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Africa - Preparing for the next wave in telecoms growth

By Mark Casey
Technology, Media, and Telecommunications Industry Leader

Johannesburg, September 2013 - Africa can no longer be considered the Dark Continent. Given the rate at which mobile connectivity is growing, it seems only natural that the way business is done will change. But how will Telco’s embrace this change and are they even ready for it?

Deloitte has recently completed an in-depth analysis of the market, its trends, and the drivers of it. We are convinced that there will be consolidation in the telecommunications sector and inevitably more inbound investment as the market opens up and the economic returns improve.

Indigenous companies, foreign investors, and global players have all made significant investment into the continent or certainly parts of it. Even governments are waking up to the opportunity to regulate and to auction spectrum and licences. The more enlightened amongst them are also seeing the opportunity to drive economic growth and empowerment through mobile communications and the innovation that it breeds.

While the future shape is still far from clear, we see four potential scenarios:

  1. Winner takes all as the markets consolidate quicker than most operators can respond;

  2. Turf wars continue as new and existing operators battle it out for the profitable market and are joined by banks trying to protect their core business against mobile payments;

  3. New entrants come into the market from adjacent sectors with greater added value than the traditional carriers – foreign media and even advertising groups are viewing telcos as a ready-made channel to market; and

  4. Owning the hearts, minds, and wallets of consumers is the end goal. Will telcos, who have laid the foundation for connectivity and access, be the winners; or will it be global technology groups, the banks, media, advertisers or retailer giants?

One thing that has become clear is that a strong brand is not enough.

The winners will be those companies who really understand consumers, consumer behaviour, and provide an experience that is memorable, relevant, and cost-effective. Whatever the outcome, none of these scenarios argue against investment once one understands the drivers for the market.

But despite the potential for investment, one needs to be cautious about the potential for creating a two-speed Africa. Already we are seeing some countries like Nigeria and Kenya getting sizable foreign investment while others are getting none. It is clear that there will still be winners and losers in the market.

From a regulatory perspective, operators have experience in dealing with very specific and unique country requirements and are able to adapt easily to the various African markets. They know how to work with operators and Africa is certainly not any more difficult or challenging than any other parts of the world.

But the pressure for improving margins will be the vocal point. The reality is that there are dwindling margins in voice. This sees operators under pressure to do something quickly but they are stuck in a telecoms-specific way of thinking. There needs to be more of a transition through partnerships and collaborations which, in turn, can lead to a potential increase in mergers and acquisitions.
This consolidation will come through additional services being integrated into the existing data offering of operators. With the price of data also coming down, companies are looking at identifying new revenue streams. For many operators, services do not form a natural fit in their business models.

So how do they transform? The simple answer is that they need to be able to use more non-telecoms specific influencers in driving business strategy.

Our research makes the following key observations about the market opportunity:

  1. Operators need to quickly understand the true profitability of data before it consumes all of the available CAPEX;

  2. The growth of the middle classes is unstoppable; can operators keep up with it?

  3. The central role of telecoms in empowering people and economies puts additional obligations and duties onto operators that are hard to justify from a pure business case point of view. There is an African cost premium not seen in other markets which will have consequences for marginal telco operators;

  4. The battle is on for the very long tail, and it seems to be all about price;

  5. Price competition has not hit the bottom yet by a long way;

  6. The rural frontier is big, wide, and fraught with challenges;

  7. Governments need to step up and have a clear and well supported ICT strategy which may well have at its core the ownership of national backbones;

  8. There is a huge new wave of mergers and acquisitions as operators consolidate, rationalise, divest non-core, and acquire new core activities and skills.

It is clear that investors are approaching the African telecoms sector quite differently than in the past. This might well be a turning point that will see telcos redefine their roles in ways that will be relevant for any investor.

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