Battle in Telecom Market Intensifies in East Africa

Posted on February 10, 2013 10:39 am

Most mobile phone subscribers in sub Saharan Africa have had little to complain about over the last few years when it comes to calling rates. With new operators entering the African market, the result has been an over-saturation and an all-out price war as eight operators fought for a foothold in a continent with more than 1Billion people and poor quality services. In some countries where cut throat competition is the order of the day, wild promotional campaigns like monthly cash prize giveaways with notable examples being AirTel in Uganda, Safaricom in Kenya, Zantel in Zanzibar and Tigo in Tanzania and top-up bonuses worth up to triple the price of a prepaid card with notable examples being MTN in Uganda and Vodacom in Tanzania. Investors have poured millions of dollars into coverage expansion and infrastructure overhauls with Safaricom, a Kenya telecom company leading the way in building the fourth generation network and MTN in Uganda is expected to test its 4G network in March this year. East African Telecom companies have vastly improved their services and from my own assessment the regular promotions have dropped the price of a domestic call per minute.

Telecom companies in East African region are mainly backed by large and wealthy foreign owned companies. For example Safaricom is backed by Vodafone UK same as Vodacom Tanzania, Tigo operations in both Tanzania and Rwanda are bankrolled by The Milicom International group, a Luxembourg based company that has significant presence in South America just to mention a few. Most Telecom operators aim was to build up their subscriber bases that resulted in a pricing war.The model was not sustainable for operators, as they had to absorb high operating costs as revenues continued to dwindle. To run a telecom company in East Africa costs more in operating costs compared with other places like Finland and Australia due to the lack of electricity in most parts of the five East African community member states since most of them are forced to use a diesel power generator. In addition to that, operators in East African Telecom companies had to pay for extensive marketing campaigns, distribution, call centers, customer service, financing and many more costs.

There is little revenue to be made from phone usage and only a few people using data plans in an infant smartphone culture, East Africa’s mobile sector has sustained annual losses running into the millions of dollars with the exception of Safaricom in Kenya and Vodacom in Tanzania. Only now are the hard realities of the unsustainable, protracted price war starting to play out as the revenue has shrunk. The Telecom markets are now beginning to move at a level with more sustainable competition finally and in the long term I don’t see any more of those crazy price wars that were prominent in 2010-2012. I think that in a market the size of East Africa, in terms of population and GDP, you can only have three, maybe four operators for the sector to be sustainable per every country and that would mean a total of 20 mobile operators in a population of currently 140 million people in the East African Community. While the consumers had benefited from the low prices, the price war scared away investors in the larger East African region who wouldn’t foot the bills for upgrading telecoms infrastructures in the region. I would say that because of the initial rush of entrants, the equipment was improved substantially, but now quality is definitely toward the bottom as only three operators have so far tested 4G Network namely MTN Uganda, Safaricom in Kenya and Vodacom in Tanzania. I expect the East African Telecom market behavior to move slowly until there is further consolidation among operators but there is still going to be a price war at a high level of competition. East Africa’s telecoms sector faces other challenges with most operators claiming that the market is far too under-regulated. On the regulation side, there are fewer rules that have been put in place with the thinking that this competition would provide the best way to make the most affordable rates for East Africans. I do also think the next battle is going to be the allocation of 4G licenses and people in the East African countries will gain access to the Internet through their phones and I expect there is going to be high demand for 4G type services in Uganda, Tanzania, Kenya and Rwanda as well as Burundi in the future.

 

Contador Harrison