HELPING TMT CLIENTS THROUGHOUT AFRICA

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1 InnovatIon africa DIgItal SummIt 2013 HELPING TMT CLIENTS THROUGHOUT AFRICA For more than 25 years, Analysys Mason has supported clients around the world providing unique and specialist knowledge on all issues that relate to the telecoms, media and technology (TMT) sectors. Across our offices in Africa, Asia, Europe, the Middle East and North America, Analysys Mason has brought significant, measurable results for our clients helping them to operate more efficiently, effectively and profitably. Recent reports from Analysys Mason s Middle East and Africa research programme: Mobile Internet Survey in the Middle East and Africa 2013: Internet access trends and analysis The handset market in Sub-Saharan Africa: trends and forecasts The Sub-Saharan Africa telecoms market: trends and forecasts Our clients include telecoms operators, regulators, financial institutions, governments, vendors, content and media players, satellite companies, cable companies, lawyers, public sector and enterprise companies. We have worked on more than 110 consulting projects in Africa during the last three years, which include: Developing the commercial strategy to launch an MVNO for an financial institution Carrying out a full financial, commercial and technology due diligence on a tower company on behalf of an investor Developing a business intelligence platform (extraction of CDRs, creation of segments etc) for an MNO Building the strategy to structurally separate the fibre network assets from incumbent BTC in Botswana Creating the consumer and enterprise voice, data and bundle offers for an MNO Reviewing the business plans and valued the operational units of a pan-african telecoms group Developing the strategic plan for a national health information management system, for the ministry of health Authoring the RFP for the outsourcing of passive facility maintenance and build-to-suit contracts for an MNO Undertaking the due diligence of a long-distance submarine cable for an equity investor Building the strategy and supported the launch of a data centre service analysysmason.com

2 Innovation Africa Digital Summit 2013 WHOLESALE MOBILE BROADBAND: WHAT COULD GO WRONG, AND HOW IT COULD BE FIXED Robert Schumann Manager Michal Gabrielczyk Consultant The first challenge to any model is service and pricing flexibility: mobile data services are not a one size fits all product that can be bought off the shelf, as are towers and roamed minutes. Increasing demand for mobile data services in many markets, and a desire to ensure cost efficiency in the industry, has prompted mobile network operators (MNOs) and regulators alike to explore novel ways of using and sharing infrastructure including radio spectrum. A tempting solution, inspired by the success of MVNOs, tower companies and the outsourcing of backhaul, is to introduce a wholesale layer into mobile service provision but how well would this model work when applied to mobile broadband? Before discussing the issues facing a wholesaler, we should acknowledge that there are several ways in which wholesale mobile broadband can work: Voluntary open access: An operator builds its business plan around open access, and probably identifies anchor customers in order to make sure that its network is suitable for their needs. Commercial risk tends to be very high. An example of an organisation proposing to use this model is LightSquared (USA). Two-operator joint venture: Two operators agree to share a network, usually by entering a joint venture that may include compensation to each operator for the infrastructure it contributes. Governance arrangements are critical to ensure that operators get what they want from the set-up. An example is MBNL (UK), a joint venture between Everything Everywhere and Three. Multi-operator joint venture: This is similar to the two-operator approach, but scaled up. The scaling tends not to work very well, as co-ordinating the needs of more than two parties becomes very difficult. Yota (Russia) was originally intended to be an arrangement of this sort. Vendor-led consortium: A vendor takes the lead in deploying the network, as a way of securing stable revenue (as opposed to one-off revenue for equipment sales) and perhaps deployment to areas where each individual operator may not consider coverage to be economically viable. A key issue is aligning incentives to prevent the deal from falling apart. An example is Rural NetCo (Tanzania). Government-led consortium: The government uses policy or regulatory leverage to compel operators to share a network roll-out. Risks include lack of control by stakeholders, poor service and underutilisation particularly if the consortium commands some type of exclusivity. The Kenyan government is proposing this approach for 4G roll-out. Wholesale obligation on spectrum: As a condition of being awarded the spectrum, a regulator may insist that the operator offers wholesale access. The incentives of all parties tend to be poorly aligned in this situation, which was the approach advocated for assigning 800MHz and 2.6GHz spectrum by South Africa s regulator, ICASA, in December The challenges faced by a wholesale mobile broadband operator The first challenge to any model is service and pricing flexibility: mobile data services are not a one size fits all product that can be bought off the shelf, as are towers and roamed minutes. Retail MNOs use their networks to differentiate themselves through coverage (for example, prioritising indoor urban coverage over outdoor mobile use), quality of service, tariff structure and pricing (possibly per megabit per second, per megabyte or per minute of usage) and perhaps by using network information to optimise revenue or service. Each strategy requires different infrastructure and one wholesale provider cannot and should not try to satisfy all retail strategies. Furthermore, if the operator is required to offer transparent non-discriminatory prices, the situation gets even worse: changes in tariff structure must be renegotiated with all wholesale customers, and the market may become slow to react to consumer demand. Generally, locking in elements of a business plan (for example, by making beauty contest promises part of an operator s contractual obligations) is inappropriate in a dynamic industry such as telecoms. Second, governance is a critical success factor. Any operator that feels that it lacks control over the shared network (for example, over strategy, operations or pricing) is going to be a reluctant participant. Obvious remedies for this include all parties having at least a 50% share in the business (so only two partners are allowed) or having a competitive wholesale market in which buyers can exercise choice. Related to governance is the question of fairness and cost allocation in the network, a third challenge. We have found that some RAN-sharing deals can collapse, despite substantial financial benefit to all parties, simply because one or more participants believes that others are deriving greater benefit from the deal than they. This is less of an issue with towers (a fairly simple cost to allocate) and roamed minutes (the cost of which is subjected to exhaustive study by regulators). As an example, the Huawei-led attempt in 2011 to provide cellular coverage on London s underground train network failed when London Underground and the MNO partners could not agree terms for sharing the cost of deployment although some blame has been also attributed to mistrust of the Chinese vendor s motives. 2

3 Governance is a critical success factor. Any operator that feels that it lacks control over the shared network (for example, over strategy, operations or pricing) is going to be a reluctant participant. Fourth, a shared network offers less strategic agility and ability to innovate. Key strategic questions include where first to roll out the network, which technology upgrade path to follow, which vendor to use and in which geographies to invest. The mobile telecoms sector continues to be innovative and competitive, and wholesale operators may lack the strategic agility to respond to changes in end-user requirements. On an operational level, a fifth challenge is the rigidity of forecasting and planning processes. Since the interaction between wholesaler and retailers must be at arms-length (to avoid conflicts of interest), these processes must be formalised contractually for example, with quarterly traffic forecasts and penalties imposed for deviations from forecasts. The constraints dictated by such formal processes can only be overcome if there is sufficient wholesale competition, or if there is less need for arms-length trading (for example, in a 50% owned joint venture). The level of commercial risk faced by operators is a sixth challenge. This is less of an issue if operators own investment is on the line, in a small joint venture. However, a private operator, or an operator forced to offer wholesale, may find little demand for its wholesale services particularly if many operators already hold comparable spectrum (for example, UMTS on 900MHz may be an adequate substitute for 800MHz LTE) or if networks can feasibly expand to cope with demand. The wholesaler may also find its network cherry-picked: retailers will use their own networks to provide lucrative services, and only use the wholesale network for unprofitable services. Increased commercial risk translates into higher cost to deploy, and may lead to financial difficulties for the wholesaler. Regulatory uncertainty may create a seventh challenge. Typically, regulators support sharing arrangements, but there is an uneasy awareness that sharing is not far from collusion. Sharing arrangements commonly require approval from a competition authority. Even in situations where government and regulator support is explicit, such support may wear thin over time if the wholesale network fails to deliver up to expectations. Our view of how the wholesale models identified above deal with these challenges is shown in Figure 1. If these challenges are not taken into account, there is a possibility that a spectrum ghetto could evolve, used only by marginal service providers. With poor governance and strait-jacketed operations, and MNOs that only use the service if they do not consider it worthwhile to deploy their own, the only retailers that might be likely to use the wholesaler are those with no other option. It remains to be seen whether any wholesale model can overcome all these challenges sufficiently to be competitive with the indisputably successful infrastructure-based competition that has emerged in mobile telecoms. For more information, please contact Robert Schumann, Manager, at robert.schumann@analysysmason.com and Michal Gabrielczyk, Consultant, at michal.gabrielczyk@analysysmason.com It remains to be seen whether any wholesale model can overcome all these challenges sufficiently to be competitive with the indisputably successful infrastructure-based competition that has emerged in mobile telecoms. key issue voluntary open access two -operator joint venture multioperator joint venture vendor-led consortium governmentled consortium wholesale obligation on spectrum Example LightSquared (USA) MBNL (UK) Yota (Russia) Rural NetCo (Tanzania) Kenya (proposed) South Africa (proposed) Service and pricing flexibility Ease of governance Fairness and cost allocation Strategic agility Ability to forecast and plan Level of commercial risk Regulatory support Figure 1: Ability of different wholesale models to deal with identified challenges [Source: Analysys Mason, 2013] Key: = best able to deal with challenge; = least able to deal with challenge. 3

4 Innovation Africa Digital Summit 2013 MOBILE DATA REVENUE IN SUB-SAHARAN AFRICA WILL INCREASE TWICE AS FAST AS MOBILE VOICE REVENUE IN Telecoms markets in Sub-Saharan Africa (SSA) will be increasingly driven by mobile data during the next five years, because growth in the number of mobile subscribers will slow and voice revenue growth will decline as markets mature and the impact of regulatory and competitive shifts hit voice pricing. Roz Roseboro Principal Analyst Mobile voice has long been the largest source of revenue for operators in SSA, representing 82% of all mobile retail revenue at the end of According to Analysys Mason s new forecast for the region, The Sub-Saharan Africa telecoms market: trends and forecasts , the number of mobile subscribers will increase at a 7% CAGR during the next five years, reaching 727 million subscribers in Mobile voice revenue will increase at a 4% CAGR, while non-voice revenue will increase 50% faster, at a 6% CAGR. Regulatory and market forces will put sustained pressure on mobile voice pricing in SSA Mobile voice has long been the largest source of revenue for operators in SSA, representing 82% of all mobile retail revenue at the end of However, pricing has been on a downward trajectory during the past five years because of the continued declines in mobile termination rates (MTRs) and more-intense competition - and we expect this will continue during the forecast period ( ). Newer users are also extremely price sensitive and tend to have lower usage rates, and this combination of factors leads us to predict that mobile voice revenue growth will slow. We forecast that while the number of mobile handsets will increase at a 7% CAGR during , mobile voice revenue will only increase at a 3% CAGR. Tanzania and Uganda - which have the lowest mobile penetration rates among the countries modelled in our forecast - will have faster mobile voice growth than the SSA market overall, at 6.5% and 4.9% CAGR respectively in Mobile voice will represent 73% of mobile retail revenue in SSA at the end of the forecast period. Smartphones will remain too expensive for the mass market in Operators such as Airtel, Etisalat and MTN are bringing 3G to secondary cities and upgrading their networks to HSPA+ across SSA, with particularly strong investment in Nigeria. These investments will help drive growth in handset data, which will be the main driver of revenue growth for mobile operators in SSA during Handset data will generate more revenue, while USB modem-based mobile broadband will grow faster than handset data, because it is starting from a much lower base. PC penetration is relatively low in SSA, so most people access the Internet via handsets. Smartphones will become more affordable during the forecast period, but they will still be too expensive for the mass market, and will only account for 16% of handsets by This means that operators will need to work with content owners to ensure users can consume content on simple feature phones. Lower pricing will help drive growth in SSA broadband markets SSA lags behind the rest of the world in fixed and mobile broadband penetration, with only 1% population penetration at the end of 2011 (note that mobile broadband does not include Internet access via handsets). This is because PC penetration rates are low, and high prices have made broadband services unaffordable for most people. The lack of international capacity has been addressed with the landing of numerous submarine cables during the past few years, and operators have begun laying fibre to bring that capacity inland. This has helped reduce the price of broadband services, and subscriber growth has followed. We expect this to continue, with the number of mobile broadband subscribers increasing at a 22% CAGR between 2012 and 2017, and the number of fixed broadband subscribers increasing at a 28% CAGR. The pricing gap between mobile and fixed broadband is narrower in SSA than in the rest of the world because of the shared requirement for Internet transport, but mobile technologies - including HSPA, HSPA+, CDMA and WiMAX - will be the primary technology used to deliver broadband services during the forecast period. Operators are unlikely to expand their fixed 4

5 Operators such as Airtel, Etisalat and MTN are bringing 3G to secondary cities and upgrading their networks to HSPA+ across SSA, with particularly strong investment in Nigeria. infrastructure outside their existing footprint, or invest to improve quality, meaning mobile will be the only option for most Internet users. Mobile will comprise 71% of all broadband connections by Analysys Mason s latest Sub-Saharan Africa forecast report provides subscriber, revenue and traffic forecasts for seven key countries and for the region as a whole, for For further information, see For more information, please contact Roz Roseboro, Principal Analyst, at roz.roseboro@analysysmason.com According to Analysys Mason s new forecast for the region, The Sub-Saharan Africa telecoms market: trends and forecasts , the number of mobile subscribers will increase at a 7% CAGR during the next five years, reaching 727 million subscribers in Revenue (USD billion) Mobile voice revenue Mobile non-voice revenue Mobile connections Connections (M) Figure 1: Mobile voice and non-voice revenue, Sub-Saharan Africa, [Source: Analysys Mason, 2013] 5

6 service overview THE MIDDLE EAST AND AFRICA RESEARCH PROGRAMME Service providers and vendors in the Middle East and North Africa must focus on maximising subscriber value and loyalty, driving mobile data usage and understanding requirements for next-generation services, while Sub-Saharan Africa offers a significant opportunity for service providers to drive mobile and fixed penetration affordably. As demand grows, providers in both regions face significant infrastructure challenges if they are to increase international capacity and extend access and backbone networks cost-effectively. Roz Roseboro, Lead Analyst for The Middle East and Africa Telecoms markets in the Middle East and Africa present a dynamic combination of mature and developing environments. Operators in the Middle East and North Africa (MENA) are considering next-generation infrastructure investments while facing increasingly competitive mobile markets many of which are already saturated. Effective customer segmentation, ARPU growth and the introduction of new content and media services are critical issues for service providers. In the rapidly growing telecoms market in Sub-Saharan Africa (SSA), mobile is king mobile services will replace fixed in most countries, and operators and vendors must plan investment and product development accordingly. Key issues for the Middle East and Africa include: consumer mobile usage trends and innovation: device and services trends in MEA, with focus on emerging markets, including surveys, mobile money and payments markets, handset strategies and forecasts enterprise services: supply-side and demand-side views and key market drivers extending connectivity: international, national and access-level fibre connectivity in the region cost reduction and network expansion strategies in the region: infrastructure sharing, outsourcing customer retention and acquisition in high-churn, low-arpu markets. Analysys Mason s The Middle East and Africa regional research programme offers clients critical data and insight into the opportunities and challenges in this telecoms market and benefits from the on-the-ground support and resources of our office in Dubai. Research programme deliverables: The Middle East and Africa Deliverable type Reports: forecasts, quantitative modelling and survey reports, with in-depth analyses of critical topics Viewpoints: targeted analyses of key industry issues and players in the form of case studies, best practice studies or forecasts of specific services Country reports: comprehensive overviews of the telecoms and media landscape, including regulation and market outlook Comments: informed opinion on industry developments in the region Indicative number (over 12 months) - 2 regional forecast reports (updated twice a year) - 2 strategic reports The service in detail For a typical 12-month subscription, our clients can expect: strategic impact reports and regular market commentary: thought leadership delivered via in-depth reports and commentary on developments and strategies for success in the telecoms market in the Middle East and Africa five-year forecasts for key regional telecoms markets: mobile and fixed KPIs for MENA, SSA and 15 individual countries (listed overleaf). Forecast KPIs include connections, ARPU and revenue, technology, usage and traffic country reports: 15 detailed profiles that identify key market issues, discuss the strategies and market shares of major players, evaluate the regulatory environment and provide comprehensive KPIs. Country profiles support competitive analysis, market prioritisation and entry strategies, benchmarking and investment decisions access to experts: unmetered access to our subject matter experts and thought leaders for additional insight and opinion, in response to ad hoc questions relating to our research. Programme Highlights Analysys Mason provides comprehensive analysis of the key issues affecting all parts of the telecoms value chain in the Middle East and Africa. We will be covering critical industry issues, including: content and apps strategies in the MEA region: innovative approaches, and impact on operator success building customer loyalty in prepaid/emerging markets: operator strategies for building loyalty in heavily prepaid and multi-sim environments, including segmentation, promotions, bundling enterprise connectivity services in Africa: competitive landscape, end user demand drivers, key challenges and market outlook consumer mobile Internet usage, mobile services spend and preferences infrastructure sharing: impact of, and strategies for, infrastructure sharing for operators in the MEA region fibre connectivity: overview of fibre buildout in the region; drivers for expanding capacity requirements, impact of increased connectivity on pricing, services and adoption. 6

7 Market data Analysys Mason s The Middle East and Africa regional research programme provides the following key data and five-year market forecasts, which are updated on an annual basis: Mobile subscribers and mobile penetration split by - contract type (prepaid/contract) and technology generation - connection type (handset, mobile broadband and M2M). handsets - split by type (smartphone and non-smartphone) - penetration rate. service and retail revenue - split by contract type (prepaid/contract) - split by service type (voice, messaging data, mobile broadband, M2M, handset data and interconnect) - as a percentage of GDP - per capita. service ARPU split by - contract type - service type (handset voice and handset non-voice). traffic total network voice traffic, outgoing voice traffic. Broadband connections by technology (DSL, cable, fibre and other) retail revenue by technology (DSL, cable, fibre and other). Fixed connections by service type (voice, dial-up and IPTV) service and retail revenue by service type (fixed voice, dial-up, fixed broadband, IPTV and business network services) outgoing voice traffic. Geographical coverage Analysys Mason s The Middle East and Africa regional research programme provides operational KPIs for fixed, mobile and broadband players in, as well as country reports for, 15 key countries: Algeria Egypt Ghana Israel Kenya Regional-level forecasts are provided for two sub-regions: the Middle East and North Africa Sub-Saharan Africa. Kuwait Morocco Nigeria Qatar Saudi Arabia South Africa Sudan Tanzania UAE Uganda. Roz Roseboro, Principal Analyst Roz is the lead analyst for Analysys Mason s The Middle East and Africa regional research programme. Her primary areas of specialisation are market drivers in growth markets and understanding the opportunities for operators and vendors in these markets. Roz has nearly 20 years experience in market research, marketing and product management, working for analyst firms and equipment manufacturers. Why Analysys Mason? At Analysys Mason, our focus is exclusively on telecoms, media and technology (TMT). Our ability to understand the complex workings of TMT industries and draw practical conclusions sets us apart. Our work is always based on our broad skill set and the specialist knowledge of our people and our aim is to help our clients change their businesses for the better. We deliver our expertise via three channels: consulting, custom research and subscription research. Analysys Mason s subscription research portfolio Our 27 research programmes cover consumer and enterprise services, network technology and telecoms software, as well as provide detailed data and information on regional markets. All programmes give you regular and timely intelligence plus direct access to our team of analysts. Find out more: analysysmason.com/research Customised presentations and additional analyst support You can commission custom analysis from our experts in three ways: we can develop customised presentations and workshops for senior client and partner teams, as well as their customers, to explore key market drivers, inhibitors, threats, competitors and opportunities you can secure additional analyst support hours, which enable you to engage with our expert analysts for answers to specific questions on issues beyond the immediate scope of our published research for large custom engagements, our expert analysts work with our custom research team to define the scope of and deliver targeted projects. The depth and breadth of Analysys Mason s industry experience, combined with our established methodologies and strong background information on market trends, enable us to help clients address their most-critical business challenges. Analysys Mason provides an honest and forthright perspective on key issues, challenging assumptions and delivering insight that enables our clients to lead the market. Contact us: To discuss our research services in more detail, please contact our Sales and Customer Services team on +44 (0) or via research@analysysmason.com 7

8 about analysys mason Consulting For more than 25 years, our consultants have been bringing the benefits of applied intelligence to enable clients to make the most of their opportunities Research Analysys Mason s research service covers consumer and enterprise services, as well as the software, infrastructure and technology underlying those services. Our clients in the telecoms, media and technology (TMT) sectors operate in dynamic markets where change is constant. We help shape their understanding of the future so they can thrive in these demanding conditions. To do that, we have developed rigorous methodologies that deliver real results for clients around the world. Our focus is exclusively on TMT. We support multi-billion dollar investments, advise clients on regulatory matters, provide spectrum valuation and auction support, and advise on operational performance, business planning and strategy. Such projects result in a depth of knowledge and a range of expertise that sets us apart. We look beyond the obvious to understand a situation from a client s perspective. Most importantly, we never forget that the point of consultancy is to provide appropriate and practical solutions. We help clients solve their most pressing problems, enabling them to go farther, faster and achieve their commercial objectives. The division consists of a specialised team of analysts, who provide dedicated coverage of TMT issues and trends. Our experts understand not only the complexities of the TMT sectors, but the unique challenges of companies, regulators and other stakeholders operating in such a dynamic industry. Our 25 research programmes cover the following five key areas: consumer services enterprise services network technologies telecoms software regional markets. Our programmes offer a mixture of qualitative and quantitative market intelligence. The result is an essential resource for strategic planning, investment, marketing and benchmarking. Custom research We also deliver tailored research that addresses specific business needs for a wide range of organisations. We deliver tailored research that addresses specific business needs for a wide range of operators, vendors, industry bodies and regulators within the telecoms, media and technology (TMT) sectors. Our comprehensive knowledge of the TMT industries draws on a large base of market data that we have collected over 25 years, refreshed through continuous research and custom consulting project assignments. analysys mason contacts: David Eurin, Partner david.eurin@analysysmason.com Roz Roseboro, Principal Analyst roz.roseboro@analysysmason.com Robert Schumann, Manager robert.schumann@analysysmason.com analysysmason.com