Playing African monopoly: Is there an end in sight to mobile upheaval in the region?

Africa's mobile industry was once seen as the route to riches for operators. Now, consolidation looks to be the only way for carriers to survive in a highly competitive market.
Written by Hilary Heuler, Contributor

Earlier this year the Aga Khan Fund for Development (AKFED), owned by the Aga Khan, announced that it was plunging into perilous waters: the East African telecom market.  The AKFED's decided to launch a new mobile operator, Smart, which is hoping to grab customers through an aggressive pricing strategy, offering calls far cheaper than those from competitors MTN, Bharti Airtel and Uganda Telecom.

At the company's Kampala launch, Group CEO Abdellatif Bouziani said the fledgling operator had a long term future. "We discovered in our market survey that the telecom project investment in the region will have more value and will attain the required growth," he said.

But industry insiders are greeting the new arrival with skepticism. Godfrey Mutabazi, executive director of ­­­­the Uganda Communications Commission, told a local daily that the country's telecommunications sector already has "too many operators".  Anthony Katamba, MTN's general manager for corporate services, hinted to the paper that companies like Smart would simply be bought up by their larger rivals.

Other operators are drawing similar conclusions. Reports have recently surfaced that Orange was looking for buyers for its business in Uganda, and possibly elsewhere in the region as well. The company has a relatively small share of the Ugandan market, and even its dominance of its data services is being eaten away by the competition. Nor is Orange the first to fall: just last year Warid, another of Uganda's smaller players, was bought out by Airtel.

Such buyouts are taking place across the continent. In a January, analyst house IDC predicted that Africa's telecom market is "ripe for consolidation" across most markets in the region.

"As markets become increasingly crowded, growth rates decline and spectrum availability becomes even scarcer. Consequently, IDC expects to see a stronger push for market consolidation by telecom providers in 2014," it said.

There are numerous examples already underway. In Kenya Safaricom and Airtel are splitting Essar's Yu, Vodacom in South Africa is in the process of buying out Neotel, and Nigeria's CDMA operators have been buying one another out in a desperate bid to survive.

The trend began about a year ago, says Spiwe Chireka, Africa telecommunications program manager for IDC Africa. And this, she predicts, is just the beginning.

"Most markets in Africa are quite overcrowded. There are only so many customers for everybody," says Chireka, pointing out that some markets are starting to look like oligopolies."Two or three operators hold about 80 percent or 90 percent of the market share, and the rest are fighting for the breadcrumbs. They just struggle to be competitive."

With an average of four operators per country, Chireka thinks further consolidation is inevitable. Resources like fiber networks and spectrum are scarce in Africa, and more and more operators are looking to sell to enterprises. This, says Chireka, is creating a scramble for infrastructure.

"Some of these smaller players have got grossly under-utilized networks. They're sitting on two million subscribers while they've got spectrum that could carry ten million," she says. "Then on the other hand you've got large players like MTN who are struggling to handle the capacity on their networks. So they start looking at other players in the market, at who's sitting on what spectrum, and can we share that spectrum or can we just go ahead an acquire them?”

The primary driver behind Vodacom's interest in Neotel, she says, is access to Neotel's fiber and datacenter infrastructure, key for Vodocom to serve its lucrative corporate customers.

If Africa's telecom market is crowded, it's due to a regulatory policy which, for years, could be described as "let's license till we drop," says Chireka.

Some countries have even mandated infrastructure sharing to encourage new players to set up shop. The idea was that increased competition would drive down prices and boost innovation, assuming consumers would reward those who served them best."But the one thing they did not foresee is that the consumer is just not that elastic," Chireka says. "They just aren't moving, and there were no provisions for that."

Telecom operators are to blame as well. The current overcrowding can be traced back to the mid-2000s, when Africa was seen as the next pillar of growth, or, as Chireka puts it, "a bottomless pit of money" where profits were guaranteed.

But, she says, many underestimated the challenges of working on the continent, not realizing that "you have got to spend money to make money in Africa, and you have to spend a lot more than you'd spend in other regions."

Business costs are high, infrastructure is poor, politics can be unstable and many government have a long history of favoring incumbents. Even home-grown telecom companies have yet to crack the nut of Africa's rural, low-income majority, a vast untapped market that can be prohibitively expensive to reach.

For customers telecom consolidation could be a mixed blessing. Larger operators do tend to offer more sophisticated services, which will be passed on to customers of the smaller companies they swallow. With more infrastructure to work with, those services could become better still.

But the competition risks are very real, and for regulators, says Chireka, this creates a conundrum. "Do we still issue licenses when we know people are struggling to survive, or do we just allow consolidation to happen, knowing that it could create an unfavorable competitive environment, or even collusion?" she asks.

It also makes things harder for new entrants like Smart, who will have more difficultly fighting their way to the top of a consolidated market. "We are here for the long term," Bouziani declared in March, although plenty of people in the industry suspect otherwise.

In the mean time, Chireka thinks it's time for the regulators, perhaps even competition commissions, to gird themselves for battle with Africa's telecom powerhouses.

"Otherwise we're just going to see players falling away, until the market ends up a virtual monopoly," she warns. "It's key that African regulators start to make provisions for consolidation because it is happening, and I suspect they're not prepared for it."

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