A decade ago, an African GSM license was an attractive ticket for international investors to enter a market with huge profit potential. But most regulators on the continent have found ways to raise money by licensing more GSM spectrum and fixed line operators, with the argument that competition would drive down cost of services. It has done that, but has also meant continued struggles for smaller, newer companies.
"Newly licensed operators do bring much needed competition, but one has to be careful of oversaturating the market and making it unattractive to potential investors; telecommunications investments are quite expensive especially when deployed in rural Africa and it is important to ensure that the return on investment is still attractive to potential investors," said Tinyiko Valoyi, CEO of Mavoni Telecoms, an investment vehicle that is focused on acquiring spectrum in African countries to deploy 4th Generation networks.
Last month, Tanzania licensed new mobile services provider, bringing the total to 12 with a population of 37 million, Ghana has 4 providers and a population of 10 million, Benin has 6 providers against a population of 8 million, Nigeria has 9 providers and a population of 150 million and Burundi has 6 providers and a population of 7.5 million, among others. Most countries, regardless of population, have at least two providers.
The increase in number of operators has led to lower cost of voice calls, which has reduced the Average Revenue Per User (ARPU) and led to lower profit margins for newer entrants with no financial muscle to challenge older service providers.
Because of falling margins, shareholder squabbles have emerged as witnessed in the Democratic of Congo between Vodacom and CWN, and in Kenya between France Telecom and the government of Kenya over shareholding and investment in Telkom Kenya. Vodacom has had similar shareholder problems when trying to enter Nigeria while MTN was faced with law suits in Ghana.
"These are typical problems when you operate in emerging markets like Africa where minority shareholders often do not have the financial muscle and balance sheets to access debt finance on their own and fund their part of the investment to deploy networks," Valoyi said.
The issue of shareholding is further complicated by the fact that many investors coming into Africa are forced to partner with strategic minority shareholders who are often key in ensuring that licenses and permits are issued. In some cases government policy requires foreign investors to partner with locals. In other cases licenses are issued to locals only, even though the practice is not official government policy.
"In most such cases the problems are based in lack of clear communication upfront between the respective parties or lack of proper due diligence or putting relevant clauses into the agreements; if more upfront work is done (particularly by the investing party) most of these problems can probably be avoided," said Dobek Pater,senior telecom analyst at Africa Analysis.
National regulation authorities have accelerated legislation and have imposed stiffer penalties for poor network quality, stopped providers from adding more subscribers unless they upgrade networks and in some cases, as in an incident in Niger, licenses have taken away.
"The National Regulatory Authorities have been addressing issues such as network quality with the objective of improving the quality of services delivered and lowering the cost of mobile communications; often, license conditions have Service Level Agreements included which forces operators to deploy networks and offer services in under-served areas; therefore, where fixed line telcos have often failed to deliver services, mobile operators have brought communications to communities," Pater said.
Meanwhile, declining voice revenue and stiffer regulation have shifted the focus to data, which has led to blurred lines between ISPs and mobile service providers. With the unified licensing regime, the largest mobile service providers have become the biggest ISPs.
"Large mobile operators have begun to enter the traditional fixed line and ISP markets, and are beginning to market their broadband products as solutions provided to the corporate market segment, e.g. using 3G connectivity for remote branch office connectivity on a WAN or even running VPNs over EDGE / 3G infrastructure," added Pater.
The focus on building infrastructure and the need for shareholders to contribute to the development has strained the relations between majority and minority shareholders. But the investment in some of the modern technologies like IP networks has led to operational savings.
Analysts agree that the green fields license opportunity is diminishing in Africa and the extent to which the licensees are able to compete will be based on management, technical ability and access to capital, which will also determine the intensity of competition on the country.
"As Zain saw in Kenya, simply having a license does not guarantee a share of the market, and market shares can change dramatically and quickly; the future is broadband," said Christie Christelis, president of Technology Strategies International.
Some observes say that even with the sector in flux, international investments are not likely to dry up, as some have feared.
"While there may be some areas where investments are declining; the continent has a mobile penetration rate of almost 50 percent, so there is at least another 50 percent to go," Christelis said. "While this will mean lower ARPUs as lower income segments of the market adopt the technology, operators will figure out, and have in some parts of the world, ways of making money from the market."
The consolidation in Africa's GSM by big companies such as MTN, Zain, Vodacom and Orange is likely to make their operations profitable as relaxed regulations allow "one network" services where losses in one country can be absorbed by better performance in other countries.
Zain's recent sale of its African operations, however, is indicative of the fact that the African GSM market has probably reached its peak, in terms of players coming into the market -- as it moves into the next phase of converged services and market consolidation by bigger players.
Regulation will play a bigger role in safeguarding the smaller players, who in some cases will have to merge in order to survive. South Africa's long-standing interconnection debate, meanwhile, has raised the issue of the regulators' role in forcing bigger players to come up with rates that will favor survival of smaller telcos.
"In South Africa for example, the issue of interconnection has resulted in a less competitive GSM market with smaller operators unable to offer lower prices due to high interconnect fees they had to pay to larger and more dominant players like MTN and Vodacom; some of the regulatory issues nearly bankrupted operators and certainly discouraged further investment," Valoyi added.
Whether the market has reached saturation or not, from a service provider perspective, the direction of African telecom favors revamping of management structures to focus more of data and converged services.