OTT - THREAT OR OPPORTUNITY FOR AFRICAN TELCOS? DR CHRISTOPH STORK

OTT - THREAT OR OPPORTUNITY FOR AFRICAN TELCOS? DR CHRISTOPH STORK

MOBILE BROADBAND Mobile broadband (2.5G and 3G) and declining smart phone prices have lead to a rapid increase in Internet use Computer based Internet access - is a privilege of the few in Africa (formal jobs or Internet Cafe) Mobile BB Requires less skills than computer based access It does not require electricity at home It is prepaid Mobile BB is expensive for the poor, and at the same time as it is a cost saving tool It is expensive when using the full Internet including media streaming It is cheap when Over The Top (OTT) services are used instead of voice and SMS

GLOBAL TREND 100% Voice + SMS Data 75% Revenue 50% 25% 0% 2000 2005 2010 2015 2020 Separation of access and service platforms

PHASE 6: MNO = ACCESS ONLY PROVIDERS Pricing = flat access Billing = very easy Marketing = performance can be measure objectively Dumb Pipe Syndrom? Investors don t complain if the make reasonable returns Some operators in Africa prepare for transition: Bundling to keep stable ARPU and simulate flat access e.g.

VOICE AND SMS VS DATA RETAIL PRICES Q1 2016 Lowest average prices in US cents 1 Mb out of bundle 1 SMS 1 Minute 1 Mb based on 1 GB top up % 1 Mb when purchased as a 1GB top up expressed in share of other prices 1 MB out of bundle 1 SMS 1 voice minute Malawi 0.89 3.78 9.30 0.67 75% 18% 7% Sudan 1.08 0.71 0.71 0.43 40% 61% 61% Ethiopia 1.76 1.76 3.37 0.96 55% 55% 28% Tanzania 1.88 1.47 5.29 0.60 32% 41% 11% Egypt 1.97 1.97 1.97 0.32 16% 16% 16% South Africa 2.50 2.50 5.14 0.70 28% 28% 14% Botswana 2.65 2.12 7.04 1.79 68% 84% 25% Tunisia 2.74 1.37 1.70 0.50 18% 36% 29% Cote d'ivoire 3.81 3.81 8.95 0.82 22% 22% 9% Kenya 5.65 1.13 3.01 0.50 9% 44% 17% Namibia 7.76 3.02 12.50 0.55 7% 18% 4% Mozambique 7.93 3.81 10.84 0.36 5% 9% 3% D.R Congo 9.00 4.00 8.44 1.30 14% 33% 15% Angola 9.01 9.01 20.03 1.86 21% 21% 9% Lesotho 11.15 4.46 10.70 0.84 8% 19% 8% Zambia 16.66 3.28 13.54 0.90 5% 27% 7%

OTTS PROVIDE A COMPETITIVE OPPORTUNITY Small Operator On-net / Off-net discrimination does not apply to OTT services The size of the subscriber base doesn't provide a competitive advantage OTTs stimulate data use through social networks - boost data market share Dominant operators may embrace OTTs to defend their market share and discourage market entry A new operator- several years to break even while building a network A new operator would have to build a business case around flat access pricing rather than traditional mobile business model in a market with wide spread OTT use

MNO RESPONSE TO OTTS

BLOCKING OTTS In Europe, the initial response by mobile operators had been to block or throttle peer-to-peer traffic or VoIP The European Commission in 2013 raided telecom operators on grounds of throttling concerns AT&T blocked mobile VoIP following the release of the iphone but soon faced consumer and regulatory pressure and backed down Morocco operators blocked Voice over IP services - Viber, WhatsApp and Skype without subscribers knowledge Blocking directly violates the idea of net neutrality, an open Internet accessible to all Consumer pressure has been more effective though

REGULATING OTTS Regulatory intervention to prevent customers using OTTs To protect operators from market erosion Regulating zero rated OTTs based on net neutrality principle (India 2016, Egypt 2016) Regulatory intervention to create an equal playing field - OTTs have no licence or tax obligations (Vodacom and MTN in South Africa)

EMBRACING OTTS 1.Bundling dedicated data for social media (MTC in Namibia) 2. Zero rated OTTs - without charging for data services 3. Free Basics package from internet.org Operators in 21 African countries have partnered with Facebook to offer zero rated Free Basics on their platforms Interestingly, in nine of the African countries it is being driven by Airtel despite despite the head of Airtel Africa calling for regulation of OTT services Malawi and the Democratic republic of Congo are the only countries in Africa in which the service is being offered by two operators

SIMULATE OTTS THROUGH BUNDLING Bundle voice, SMS and data into packages that provides OTT like services Price of the top-up so that it receives the desired ARPU 4 x 7 day validity top up = ARPU * Subscribers = desired revenue Sometimes lose to unlimited voice call and text messages Operators in 24 African countries offered bundling voice, text and data together in 2015

OFFERING NON TELCO OTT Safaricom offers MPESA successfully Streaming music and videos (zero rated - i.e. not charging for data) In South Africa, Vodacom partnered with Deezer, a music streaming service - ZAR59 per month for unlimited music access MTN offered its own video streaming service - MTN Vu formerly known as MTN Front Row

OFFERING OWN OTT An operator could develop a own OTT service Deutsche Telekom offers a WhatsApp alternative with its immmr service Such a strategy would facilitate the transition to a flat rate access model

MOBILE PRICES

LOWEST PREPAID Q1 2016 Egypt Mozambique Rwanda Sudan Uganda Ghana Kenya Cape Verde Tunisia Nigeria Morocco Namibia Burundi Tanzania Mauritius Malawi Guinea Cameroon South Africa Madagascar Cote d'ivoire Benin Bukina Faso Senegal Niger Togo Lesotho Zambia Gabon Algeria Ethiopia Liberia Mali D.R Congo Chad ongo Brazzaville Botswana Angola Zimbabwe Sierra Leone Mauritania Swaziland 3.18 3.62 4.13 4.32 4.35 4.89 4.97 4.98 4.99 5.06 5.10 1 GB PER MONTH 5.32 5.85 6.03 6.46 6.65 6.66 6.68 6.97 7.10 8.18 8.34 8.34 8.34 8.34 8.34 8.44 8.97 9.18 9.39 9.60 12.00 12.52 13.00 16.69 16.69 17.91 18.57 20.00 25.19 27.08 32.00 Seychelles 47.39 Uganda Sudan Tunisia Kenya Egypt Ghana Cameroon Mauritius Nigeria Tanzania Ethiopia Guinea South Africa Madagascar Mauritania Rwanda Algeria Gambia Burundi Zambia Namibia Libya Botswana Mozambique Benin Cote d'ivoire D.R Congo Senegal Congo Brazzaville Niger Bukina Faso Malawi Morocco Mali Liberia Gabon Central African Republic Swaziland Guinea-Bissau Zimbabwe Chad Togo Angola Sierra Leone Lesotho 1.45 1.58 2.03 2.23 2.26 2.49 2.93 3.10 3.28 3.36 3.40 3.57 3.82 4.31 4.56 4.59 4.70 4.88 5.83 30 CALLS 100 SMS PER MONTH 5.92 6.13 6.45 6.94 7.31 7.63 8.11 8.14 8.34 8.65 8.84 9.25 9.93 10.20 10.47 10.48 10.58 11.19 12.56 12.74 12.80 12.86 12.99 12.99 13.37 13.66 17.13 Seychelles Cape Verde 23.21

HIGHEST VALUE FOR MONEY INDEX Q1 2016 Uganda Namibia Cameroon Tanzania 4.16 Mauritius 3.68 Sudan 3.33 Morocco 3.11 Madagascar 2.30 Cote d'ivoire 2.00 Kenya 1.92 Senegal 1.80 South Africa 1.10 D.R Congo 1.03 Egypt 0.90 Rwanda 0.67 Angola 0.67 Botswana 0.61 Mozambique 0.59 Mauritania 0.57 Chad 0.35 Algeria 0.33 Gabon 0.24 Ethiopia 0.13 Ghana 0.00 5.83 8.59 7.79 Valuing bundled voice, SMS and data from a OTT users perspective 1 minute = 0.2 US cents, 1 SMS = 0.1 US cent 1 MB data = 1 US cents 1 MB Social Media = 0.5 US cents

CASE STUDIES: KENYA, NAMIBIA, SOUTH AFRICA

DATA REVENUES AS SHARE OF TOTAL REVENUE 30% Vodacom SA Safaricom MTN SA MTC Namibia 20% 20% 25% 21.2% 23.8% 21.8% 17.8% 11.6% 11.7% 13.4% 15.2% 9.1% 9.1% 4.8% 4.9% 5.3% 6.4% 2011 2012 2013 2014 2015

COMPARISON BETWEEN DOMINANT OPERATORS Kenya South Africa Namibia Number of Mobile operators 3 4 2 Marketshare of dominant operator in terms of active SIM Marketshare of dominant operator in terms of traffic Cheapest OECD Basket Cheapest 1 GB Highest Bundled Top up Share of Data Revenue of total for dominant operator FY 2014 67% MTN 33% Vodacom 42% 96% 76% NA 99% USD 2.23 3.82 6.12 Ranking 4 13 21 USD 4.97 6.97 5.3 Ranking 7 19 12 BVI 1.92 1.1 7.79 Ranking 10 12 2 6.4% 23.8% 30%

KENYA SAFARICOM Offering Non Telco OTT - MPESA Data revenue compared to voice low, 9% of total revenue Voice Revenues still increasing 76% 16% 8% Equitel Airtel Orange Safaricom Market share by voice traffic July to Sep 2015 Voice M-Pesa Mobile data SMS 11.78 63.5 16.87 68.12 21.84 75.84 26.56 84.32 32.63 87.41 FY11 FY12 FY13 FY14 FY15

NAMIBIA MTC Total Mobile outgoing traffic MTC Namibia is close to unlimited bundles for several years 97.2% 97.2% 98.1% 98.2% 98.6% 99.0% to defend market share and keep new competition out MTC s aim for constant ARPU and competitive pressure leads not to lower ARPUs but to more bundled value This strategy is simulating flat rate pricing for unlimited voice and SMS Jul - Dec 2012 Jan - Jun 2013 Jul - Dec 2013 Jan - Jun 2014 Jul - Dec 2014 Jan - Jun 2015 MTC s KPIs 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Revenue N$ million 769 937 1,113 1,232 1,390 1,407 1,453 1,617 1,832 2,082 Shareholders equity N$ million Net profit after tax N$ million 646 903 999 1,136 1,153 1,166 1,121 1132 1,173 1,212 293 337 340 358 388 397 319 353 425 505 EBITDA margin 61% 60.2% 52.2% 50.9% 53.8% 55.8% 53.2% 53.2% 55.0% 54.7%

SOUTH AFRICA 39% Voice and SMS revenues in decline while data revenue increases APRUs declining CellC embraces OTT - zero rated facebook and whatsapp Dominant operators Vodacom and MTN argue for regulating OTTs 154.0 26% 3% 32% 184.0 183.0 ARPU 134.1 Vodacom 157.0 122.0 Cell C (Oger Telecom) MTN Telkom Mobile Vodacom MTN 128.0 125.0 108.0 92.0 113.0 2010 2011 2012 2013 2014 2015 Table 5: Revenues in R(m) 2013 2014 2015 Change Vodacom MTN Mobile voice 29,151 28,135 25,855 Down Mobile 3,027 2,675 2,522 Down Mobile messaging Data 8,882 10,974 13,538 Up Mobile voice 22,125 19,677 Down Mobile 2,365 2,069 Down Mobile messaging Data 8,656 9,264 Up

BLENDED ARPU 2010 = 100% Vodacom MTC Safaricom MTN 127% 128% 120% 108% 96% 99% 86% 87% 87% 85% 79% 84% 88% 70% 70% 68% 58% 61% 2011 2012 2013 2014 2015

CONCLUSION Zero rated OTTs can be used to gain market share for new entrants or defend market share against new entrants Declining voice revenues can be combated with increasing data revenues - or non-telco OTTs like mobile money - jury is still out on video and music Providing prepaid products that resemble flat rate pricing is a successful strategy to retain revenues An access only model would reduce expenses for billing and branding thus retaining profitability with declining revenues New business model for MNO Ghana 4G data only providers are there already