
The investment by mobile operators has also brought significant
of scale and delivered greater growth potential. The pure
foreign direct investment and increased opportunities for formal
African operator, however, is largely a thing of the past, with
employment in countries where the informal economy dwarfs
almost all of the regional operators having expanded beyond the
the formal.
continent, wither organically or by acquisition.
The global economic crisis is expected to have a limited impact

Apart from isolated hot spots, Africa has enjoyed a period of
on the region’s telecommunications market. Relative market
relative political and economic stability over the past five years.
maturity and limited exposure to global markets should see
This stability, combined with declining revenues in developed
African telecommunications continue on its current growth path.
markets, has attracted a new wave of global operators to the
continent.
There may be some short-term impact caused by currency
fluctuations and lower commodity prices. The biggest impact of
Telecommunications growth has also been encouraged by the
the current economic slowdown may come from the increased
easing of regulatory restrictions by African governments and
consolidation of the market, as operators looking to fund
increased liberalization across the market.
operational and capital expenditure may find it harder to gain
access to finance.
17 United Nations Statistics Division

18 Global Mobile Tax Review 2006-2007 GSM Association, Deloitte

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Challenges in the African

market
“Governance, including In our research, political uncertainty topped the list of external factors faced by
regulatory authority and operators in Africa. This indicates that although the political environment has been
political structure, in Africa is relatively stable for the last few years, operators are still mindful of the potential for
volatile” serious conflicts. Even in reasonably stable democracies, simmering hostilities or local
disputes may make conducting business difficult.
Mobile operator
Operators also identified the rise in competition as one of their chief concerns. This
competition, fostered by demand and government involvement across the region, has
“We are considering
resulted in decreasing ARPUs. Operators view this level of competition as
alternative sources of power unsustainable in the medium term with consolidation inevitable.
like solar energy”
Another key concern identified by operators was the lack of reliable infrastructure,
Mobile operator especially surrounding the supply of power to base stations. Power supply can be
unreliable, forcing operators to explore alternative sources of power like solar, wind or
generators.
According to a recent report Nigeria produces only 10% of the power it requires on a
daily basis, leaving many companies and facilities without power for long stretches of
time.19 This forces operators to make contingencies, including generators at every
base station, to ensure consistent operation. Having to maintain and fuel these
generators adds to operational costs.
Fig 2.1: The biggest external challenges facing telecommunications operators in Africa20
% of operators who listed it as a challenge
50
45
40
35
30
25
20
15
10
5
0
s
n
r
n
ty
t
st
ur
we
en
tio
io
in
Co
ct
tit
Po
ta
up
ru
pe
on
er
rr
st
m
nc
vir
Co
fa
Co
lu
en
in
ica
gy
ry
lit
lo
to
Po
no
la
gu
ch
Re
Te
19 University World News


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| Challenges in the African market
“A high level of government Regulatory and policy challenges remain

intervention has a significant
impact on the policies of the Despite moves to establish independent regulators across the continent, 88% of the
regulator, with different operators interviewed felt that regulatory bodies in Africa were not robust enough. Of
policies from one government particular concern to operators is a perceived level of political interference in the
regime to another” regulatory process.
Mobile operator Regulators have, however, increasingly been taking their consumer protection role
more seriously, with networks across the continent being taken to task for poor service
provision. Zambia, Nigeria and Senegal are just three examples where large operators
have been compelled to address weaknesses in their offerings under the threat of fines
or being barred from advertising their products and services.
The continued existence of fixed line monopolies, which typically keep pricing high in
many countries, remains an obstacle to growth, as does monopoly access to
international gateways.
Fig 2.2: Competition levels (%) in telecommunications sub-segments21
100% No data
90%
80%
70%
60% Full
competition
50%
40%
Partial
30% competition
20%
Monopoly
10%
0%
Fixed International Mobile Internet International
local fixed long services gateways
services distance

< back | forward >
“Our biggest internal Talent is the biggest operational challenge

challenge is key skills, not only
technical but managerial as Our research highlighted the issue of a chronic shortage of talent which extends across
well” all skill sets, from technical through to management. While operators acknowledged
the importance of training, it was noted on several occasions that the issue of staff
Mobile operator being head-hunted by other operators was an on going challenge.
“Training and knowledge of Difficulties of running operations across multiple countries create a unique set of
the employees are essential to internal challenges for operators. The complexity of internal processes and systems
reach the objectives of the can make it difficult for operators to respond quickly to market demands and
company” competitive threats.
Fig 2.3: The biggest internal challenges facing telecommunications operators in Africa22
Mobile operator % of operators who listed it as a challenge
90
80
70
60
50
40
30
20
10
0
ns
s
g
t
se
ke
fin
in
io
nc
es
ar
af
at
oc
m
na
St
er
pr
to
Fi
op
al
of
ee
rn
st
te
Sp
Co
In

< back | forward >
“Price sensitivity in Africa is Affordability is a key issue on the continent

very high; one user has several
SIM cards in order to benefit Despite the success of telecoms operators, We are also beginning to see innovative
from best prices” our research indicated that the cost of customer relationship programs being
telecoms remains high. Annual fixed line introduced to reduce churn and leverage
Mobile operator subscriptions are 10.6% of GDP per capita regional ownership. Initiatives such as
as opposed to the 4.2% global average.24 cross-border roaming services encourage
“Low-cost solutions need to be The high cost has been perpetuated as users to remain loyal, as well as reducing
found and implemented to incumbent fixed line operators try to income lost through roaming agreements.
bring a larger number of the maintain revenues in the face of increased
population into the market” competition. Operators are also looking to find new
ways to package their services to make
Mobile pricing also remains higher than them accessible to the lower end of the
Fixed line operator
the international average when compared market. In South Africa, a government -
with earning potential. While the cost of mandated, lower interconnect fee has
100 minutes of mobile use internationally been used to minimize the cost of
costs 30% of GNI, for African consumers it community phones in underserviced
costs 77% of GNI.23 areas, and Vodacom and MTN have both
introduced services that offer discounts to
In some markets this is changing. There subscribers based on the load on the
are indications that operators are looking network at that point in time.
to use pricing as a competitive
differentiator. Pan-African operators have The arrival of the real low-cost operator in
begun to standardize their tariffs across Africa, however, remains a new frontier.
borders and the acquisition of African
operators by large multinational groups
has resulted in increased price pressure.
Fig 2.4: Africa and India ARPU development24

US$ per month
30
25 Africa
20
15
10
India
5
23 State of World Population 2007 UNDP 0

24 International Telecommunications Union Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
01 01 02 02 03 03 04 04 05 05 06 06 07 07 08

< back | forward >
“There is huge pressure by Infrastructure weakness in data connectivity is

stakeholders (governments,
regulators and consumers) to a continent-wide concern
reduce tariffs in environments
Africa has limited inter-continent and global connectivity, which means structurally
where operators have to
high broadband prices and poor enterprise service levels. In the current situation two-
provide their own
thirds of inter-African data has to travel outside the continent to peering points in
infrastructure”
Europe in order to return to its African destination.25
Mobile operator With cable landing points controlled by incumbent monopolies, the cost of a 1Mbps link
(US$7000) is substantially higher than in other regions. This is opposed to a cost
price to the operators of $2000 per Mbps.26
Access to international gateways and the reliance of countries on satellite connectivity

has also contributed to the cost of data connectivity across the continent.
Fig 2.5: External factors inhibiting ICT growth in Africa27
Under-prioritization of
open access in
backbone
environment
Lack of regional ICT Lack of skilled staff

regulatory co- inhibitors and management
ordination policies
Lack of public sector

resources and private
sector investment
25 African Renewal
26 Tectonic

< back | forward >
“Competition here is currently Competitive intensity is increasing across the

moderate, although within the
next six months three new continent
competitors are entering the
Using the Herfindhahl Hirschmann Index, it is possible to chart the increase in
competitive market. This will
competition across the continent. Our analysis indicates that while competition is
put competition on a level too
increasing across the surveyed territories, the tendency is for competitors to avoid
high to be sustainable for a
getting caught in a price war. This is the case in Nigeria where the index is relatively
medium-sized country” stable even though there are six operators in the market.
Mobile operator In South Africa, the impact of Cell C as a competitor is beginning to be felt as the index
moved sharply downwards in 2008. The Egyptian index was flat from 2004 to 2006,
“In future, our market will but the launch of 3G services and the entry of Etisalat in 2007 has raised the level of
become hyper competitive as competition. While the Kenyan market was relatively flat in this analysis, more recent
one or two licenses are in the developments, including the price war triggered by acquisitions by global operators
offing. It will mean too much and the launch of a fourth mobile operator should see this change.
competition in GSM”
While increased competition is viewed favorably by regulators and consumers, our
Mobile operator research indicated that operators in highly contested markets were uneasy about the
sustainability of the level of competition and the effect on ARPUs.
Fig 2.6: Market concentration in selected African mobile markets28

Herfindhahl Hirshmann (HH) Index
8,500
7,500 Kenya (3 operators)
6,500
5,500
4,500 Egypt (3 operators)

South Africa(3 operators)
Ghana (4 operators)
3,500 Uganda (5 operators)
Tanzania (4 operators)
Nigeria (6 operators)
2,500
Q2 2004 Q2 2005 Q2 2006 Q2 2007 Q2 2008
28 Ernst & Young Analysis, Wireless Intelligence

< back | forward >
“We see governments asking There is a heavy tax burden on both consumers
for more and more taxes
which in the end impact and operators
airtime and pricing”
Across the continent, taxation is a key concern for operators with the average taxation
on operator profits at 30%. Governments have chosen to place a heavy tax burden on
Mobile operator
mobile operators in terms of a tax on profits as well as higher license fees to bring
more money into the fiscus.
“On the continent, telecom
companies are considered as Kenyans, for example, pay a tax of 26% on mobile communications and Safaricom has
cash cows and used as tax been acknowledged as the highest corporate tax payer in the country for 2007.29 In
collectors of indirect tax rather Namibia, the incumbent operator absorbed a 15% tax increase on pre-paid airtime,
than taxing the consumer allegedly to reduce the impact on students and the elderly.
directly. Telecom companies
have embarked on educating In our research, respondents also raised the issue of excise duties on handsets as a
the government on the need roadblock to getting the lower end of the market on the network. Operators believe
to reduce taxes on tariffs in their efforts to roll out lower-cost handsets have been stifled by high taxes.
order to boost growth in
demand. The process is slow” Respondents interviewed favored the use of indirect taxes such as VAT as the method
of taxation. This would allow operators to drive costs lower and allow government to
Mobile operator recoup lost tax revenues through increased usage of mobile services. VAT rates on the
continent range from 5% to 23%.30
Fig 2.7: Total taxes as a share of total revenue by mobile operators - 200631
%
60
50
40
30
20
10
0
Ca bon
R da
Se a
n
Ta bia
h a
Ga a
Ni a
Ug a
az l
nd
Sw ega
ric
an
ny
ut nd
i
oo
ri
an
an
ge
m
ila
Ke
Af
Gh
er
So wa
nz
n
Za
29 IDG News Service

30 Taxation and the Growth of Mobile in East Africa
GSM Association
31 Taxation and the growth of mobile services in
sub-Saharan Africa GSM Association

< back | forward >
Return on investment (ROI) profiles in the

region are encouraging
Delivering ROI in the African environment can be delayed due to the cost of
infrastructure, coverage requirements and the low ARPU profiles of consumers.
However, established African players which can benefit from economies of scale due to
a large portfolio on the continent, have encouraging ROI profiles. This may indicate
that even with ARPUs below US$15 a month, operators can recoup their investment
within a reasonable amount of time.
Profitability can be enhanced by an “informal economy” effect that helps produce

higher ARPUs than expected, given the low per capita GDP of African consumers. A
large prepaid market also means that marginal costs involved in new customers are
quickly covered to allow them to become lucrative to operators.
Site sharing and tower companies could offer African operators increased economies
of scale and improved profitability, although operators have shown resistance to this
idea up to now.
A profitable enterprise
Telecommunications companies have historically had high EBITDA margins. The
margins recorded by some African operators place them high up on the world rankings
when it comes to profitability, with at least five African operators having EBITDA
margins above 50%.32
Not all African operators are seeing this kind of positive margin, and operators
struggling to compete in markets that are dominated by a single operator may
experience significantly lower EBITDA margins.

< back | forward >
Telecommunications
industry response
“The focus in Africa is on African assets are attracting local and foreign
acquiring other players with a
portfolio of network assets in interests
order to extend the
geographical footprint” Even with the challenges presented by the business environment on the continent,
operators are keen to acquire assets and licenses.
Mobile operator
The race to dominate the African market is being driven not only by potential growth,
but also the ability to build synergies across a continent-wide network. However, our
analysis shows that it may be challenging for those operators looking to enter Africa for
the first time. For those operators that have established themselves on the continent, the
business processes required to successfully operate a network and service the varying
needs of the market, is institutional knowledge that will be hard to replicate.
The scale of regional operators also allows them to extract economies of scale that
enable them to procure infrastructure at costs that smaller operators can not.
From our research, market position across the continent is considered the key to
survival. It is clear that the primary focus for operators at present is the acquisition of
customers. This acquisitive trend is likely to last for the next few years as more licenses
become available and both established operators and new entrants vie to grow market
share.

< back | forward >
| Telecommunications industry response
“Due to the large number of Consolidation is already happening

operators in Africa, we will see
very soon a consolidation and African telecommunications has already seen some consolidation, with more expected
there will surely be operators in the future. The market remains fragmented with less than 10 large operators and
who will try to join more than 80 smaller operations (40% of the networks account for only 1% of the
international operators. Big continent’s subscriber base).33 This suggests a large potential for consolidation, both
international operators like cross-border and within territories.
MTN, Vodafone and Orange
will probably actively take part Markets that have five or more operators are likely to see some consolidation, either as
in this consolidation” large regional players compete for access to lucrative markets or as the number of
operators is cut down through in-country consolidation.
Mobile operator
Consolidation will not be confined to the mobile environment, even though this is
where most of the activity will be concentrated. Mobile operators looking to build
“We have already seen
converged networks are acquiring fixed-line operators, as with the case with MTN’s
consolidation begin to take
recent acquistion of Ivory Coast landline operator Arobase Telecom.
place. Although there are still
new licenses being issued in There is also broader consolidation as telecoms operators look to expand their operations
many African markets, and into related technology areas. This includes buying into ISPs as well as IT companies.
new operators are coming to
the market, we expect While we have seen the emergence of operators with considerable African coverage,
consolidation to gain no single operator has secured a dominant position on the continent. Even MTN and
momentum. A number of large Zain, which have the largest African footprint, have less than 20 territories each.
pan-African operators will There are, however, only 14 countries where none of the operators with the largest
dominate many of the number of African networks have a presence.34
markets, but there will be
room for niche operators,
addressing specific market
segments and remaining
profitable”
Fixed line operator
33 Blycroft
34 These large operators include MTN,
Vodafone/Vodacom/Safaricom, Zain, Millicom,
Etisalat, Orascom, France Telecom/Orange

< back | forward >
“We foresee more The outsourcing model has not yet taken off in
infrastructure sharing in the
future due to cost sensitivity Africa
on the part of new operators
According to respondents interviewed, African operators wish to retain control of their
coming into markets. Many
infrastructure and are resistant to outsourcing their non-core activities.
operators may choose to
transfer the capex they would
However, there is some acceptance that in order to reach some of the outlying areas it
have to incur into opex, and may be necessary to share physical infrastructure such as towers. To make these
regulators may begin to force ventures more viable, operators may be forced to initially create a common
or enable operators to infrastructure while estimating the viability of individual areas.
collaborate to a greater
degree” Operators with operations in multiple territories are also hesitant to centralize
operations because of the potential for job losses in individual operations. The use of
Mobile operator outsourced services is more prevalent in more mature markets as vendors look to
reduce costs rather than simply acquire more customers.
“We believe that the African
markets are each different, The emergence of pure infrastructure companies demonstrates that infrastructure
and therefore synergies services can be shared among a number of operators. However, our research
between countries are very highlights this is not the preferred route for growing companies as they require more
difficult to achieve and shared direct control over their base infrastructure. This may change in the future as margin
services will not work. This is pressure starts to impact and operators seek ways to reduce costs.
very different from our model
Alternative models to outsourcing present an opportunity for emerging operators to
in other geographies where we
forge a broad coalition with some of the more vertically integrated vendors. By
see more opportunities for
leveraging a relationship with vendors able to control the supply chain, it should be
shared services”
possible to cut the cost of deploying a network, introducing a low-cost model to the
African arena.
Mobile operator
The cost advantage that Chinese vendors, for example, are bringing to the market can
help address the issues surrounding rural infrastructure deployment. Already these
companies are winning deals across the continent with end-to-end contracts starting to
emerge. This kind of service may gain in popularity as competition increases and
operators look for ways to boost their competitiveness.

< back | forward >
Operators are investing heavily in

infrastructure
Due to lower maturity levels in market development, when compared with other
regions, a 20% ratio of capital expenditure to revenue is higher than Europe or the
Middle East (See Fig 3.1).
The difference, however, between Africa and Eastern Europe is not disproportionate,
indicating that operators on the continent are investing the appropriate amount in
relation to the income they are receiving.
The scale of networks necessary to cover many of the more rural areas means that
operators are expected to have to continue to invest heavily in the short term. This
investment is part of the strategy required to deliver services to a rising subscriber
base and is essential for the continued success of the operators.
Our research shows that the biggest players on the continent are spending heavily in
order to ensure that their networks can cope with increased demand. MTN has raised
its capex/revenue rate from 19% in 2006 to 21% in 2007.35 Considering that this is on
the back of rising revenues, the monetary value of this investment has increased
significantly.
Operators are also contributing heavily to the development of undersea cables.
35 MTN Annual Report 2007

< back | forward >
“In Europe, the decrease of Fig 3.1: Quarterly mobile capex/revenue by region(%)36
turnover per minute is
30
associated with higher
subsidies and is compensated 25
by a rise in interconnection
Africa
earnings. In Africa, the 20
Eastern Europe
decrease of turnover per
minute is associated to a rise 15
Middle East
in the number of subscribers, Western Europe
10
which requires important
investments. Consequently, 5
the capex on turnover ratio is
higher” 0
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2006 2006 2006 2007 2007 2007 2007 2008 2008
Mobile operator
Fig 3.2: Mobile operator capex per subscriber 200737
Operators Subscribers (m) Countries Capex/sub

MTN 49.8 16 US$35.7
Vodacom 33.0 5 US$28.1
Orascom 32.4 4 US$30.2
Zain 30.2 15 US$42.1
Vodafone 22.6 2 US$23.4

< back | forward >
Moves to improve ICT are taking place at all

levels
The arrival of at least two, but probably three or more, undersea cable systems in the
next two to three years, should have a key impact on African telecommunications and
on the broader African ICT market.
While SAT-3 provided a taste of the advantages of proper access to countries on the
west coast, East African countries have had limited access to reliable and cost-effective
bandwidth. The east coast of Africa is expected to benefit from new infrastructure with
the TEAMS cable system linking Kenya to the United Arab Emirates and the Seacom
cable which will run down the eastern seaboard of the continent and link South Africa,
Mozambique, Madagascar, Tanzania and Kenya with India and Europe.
Both the TEAMS and the Seacom cable systems should provide the impetus for vital
price reductions in the cost of access to international bandwidth for both operators
and customers alike. The open nature of these systems, where no single organization
controls access, may prove to be the single most important aspect of
telecommunication growth in Africa, as a lack of international gateways has inhibited
growth to date.
Down the west coast there is the Glo-One cable system linking Ghana and Nigeria and
potentially other countries to Europe. There are a number of other projects in various
stages of completion including the EASSy cable system down the east coast and the
West African Cable system.
The building of terrestrial links into these systems is equally important as it should
eliminate the dependence of landlocked countries on satellite connectivity. However,
satellite is expected to continue to play a part in connecting the continent, especially in
remote areas where access to the fiber backbone will be challenging.
The amount of voice and data that will be carried by satellite should drop from the 80%
that it stands at today. The final quantity carried by satellite will be determined by a
number of factors, including the pricing of fiber access, as well as the extent and
reliability of networks inside individual African countries.

< back | forward >
“NGN’s will allow us to deploy Fig 3.3: Prospective African submarine cables38
London
a wider range of products and England
services for various market Marseille

France
segments, moving towards
triple/quadruple-play service Sesimbra Chipiona
Portugal Spain
offering and over time also Casablanca
Morocco
convergence” Altavista
Canary Islands
Fujairah Mumbai
United Arad India
Mobile operator Port Sudan Emirates
e
D’Ivoir
Dakar Sudan
Senegal Massiwa
nin
Co , Ghana
, Cote
ria Eritrea Cochin

Be
ge ria India
“Business customers’ Ni
u,
e Djiboutu
s, Nig
no
Abijan
ra
o
to
g y ,
Acc
La nn
investment into fiber networks o
B Douala
Mogadishu
Cameroon Somalia
will show high growth Librevile
Gabon Mombasa
potential. Given the new sea Pointe Noir
Congo
Kenya
Dar Es Salaam
cables in Western and Eastern Sub-Saharan Africa Cacuac
Tanzania
o, Ango
undersea cables (2010) Luan la
Africa, even land locked SAT3/SAFE 120 gigabits
da, A
ngola
countries are investing in fiber TEAMs 120/1200 gigabits Baie du Jacobet

Maputo Mauritius
rings with access to the Seacom 1280 gigabits Mozambique St Paul
Reunion
Toliara
sea-cables as this is seen as MaIN OnE 1280 gigabits
Mtunzini
South Africa
Madagascar
critical for growth by EASSy 1400 gigabits

Melkbosstrand
South Africa
business customers. WACS 3840 gigabits
Fig 3.4: TImeline of submarine cables with landing points39

However, we do observe that
the current activities in this
area will lead to some
overcapacities which will lead Glo One: UK, Senegal, Nigeria Early
2009
TEAMS: Kenya, UAE
to a severe price competition
and, again, at the end of it we
will see consolidation”
Seacom: Europe, India, Kenya,
Mid Tanzania, Mozambique,
Telecommunications 2009 Madagascar, South Africa
consultant
EASSy: Sudan, Djibouti, Somalia
Kenya, Tanzania, Madagascar,
Mozambique, South Africa Mid
AWCC: UK, South Africa 2010
MaIN OnE: Portugal, Ghana,
Nigeria
Late Infinity: Portugal, Senegal,

2010 Ghana, Nigeria, Cameroon,
Angola, South Africa
38 www.manypossibilities.net

< back | forward >
“3G has the biggest growth 3G technologies have the greatest potential
potential in African countries,
but in four to five years’ time” The strong investment by operators in GSM technologies should make W-CDMA the
natural choice for rolling out broadband access to the wider population. It is expected,
Mobile operator however, that operators will choose a variety of technologies to meet the needs of the
individual markets. This could include a mixture of W-CDMA, CDMA EVDO and WiMAX
technologies, depending on the individual specifics of each country. These could include
license conditions as well as spectrum availability. The Ugandan regulator has revealed
that the country is running out of space in the GSM bands and if this is replicated in
other countries, it could create opportunities for other wireless broadband
technologies.
While WiMAX is garnering attention at the moment, it is not expected to have a large-
scale impact on the market. In particular, it has been hampered by the cost of the
technology, which can not yet compete with GSM or CDMA, as well as by the failure of
the WiMAX vendors to meet their own deadlines for delivering mobile WiMAX devices.
There are concerns that over-licensing on the part of regulators in some countries may
result in the creation of sub-scale markets. It is expected that operators will divide into
two main groups, those looking to offer a converged service and those that will retain a
voice-only offering. This may evolve into a contest between low-cost operators on one
side and converged, value-added operators on the other.
Fig 3.5: Recent wireless broadband 3G license awards in selected markets40
Date Country Operator Notes
Aug-08 Malawi Orascom Tech Network connects drilling rigs to home

office
Apr-08 Ghana Globacom US$50.1m license cost; plans to invest
US$200m in the network
Mar-08 Kenya Safaricom Long-standing client/vendor relationship
Sep-07 Egypt EgyNet Deployment in Sharm-El-Sheikh

Sep-07 Uganda Warid Telecom Commercial by YE 2007
Jul-07 Uganda MTN Uganda National network
Jul-06 Mauritania Chinguetel Unified license at US$32 per head

< back | forward >
“20% of people have a bank Africa has led the way in mobile payments
account in Senegal and I think
services such as micro The failure of the formal banking sector to penetrate the mass African market has
payments could be quite opened the door for mobile operators to build sophisticated and successful mobile
popular in near future” payment services. In this respect, Africa has taken the lead internationally and the M-
Pesa service launched by Safaricom in Kenya and Wizzit in South Africa are two
Mobile operator examples of this.
“Mobile banking, or more Mobile banking offers a number of key advantages to users, specifically a low
specifically mobile money transaction cost and the removal of the need for a physical banking infrastructure. The
transfer, holds great potential strong brand presence that mobile operators have throughout their coverage areas
as a converged service” makes it easier for them to engage potential clients than is the case with traditional
banks. Handsets can also be configured to deal with payments and existing mobile
billing systems are especially suited to micro-transactions.
Mobile operator
In order to offer these services, operators need to collaborate with existing financial
services companies. These services usually combine a mobile element with a
traditional banking instrument such as a debit card.
Value-added services can also include the provision of content, as well as more
practical services such as education and healthcare information. The mobile channel
offers one of the greatest opportunities for content providers to deliver music and
video in digital format to the market. However, the sophistication of the average
handset on the continent may prove to be an obstacle in providing this kind of service.
Fig 3.6: M-banking as a new banking channel41

Banking activities of WIZZIT users by % channel type
Money transfer
Balance checking
Electronic bank transfer
Airtime purchase
Pay for electricity
Pay store accounts
0% 20% 40% 60% 80% 100%
Handset ATM Bank Store/office
41 Consultative Group to Assist the Poor/The World

Bank and United Nations Foundation

< back | forward >

< back | forward >
The way forward in the

African telecommunications
market
Lifting the veil on Africa

Africa is expected to be a key focus of global telecommunications operators and
vendors over the next five years. This is being assisted by the realization that the
continent is open for business and not simply a market where only the brave venture.
Operators that have African experience should have a decided advantage over new
entrants. Complexities in dealing with multiple regulatory environments and rolling out
and maintaining infrastructure in challenging environments is not something that can
be learned overnight.
There are relatively few countries that do not have one of the big regional or global
operators already present, so the chance that new entrants would have to compete
directly with an established player is high. Additionally, with these operators looking to
expand their reach, any new license is likely to attract their attention and competing
against them for licenses may be difficult.
Those countries that have established independent regulators and switched to unified
licenses are likely to find themselves at the forefront of African telecommunications.
The second coming of the fixed line

The time is coming for operators in many parts of the continent to disregard their
existing fixed line infrastructure and embrace the next generation of converged
networks.
With the imminent launch of several submarine cable systems over the next three
years, the bandwidth drought that has plagued the continent should be over. There is
already tremendous investment in new fiber optic networks across the continent.
These networks, in conjunction with next generation wireless technologies, may render
almost all legacy wireline infrastructure obsolete.
The opportunity will be there for larger consumers of bandwidth, such as banks and
government, to access the fiber networks directly, with almost every other user being
able to get sufficient bandwidth via wireless links.

< back | forward >
| The way forward in the African telecommunications market
Unified licensing takes hold

Regulators in Africa need to move away from technology-specific licensing systems
and towards unified licenses. These licenses will allow all operators to compete on an
equal footing, choose the most appropriate system for the environment where they
are looking to operate and counteract the propensity of incumbent operators to
hamper the growth of their rivals.
Unified licenses will allow mobile operators to branch out into converged telecoms by
building out their own fixed-line networks. This form of licensing also frees up
resources within the regulatory environment as it moves the focus of regulation away
from the judging and issuing of licenses and refocuses their attention on spectrum
management and consumer protection.
Low-cost telecommunications
The existence of large numbers of people that are not able to afford the current cost of
telecommunications has set the stage for the emergence of true low-cost operators.
The new low cost operator will have to outsource extensively and leverage off
relationships with its vendors in order to reduce costs.
Currently, emerging low-cost operators are more focused on the providing community
services than full mobile services, as much of their target audience is rural and
universal coverage is not economically viable. However, as urbanization continues,
these low-cost operators may expand their operations and compete directly with
existing networks.
The winners in this space should be those operators able to keep their costs at an
absolute minimum while still growing their subscriber base. The emergence of a
successful low-cost operator in Africa should force many of the other operators to
fundamentally rethink their approach to doing business on the continent.

< back | forward >
Key success factors
Operators have a clear understanding of the African markets and have developed their
operating models accordingly while they continue to look for new opportunities.
However, operators do face challenges going forward including regulatory compliance,
pricing issues, convergence and consolidation.
Operational efficiency of growing importance

Operational efficiency is critical to long-term success as voice ARPUs decline under
increasing pressure from the competition and there is uncertain demand for new
services. Even though many operators are benefiting from high margins at present,
those that are able to practice cost efficiency while still investing in infrastructure, are
expected to prove to be the most successful.
Going forward, African operators will need to optimize performance, cut costs, prevent
revenue leakage and increase operational efficiency to maintain profit margins.
Operators experiencing high growth, undertaking aggressive consolidation and

acquisitions and outsourcing non-core activities may be at risk of suffering internal
control failures. This needs to be addressed with enterprise-wide risk assessments and
the appropriate processes and systems to avoid the threat of organizational
breakdown.
As markets reach saturation, the need to share facilities should become more urgent.
While this is likely to start with the sharing of towers in rural areas, as market
pressures increase and coverage becomes less of a competitive advantage, operators
may start looking at sharing infrastructure as a means of containing costs.
Increasing investment from telecommunications vendors in alternative energy

solutions could prove to be beneficial for operators as they will be able to deploy
coverage in areas that do not have power without having to rely completely on diesel
generators.
Government must play its part

African governments will need to play their part to encourage continued growth in the
telecommunications sector across the continent. The institution of independent
regulators should create the foundation for business, as regulators inevitably play a
role in setting the competitive environment. Tax burdens in the region need to be
reduced to help operators minimise costs and increase the potential market.

< back | forward >
| Key success factors
Mergers and consolidation need to be

addressed
The African telecommunications market is characterized by increasing transaction
and acquisition activity, and operators can come under intensive competitive
pressures to find the right partner or target quickly.
In a market that includes a very diverse set of countries, it is crucial that operators
understand the operating environment that they are acquiring and accurately value
the transaction. They are also challenged to extract post-merger synergies timeously
without compromising operational efficiency.
Current State Future State
• Cost sensitive • Mature, demanding customers

Customer • Immature customer base • Performance sensitive
• Little loyalty to network • Increased brand loyalty
• Predominantly pre-paid • Consuming both voice and data services
• Larger post paid base
• Availability of airtime • Value-added services

Proposition • Delivery of low-cost voice services • Converged offering
• Cross border roaming services • Sophisticated customer retention strategies
• Embryonic value added services • Enterprise services
• Voice focused • Fixed and wireless networks

Network • Coverage is competitive differentiator • Data and voice play complementary roles
• Quality of service seen as competitive
differentiator
• State and private • Almost entirely private with some state

Ownership • Diverse set of small and large operators shareholding
• Market dominated by large operators
• Talent scarce in technical and • Long-term staff retained, training a

management fields key focus
People

< back | forward >
Glossary
3GPP (3rd Generation Partnership Project) is a collaboration between groups of

telecommunications associations, to produce globally applicable 3G mobile phone
system technical specifications based on evolved GSM core networks and radio access
technologies.
ARPU (Average Revenue Per User) is a key performance indicator used by mobile
operators. ARPU represents total revenue divided by the weighted average number of
customers during the same period, expressed monthly.
CDMA (Code Division Multiple Access) is a second generation mobile technology

standard for digital transmission of radio signals that uses digital encoding and spread-
spectrum RF techniques to let multiple users share the same RF channel.
Converged ICT operators are those offering voice and data services including value-
added network services.
Fiber optic cable is a bundle of thin filaments of glass or other transparent materials
used as the medium for transmitting coded light pulses that represent data, images or
sound.
GSM (Global System for Mobile Communications) is an open digital cellular technology
used for transmitting mobile voice and data services. It is the most widely used 2G
mobile technology standard in Africa and worldwide.
ICT refers to information and communication technology.
International gateway is a telephone switch that forms the gateway between a national
telephone network and one or more other international gateway exchanges, thus
providing cross-border connectivity.

< back | forward >
| Glossary
Mobile phone penetration rate is a term generally used to describe the number of
active mobile phone numbers (usually as a percentage) within a specific population.
NEPAD is the New Partnership for Africa Development, a development program

designed to provide an overarching vision and policy framework for accelerating
economic co-operation and integration among African countries.
NGN (Next-Generation Network) represents the convergence of traditional public

switched telephone networks (PSTN), and data networks, into a common package
infrastructure. The architecture reconfigures the central office functionality of a
business, pushing it to the edge of the network, thereby creating a distributed
infrastructure that can incorporate new services.
Roaming is using a mobile phone outside a subscriber’s home service area.
SNO (Second Network Operator) is a fixed line operator licensed to provide

competition to an incumbent operator.
WiMAX (Worldwide interoperability for Microwave Access) is a wireless access

technology based on IEEE 802.16 standards, that offers greater speed and coverage
compared to WiFi (wireless fidelity), which in turn is based on an earlier 802.11
standard. Mobile WiMAX is an amendment of WiMAX that includes better support for
quality of service.
Wireless is a method of transmission other than along wirelines, including, for

example, cellular, satellite and microwave.
Wireline is traditional telecommunications transmitted and received via, for example,

traditional telephone lines and cables.

< back | forward >
Notes
38 Africa connected – A telecommunication’s growth story

< back
References
1. International Telecommunications Union

2. Wireless Intelligence
3. United Nations Statistics division
4. Global Mobile Tax Review 2006 -2007, GSM Association, Deloitte
5. Starcomms Analysis, CSL Research & Strategy
6. Communications Technologies Handbook, BMI-T, 2008
7. Vodacom Annual Report 2008
8. Blycroft
9. State of World Population 2007, United Nations Development
Programme
10. Uganda legislators approve US$75 million for data backbone,
Computerworld Africa, 10 December 2008
11. Usage and population statistics, Internet World Stats
12. World Bank
13. Poor electricity supply hits ICT growth, University World
News, 27 April 2008
14. MTN May Introduce $12 Branded Handsets in Africa Next
Year, Bloomberg, 18 November 2008
15. Harnessing the Internet for development, Africa Renewal,
July 2006
16. Will EASSy make African bandwidth affordable?,
Tectonic, 9 March 2006
17. Mobile Price War in Kenya Reaches Fever Pitch, IDG
News Service, 21 May 2008
18. Taxation and the Growth of Mobile in East Africa, GSM
Association
19. Taxation and the growth of mobile services in
sub-Saharan Africa, GSM Association
20. MTN Annual Report 2007
21. www.manypossibilities.net
22. Consultative Group to Assist the Poor/The World
Bank and United Nations Foundation

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Africa

Global Telecommunications Leader

Global Telecommunications Markets Leader

EMEIA Telecommunications Leader

Global Telecommunications Center – Africa

Global Telecommunications Center – Africa

Global Telecommunications Center – Beijing

About Ernst & Young’s Global Telecommunications Center

In a rapidly changing environment, telecommunications operators are facing

Africa connected - A telecommunication’s growth story

2 Africa connected A telecommunications growth story

About the report

Heiko Schlittke Zul Javid Justin Ramayia

Africa connected – A telecommunication’s growth story 1

Telecommunications has transformed Africa

Data set to make an appearance as a revenue

The low average revenue per user (ARPU)

1 International Telecommunications Union

2 Africa connected – A telecommunication’s growth story

Competition escalates, innovation is key

Networks in more mature African markets are starting to reposition themselves as

Still a challenging environment

Operators continue to be challenged by infrastructure problems, including unreliable

Africa connected – A telecommunication’s growth story 3

“Markets in Africa are not African markets are at different stages of

Demographics have a key influence on the speed at which penetration increases.

4 Africa connected - A telecommunication’s growth story

| African telecommunications in context

Developed4 Emerging4 Virgin4

4 International Telecommunications Union;

Africa connected – A telecommunication’s growth story 5

| African telecommunications in context

Fig 1.2: African mobile markets – 2007 penetration(%)5

Sierra Leone Nigeria

Equatorial Guinea Somalia

20% to 50% Comoros

South Africa Lesotho

6 Africa connected - A telecommunication’s growth story

| African telecommunications in context

Fig 1.3: Mobile penetration by African region6

6 Ernst & Young Analysis

Africa connected – A telecommunication’s growth story 7

| African telecommunications in context

7 International Telecommunications Union 100,000,000

8 Africa connected - A telecommunication’s growth story

| African telecommunications in context

Sub-Saharan Africa North South

Africa Africa Africa

11 State of World Population 2007 UNDP

Africa connected – A telecommunication’s growth story 9

| African telecommunications in context

“We also expect an increased Fixed line is seeing increased investment

Fig 1.7: Africa fixed and mobile penetration levels 200713

13 International Telecommunications Union;

10 Africa connected - A telecommunication’s growth story

| African telecommunications in context

“Broadband does have a The fixed broadband market remains small

Fig 1.8: Internet and broadband population penetration 200716

Africa connected – A telecommunication’s growth story 11

| African telecommunications in context

12 Africa connected - A telecommunication’s growth story

| African telecommunications in context