|Issue:||Africa and the Middle East 2004|
|Topic:||Value Proposition for Speedy Telecoms’ Growth|
|Title:||Senior Business Advisor & Director of Service Area Advice|
Kaul Sanjay is a Senior Business Advisor and the Director of Service Area Advice for Ericsson Global Services in Africa with a focus on telecoms strategy and services operations. Kaul Sanjay has had broad international experience working with mobile markets around Europe, Asia Pacific and Africa. Before joining Ericsson, Mr Sanjay worked with BT and Telia for a number of years. Mr Kaul has a BE in Electronics & Telecommunications and an MBA in marketing and strategy.
Many operators on the African continent lack local competence, operational frameworks and financing capabilities. Penetration levels are low and the consumer is paying too much for what they are receiving. Businesses are suffering from the absence of a proper communications infrastructure. Yet research in one developing country shows that a one per cent growth in telecommunication services boosts the economy by two per cent. The case is clear, operators and governments need to overcome the problems and do so at speed.
Today, if we take a deeper look at the telecommunication market in the African continent, we see a paradigm shift in strategic thinking. Over the last decade, especially, mobile subscriber turnover has exceeded all forecasts, despite the fact that there has been a sharp focus on satisfying and retaining the high ARPU (average revenue per user) subscribers. As a result, we are beginning to see a change in strategic thinking. Where the old strategic thinking had an upstream focus, calculated to bring only high-value subscribers onto the networks, the new strategic thinking concentrates on the downstream – lower in value, but greater in number -subscribers. This is bringing in as many users as operator network capacity and resources will allow and requires the operators to set up the operational framework to keep them active. Sustainable growth The above-said paradigm shift in strategic thinking is having a dramatic impact on subscriber growth and active subscriber counts. African operators are growing much faster than their peers in the developed economies; even the slowest-growing African players have achieved compound annual growth rates of up to 30 per cent between the years 2001 and 2003. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) levels are as high as those for successful operators around the world. The African subscriber base has grown phenomenally over the last three years and will continue to grow. Nevertheless, it is expected that the operator’s margins will fall and their profits per unit will decrease. Africa was the first continent of the world where mobile penetration exceeded fixed line telephones and it continues to lead the way. In Nigeria, growth is incredible: in the last four years it has gone from almost nothing to about three million and is almost twenty times higher than fixed telephones in the country. In Algeria growth has been enormous – from 100,000 mobile subscribers two years ago to close on 1.5 million today. In Uganda, mobile penetration has grown tenfold over fixed line telephones; and so it goes. The rise of regulatory bodies and the expansion of mobile and fixed telephony license awards has stabilised the African business environment for further growth. The current strong subscriber growth is sustainable for at least three to five years. The shift in strategic thinking of the continent’s nations offers a significant opportunity for all suppliers, operators and governments. The key task is to analyse the business models that can address the challenges faced by the telecom services industry. Some of the proven business models – primarily followed by the telecom suppliers in the region are: establish, operate and transfer; manage capacity; and full-fledged outsourcing. Key challenges Network coverage and capacity Even though much has been invested in telecom infrastructure during the last five years, there is still a tremendous need for network capacity. Subscribers are still queuing up for both mobile and fixed connections. For instance, in both Nigeria and Algeria, the telecom markets have seen enormous growth in the last 3 years; nevertheless almost all the players still lack capacity. Quality of service Maintaining quality of service in the region is seen as a fundamental challenge. Network downtime is high and speech quality is poor and must be addressed. The network across the continent needs to be optimised and utilised to the maximum, while making sure the quality parameters are not suffering. There has to be a shift from CAPEX (capital expense) to OPEX (operating expense) to make sure the investments made in CAPEX are sweated to the maximum. High operational costs Telecom service operations in Africa are run very inefficiently compared to the operators in other developing parts of the world. The cost of the operations vis-à-vis the quality level ratios are poor. The fundamental reasons for the high OPEX are the following: High churn rates – Largely owing to a predominantly pre-paid subscriber base, the churn rates are higher compared to more developed markets and the main reason is the lack of churn management strategies. Average churn rates across the continent are exceeding 15 to 20 per cent Capacity and coverage – It is quite costly for operators to reach people in remote areas; the cost of rolling out telecom networks there is high; this is due, in part, to the lack of local competence and inadequate operational frameworks High price levels – The main obstacles to increased penetration are not ARPU and profitability, they are the handsets costs and the operator ability to reach the customer. Also, mobile tariffs are still very high for the quality provided. There are various initiatives driven by telecom suppliers to address these problems, but governments and regulators have not been innovative enough to explore and exploit these initiatives and possibilities Lack of local competence – Many countries, because of the lack of telecom and mobile operations experience in the region, depend upon the skills of expatriate workers. This adds an increased load to the OPEX Adequate funding There are many obstacles to increasing the penetration levels of telecommunications services. The cost of building or expanding network capacity and coverage is high, as is the cost of the handsets and the cost of reaching and servicing the end user. Developing customer awareness and the reach of marketing requires extensive sales channels and well-targeted promotions. Customer care and, overall, QoS (Quality of Service) are also essential to capture and retain subscribers. All of these require funding. There is a pressing need to find an innovative model that can catalyse the funding process and ensure speedy financing and a shorter time to market Business models worth considering The shift in strategic thinking offers a significant opportunity for suppliers, network operators and service providers. Regulators and governments play a catalytic role and can encourage models that meet the challenges and administer the weaknesses already described. Some of the successful business models, as mentioned above, are: establish, operate and transfer; manage capacity; full-fledged outsourcing Establish, operate and transfer Establish, operate and transfer services are aimed at operators entering a new market, migrating between technologies or facing a major expansion. This set of services targets network planning, design and performance optimisation, service and network assurance and service provisioning. The purpose is to establish a successful operation within these areas in a smooth and efficient way and to ensure fast time to market. The supplier takes responsibility for the operation of the network for an agreed period, delivering – it is expected – optimal network performance according to defined and agreed targets. Transfer of knowledge, processes and routines should then enable operators to easily take over the responsibility for their network operations at an agreed point in time. The proven processes, on-the-job training and certification programmes will bring the operator’s organisation to the necessary level of competence and result in high performance capability. The benefits of the model are: Shorter time to market State-of-the-art network performance Investment in proven operational practice In-house, high-performance, operation capability Operational performance at predictable cost Knowledge transfer to operator staff. Manage capacity This model is especially of interest to those governments and operators that have problems of funding expansion on one side and lack of competence and operational experience in running the telecom networks on the other. In this model, the supplier manages and builds the capacity rapidly and at a lower total cost. The benefits of the model are: Built-in financing – the supplier and operator work as a team Network capacity is provided at predictable costs Faster network capacity build Guaranteed quality levels and operational performance. Outsourcing This business model has been very successful in the West. The operator outsources all the non-core elements of its business (for example, managing technology and operating customers and network) and focuses on marketing, the customer offering and customer care. The benefits of the model are: Shorter time to market and earlier cashflow State-of-the-art operational performance Network capacity at predictable costs Guaranteed quality levels and operational performance Proven operational frameworks as part of the package In-house, high performance, operation capability Operational performance at predictable cost. Value added The value added by all the above business models, apart from cost saving, includes the following advantages: Improved quality – guaranteed quality at predictable costs Cost-reduction – cost reduction due to efficient processes and economy of scale Competence transfer – transfer of the operations framework and competence to the local staff, enhances the human capital of the region Better prices for end-users – efficiently organized telecom networks ensure low OPEX, which in turn gives the operators the ability to offer better prices on tariff and subsidies on handsets. Summary Telecoms in Africa are driven by success in the prepaid market. This segment of the market quickly becomes unprofitable if the costs are not controlled adequately. Indeed, in some cases prepaid is already showing negative net present values. The average value of the African subscriber will decline over the next few years as the subscriber base expands. As competition increases so will the churn and the ARPU levels will go down. The only way to sustain profits is to manage and cut, costs in order to improve margins. The above business models present clear value propositions, in terms of managing margins, for both the telecom players and governments. They provide the means to expand the telecommunication infrastructure faster and to ensure lower prices, better quality and superior end-user experience. Isn’t that a ‘win-win’ solution for all?