African telecoms at a crossroad final

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  • 1. African Telecoms ata Crossroad
  • 2. A.T. Kearney | African Telecoms at a Crossroad 2IntroductionAfrica is the last frontier for the telecoms industry and has been attracting significant interestand investments. The market certainly offers attractive fundamentals: a population roughlyas large as China and India, strong economic growth forecast at 6% p.a. over the next fiveyears, an emerging middle class and still low penetration levels for telecoms services.However, after years of vibrant double digit growth, the rate of new subscriber acquisitionhas sharply decelerated. Intense competition is also driving a free-fall in prices and is placingpressure on margins.The African telecoms market is at a crossroad. The market will shift from being focused onupper classes and largely voice-centric, to a mass-market with a much more significantshare of data services. This paradigm shift certainly offers substantial long-growth prospects.However, the transition process period, underway in most countries, might prove challenginggiven the adjustments required in price levels, cost base, offers and investments.Figure 1 - The Paradigm Shift in the African Telecoms MarketMarket Characteristics Today TomorrowTarget CustomersHigh and Middle Class(Urban)Mass Market (urban andrural)Market Segmentation Largely undifferentiatedHighly segmented and bi-polar marketPrices High (>10$c/min.) Affordable (3-6$c/min.)Competitive Landscape Fragmented ConcentratedShare of Non-VoiceRevenuesNegligible (<5%) Significant (>30%)Networks 2G 2G/3G/4GTo successfully navigate through this transition process, we argue that industry leaders, withhopefully positive support from local governments / regulatory authorities, need to act todayto find a new, robust growth path on the long-term.
  • 3. A.T. Kearney | African Telecoms at a Crossroad 3EgyptMoroccoSouth AfricaNigeriaGhana64%128%80%116%Ivory Coast79%126%Recent Developments in the AfricanTelecoms MarketThe End of a Boom Era?Recent growth in adoption of telecoms services has been breath-taking, largely driven bymobile voice services. There are now over 730MM mobile subscriptions, corresponding to aSIM-card penetration rate of over 65% and total revenues of US$40 Bn. Adoption of mobileservices has been fuelled by increased network coverage and reducing prices for bothservices and mobile handsets (some now sell well under US$10).Figure 2 – Growth in Mobile Subscribers in AfricaGrowth in Mobile Subscribers (MM Sim Cards)Mobile Penetration Ratesfor Selected Countries(H2 2012)Source: GSMA, Merrill Lynch; A.T. Kearney AnalysisIn 2011, growth in mobile penetration seems to have abruptly decelerated, with subscribergrowth rates now in single digits in most countries. Industry observers attribute this to avariety of factors – including a tougher economic climate in some countries, prices still aboveaffordability levels for the more modest socio-economic segments, and penetration ratesgradually approaching so called saturation levels.Whilst all these facts are certainly relevant, they are in our view partly misleading. Multi-SIMownership, which stands at approximately 30-50%, means that real penetration rates are inreality closer to 35%. Also, the abrupt deceleration in subscriber growth in 2011 is to asignificant extent explained by the implementation of mandatory subscriber registration in anumber of countries.As a result, the African telecoms market still offers ample room for growth from the currentreal population penetration rate of 35% to what we estimate to be saturation penetrationrates of circa 60%-70%. Further adoption of data and Internet services, still in their infancy,will provide additional momentum to the development of telecoms services in Africa.+37%+7%2015F9102014F8602013F8072012F7352011620201055220094582008379200728320062012005136200483200353200237200126200017
  • 4. A.T. Kearney | African Telecoms at a Crossroad 4Intense Competition (and Plummeting Prices)The telecoms market in Africa has attracted a flurry of both international and local investors.Global telecoms operators, such as Vodafone, France Telecom, Etisalat, Bharti Airtel andMillicom are particularly active on the continent. At the same time, Africa has seen theimpressive development of home grown players such as MTN (South Africa), Glo (Nigeria)or Morocco Telecom (partly owned by Vivendi). The Sub-Saharan African telecoms marketis largely controlled by five players, which represent over 70% of revenues.This apparent concentration is, nevertheless, misleading. The reality is that there are todayover 3.5 mobile operators per market, with some countries such as Tanzania or Nigeria withover 8-9 operators. This situation is untenable given the importance of scale effects in thetelecoms industry – in fact, it is incredibly rare to find a number four operator profitableanywhere in the world.Figure 3 – In-Country Scale Effects in Africa:The Relationship between Market Share and ProfitabilityNote: Data for 2008, 2009 and 2010 (depending on availability)Source: Companies annual reports; ML Wireless Matrix; A.T. Kearney AnalysisWith over-supply, competitive intensity has been amplified by the deliberately aggressivepricing strategies of some players in an attempt to gain market share and grow the market.For instance, Bharti Airtel, following its acquisition of Zain’s African assets in 2010, tested itsminute factory model in Kenya by halving price levels. Price reductions in the last two yearshave been, in some markets, quite staggering: from US$c 20/min to US$c 6/min in Nigeriafor instance.05101520253035404550550 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80EBITDA%Market ShareTop QuartileBottom QuartileOperatorstarget forconsolidationOperatorsvulnerable toliberalizationOperators toFocus on CostOptimizationOperatorsvulnerable tomarket shareloss
  • 5. A.T. Kearney | African Telecoms at a Crossroad 5Figure 4 – Price Reductions in Selected African Markets(March 2011 – Jun 2011)Source: GSMA African Observatory, A.T. Kearney analysisDecelerating revenue growth and price reductions are already placing telecoms operatorsunder financial pressure. MTN Nigeria has seen its EBITDA margin drop by 4 points in oneand half years, mainly driven by an ARPU decrease of 12%. Equally, from Q3 2011 to Q32012, the EBITDA margin of Millicom’s African operations dropped by 11%, following adecrease of 5% in ARPU.The impact of these market changes will be substantially different across markets – weexpect markets with already high penetration levels and a large number of players (such asNigeria, Ghana, South Africa) to face more challenging times than less competitive anddeveloped markets (e.g., Togo, Zambia). The figure below provides a summary of therelative attractiveness of telecoms markets across Africa, taking into account marketdevelopment and competitive intensity.Namibia Libya Ethopia61%57%35%Togo Gabon Mali Congo Djibouti CapeVerdeZimbabwe17%15%13% 13%11%9%26%
  • 6. A.T. Kearney | African Telecoms at a Crossroad 6Figure 5 – African Telecoms Markets Heat MapSource: ITU, Blycroft, A.T. Kearney analysisSubstantial Growth Potential for Data Connectivity and Value-Added ServicesNot all is doom and gloom however. In fact, data connectivity and valued-added services(VAS) are poised to grow strongly – starting admittedly from a particularly low base.Mobile data services (including SMS) represent on average 12% of African telecomoperators’ total revenues. However, the average is skewed by a few Tier 1 markets such asSouth Africa and Kenya. In most other African countries, mobile data services are still atparticularly low levels, with an average of 6% of total revenues. This is very substantiallylower than in other emerging markets and, naturally, developed economies.High penetration, high competitivenessHigh penetration, low competitivenessLow penetration, high competitivenessLow penetration, low competitiveness
  • 7. A.T. Kearney | African Telecoms at a Crossroad 7Figure 6 – Comparisons of data as % revenues and ARPU for Selected African andGlobal Markets1stTertile: Top markets in Africa in data % rev, e.g.: South Africa, Kenya2ndTertile: Second markets in Africa in data % rev, e.g.: Nigeria, Ghana3rdTertile: Bottom markets in Africa in data % rev, e.g.: Ivory Coast, TogoSource: African operators, Merrill Lynch, A.T. Kearney analysisThere is ample evidence that the African consumer has significant interest in accessingInternet services, provided services are affordable and relevant. Today, ten per cent of theAfrican population accesses the Internet on a regular basis, mainly through public accesspoints such as cyber cafes, work or school. There are now close to 50MM Facebookaccounts across Africa. However, Internet access through PCs remains quite limited, atapproximately 1%, with some notable exceptions such as South Africa or Egypt.Looking forward, we expect strong growth of broadband access growth. Stronger diffusion ofsmartphones, with low cost versions expected to sell as low as US$30 in the upcomingfuture, will be the main driver of Internet access growth. However, mobile broadband willalso constitute an important market and represent the bulk of PC-based access to theInternet. Broader access to the Internet will be an important enabler to develop the smallVAS market in Africa – including services such as social networking, mobile content /entertainment or mobile financial servicesAs a result, the market for Data and mobile VAS in Africa is expected to grow at 16% p.a. toreach US$14 Bn by 2016, representing close to 32% of total mobile revenues.14%52%1%5%2nd Tertile15%15%1st Tertile33%43%Europe6% 2nd & 3rd TertileAverageSouth East AsiaIndia12% TotalAfrican Average6%3rd Tertile25%28%African MarketsARPU range(USD, 2011) $18-$20 $7-$9 $2-$6 $12-$35 $3 $4-$37Data as % of revenues
  • 8. A.T. Kearney | African Telecoms at a Crossroad 8Figure 7 – Growth of Data (incl. SMS) and VAS in Africa (2010-2016, USD Billion)Source: Pyramid researchIn summary, the African telecoms market still offers room for growth, estimated at 2% p.a.over the 2012-2016 period. This growth will be essentially driven by data / VAS services,with voice revenues eroding slightly.Figure 8 - Growth in Mobile Revenues in Africa (US$Bn)Source: Pyramid; A.T. Kearney Analysis+16%201614.010.01.720127.76.41.220116.45.50.920104. Data201442.331.810.5201341.332.39.0201240.132.57.7201138.932.543.4201035.230.34.9200931.2+8%201644.230.214.02015+2%
  • 9. A.T. Kearney | African Telecoms at a Crossroad 9A Call to Action: Create the Path forRenewed Profitable GrowthWith an African telecoms market at a crossroad, industry executives will have a tougher taskahead to drive further profitable growth. Growing a telecoms business in Africa is no longerjust about putting up radio base stations and distribution networks faster than competition. Infact, we see six important priorities for leaders of telecoms operators in Africa.Figure 9 – The African Telco CEO Agenda1. Create a Sounder Economic Environment for the IndustryEscaping fundamental economics is impossible: only under exceptional circumstances dowe see room for more than three mobile operators per country. With prices declining and asurge in capital expenditure requirements expected over the next few years, we anticipatethat dozens of sub-scale operators will disappear. In some cases, this will be through in-country mergers, in others simply through shutting down loss-making operations. As a casein point, Telkom has recently shut-down its loss-making operation in Nigeria (Multi-Links).Beyond industry consolidation, telecoms operators face a number of regulatory and taximpediments to further profitable growth. Some governments and regulatory authorities viewtelecoms operators essentially as tax collection machines. They should also consider theirbroader role in stimulating economic growth.CEOAgendaTransform theOperatingModel andGrow NewTalentKeepInvesting inthe NetworkDrive a Step-Change inOperationalExcellenceSounderEconomicEnvironmentfor theIndustryDrive GrowththroughSmarterPricing &ValuePropositionDifferentiationAcceleratetheDevelopmentof NewServices
  • 10. A.T. Kearney | African Telecoms at a Crossroad 10To support the further growth of the industry and stimulate wider adoption of ICT services,we would encourage African governments to focus on the following initiatives: Encourage wider and more affordable access to Internet devices. Governmentsshould consider reducing import tariffs on devices such as mobile handsets or PCs,which amount to 20-50% in most African markets. We believe that programs toencourage computer literacy and ownership are also essential to digital inclusion andproductivity improvements. For instance, the Ghanaian government removed in 2012the import duties (10%) and import VAT (15%) on mobile handsets, which had apositive impact in increasing mobile penetration. In this case, it is expected that theincreased tax revenues from a bigger mobile market will largely offset any losses onimport taxes. In fact, total tax revenues are expected to be 24% higher1. Provide access to additional spectrum to qualified operators. It is estimated thatby 2016, Internet traffic in Middle East and Africa will reach 3,714 PB per month,driven mainly by Internet video2. However, spectrum allocation for mobile services ismuch lower than in most other regions in the world (Figure 10). In particular,essential spectrum for mobile broadband in the 800Mhz and 2.1Ghz range, has yetto be allocated. Other important spectrum bands – e.g., 2.3Ghz, 2.6Ghz and 3.5Ghz– have in many countries been attributed to a flurry of small, niche Wimax operators,which in many cases sub-utilize the spectrum;Figure 10 Spectrum Licensed in Selected African Countries vs. InternationalBenchmarksSource: GSMA Adopt a more balanced approach to taxation of telecoms operators. Regulators/ governments generate a substantial amount of revenues from the mobile industry inAfrica. In 2010, the mobile ecosystem contributed around US$16bn to public fundingin Africa, which represented 4.1% of total African government income. In somemarkets, individual operators account for a disproportionate amount of governmentincome. For instance, MTN represented 5% of total tax income in Ghana in 20083.Beyond normal corporate taxes, operators are imposed various special taxes,ranging from revenue share, license fees, and special telecoms taxes. One specificissue which is now emerging is the high costs of recent license / spectrumattributions, which, in some cases, are considerably higher than in developed1GSMA, Taxation and the growth of mobile services in sub-Saharan Africa, 20122Cisco Visual Networking Index, 20113GSMA Africa Mobile Observatory16627370Morocco20550155Tunisia22070150Nigeria2734015380Mexico360240120China39570110215HongKong43465140229UnitedStates513108120285Sweden585118142325Germany594130150314204Coted’Ivoire3620Botswana943460Uganda985048SouthAfrica700-900MHz1800-1900MHz2100-2600Mhz
  • 11. A.T. Kearney | African Telecoms at a Crossroad 11markets (in relative terms). Therefore, African governments need to carefully balancethe legitimate need to collect public funding with the ambition to encourage broaderaccess to ICT services. Encourage the development of cheaper, high bandwidth backbone capacity(national and international). US$2.8 Bn has been invested between 2010 and 2012in building new submarine capacity in Africa. There are now eight submarine cableslaid along the West and East coasts of Africa with a lit capacity of 1.57 Tbps4. Twoadditional cables, WACS and ACE, are expected to go live by 2012-2013, bringingthe number of connected countries to more than 25. This submarine cable systemoffers a tremendous opportunity to finally bring a true broadband service to end-consumers in Africa at affordable prices. However, cheap access to this submarinecable capacity is not pervasive. In land-locked countries, links to submarine cableseither do not exist or are priced dearly. Also, in countries such as Cameroun, mobileoperators are obligated to buy national backbone capacity to the local incumbent, atparticularly high prices. African governments should more actively seek to encouragethe development of cheaper and higher bandwidth capacity, either throughderegulation or government sponsored national / international backbonedevelopments. Adopt more ambitious ICT policies. ICT sector is crucial to the development ofeducation, healthcare, agriculture and business services. Some African governmentshave already begun to adopt ICT policies that align with their development goals. Forexample, Ghana has established ICT as the cornerstone of its development of theeconomy:“The Government of Ghana is committed to pursuing an ICT for AcceleratedDevelopment (ICT4AD) Vision aimed at improving the quality of life of thepeople of Ghana by significantly enriching their social, economic and culturalwell-being through the rapid development and modernization of the economyand society using information and communication technologies as the mainengine for accelerated and sustainable economic and social development.” 5Other African governments need to adopt similarly ambitious ICT policies in order todrive the “rapid development and modernization of [their] economy and society”.2. Drive Growth through Smarter Pricing and Value PropositionDifferentiationAffordability of telecommunications in African countries is well below other markets – while inSouth Africa one minute of work is worth half a minute on the phone, in the US a minute ofwork is worth 19 minutes of telecommunication consumption. In fact, challenges in Africa arewell known with a substantial percentage of the population living below the poverty level.However, the importance of the high and middle class has tripled over the last 30 years to313 million people, with the correspondent increase in size and purchasing power. As aresult, a small proportion of the population is today driving the lion’s share oftelecommunications consumption, with less than 15% of the subscribers typically accountingfor 50% of the revenues.4Telegeography5Ghana Ministry of Communications
  • 12. A.T. Kearney | African Telecoms at a Crossroad 12Figure 11 - High-Value Segment – A key Source of ValueSource: Client Finance Department; A.T. KearneyFor telecoms operators, the structure of the customer base is critical in defining their growthand commercial strategies looking forward. The bulk of new subscriber growth will comefrom youth and the bottom-of-the pyramid. However, ARPU growth from greater data usagewill come from high value customers.As a result, operators will need to increasingly operate in a bi-polar business model: ultra-low-cost services for the masses, combined with more sophisticated products and customerservice for the higher value customers. This will require African telecoms operators to designand deliver greater value proposition differentiation.To maximize value capture, African operators will have to get smarter about pricing. On theone hand, they will certainly need to further reduce prices to maximize affordability for themasses and stimulate usage. On the other hand, they will need to move away from pureprice competition on high value customers to create economic space for investing inproducts and customer service.In fact, in the last couple of years, we have seen African operators introducing quiteinnovative pricing plans. MTN Zone, a dynamic price plan – with discounts availablethroughout the day, depending on location and traffic per radio base station – is a clearsuccess, in maximizing value and network usage, building customer loyalty and satisfaction(through superior network quality) and limiting competition (as tariffs are not known inadvance).However, more needs to be done. It is critical to have clear and differentiated valuepropositions for the different segments, addressing customer needs in the right way. Africanoperators can leverage the experience of operators in more developed markets, whereoutperforming operators combine different strategies such as segmentation / customer basemanagement and innovation. A strong focus on segmentation with insights into evolvingconsumer behaviour has been used by several players in developed markets (e.g. Vodafoneor O2). Some have even adopted a multi-brand strategy, which gives them flexibility to tacklethe market and competitors in different ways.LVMVHVVHVTotal subs100%53%33%9%5%Subscribers MoUsLVMVHVVHVTotal MoU100%15%41%24%21%On-net voice revenuesLVMVHVVHVTotal revenues100%12%40%25%23%
  • 13. A.T. Kearney | African Telecoms at a Crossroad 13Addressing the high value segment is not about having the lowest price – it is about havingthe right price for the right customer experience. Price differentiation is thus a tool to beenintroduced – e.g. integrated offers to increase stickiness, quality of service differentiation,smart tariffs structure (e.g. flat rates for voice and sms, etc), among others.However, the low value segment cannot be forgotten by operators while remainingcompetitive without further decreasing prices. The optimization of on-net / off-net pricedifferences, carefully balancing network effects vs. multi-SIM is a key issue. Moreover,operators need to follow a few key rules: Keep it simple as complex pricing doesn’t work in low income markets (e.g.,digressive pricing where 1st min is offered at a premium to subsequent mins); Use volume to build affordability (e.g., sell bundles with lower volume at higher price); Base pricing on overall customer yield concept (i.e., avoid a siloed view on pricing;measuring the pricing impact from just one of customer’s many revenue streams); Adapt to the recharging behaviour of your customer base (e.g., pricing productswithin the most commonly used recharge denomination limit)As a result, we expect to see more differentiated strategies in Africa, with operators clearlymoving away from largely undifferentiated offers to more sophisticated value propositionsand customer management practices.3. Accelerate the Development of New ServicesAs discussed in the previous chapter, data and VAS are expected to generate revenues ofUS$4.8 Bn and US$4.0 Bn respectively by 2016.DataThe African data market presents two distinct segments: large and small screen.The large screen market consists in accessing the Internet through a PC, notebook orpotentially even a television set through a 3G or 4G datacard. This is an important market fortelecoms operators, given the absence of a proper fixed network in most countries.However, the main challenge in expanding this market will be growing the penetration oflarge screen devices such as PCs. Some operators in Africa are actively selling PCs nowand, in some cases, subsidizing them.The small screen market consists in accessing the Internet from a smartphone or tablet.Declining prices for smartphones will help drive adoption for the mobile Internet. Retail pricesfor smartphones are today on average at US$250, but entry smartphones come as low asUS$70. In the future, we expect ultra-low cost smartphones to be as low as 35$. Thecombination of lower handset and data service prices will enable the mobile Internet tobecome truly mass-market in Africa. We expect that 50% of mobile phone subscribers will beusing the Internet in the next five years, largely from mobile devices.
  • 14. A.T. Kearney | African Telecoms at a Crossroad 14Value-Added ServicesThe most prominent of Value-Added Services are Mobile Financial Services (Figure 12),which had a phenomenal growth in the continent since it was first launched in Kenya in2007. In an effort to “bank the unbanked”, after 30 months in services, Safaricom’s M-Pesain Kenya had 8.5M users who have transferred US$3.7Bn (~10% of Kenya’s GDP) worth oftransactions6. Other operators have followed suit and launched mobile payment services inseveral African countries. For example, Millicom launched its mobile money wallet inTanzania in September 2010 and reached 10% penetration of its subscribers in less thanone year later. In Ghana, Millicom launched a micro-insurance service as a loyalty tool. Theresults showed a 15% increase in ARPU and 20% churn reduction. 7Figure 12 - Sub-Saharan Africa, mobile VAS announcements, by service type, Jan2009 – Aug 2012Source: Informa, A.T. Kearney analysisOther VAS opportunities that are growing in the region include entertainment (music, ringtones …), m-Health, m-Learning, and m-Agri. New entrant VAS providers, Comviva andSpice, have brought their expertise from India and are putting great emphasis on voice-based services and content such as ring-back tones and radio channels, which were verysuccessful services in India. The success of these content services will vary dramaticallyfrom country to country depending on the local culture and taste, literacy rate and GDP /capita. In Nigeria for example, operators are making close to $150 million per year frommobile music, driven mainly by ring-back tones. MTN generated $3 Million a month in 2011from this service and reached 4.4 million subscribers (30% of total subscriber base)8.By providing new value-added services to their customers, operators will benefit fromseveral ways: Increase the ARPU Increase customer royalty and reduce churn Increase total revenues6Mobile Banking: The impact of M-Pesa in Kenya. Mbiti, I. and Weil, D.N. (2011). National Bureau of EconomicResearch Working Paper Series.7Millicom, Capital Markets Day, 20118Informa telecoms & Media, 2012Financial Services55%Messaging13%Entertainment7%Web and apps8%Other18%
  • 15. A.T. Kearney | African Telecoms at a Crossroad 15Operators should carefully evaluate the VAS opportunities in their local markets anddevelop/invest in the most promising one.4. Drive a Step-Change in Operational ExcellenceThe focus for telecoms operators in Africa has until now been on keeping up with theastounding growth of subscribers and traffic. Improving operational excellence and reducingcosts is more recent on the CEO agenda, but is certainly gaining more attention as marketsmature and prices decline.In fact, costs in Africa are still significantly higher than in other comparable emergingmarkets. For instance, costs per subscriber in Africa are 50% higher than in India.Based on A.T. Kearney’s experience in cost benchmarking and structuring cost reductionprograms in Africa, the potential for performance improvement is very significant. In ourrecent work with several operators, we have identified free cash flow improvement potentialof at least 20%-30%.Figure 13 – Financial Performance Improvement Potential for a Telecom Operator inAfrica (Average OPEX+ CAPEX savings potential by lever)Source: A.T. Kearney AnalysisAs a result, operators active in Africa need to amplify initiatives to substantially improve theiroperational excellence. This is not just about reducing costs, but also improving theeffectiveness of key processes (e.g., faster network roll-out, better quality of service). In ourexperience, some of the highest impact initiatives include: Network. Most operators have engaged initiatives such as sustainably reducing fuelconsumption (which can account for over 50% of network operating expenses inAfrica in comparison with 15% in mature markets), tower sharing / outsourcing andmigrating to a managed services model. In fact, a large number of tower and networkoutsourcing deals are currently in the pipeline. These are all necessary measures,but the real issue is that there are simply too many networks per country. Operatorswill now have to look at more structural ways to reduce network costs, in particularthrough active network sharing.TotalOthersRoaming& IntercoSourcingMarketingSalesITNetwork ops&deployment,optimizationSitesharingPowerCapexOpexTop Line (Gross Margins)% totalimpact20%60%20%35% 30% 15%10% 15% 3% 13% 35% 5% 22%Cost savingsas % ofaddressedbaseline
  • 16. A.T. Kearney | African Telecoms at a Crossroad 16 Procurement. Aside from the more global operators, regional players are still in theearly stages of re-enforcing their procurement teams. Significant room forimprovement exists in the procurement area and different levers can be used – fromthe straightforward supplier consolidation to a more complex review of specificationsto generate savings of 10 to 15% of baseline spend (Opex and Capex), with aparticularly high impact in network costs (which typically account for over 35% of totalspend). Distribution. Distribution of mobile services in Africa relies essentially on indirectdistribution, although operators are actively building direct channels as they seek tosell a broader range of services and devices and increase market share. However,distribution costs in Africa are particularly high – 10% of revenues on average vs. 5%globally, partially driven by higher churn rates and by distribution networks with toomany layers. In this context, revisiting the distribution strategy (e.g., reducing thenumber of intermediaries) and the commission model (e.g. focusing more and morein quality of service provided and in the ability to perform) are two key levers tooptimize distribution costs, while sustaining and even increasing gross adds andretention. Shared services. Another important change is the need to better capitalize on globalscale effects. This is of particular importance in Africa where the vast majority ofoperators are below scale effects (close to 130 operators have less than 5MMsubscribers). As a result, there is value in consolidating globally or regionally anumber of activities. The most obvious candidates include procurement, wholesaleservices, selected product developments, and selected IT developments andinfrastructure. In a second stage, one might consider centralizing other less obviouscandidates - e.g., creating shared services for support functions (e.g., finance, HR).5. Keep Investing in the NetworkTelecoms operators in Africa have committed substantial investments to build networks withsufficient coverage and capacity. With more modest revenue growth and pressure onmargins, reducing capital expenditures budgets has been the main driver of free cash flowappreciation for many operators active in the region. To the extent, that Capex budgets forsome operators are now at dangerously low levels, at 10%-12% of revenues in some cases.Figure 14 –Capital Expenditures of Mobile Operators in Africa(USD per subscriber, 2012)56252516914MatureMarketNigeria SouthAfricaAlgeria MoroccoEgypt
  • 17. A.T. Kearney | African Telecoms at a Crossroad 17Source: ML Wireless Matrix A.T. Kearney AnalysisPressure to increase capital expenditures is mounting intensely – networks are saturated indense urban areas, the launch of 3G/4G services requires substantial investments in newradio and transmission capacity and most operators need to embark in heavy networkmodernization programs, particularly for their core network. As a result, we expect a surge incapital expenditure requirements over the next three to four years.6. Transform the Operating Model and Grow New TalentUntil now, operators’ main challenge has been to build networks and distribution channels asquickly and cheaply as possible. With limited capabilities available from external serviceproviders, they have had to build up capabilities to large extent internally.Looking forward, telecom operators’ organizations will face new challenges, includingincreasing customer differentiation, selling a broader range of services, being more agile inan intensely competitive and fast moving environment whilst reducing costs.As a result, they will need to transform their operating model and improve their corecapabilities. Some of the key priorities include: Create a more customer centric organization, which could lead in some cases to re-organizing against customer segments (at a basic level consumer vs. business); Outsource non-core activities, particularly in network, IT and call centres; Re-enforce marketing and distribution skills / capabilities; Attract new and different talent, to grow adjacent businesses such as mobile financialservices or ICT; More extensively rely on IT systems to automate core processes, enabling theorganization to focus on higher value-added tasks; Drive tighter and more balanced financial management, by re-enforcing managementcontrolling capabilities.
  • 18. A.T. Kearney | African Telecoms at a Crossroad 18ConclusionTen years ago, who would have imagined the phenomenal growth the African telecommarket has witnessed. We believe that the next ten years will be equally exciting and thatAfrica will face a digital revolution, enabled by ubiquitous and affordable access to Internetservices. Telecoms operators will play a central road in making that vision a reality.At the same time, telecoms operators will face a challenging two to three year transitionperiod which will require much stronger, precise and balanced management. Executives oftelecoms operators will be faced with difficult, and sometimes contradictory, decisions.Striking the right balance between more aggressively reducing costs whilst still investing inthe business will separate the winners from the losers.
  • 19. A.T. Kearney | African Telecoms at a Crossroad 19About the AuthorsLaurent ViviezPartner, Head of African Telecoms Practicelaurent.viviez@atkearney.comMarc BioscaPartner, Telecoms Practicemarc.biosca@atkearney.comIsabel NeivaManager, Telecoms Practiceisabel.neiva@atkearney.comMakram AtiyahManager, Telecoms
  • 20. A.T. Kearney | African Telecoms at a Crossroad 20A.T. Kearney is a global team of forward-thinking, collaborative partners that deliversimmediate, meaningful results and long-term transformative advantage to clients. Since1926, we have been trusted advisors on CEO-agenda issues to the world’s leadingorganizations across all major industries and sectors. A.T. Kearney’s offices are locatedin major business centers in 38 countries.For more information,permission to reprint ortranslate this work, and allother correspondence,please AtlantaCalgaryChicagoDallasDetroitHoustonMexico CityNew YorkSan FranciscoSão PauloTorontoWashington, D.C.Europe AmsterdamBerlinBrusselsBucharestBudapestCopenhagenDüsseldorfFrankfurtHelsinkiIstanbulKievLisbonLjubljanaLondonMadridMilanMoscowMunichOsloParisPragueRomeStockholmStuttgartViennaWarsawZurichAsia Pacific BangkokBeijingHong KongJakartaKuala LumpurMelbourneMumbaiNew DelhiSeoulShanghaiSingaporeSydneyTokyoMiddle Eastand AfricaAbu DhabiDubaiJohannesburgManamaRiyadh© 2012, A.T. Kearney, Inc. All rights reserved.A.T. Kearney Korea LLC is a separate andindependent legal entity operating under theA.T. Kearney name in Korea.