Challenges facing Uganda Telecom Industry

Posted On January 18, 2013 , 4:12 PM Contador HarrisonPeriscope

Uganda telecom industry has come a long way since its liberalization era in 1990s.Over the last decade, the mobile industry has witnessed exponential growth especially in the wireless segment and the plethora of telecom services evolved over the years, ranging from basic telephony to voice, video and data services as well as bandwidth on demand that has catalyzed radical changes in the business operations for the service sector and has provided millions of people access to new technologies.Despite a reflected promising growth, the Tele-density in Uganda still remains at a very low level compared with global standards and thus providing tremendous opportunity for future growth. This is the reason why the entrant of K2 Telecom is welcome news to the millions who still have no access to Telecom services especially in rural areas.Other segment that has celebrated the entrant of K2 Telecom is the low Income tier of the population the company has stated clearly as its main target market. In the medium-term, the industry is expected to continue to record good subscriber growth as a result of low penetration levels, heightened competition as a result of K2 Telecom entry into the market, a sustained fall in minimum subscription cost and tariff that increase affordability for lower-income rural user and expansion of coverage area by mobile operators.The Uganda telecom sector offers unprecedented opportunities in various areas, such as rural telephony which I strongly believe led to the entry of K2 Telecom, 3G services, virtual private networks and more important value-added services among others.Nonetheless, the lack of telecom infrastructure in rural areas and falling average revenue per user of telecom service providers could inhibit the future growth of the industry and this should be an issue K2 Telecom must tackle for its success and growth.There in no doubt in my mind that the competitive intensity in the telecom industry in Uganda is one of the highest in the East and Central Africa and has lead to sustained fall in realization for the service providers. Intense competitive pressure and cut throat pricing has resulted in declining ARPUs. With entrant of K2 Telecom, the first indigenous company in the telecom space the competitive intensity is likely to continue, putting further downward pressures on the telecom tariffs. Thus, the telecom companies might have to grapple with further decline in ARPUs, going forward starting with this year.

MTN Uganda a subsidiary of MTN Group is the country market leader
MTN Uganda a subsidiary of MTN Group is the country market leader

Alternatively, telecom operators are turning their focus to steadily increasing the minutes of usage to counter the sustained fall in ARPUs. Likewise, the growth of the VAS is also crucial for some improvement in the ARPUs of operators. According to recent trends in the industry, telecom companies in Uganda are moving their focus to the rural areas for driving the future subscriber growth they might not witness a commensurate increase in revenues. In fact, the risk of steep decline in ARPUs will increase going forward as the telecom companies penetrate rural markets that are characterized by higher concentration of low-income, low-usage customers. A higher-than-expected decline in ARPU poses a risk of reduction in margins of service providers.Another problem the Telecom industry in Uganda is grappling with is lack of telecom infrastructure in semi-rural and rural areas could be one of the major hindrances in tapping the huge rural potential market, going forward.The service providers have to incur a huge initial fixed cost to enter rural service areas. To make it worse, any rural areas in Uganda lack basic infrastructure such as road and power, developing telecom infrastructure in these areas involve greater logistical risks and also extend the time taken to roll out telecom services.The lack of trained personnel in the rural area to operate and maintain the cellular infrastructure, especially passive infrastructure such as towers, is also seen as a hurdle for extending telecom services to the under penetrated rural areas especially in northern Uganda regions of west Nile and upper eastern regions of Karamoja. A rural Tele-density of merely 18% point towards the fact that majority of Ugandan population still do not have access to telecom services.

The rural Uganda seems to have remained untouched by the telecom revolution witnessed in the last three years. A huge ‘digital divide’, which is reflected by the enormous difference between the urban and rural Tele-density, reiterates this fact. With the urban markets reaching a saturation point, the telecom service providers are penetrating rural areas for driving future growth. Thus, the service providers like K2 Telecom entering new rural markets might witness substantial increase in subscriber base.Nonetheless, the revenue growth from these regions is unlikely to match the surge in the subscriber base. Another major concern that has come to the forefront in the recent past has been heightened competitive intensity in the industry that has correspondingly fuelled the price war between industry players especially MTN vs Warid Telecom that almost brought down the industry margins a year ago.The pricing strategy of per second billing already has taken the price war between telecom operators to the next level. The intensifying price war could put significant downward pressure on the industry revenue growth. In my opinion, the ongoing price war and the concomitant decline in telecom traffic could raise the entry barrier for new companies like K2 Telecom. The Ugandan economy remains highly underpenetrated in terms of broadband connections. High cost of PC and laptop, high Internet charges of average $10 per 500MB and lower wire-line connections have been some of the major factors inhibiting broadband penetration. Broadband is one of the key catalysts for economic development and major initiatives by both the government and service providers are needed to increase its penetration otherwise the country will continue to lag behind its neighbors Kenya and Tanzania.