The African ICT sector, promoting growth while tackling costs
August 2014 | EXPERT BRIEFING | SECTOR ANALYSIS
Over the past 15 years there has been dramatic growth in the Information and Communication Technology (ICT) sectors worldwide, particularly in the mobile services market. ICT markets in many jurisdictions are now highly saturated and revenue growth has begun to slow down. Although there is still room for growth in the mobile services market, network operators worldwide are faced with the challenge of future growth and many operators are looking to expand their operations in Africa, which continues to experience significant growth and development in this sector.
Africa has some of the lowest mobile telephony subscription rates globally, and as a continent, has an ever increasing demand for connectivity. Africa also has the lowest fixed line penetration rates in the world, which means that mobile telephony has to fill this gap and there is a great demand for both infrastructure and technology.
More than half of Africa’s population is under the age of 24 and Africa’s youth is increasingly eager to participate in the global information society at low cost. This translates into a strong demand for handsets, more specifically low cost smartphones and data connection rates. Network operators are reconsidering their business models and pricing strategies to appeal to this market. Operators recognise that Africa has a growing appetite for ICT services, and understand that they have to offer innovative services at low prices to participate effectively in African markets.
Popular cost-cutting strategies for operators include, network outsourcing and infrastructure sharing. Many network operators have struck deals to outsource their networks, information technology systems, call centres and other support functions to network operating companies. In addition to traditional network outsourcing, operators are also selling their towers and then renting tower space from tower companies. Not only does network outsourcing help reduce capital and operations costs but it also means that operators can focus on other commercial strategies such as improving client care, marketing and branding and on providing good, innovative services.
Network outsourcing has become an increasingly popular strategy for many mobile network operators in Africa. South Africa’s MTN recently sold its tower portfolios in Rwanda and Zambia to IHS Holding Limited, and it is envisaged that in total MTN will sell 1228 mobile network towers to IHS’s subsidiaries in Rwanda and Zambia comprising 524 and 704 towers respectively. Under the transaction agreements, IHS will acquire and operate the towers and related passive infrastructure and will invest in a build-to-suit program to support MTN’s future requirements in both countries. This latest move by MTN comes as yet another move by a major African mobile operator to reduce exposure to costly infrastructure in the region. In a similar move, French mobile operator Orange has also disposed of its towers in sub-Saharan Africa and Egypt in order to lease them instead. Other such outsourcing transactions include the sale by DRC Millicom of its towers to Helios Towers, Vodafone Ghana’s long term agreement to outsource the operation of 750 towers to Eaton Towers and Vodacom Tanzania’s network operations outsourcing agreement with Nokia Siemens Networks. Bharti Airtel has outsourced the operation of several of its networks in African jurisdictions to Huawei and currently does not operate any networks, call centres or information technology systems. As a result Bharti Airtel has cut costs significantly in 11 of the 15 African countries in which it currently operates and is now able to focus fully on customer growth.
Another cost-cutting strategy is infrastructure sharing, which may take the form of passive or active sharing. Passive infrastructure sharing is the sharing of the non-electronic components of telecommunications infrastructure, including the towers, shelter, air-conditioning equipment, diesel generators, electric power supply and site leases which allow network operators to install the active (electronic) components such as antennas, microwave radio equipment, switches and trans-receivers which are used for telecommunications signal processing.
Africa has recently seen major infrastructure sharing initiatives aimed at cutting the costs of providing mobile voice services, increasing internet access, and reducing mobile telephony costs for end-users. One such example is the recently announced collaboration between eight major multinational mobile operator groups in Africa and the Middle East, whereby the different operators will collaborate on future network infrastructure sharing initiatives. The proposed deal will bring together eight groups who collectively operate 79 mobile networks across 47 countries in Africa and the Middle East including Bharti Aitrtel, Etisalat, MTN, Orange, Vodacom and Zain. One of the major effects of this possible transaction will be cost effective expansion of services into underserved rural communities as these operators will be able to avoid cost duplication, reduce individual operating costs, increase coverage and improve rural penetration.
Regulators have generally embraced passive infrastructure sharing and many are considering active sharing since competition among operators is based on pricing and the quality of their services as opposed to individual network features. Importantly for regulators, infrastructure sharing is likely to decrease entrance barriers for new players in the market, which will aid in the stimulation of competition. A positive regulatory environment will allow operators to implement their cost-cutting strategies and this will enable them to meet the ICT needs of the African consumer. Those network operators who are quickest off the mark, and most active in this ever changing ICT African landscape, will likely reap the rewards of their innovation in years to come.
Mosa Thekiso and Ashford Nyatsumba are associates at Norton Rose Fulbright. Ms Thekiso can be contacted on +27 11 685 8639 or by email: firstname.lastname@example.org. Mr Nyatsumba can be contacted on +27 11 685 8954 or by email: email@example.com.
© Financier Worldwide
Mosa Thekiso and Ashford Nyatsumba
Norton Rose Fulbright