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What Telstra, others can learn from South Africa

A mobile telecommunications revolution in Africa is bringing new economic opportunities to the world's most impoverished continent, while providing lessons that can help carriers around the world push into other low-value markets. Brad Howarth reports.
Written by Brad Howarth, Contributor

A mobile telecommunications revolution in Africa is bringing new economic opportunities to the world's most impoverished continent, while providing lessons that can help carriers around the world push into other low-value markets. Brad Howarth reports.

Africa is not the first continent many people would think of when it comes to hosting a mobile communications revolution. But closer examination reveals a market that may already boast as many as 150 million subscribers. And at a time when subscriber growth rates in North America and Western Europe are grinding to a halt, Africa witnessed growth for 2005 of 61 percent.

According to the last results posted by the telecommunications research group BuddeComm, 14 African countries have achieved greater than 100 percent growth in subscribers for the past five years, and penetration across the continent climbed above 13 percent in 2005, with several countries reaching 50 percent. There are 120 digital networks operating across the continent.

Africa is also a market whose unusual conditions are driving a level of ingenuity that mobile telecommunications companies around the world can learn from as they push further into low-income markets. It is the poorest continent on earth, with a gross domestic product of less than US$2000 per person, and 36.2 percent of its population living on less than US$1 per day.

But even amongst such extreme poverty, the mobile communications sector is flourishing, and likely to have long term consequences on the lives of many of its inhabitants.

Where some [other networks] may have 5000 $50 customers, we are going to have 20,000 $10 customers.

Shameel Joosub, managing director, Vodacom

The economics of African mobile telecommunications are very different to those of Western nations. The market is anchored squarely in a high-volume, low value model, with by far the majority of phone owners on pre-paid plans -- in some markets close to 100 percent. Average revenue per user is as little as US$5 per month in some countries, rising to around US$10 per month in the most developed market, South Africa.

But despite the harsh market conditions, there is still money to be made. BuddeComm reports that mobile revenues passed the US$10 billion barrier in 2003, with profits estimated at over US$1 billion.

According to Robert Lipschitz, an analyst with the African economics consulting firm Genesis Analytics, the vigour with which mobile phones have been adopted reflects a situation where much of the population never previously had access to reliable fixed-line communications. In 2001 Africa became the first continent where mobile phones outnumbered fixed telephone lines, and mobile users now account for 80 percent of the total number of phone lines on the continent.

"And that is driven by a failure of fixed-line networks to roll out to rural and low-income areas," Lipschitz said. "So the prepaid services have been taken up with gusto by the local population."

The most lucrative market for network operators is South Africa, where a stronger proportion of high-income earners helped fund early infrastructure deployment for three networks, Vodacom, MTN and Cell C. All three carriers have been criticised however for poor customer service, although this is expected to improve with the introduction in late 2006 of call number portability. In 2005 the South African market also saw the introduction of Virgin as a mobile virtual network operator on the Cell C network.

The largest player in South Africa is Vodacom, a Pretoria-based network operator that is 50 percent owned by Vodafone, and which also operates in Tanzania, the Democratic Republic of Congo, Lesotho and Mozambique. In 2005 Vodacom experienced 49.3 percent growth in South Africa, to 23.5 million subscribers, which is roughly 58 percent of the total market.

For managing director for South African operations at Vodacom, Shameel Joosub, the African market provides three specific challenges: reducing the barriers to getting new subscribers onto his network; raising the average revenue per user; and driving down the cost of service provision such as base stations and backhaul connections.

"Where some [other networks] may have 5000 $50 customers, we are going to have 20,000 $10 customers," Joosub said.

One of the keys to success is in building scale -- as more users come on to the existing infrastructure, the cost of maintenance of that network per subscriber declines accordingly. Joosub estimates that Vodacom is also driving down infrastructure costs for his network by at least 10 percent each year, but each country provides new challenges.

"In each of the countries [outside of South Africa] that we are operating in, we are the biggest purchaser of diesel, purely to service the base stations [with electricity]," Joosub said. "Your operating costs go up because there are no proper roads in some of the countries. The lack of infrastructure really pushes up your costs, which brings down your margin as well."

Regardless, Vodacom still managed to increase its net profit for 2005 by 23.1 percent to 5.1 billion rand (AU$923 million) for 2005.

African mobile operators generally have become increasingly skilled at driving costs down, particularly in terms of distributing airtime to pre-paid users. Electronic airtime vouchers have proven preferable to physical scratch cards, and several networks have also fostered the creation of micro-entrepreneurs who resell airtime to subscribers, through so-called ME2U programs that let one subscriber transfer airtime to another. This has proven to be an effective means for carriers to distribute airtime minutes to the poorest and more remote regions, such as when a family member who works in an urban area returns to their home village.

Some handset manufacturers have also been driving down the cost of handset production, with Motorola introducing a handset that retails for less than US$30. Many new subscribers are opting for higher-end second hand phones, which are commonly imported from Europe.

At first you might think that's crazy, but it is more than a gadget for them, because it really makes a difference to their daily lives.

Peter Lange, researcher, BuddeComm

"In a market like South Africa, where it is a status symbol as well, people go for brand and high-end handsets," Joosub said. "We have been fortunate that Motorola has been able to establish itself as a brand in that market."

Vodacom sells pre-paid starter packs for just R149 (AU$26.95), immediately giving users a phone number and the ability to receive calls for 180 days. Top-ups sell for as little as R29 (AU$5.25), providing an additional 90 day airtime window.

Access to mobile communication is also being provided through community phone shops, which use mobile phones as a substitute for public payphones. According to BuddeComm, in South Africa these shops are generating over 90 million call minutes per month, and phone shop owners are receiving sizeable commissions from the network operators.

A high priority for many carriers has been migrating some of their high proportion of prepaid subscribers on to contracts. Joosub says his company is signing up 850,000 new customers each month, but with only 80,000 taking on a contract. Vodacom has had some success with a hybrid subscriber plan, which locks in a minimum monthly commitment from the consumer at a lower call rate than is available on pre-paid services, but then allows them to buy additional pre-paid minutes if they exceed this spend.

"The consumer is able to control their spending whilst getting better rates than they would get on prepaid," Joosub said. "These Top-Up plans represent half of Vodacom's total contract subscribers."

One of the intriguing questions of the African market, where many people have little discretionary spending power, is what other spending is being sacrificed to allow people to redirect income to their mobile phones.

According to BuddeComm researcher Peter Lange, Africans are choosing to cut back spending on other items -- including food -- in order to be able to afford a phone.

"At first you might think that's crazy, but it is more than a gadget for them, because it really makes a difference to their daily lives," Lange said. "In Africa many people do not have transport, so a lot of Africans walk to everything. [The mobile phone] gives them the opportunity to get more done with their time and make more income. It makes their daily routines and their daily business so much more effective."

Joosub says other industries have noted the redistribution of spending and reacted accordingly with loyalty and reward schemes that tie in mobile-loving Africans. Retailers such as clothing and furniture stores are offering credit that can be used for purchasing a mobile phone.

"Because telecoms is such an attraction for the consumer, retailers have come up with a number of different ways to attract consumers to buy their goods," Joosub said. "They would rather get a piece of the pie than get nothing, as it has taken away from purchasing other goods."

Ten or 15 years ago, for these people to communicate with their families was practically impossible ... today most villages in Africa would have a mobile phone signal.

Andile Ngcaba, executive chairman, Dimension Data

Joosub said phone take-up is being driven by people's basic desire to communicate, be it for business or purely social purposes.

"Now you can advertise your activities," Joosub said. "Plumbers advertise their services by the side of the road, but if they don't have a phone number where people can call them, it is much harder for them."

The executive chairman for African operations at the technology integration company Dimension Data, Andile Ngcaba, believes growth is being fuelled by the current resources boom in Africa, which is increasing the disposable income of mining workers in particular. A former director general of the South African Department of Communications, Ngcaba has 27 years of experience in African telecommunications, but says the last three have been the most interesting.

"Ten or 15 years ago, for these people to communicate with their families was practically impossible," Ngcaba said. "Today most villages in Africa would have a mobile phone signal."

He says it is important not to underestimate the benefit that simply owning a mobile phone brings.

"In the same way as in modern economies people can go and search on the Internet, that's how mobile is used in emerging Africa," Ngcaba said. "What you find is people know where to phone to find things. For people who buy and sell products, mobile phones are being used extensively. People are using a phone to buy goods from the nearby urban areas for others to sell in villages and the outlying areas."

In March 2006 the Centre for Economic Policy Research in the United Kingdom gave its backing to a report by from Vodafone titled "Africa: The Impact of Mobile Phones", which found a corresponding higher rate of economic growth among those African countries with higher mobile usage.

The report found that a developing country with an average of 10 or more mobile phones per 100 people between 1996 and 2003 would have enjoyed per capita gross domestic product growth that was 0.59 percent higher than an otherwise identical country. This was also twice the size of the impact that mobiles have had in developed countries, with mobiles playing the equivalent role in the developing world as fixed-line telephony did in countries like the US and UK in the 1970s and 80s. A link was also found between the presence of fixed and mobile communications networks and higher levels of inward foreign direct investment.

Mobile banking has also taken off in South Africa, with the country's four largest banks expecting to witness R650 million in transactions over the recent Christmas period. For much of the population, mobile phones are the cheapest and easiest way to make payments, check balances, or otherwise monitor their banking activity. A recent study from the United Nations Foundation and the Vodafone Group foundation found that mobile banking can be up to a third cheaper for customers than current banking alternatives.

And just as mobile networks throughout Africa have leapfrogged fixed-lines, so too is it likely that for many Africans their first experience of the Internet will be delivered over a high-speed mobile phone.

Lipschitz is critical of the service quality and cost of fixed-line services from companies such as the national carrier Telkom SA.

"Telkom in South Africa charges prices that are higher than others around the world by large magnitudes, and the service is of much lower quality -- that renders mobile prices comparable for a whole range of usage patterns," Lipschitz said.

The South African mobile operator MTN has worked in the province of Gauteng to provide high-speed wireless Internet access to Internet cafes in townships that lack affordable fixed-line connections. The program currently uses MTN's 3G network, but already a service using higher-speed HSDPA connections has been trialled, with users renting time on the network able to access the Internet of speeds of up to 1.8 Mbps.

According to the media strategy consultant and chairman of the Future Exploration Network, Ross Dawson, who recently completed a study tour of South Africa, the model of using HSDPA-based phones for Internet access in regional townships is economically viable.

"With HSPDA you can get high-speed access to township locations where it may take years to get a landline in place," Dawson said. "So you're leapfrogging not just phone access, but high speed Internet access. This is really changing the landscape dramatically."

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