Vodafone, Bharti Struggle to Squeeze Profit From African Deals

For Vodafone Group Plc, Bharti Airtel Ltd. and other phone companies with more than $90 billion invested in Africa, making money from each user in the world’s fastest-growing market is turning into the biggest challenge.

The number of operators is prompting a race to the bottom on call rates. In Tanzania, which has seven phone companies, prices have fallen 90 percent over the past 18 months. Companies also face among the world’s highest “churn” rates, with users frequently changing operators, and patchy infrastructure, all of which make returns on investment difficult.

“It is hard,” said Pieter Uys, chief executive officer of Vodacom Group Ltd., which is controlled by Vodafone and is the largest provider of mobile-phone services in South Africa and Tanzania. “You have to do business in a very different way, you have to build data networks, find other ways to grow revenue.”

Phone operators gathered at Africa’s telecommunications conference that began yesterday in Cape Town want to sell services to the 50 percent of the market that doesn’t have mobile phones. They also want to service current customers more cheaply, without losing user loyalty, while stemming declines in average revenue per user, or ARPU, by offering newer services such as mobile Internet, banking and other money transactions.

“We are now dealing with an ecosystem that’s changing very, very fast,” Andile Ngacaba, chairman of Dimension Data and Convergence Partners, said at the conference. “On the one side, we see this subscriber growth and growth in data and data applications. On the other side, we see this decrease in ARPUs. This requires new models of investment such as infrastructure sharing.”

African Growth

Operators have been lured to the continent by its promise. Africa has a mobile-phone population of about 445 million handsets, according to a McKinsey & Co. report. It took 20 years for the size of the mobile-phone population to reach 200 million, and less than three years to get to the next 200 million, according to the report.

Africa has “become the fastest-growing region in the global cellular market, going from fewer than 2 million mobile phones in 1998 to more than 400 million today,” it said.

The mobile value-added services market in Africa was worth $4.5 billion in 2009, and over the next five years is forecast to grow at a compound annual growth rate of 20 percent, generating $11.5 billion by 2014, Informa Telecoms & Media, a London-based consultant, said in its Rural Connectivity Report in Africa published this month.

Capture Opportunity

About 80 percent of the sales were from messaging, while mobile Internet contributed 14 percent and mobile entertainment such as music and television 3.5 percent, the report showed.

Internet and broadband penetration is still in single digits, Uys said.

“So the possibilities are still there but it’s what you pay for it to get it, the investment in infrastructure,” he said. “If the tariffs are driven too low for whatever reason then it might also not make sense.”

In order for mobile operators to “capture this opportunity” the market needs consolidation, McKinsey said. “The industry structure should be rationalized, for example, because many markets, even smaller ones, have four or more players.”

Competition on the continent is fiercer now than it has ever been. In the Democratic Republic of Congo and Tanzania mobile-phone tariffs plunged between 50 percent and 60 percent in the six months through September.

Tumbling Prices

Prices in Kenya have been slashed to such an extent that Safaricom Ltd. Chief Executive Officer Bob Collymore said India’s Bharti, which bought most of Zain’s African operations last year for $9 billion, is losing money on as much as 50 percent of its voice traffic.

Safaricom has an 86 percent share of the market and is 40 percent held by Newbury, England-based Vodafone. Bharti’s head of African operations, Manoj Kohli, declined to comment on Safaricom’s remarks. “We can’t comment on our competitors’ claims,” Kohli said.

On Aug. 18, Bharti halved tariffs in Kenya to 3 shillings, Les Baillie, a spokesman for Safaricom said. Safaricom “knew that voice was always going to become a commodity,” Baillie said. “It was not expected that it would happen so rapidly though.”

Companies are scrambling to adapt their operations to the new climate.

“We have to review our business model and make it leaner and compete on price and have more quality in our network and to have more data,” said Mickael Ghossein, chief executive officer of Orange Telkom Kenya, which is 51 percent held by France Telecom SA. “We have to enhance our quality of networks.”

Sharing Towers

In South Africa, Vodacom, which is 65 percent owned by Vodafone, is investing in data networks. Data now accounts for more than 50 percent of its traffic and is growing at more than 50 percent a year, Uys said.

The company is also pushing smart devices that are able to browse the Internet to low-end segments with touchscreen phones that retail at 499 rand ($73). Once users have an improved mobile browsing experience, data consumption increases, Uys said

Operators are also sharing infrastructure, especially to reach sparsely populated rural areas where returns on capital invested in infrastructure are low.

Infrastructure sharing and outsourcing of towers has been punted for years. Now, faced with greater competitive pressure, companies are beginning to act.

‘Good Industry’

Last month, Vodafone signed an agreement with Eaton Towers to manage its 750 towers in Ghana. On Nov. 5, American Tower Corp. agreed to buy 3,200 towers from Cell C Ltd., South Africa’s third-largest mobile phone services provider, in a deal worth $430 million.

“We are going to see more and more of those type of deals happening,” said David Lerche, a telecoms analyst at Johannesburg-based Avior Research. “There are lots of little tower companies running around trying to position themselves as tower outsourcers. It’s quite an interesting development.”

For all its challenges, the market is still attractive, Marc Rennard, vice president of Orange Mobile for Africa, Middle East and Asia, said in an interview.

While investor interest has waned a little, “we are profitable, the big players, the five, six main players are profitable,” he said. “It’s still a good industry.”

To contact the reporter on this story: Nicky Smith in Johannesburg at nsmith38@bloomberg.net; Mike Cohen in Cape Town at mcohen21@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.