Analysys mason innovation_africa_digital_2014_lr

analysysmason.com

DELIVERING SERVICE EXCELLENCE IN AFRICAN TELECOMS

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CONTENTS

Introduction p3

Telecoms: it is all about the experience p4

Lifting barriers to internet connectivity in Africa p6

Mobile internet survey in the Middle East And Africa 2013 reveals heavy usage and high expectations p8

Opex transformation: a recipe for lasting performance improvement p10

Monetising LTE services: developing new revenue streams through differentiation and innovative pricing p12

African mobile operators : improving returns through consolidation p14

South Africa’s national broadband targets seem ambitious compared with European benchmarks p16

Meeting DSO deadlines: what are the international lessons for Africa and similar regions? p18

About Analysys Mason p20

Analysys Mason expertise in Africa p21

Analysys Mason Research p22

Subscribe to our services p23

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INTRODUCTION

As African markets mature and the limitations of traditional price/coverage models become increasingly exposed, telecoms operators are shifting towards service excellence as a means of sustainable competitive advantage. This key issue is the theme for this year’s Innovation Africa Digital Summit.There is a wide variety of service delivery models that claim to improve customer experience, IT platforms that aim to better manage customer information and network technologies that promise to deliver higher QoS. The challenge for operators is to select the best end-to-end path to service delivery excellence that provides measurable improvements to commercial performance while delivering a strong return on investment.

Analysys Mason has been delivering strategic and operational advice to telecoms operators, regulators and investors worldwide for 30 years, and is proud to once again be contributing to the Innovation Africa Digital Summit. Our team will be hosting workshops and moderating panels on subjects such as customer experience, digital inclusion and connecting communities, and we look forward to lively discussions in these forums and throughout the summit.

Members of our team share some of their thoughts and insights on important trends and issues affecting African telecoms now and in the future. Themes of the articles include:

• Customer experience• Lifting barriers to internet connectivity• Results from our MEA Mobile Internet Survey• Opex transformation• Monetising LTE services• Consolidation in Africa • National broadband targets

We hope that you find these opinion pieces and expert commentaries of interest and value. We welcome your feedback and encourage you to contact the authors directly if you would like to discuss any of the points they have raised, or are looking to understand how a specific issue or trend will affect your business. To find out more about our experience and services, please visit www.analysysmason.com.

We look forward to working with you.

EDWIN GRUMMITT Partner and Head of MEA Analysys Mason

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TELECOMS: IT IS ALL ABOUT THE EXPERIENCE

Competition in the telecoms industry is threatening to intensify the pressure on the traditional revenue of established communications service providers (CSPs). This article discusses the importance of improving the customer experience and the lessons that can be learned from the airline industry.

You board a flight to return home. Before take-off, you are offered a drink and some snacks. The plane takes off, but you don’t even notice because you are watching that movie you missed last month in the cinema. After 20 minutes, a member of the highly efficient cabin crew offers you a delicious meal. Later, when you are informed that the plane is about to land according to schedule, you are surprised at how quickly the trip went. The whole flight experience was designed to please the senses. After a few flights, you start to associate the airline with high-quality customer service. Next time you are booking a trip and the name of that airline shows up in the list, you will instinctively select it, overlooking the hefty price premium you will be paying compared with the cheapest option. You will be paying for the customer experience, and you will not be alone. Many will do the same, feeding the profits of the companies that strive to please you.

The liberalisation of the airline industry led to its commoditisation, driven by the appearance of several low-cost airlines. The price pressure that this caused reduced the margins of established airlines, leaving them with no alternative but to differentiate through customer experience. The successful ones have done so, and manage to retain a price premium despite offering a commoditised service. The ones that did not, mostly state-owned companies, struggle or have vanished. Telecoms operators are in a very similar situation. More competition is driving a significant price reduction, eroding margins and forcing CSPs to improve efficiency. OTT players threaten to have the

same impact on the traditional revenue of established operators as low-cost airlines had in the airline industry. However, the potential to differentiate exists and examples from other industries can offer some guidance.

Although large numbers of CSPs’ subscribers are price sensitive, the value is typically concentrated in a small proportion of high-value customers. Above all, these customers are looking for a problem-free, enjoyable telecoms experience. When subscribing to a service, customers want their CSPs to guide them in the process, speak the same language and allow for service experimentation. Once subscribed, customers want to be able to quickly and easily access the services and activate additional services with the minimum hassle possible. Customers should never need to contact the CSP to solve problems, but if they do, the customer support should be readily available and knowledgeable. It seems simple, but a good customer lifecycle experience is hard to design and implement. However, it does not need to be expensive. In another recent article, Mike Pearson, Partner, Analysys Mason, discusses a real case of a telecoms operator that improved the experience for its customers and reduced its costs.

If telecoms operators are to improve the experience of their customers, they must make a concerted and cross-functional effort. Commercial and technical departments should work together and the right incentives should be in place to ensure that the organisation is focused on the same final goal. Roughly speaking, implementing a good customer experience involves five steps.

• Understand the pain points: The starting point of this assessment should be customer perception, but this can be misleading. Is your call centre

CARLOS PINTOPrincipal

Differentiating through customer experience should go beyond addressing the reasons for dissatisfaction – it needs to create motives for delight.

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really that good, or do customers think it is good because they have low expectations? A mix of customer perception, competitor benchmarking and internal quantitative measurements need to be part of this assessment.

• Identify the root cause of the problem: This requires a detailed internal analysis, examining KPIs and processes to understand where a gap exists. If your customers perceive that you are overcharging, the cause could be anything from an issue with the BSS to a miscommunication by the sales team.

• Quantify the impact of the problem in order to understand how much it is worth investing to solve the it: Improving customer experience improves price premium and margins, but also requires investment. Ensuring a positive return on these investments is a key part of the overall performance improvements.

• Solve the problem: A proper workplan and resources with the right incentives need to be put in place. Having the right KPIs is essential to ensuring that the impact of the transformation is quantifiable. Involving the whole company is also vitally important – changing only a part of the customer experience will not be enough. It only works if it all works.

Obviously, not having dissatisfied customers is different from providing a differentiated customer experience. Differentiating through customer experience should go beyond addressing the reasons for dissatisfaction – it needs to create motives for delight. This is where the real challenge lies, but the process is similar – assess the customer lifecycle, identify improvement potential, implement and quantify impact.

CSPs are very focused on avoiding commoditisation and margin squeeze by adding value-added services to their propositions. That is needed, but, as with airlines, the best value-added service CSPs can give to customers is an excellent customer experience.

For more information, please contact Carlos Pinto, Principal, at [email protected].

“Although large numbers of CSPs’ subscribers are price sensitive, the value is typically concentrated in a small proportion of high-value customers.”

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LIFTING BARRIERS TO INTERNET CONNECTIVITY IN AFRICA

Analysys Mason recently conducted a study on the progress of the Internet in Africa, in order to identify barriers to more widespread access to the worldwide information super highway. Over the course of a few months, we examined prices, spoke to stakeholders in the public and private sectors across the continent, and examined what differentiated successful countries from the rest.

In simple quantitative terms, such as the Internet bandwidth available to African countries, significant improvements to Africa’s Internet connectivity have taken place in the last five years. Enormous investment in telecoms infrastructure has characterised these improvements, particularly in terms of intercontinental connectivity and terrestrial fibre networks. However, these infrastructure investments are necessary, but not sufficient, to improve Internet access services experience for users in Africa.

Our study found that in many countries constraints on key inputs still hold back the development of Internet access services, notably in relation to the terrestrial connectivity between the submarine cables, the Internet exchange points (IXPs), the ‘last-mile’ access infrastructure – whether fixed or wireless – and the Internet service providers (ISPs) that deliver access to end users in Africa. Policy remedies are required to maximise the effectiveness of new investments and attract new ones.

The pricing of Internet access services for end users is one of the strongest measures of a successful policy environment, for two reasons. First, low prices themselves are evidence of a competitive market that is relatively free of bottlenecks that could raise the cost of providing services. Second, low prices generate a virtuous circle: lower prices attract more users, which increases scale and reduces unit costs,

thereby increasing the utility of the Internet to citizens and businesses. This in turn further reduces prices for end users and encourages greater and more diverse use of the Internet. Based on data shown in Figure 1, countries in Eastern Africa (Kenya, Rwanda, Tanzania and Uganda) are achieving the best outcomes by this measure.

Countries with higher prices and lower Internet use tend to be characterised by clear barriers within the sector, generally related to regulation and policy, such as a monopoly on the international gateway, a state-owned incumbent, or regulatory roadblocks in deploying long-distance and/or cross-border infrastructure. Other countries, even those with low prices or high usage, could do better still, and in particular could achieve more widespread benefits from the Internet if they removed roadblocks, promoted investment and services, and offered high-level political vision and leadership.

Recommendations

The recommendations in Analysys Mason’s report are presented in terms of solutions that can offer one of the following three types of improvement.

• Removing roadblocks. Policy makers should remove roadblocks that deter investment in and use of terrestrial fibre, including lack of liberalisation; high cost of licences; challenges accessing rights of way for deployment within countries and across borders; and high taxes on equipment and services.

• Promoting investment. Governments should promote private-sector investment in infrastructure to the greatest extent possible, offering regulatory certainty to give confidence to investors and allowing or promoting infrastructure-sharing in order to reduce costs.

Recent infrastructure investments in Africa are necessary, but not sufficient, to improve Internet access services experience for users in Africa.

STEPHEN SALE Principal Analyst

ROBERT SCHUMANNPrincipal

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Where private-sector investment is not likely, governments may need to use their own resources – financial and infrastructural – to ensure services are delivered, potentially using public-private partnerships (PPPs).

• Leading at the highest levels of government. Development and usage of communications infrastructure should be made a high-level priority, with an agency invested with oversight of all aspects of the value chain, including research and innovation, taxation, state investments in infrastructure and/or operators, and regulation. Such an agency should have the authority to address any conflicts within the government that result in roadblocks or reduced investment.

Note: This Insight is based on a study commissioned by the Internet Society (ISOC), a non-profit organisation that provides leadership in Internet-related standards, development and policy, and is a key independent source on these issues. The study, entitled Lifting barriers to Internet development in Africa: suggestions for improving connectivity, is available at www.analysysmason.com/Research/Content/Reports/Internet-development-Africa-May2013/.

Through our new office in Johannesburg, Analysys Mason is well placed to work with governments or operators throughout Africa to identify and address barriers to Internet connectivity.

For more information, please contact Robert Schumann, Principal, at [email protected]

Figure 1: Average price per GB of traffic for low-, medium- and high-usage Internet access bundles, selected African countries [Source: Analysys Mason, Google, Telegeography, 2012]

“In simple quantitative terms, such as the Internet bandwidth available to African countries, significant improvements to Africa’s Internet connectivity have taken place in the last five years.”

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MOBILE INTERNET SURVEY IN THE MIDDLE EAST AND AFRICA 2013 REVEALS HEAVY USAGE AND HIGH EXPECTATIONS

Analysys Mason recently conducted primary research with mobile Internet users in six countries in the Middle East and Africa (MEA): Egypt, Kenya, Nigeria, Saudi Arabia, South Africa and the UAE. We asked them about their Internet access, decision criteria for selecting operators and handsets, and their usage of over-the-top (OTT) services and other apps. This Insight article presents a sample of the survey results. The survey was conducted during November 2012–January 2013, in association with On Device Research.

Mobile is the main channel to the Internet in the six surveyed countries in MEA

About 87% of survey respondents indicated that they use their mobile as the main means to connect to the Internet. The prevalence of mobile over fixed for Internet access in all of the surveyed countries shows the important role played by mobile in extending online access to previously unserved or underserved groups. This proportion is slightly lower in Saudi Arabia and the UAE where fixed broadband is more available than it is in Kenya and Nigeria. In fact, we observed a reverse correlation between the level of fixed broadband penetration and the proportion of respondents who use their mobile as the main means to connect to the Internet.

Surveyed mobile Internet users in MEA have a great appetite for online services

Despite the limited access to capable devices such as smartphones, and fast mobile networks such as 3G, survey respondents showed a high take-up of non-traditional communication services. Smartphone users are more likely to use OTT communication services than feature phone users, but as the results show, the difference between the two segments is not huge. Surprisingly, three-quarters of feature phone respondents also accessed OTT services, which are often SMS-based.

In terms of the most commonly used apps, we found that worldwide usage trends are repeated in the Middle East and Africa. Social network sites come first, followed by email and instant messaging. VoIP and videoconferencing come last in MEA, but around a third of users in Saudi Arabia and UAE indicated they used these services. These countries have a high proportion of foreign residents and smartphones and Wi-Fi is widely available (which is important because these services are generally blocked over cellular networks in Saudi Arabia and UAE). VoIP and videoconferencing services were much less popular in the Sub-Saharan African countries (Kenya, Nigeria and South Africa) than in the Middle East and North African countries (Egypt, Saudi Arabia and the UAE).

People in MEA are new to the mobile Internet, but they are demanding

Like in other regions of the world, mobile Internet users in MEA have high expectations despite their relative newness to Internet services. Nearly all our survey respondents (both feature phone and smartphone users) selected 3G/4G support as the most important criteria when selecting a handset – indicating their awareness and understanding of the improved Internet experience afforded by 3G/4G networks. Affordability was the second-most important criteria – particularly in Sub-Saharan Africa. Handset design and features were ranked relatively high when cited, which was less frequently than 3G/4G support and affordability.

Price is the main deterrent to consumers’ aspirations to acquire smart devices

More than 20% of respondents indicated that they have a tablet. The UAE and Saudi Arabia had the highest penetration levels – nearly 40% of respondents have a tablet. This contrasts with only

Mobile Internet users in MEA have high expectations despite their relative newness to Internet services: nearly all our survey respondents selected 3G/4G support as the most important criteria when selecting a handset.


KARIM YAICIAnalyst

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7% and 8% in Kenya and Nigeria respectively. Smartphone users are more likely to own a tablet. These country differences are mostly due to disparity in purchasing power, access to Wi-Fi and prior experience accessing the Internet on more-capable devices. Overall, two-thirds of respondents in MEA indicated that the high price of tablets is the main reason for not owning one.1 Question: Do you use over-the-top voice or messaging services on your mobile phone (for example, Skype, WhatsApp, BlackBerry Messenger, MSN Messenger, iMessage, Facebook)?; n = 4250.

For more information, please contact Karim Yaici, Analyst, at [email protected]

“More than 20% of respondents indicated that they have a tablet. The UAE and Saudi Arabia had the highest penetration levels – nearly 40% of respondents have a tablet. This contrasts with only 7% and 8% in Kenya and Nigeria respectively.”

Figure 1: Usage of OTT services, by handset type, the Middle East and Africa [Source: Analysys Mason, 2014]1

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OPEX TRANSFORMATION: A RECIPE FOR LASTING PERFORMANCE IMPROVEMENT

Operators in emerging and mature markets increasingly face a common challenge: as the competitive environment shifts from a period of one or a few operators to a market with multiple challengers and only modest growth through new subscriber acquisition, improvements in performance must increasingly come from within. After operators have trimmed capex, they have to address perhaps the most delicate question of all: how to best trim opex?

Effective root-cause analysis is essential to opex transformation

The traditional starting point has been opex benchmarking, whereby operators assume that any area in which they are above the peer benchmark is an area where they should cut cost. This sounds logical and sensible, but unless repeated cost cutting is combined with performance improvement, you may replace a cost problem with a quality problem, as some budget operators have learned the hard way. Next came the era of process improvement, whereby each process is meticulously mapped and then improved upon – often by advisors. Unfortunately, organisations seldom behave according to prescribed processes, and any process designed for a particular business task quickly becomes outdated. More importantly, many opportunities for organisational improvement are not process-related at all so, in isolation, this method risks missing the mark.

Analysys Mason has fine-tuned a methodology for lasting opex performance improvement as a result of recent client work, building on experience we have gained over the past two decades. This methodology is holistic at its very core. It is centred on a root-cause analysis that looks broadly at multiple elements of an organisation, including its people,

processes, services, systems, incentives and key performance indicators (KPIs). Cost benchmarking and process mapping may support the overall diagnostics and improvement programme, but these aspects are only two of many means to an end. The reason for this is simple: just as an overly simplistic medical assessment may lead to the wrong diagnosis and a course of treatment that could harm the patient, a narrow cost or process focus could result in misguided efforts to transform opex that fail to deliver the desired effect – and may even be harmful to the operator.

Effective root-cause analysis begins with an open mind, no assumptions, and an active and creative approach by experienced professionals. By posing questions to an organisation’s frontline and back-office staff and complementing these views with verdicts from customers and other stakeholders, symptoms of problems can be traced back to their original source – which might not be obvious at first. Quite often, we find that the causes of high costs are upstream from the symptoms in an operator’s value chain.

For example, in recent work on customer care units, we have found that high costs are as likely to stem from complexities in the product portfolio as from inefficiencies in the customer care units themselves. In such cases, a simple cost benchmarking exercise might result in arbitrary headcount reductions in customer call centres to reduce costs, without addressing the underlying causes of those costs. By contrast, an effective root cause analysis would identify the source – that is, abnormally high call volumes – and address these first. Any efficiency improvements in the contact centres themselves would then come as an added bonus, and the combination of these measures could lead to both cost savings and quality improvements.

Analysys Mason has fine-tuned an approach to bringing lasting benefits from opex transformations, reducing opex by 10% or more while making your organisation stronger, faster and less error prone.

ERIK ALMQVISTPartner, Global Head of Operational Consulting

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When we have identified the actual root cause, we can help design a programme for resolving or removing it. Thus, rather than treating many symptoms, the cure focuses on the root causes where, over time, it will have a more-lasting effect. It is also easier to secure the organisational buy-in that is essential to the programme’s success because it targets root causes rather than false cost cuts that might backfire, and the organisation has been involved from the outset. The solutions suggested will typically encompass a broad spectrum of organisational aspects – such as people, processes, services, systems, incentives and KPIs – which radically improves their chances of success.

Case study: our holistic approach identified a potential 10% reduction in opex for an operator in Africa

In a recent case for an African mobile network operator (MNO), we identified an annual opex savings potential of 10.5%. The MNO had been experiencing a period of rapid growth since its inception, but was anticipating an increase in competition as the market saturated. As a result, operational excellence would be essential to improving the company’s financial performance. With this objective, the MNO entrusted Analysys Mason with the task of identifying areas for driving operational efficiency and reducing opex.

As a starting point, we identified key functions within the organisation and associated driver costs. We then benchmarked the identified functions with a set of global, regional and local peer operators. The peer group for benchmarking was carefully selected based on economic, environmental, market and operator-related parameters to ensure comparison between like-to-like operators. We deliberately

constructed an index that included many successful competitors in the peer group, to make it easier to identify savings areas. This helped our client to recognise areas (structural, tactical and strategic) where real improvements can be made.

In parallel to the qualitative evaluation, we carried out an extensive root-cause analysis to identify true sources of inefficiencies that led to the identified performance gaps. As part of this process, the Analysys Mason team conducted discussions with more than 70 personnel within the organisation, including CxOs, functional heads and other important team members across various departments.

This helped us in developing recommendations across different functions to improve the MNO’s operational efficiency and financial performance. There were multiple addressable factors for this operator, but the largest savings stemmed from energy use, procurement consolidation, customer care efficiency, product portfolio consolidation and reduction in leased-line costs. The sum of these factors added up to more than 10% on an annual, recurring basis (see Figure 1).

Specific factors may vary by operator, but the holistic methodology of combining traditional benchmarking and process efficiency measures with thorough root-cause analysis acts as guarantee for clients to arrive at both short-term results and real long-term improvements in efficiency. Finally, a recipe for lasting opex improvement has arrived.

For more information, please contact Erik Almqvist, Partner, Global Head of Operational Consulting, at [email protected]

“Analysys Mason has fine-tuned a methodology for lasting opex performance improvement as a result of recent client work, building on experience we have gained over the past two decades.”

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12

MONETISING LTE SERVICES: DEVELOPING NEW REVENUE STREAMS THROUGH DIFFERENTIATION AND INNOVATIVE PRICING

The experience of MNOs in countries such as South Korea show that LTE can add value to a business and have a positive impact on ARPU and share prices – when more than 28% of an MNO’s subscriber base has an LTE connection, operator share prices consistently outperform the index. This article examines how MNOs are experimenting with services, segments and pricing in order to monetise LTE offerings, and draws on our experience of working with operators worldwide.

MNOs must differentiate LTE services from those of 3G

LTE operators can begin to monetise LTE services by offering four categories of service to established and new segments of subscribers (see Figure 1).

Enhanced data for consumers is a key selling point for LTE

Operators can use the rich data experience of LTE to sell more data and develop new revenue streams. Video streaming providers such as Netflix alter the quality of video according to available bandwidth – so a 6-minute clip on LTE would consume 80MB compared with 27MB on 3G, thus driving usage. Operators are also bundling content with LTE or top-tier plans, enabling new revenue streams – for example, EE in the UK uses its film service (EE Film) to monetise data and receives sales commissions from video-on-demand provider FilmFlex.

VoLTE (+ RCS) allows operators to offer integrated voice, video and instant messaging (IM) services with the added benefit of mobility

VoLTE (+ RCS) will probably develop as a hybrid service for operators. They will be able to sell more IM and video data, a market that over-the-top (OTT) players currently dominate. Additionally, 4G networks can address the mobile opportunity for HD voice and

integrated services, and even drive usage away from Wi-Fi, thus generating new revenue.1 South Korea Telecom’s VoLTE service is taken by about 50% of the operator’s LTE subscribers.

Enterprise solutions can benefit from enhanced data services

Enhanced enterprise LTE solutions such as videoconferencing on-the-go and remote access to business applications can drive data consumption. Verizon Wireless is one of many LTE operators that offers 4G mobility applications and solutions for SMEs and enterprise customers. A survey shows that 67% of US businesses using LTE believe that it has resulted in increased productivity.2

LTE can also provide connectivity as a substitute to fixed networks

It is possible to use LTE with a 4G router to offer connectivity to the home and SME broadband segment, which could be a new revenue stream for operators. For example, UK Broadband’s ‘now broadband’ service is offering connectivity using LTE + 4G routers. This use of TD-LTE as a substitute for fixed networks could be an interesting solution in emerging markets.

Wholesale solutions may emerge as an attractive opportunity for operators

Because LTE network latency is lower than 3G, operators can develop new revenue streams by selling bandwidth for wholesale services (such as utility and M2M services). Verizon is at the forefront of this with projects in sectors such as education.

ROHAN DHAMIJA Head, India and South Asia

LTE is the latest telecoms industry buzzword – mobile network operators (MNOs) have launched more than 200 live LTE networks in 100 countries.

13

Figure 1: LTE services by user and product segments [Source: Analysys Mason, 2014]

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Pricing is determined by LTE positioning relative to 3G

If positioned as a value-added service with clear benefits (such as guaranteed speeds or premium content), then a pricing premium can be introduced. However, if positioned as a mass-market service (also used to decongest 3G networks) a premium is not advisable. Pricing premiums can also be applied in low-competition scenarios – although they will have to be removed eventually (for example, in the UK).

MNOs can also experiment with bundling. Data sharing across devices is being offered, with the aim of monetising devices (such as tablets) otherwise lost to Wi-Fi. Tethering strategies are evolving, as operators try to monetise tethering by allowing it at as part of premium or top-tier plans. Fixed–mobile converged offerings are available and aimed at increasing revenue and reducing churn.

Overall, LTE strategies are continuing to evolve and it is too early to identify winners. Successful monetisation strategies will need to focus on offering differentiated services with flexible and usage-friendly pricing models.

Analysys Mason is working with operators on 3G and LTE network and commercial launch strategies in developed and emerging markets.

1 A survey of 4G users in the UK found that since using 4G, 43% of users use fewer or no public Wi-Fi hotspots.2 A survey of 256 US businesses that use LTE, Arthur D. Little.

For more information, please contact Rohan Dhamija, Head, India and South Asia, at [email protected].

“MNOs can also experiment with bundling. Data sharing across devices is being offered, with the aim of monetising devices (such as tablets) otherwise lost to Wi-Fi.”

14

AFRICAN MOBILE OPERATORS: IMPROVING RETURNS THROUGH CONSOLIDATION

Many observers think that mobile network sharing is rare in Africa, but this is not the case.

The mobile telecoms industry in Africa has burgeoned in recent years, but slowing revenue growth, increasing costs and shareholders demanding returns are forcing operators to consider the next wave of investment. This article examines their options and suggests that lessons can be learned from operators in other parts of the world.

Mobile penetration has grown dramatically in Africa during the past 5 years, from 29% to 69%. According to GSMA Intelligence, 358 million people on the continent are now connected. This growth has been driven by the issue of new licences: the average number of GSM licences in African countries is currently 3.8, and at least 13 countries have four or more GSM operators (see Figure 1).

This glut in mobile networks helped to drive the African mobile industry to mass-market adoption. Low tariffs from many operators competing for customers enabled the industry to grow quickly, but the days of ‘land grab’ are now limited. Operators need to consider the next wave of investment – with slowing revenue, increasing costs and shareholders demanding returns, M&A is a likely option.

Mobile operator M&A has occurred in Europe – for example, T-Mobile and Orange merged their UK operations under the single ‘EE’ brand. In Africa, Bharti Airtel’s takeover of Warid Telecom in Uganda is possibly the clearest message yet that M&A is a perfectly viable consolidation strategy, one clearly recognised by Charles Mbire, Chairman of MTN Uganda: “Uganda is a market for at best two companies ... I think there will be consolidation. The anarchy in the market has to stop. Out will come realism, real prices and then we can invest much more.”1

However, M&A is extremely difficult. The model is not fully proven in the mobile telecoms market, where dual brand issues are strong enough to negate all

operational benefits. M&A often happens too late, when both operators are in deep trouble and shareholders are forced to take radical action. Regulators are wary of allowing M&A activity because it can completely remove a competitor from the market – a competitor that helps keep prices low for consumers. Furthermore, it can create a spectrum ‘giant’, which also generates regulatory issues. The Uganda deal was quick to win approval from the national regulator, but many others may be more reluctant to see their hard-fought competitive market reduced to a duopoly through M&A. The industry needs another solution – and that is network sharing.

African operators are already passive network sharers. Tower deals in Africa are common: 20 deals have been completed throughout the continent. However, as passive network expansion slows and operators focus on network capacity, equipment refreshes and new technologies, the benefits of passive sharing become limited, which is where active sharing becomes necessary. Active network sharing is a much more complex topic than tower sharing. Active networks are vital to mobile operators and are the revenue-generating assets that define it as an operator. Sharing such assets with a competitor is still relatively uncommon and only a few CEOs/CTOs in Africa have first-hand experience.

Operators in Australia and Sweden were in the first wave of 3G network-sharing deals in the early days of 3G roll-out, partly because of the nature of their geographies – large, sparsely populated areas make the economics of active network sharing very attractive. Since then, more than 40 network-sharing deals have been announced in Europe alone.

What can Africa learn from this wealth of network-sharing experience?


EDWIN GRUMMITTPartner

15

• Sharing deals can be struck and successfully executed, so executives do not need to be afraid of them. Large groups, such as Vodafone and Orange, have been involved both in active sharing and in Africa, so these companies will lead the way in understanding the benefits and the processes.

• The most proactive operator often gets the best deal. When a network-sharing deal between two operators has been struck, then the remaining operators in that country are obliged to respond. An operator that actively engages with its best partner and is first in securing a deal, develops a real competitive advantage.

• Regulators and competition authorities need to be cognisant of the value of active network sharing. M&A can deliver greater benefits to the operators, but the competitive impact on the market should not be ignored. Regulators should be aware of the different network-sharing models, the impact on spectrum and how a transaction can best be used to improve the overall market – a particularly relevant point, given that the current regulatory model of issuing new licences to increase competition will not work in maturing markets.

Consolidation in Africa will happen – it is just a matter of timing. Proactive operators can drive that consolidation through M&A and network sharing, and by matching strategies with market position and regulatory approval. Sitting back and waiting for the returns to roll in is no longer an option. Only proactive business leaders will be winners in the now inevitable network consolidation across Africa.1 Thompson Reuters (New York, NY, 2013), MTN Uganda eyes domestic takeovers after rivals’ tie-up. Available at http://www.reuters.com/article/2013/05/01/mtn-uganda-ma-idUSL6N0DI1JI20130501.

For more information, please contact Edwin Grummitt, Partner, at [email protected]

“Mobile penetration has grown dramatically in Africa during the past 5 years, from 29% to 69%. According to GSMA Intelligence, 358 million people on the continent are now connected.”

Note: Countries coloured red, orange and yellow all face intense competition.

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Figure 1: Number of mobile operators present by country, Africa [Source: Analysys Mason, 2014]

16

SOUTH AFRICA’S NATIONAL BROADBAND TARGETS SEEM AMBITIOUS COMPARED WITH EUROPEAN BENCHMARKS

South Africa’s government has published an ambitious national broadband plan to position the country as a leader in broadband connectivity. The National Broadband Policy, Strategy and Plan, referred to as ‘South Africa Connect’, seeks to ensure that all South Africans have basic broadband access by 2030 and that 50% of South Africans have access to 100Mbps broadband speeds by 2020. This Comment analyses whether these targets are realistic.

South Africa Connect is a bid to re-establish a regional broadband leadership position

South Africa Connect is intended to reinstate South Africa’s status as the continental leader in broadband and Internet. Broadband connectivity is vital in supporting South Africa’s economic development, but the targets set out in the plan must be realistic to ensure the most appropriate technical solutions, commercial models and financing options can be identified.1

It is likely that the targets relating to schools, health facilities and government facilities will be achieved as a by-product of any network roll-out initiatives designed to achieve the general population penetration targets.

The definition of broadband access for the general penetration target is quite unusual: “households where at least one member had access to or used the internet either at home, work, place of study or Internet café”.2 This definition is likely to be dependent on self-reported access from primary research surveys, so progress towards the targets could be more difficult to measure objectively than it would with a definition based on the number of broadband subscriptions.

The penetration targets appear ambitious in comparison with broadband access growth in other markets

Both the 5–10Mbps and 100Mbps penetration targets show steep rises in growth and seem ambitious in comparison with Analysys Mason’s forecast growth for fixed and mobile broadband penetration in South Africa and selected benchmarks of first-generation broadband take-up since launch in European countries (see Figure 1).

Experience from around the world suggests that the take-up of 100Mbps services in the first years following launch is likely to be more gradual than the steep curve implied by the targets, so it will be difficult for South Africa will achieve 50% penetration by 2020. In addition, the broadband penetration targets are much higher than the take-up of first-generation fixed broadband in Europe, although the definition of broadband access may affect this. This highlights the critical importance of the elements of the policy that are designed to stimulate demand.

Significant investment in fixed FTTC networks will be required to meet the 100Mbps targets by 2020

South Africa will also need to ensure that sufficient infrastructure is deployed to support the access speeds specified in the targets. Mobile broadband services could be used to meet the lower-speed targets (5Mbps and 10Mbps). South Africa has widespread 3G coverage and 4G LTE is available, although spectrum constraints have restricted coverage and capacity in the short term. However, even in the long term, 4G LTE is expected to remain a niche proposition confined to cities, and it could be difficult to reliably deliver 5–10Mbps via 3G without significant upgrades and large amounts of spectrum (for further details, see our South Africa country

African governments are setting ambitious broadband targets to remain competitive, but it is vital that the targets are realistic to ensure they can be delivered on time and within the governments’ financial means.


IQBAL BEDIPrincipal

17

report). As suggested in the policy, a national wholesale open access wireless network (based on 4G LTE) may be necessary to deliver the speed targets of 5Mbps and 10Mbps.

In order to deliver speeds of 100Mbps by 2020, some form of fixed network will be required. A fibre-to-the-home (FTTH) network would be able to comfortably deliver these speeds, and provide a good foundation for delivering 1Gbps to schools and health facilities. FTTH networks are very expensive to deploy because of the costs incurred in building the fibre access and in upgrading the core network. Fibre to the cabinet (FTTC) provides a more cost-effective option for South Africa because it avoids the cost of building the fibre access network. However, in areas where there is just a single copper pair connecting each home, 100Mbps will only be possible for those homes located very close to the cabinet or in densely populated areas.3 Therefore, achieving these targets based on FTTC networks will be challenging without further investment in FTTC networks.

It is understandable that governments set ambitious broadband targets. However, over-ambitious targets

may be detrimental to the success of the programme. South Africa needs to set realistic targets that take into consideration the forecast broadband penetration in other countries and the availability of current- and next-generation broadband infrastructure in the country. This will ensure that South Africa has a good chance of financing and implementing its national broadband network, helping to realise the full potential economic benefit of the programme, and to reinstate South Africa’s status as a regional broadband leader.1 See South Africa Connect: Creating Opportunities, Ensuring Inclusion: South Africa’s Broadband Policy, December 2013”. 2 Department of Communications (Pretoria, South Africa, 2013), South Africa Connect: Creating opportunities, ensuring inclusion. Available at www.gov.za/documents/download.php?f=205142. 3 100Mbps via vectoring is only possible over line lengths of less than 400m, which is likely to include less than 50% of homes. For further details, see Analysys Mason’s study Policy orientations to reach European Digital Agenda targets.

For more information, please contact Iqbal Bedi, Principal, at [email protected]

“South Africa will also need to ensure that sufficient infrastructure is deployed to support the access speeds specified in the targets.”

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Figure 1: Fixed and mobile broadband penetration rates and targets in South Africa, and benchmarks for penetration in European countries, 2000–2030 [Source: Analysys Mason, 2014]

18

MEETING DSO DEADLINES: WHAT ARE THE INTERNATIONAL LESSONS FOR AFRICA AND SIMILAR REGIONS?

The Tanzanian government commenced the switch-off of analogue terrestrial TV signals on 31 December 2012. It is the second country to make this move in sub-Saharan Africa, following Mauritius’s analogue switch-off on the remote island of Rodrigues in 2012. Tanzania’s experience offers the first insight into what might await African countries as they move to digital terrestrial television (DTT) broadcasting to try and meet the agreed deadline of June 2015: queues of viewers at set-top box distribution centres immediately after switchover, and an appeal from the broadcasters to bring analogue broadcasting back. In this article, we reflect on approaches and outcomes of digital switchover (DSO) campaigns in other parts of the world that might provide lessons for Africa and other regions that are planning DTT/DSO.

As experience from other countries throughout the world suggests, the approach to DSO is generally tailored to each country’s specific circumstances. The following examples provide an interesting perspective on the approaches taken and resources required for DSO:

• ”Super planning” from government and strong stakeholder investment in the UK and Australia thoroughly dealt with perceived risks.

• Spain had a smooth successful switch-off and minimised investment with the use of volunteers to help households at risk of missing the switchover.

• Croatia, Slovenia and Serbia have adopted a much lighter approach and committed less investments in a smaller geographic and market scale.

UK

The switchover in the UK was completed without fuss: the curtains were quietly drawn on the analogue TV age at the end of 2012. The approach was characterised by strong leadership from government, extensive stakeholder commitment, and substantial investment from all quarters: government, public and commercial broadcasters, and transmission companies.

From the very start, the UK process was emblematic of a gold-plated approach to digital switchover. An extensive period of collaboration of seven years between government and industry prepared the market for the transition. Competing free and pay-TV platforms drove take-up years in advance of the switch. The BBC-inspired “Freeview” platform offered consumers a new way to access a broad range of digital content for a limited initial investment and new channel providers an alternative way to reach a wide audience.

Digital UK was established in April 2005 to lead the implementation of DSO with a budget in the region of GBP200 million (EUR233 million), substantially funded by the BBC. There followed an intensive period of meticulous technical planning and preparation, and the creation of a saturation advertising campaign.

Support was provided for vulnerable citizens with GBP600 million (EUR699 million) set aside from the BBC’s funding to establish the Help Scheme. Digital UK worked with the voluntary sector to provide practical hands-on advice within the community. The UK switchover commenced in October 2007 and was completed on time and well under budget in late 2012. At the end, GBP300 million (EUR350 million) of the Help Scheme funding was not needed and was returned to the government.

LLUÍS BORRELLPartner

Digital switchover is not a technological activity, it is about changing consumer behaviour

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Australia

The Australian switchover is well advanced, with completion due by the end of 2013. Slower to start than the UK, the government drew heavily on the experience from the UK and other countries, tailoring the approach to its unique geography and a broadcasting sector dominated by competitive advertising-funded broadcasters.

The Digital Switchover Taskforce was established in August 2007. After a period of consultation with industry, the timetable was set to deliver switchover on a regional basis over the period 2010–13.

Funding of almost AUD1 billion (EUR787 million) was set aside from the federal budget for communication, assistance for vulnerable citizens, broadcaster subsidies and the establishment of a new satellite broadcasting platform.

The degree of planning and preparation came close to that of the UK. The switchover is progressing well, on time and on budget. In common with the UK, commentators and politicians in Australia applauded the smooth implementation. In both cases, however, questions have been raised about the time taken and the amount of funding set aside, suggesting some stakeholders thought the process was overplanned.

Spain

Spain also had a smooth successful switch-off in 2010 after having re-launched its DTT in 2005. It created Impulsa TDT to coordinate key stakeholders’ efforts towards switch-off with government efforts, and these activities ran for a little over two years (end of 2007 to beginning of 2010). Impulsa TDT’s objective was to promote DTT and the development of the transition process, which it broke down into the following tasks:

• promote DTT take-up • define and propose action plan • design and develop an institutional communications plan with a view to ensuring the most complete information for users • develop a DTT Observatory to monitor the transition process • offer a forum for debate, recommendation and action to its members on all related matters • represent the legitimate interests of members in front of national, European or international institutions• promote a regular exchange of information between its members in different areas of interest related to DTT.

A particular campaign was devised for multiple-occupancy dwellings, which are the most common type of housing in Spain, with a major focus on ensuring that antennas were adapted in such buildings. Investment to provide assistance for households at risk was also minimised with the use of volunteers. In the end EUR68 million was spent on

advertising and communications, EUR60 million on extending DTT coverage through regional governments, and Impulsa TDT had a relatively small staff of 3-4 people. Through this, it has been estimated that 10 000 companies were mobilised and EUR12 billion was invested in the wider industry.

Croatia, Slovenia and Serbia

Other countries have adopted a more relaxed approach and completed switchover relatively quickly and without major issues. Digital switchover in Croatia was completed at the end of 2010, a little less than two years after the DTT platform was fully operational. Slovenia completed its digital switchover in 2011, again within a short timeframe and with considerably less investment than the UK and Australia.

Planning for switchover in Serbia is now well advanced with a DTT signal available to some 50% of the population.

Arguably those countries that have switched later or are planning to do so have been able to learn from those countries that switched earlier. The risks are known and the attitude of the public better understood. In addition the market scale is in most cases much smaller than the UK and the geographical scale is far short of that of Australia.

Conclusion

Digital switchover could be relatively quick when the terrestrial platform has limited presence but could take two to five years if the country is larger and terrestrial is the most important broadcast platform. A phased, regional approach to switch-off is used in most cases but a national approach could be used in very small countries. However what is clear from experience in other countries is that digital switchover is not primarily a technological activity, it is about changing consumer behaviour.

Outside South Africa and Nigeria – which may pose unique DSO challenges – there are estimated to be fewer than 40 million TV households in sub-Saharan Africa. To put this in context, this total is about double the total number of TV households in UK. It is likely that a pragmatic communications strategy, not as rushed as Tanzania but less thorough than in the UK and Australia, will suit most of those countries although specific conditions will need to be taken into account: consumers at risk, the commitment of key stakeholders, and the ability of the local public service broadcasting/government to invest and lead the process. However, administrations will need to develop appropriate communications strategies soon if they are to meet the agreed deadline, minimising disruption to consumers and ensuring a smooth transition for the good of their citizens and broadcasting ecosystems.

For more information, please contact Lluís Borrell, Partner, at [email protected]

“As experience from other countries throughout the world suggests, the approach to DSO is generally tailored to each country’s specific circumstances.”

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