Multinationals are drawn to Africa's 300 million people who lack mobile access. But poorer customers mean slower profit growth
International soccer fans weren't the only ones recently lured to Africa. Over the last few years the world's major mobile operators have arrived on the continent. In March, India's Bharti Airtel paid $9 billion to acquire Zain Africa's assets in 15 countries. The U.K.'s Vodafone (VOD) has spent $3.4 billion on deals in Africa, and France Telecom (FTE) expects to spend as much as $8.8 billion in Africa and the Middle East over the next five years.
The phone giants hope to win business in such countries as Nigeria, where only 50 percent of the population now own phones and growth rates for mobile service are among the highest in the world. The prospect of untapped riches—Africa has 300 million people who lack mobile access—is particularly appealing to multinational companies with home markets marked by slow growth or none at all.
These hoped-for gains in Africa will come slowly according to some analysts. "The next round of growth in Africa is not as profitable as the first stage," says Mike Dunning, a managing director at Fitch Ratings in London. "The difference is quite dramatic." The best customers, he says, already have mobile-phone accounts. "You hit a certain point where you've got all the juicy subscribers covered, and you have to mine the people who can't really afford the service."
To maintain high growth rates, mobile providers are expanding into poorer, more rural areas. That translates into slower profit growth. France Telecom, for instance, is moving into rural Niger, hoping to become the No. 1 operator in a country where per-capita gross domestic product is less than $2 a day. Companies are also investing heavily in Nigeria, even though South Africa's MTN Group reported that its average revenue per user in Nigeria has fallen from $18 at the end of 2006 to $11 in March 2010. "All growth is at the bottom of the market," says Rosalind Craven, an analyst at Business Monitor International in London.
Another problem for the mobile companies is fierce competition. While the U.S. and most European countries have just four major providers, African countries often have many more, because governments can earn quick cash by selling licenses. Nigeria, Africa's most populous country, had 11 providers at the end of 2009. In Tanzania, which has seven operators, competition has caused tariffs to fall by 80 percent in the 18 months ending in May, according to Vodafone's South African unit, Vodacom.
The providers also face the difficulty of working with Africa's mercurial governments. In 2008, Vodafone bought a 70 percent stake in state-owned Ghana Telecommunications; last October a government-commissioned body recommended renegotiating the sale and raising the $900 million purchase price. Tanzania recently told Bharti it must renegotiate its acquisition of Zain's unit there. Countries from South Africa to Nigeria are pushing to slash interconnection rates, which are the government-regulated fees telecom operators collect for completing a call from a rival network.
African customers change their minds regularly, too. More than 95 percent of mobile subscribers there prepaid for their service last year, the highest proportion of any region in the world. With no penalty for switching operators, between 4 percent and 6 percent do so every month, costing the African mobile industry about $11.4 billion annually, according to consulting firm Green Giraffe.
Yet foreign companies remain determined to compete—perhaps because there's no real alternative. Revenue growth in Africa is still much higher than what Vodafone and Bharti see in their home markets. So the multinationals push ahead: Vodafone describes sub-Saharan Africa as one of its "priority areas" for expansion. Bharti says it plans to invest about $600 million in Nigeria over the next three years. Five years ago it took only six months for companies to recover investments in mobile infrastructure in Africa, says Marc Rennard, the head of France Telecom's African, Middle Eastern, and Asian operations. "Now it's more than two years. But that's still pretty good."
The bottom line: Poverty, mercurial governments, and fierce competition make Africa tough terrain for mobile operators hungry for new markets.