A bright future: Economic growth and heated competition propel market penetration

As the first sub-Saharan African country to have a mobile network over 20 years ago, Ghana is accustomed to its position as one of the pioneers of telecommunications on the continent. Its telecoms market is one of the most competitive in Africa, and as mobile penetration figures rise, operators are increasingly looking to non-voice services to drive revenue – which in turn has spawned numerous possibilities from mobile money to e-commerce. From a retail consumer’s standpoint, Ghana’s mobile telecoms market is one of the most accessible on the continent, with six highly competitive operators vying for the attention of the country’s 24.9m habitants. This, of course, has created complications for providers. Over the past decade price competition has eroded average revenue per user (ARPU) and brought about some of the lowest tariffs in Africa – a result of the policies of the market regulator, the National Communication Authority (NCA), which has sought to improve penetration figures and increase access nationwide.

BY THE NUMBERS: When it comes to wider economic development, as a whole, the communications industry punches well above its weight. According to the Ghana Statistical Service, the industry accounted for 2% of GDP in 2010 and 1.79% of GDP in 2011. Additionally, the industry contributed to 10% of government revenue in 2010 through taxes, licensing and fees, according to a report published by Dubai-headquartered investment firm Delta Partners. However, the indirect impact on growth through improved communications is much larger. In fact, a recent World Bank study quantified the effect of mobile penetration on GDP growth and found that every 10% increment in mobile penetration corresponds to a 0.81% increase in GDP (in developing markets).

RISE OF THE CONSUMER: Though the increased level of competition has driven mobile penetration, the economy’s growth has certainly helped as well. According to World Bank and IMF data, the economy’s expansion over the past five years has averaged 8.2%. The World Bank now regards Ghana as a lower-middle-income country, as GDP per capita has risen nearly five-fold over the past decade, from $270 in 2001 to $1325 in 2010. Though disparities between the country’s urban centres and rural villages remain stark, the emergence of a middle class with rising levels of disposable income is central to the long-term growth of the telecoms industry. Moreover, falling handset prices – brought on by consolidation within the hardware segment – along with a robust secondary market, have combined with the sector’s low tariffs to make mobile telephony affordable for the vast majority of Ghanaians. Market penetration is at 87.1%, already slightly higher than the world average of 86.7%. However, the emergence of more profitable internet services – the result of the development of 3G networks – is offsetting some of the potential hurdles created by the shrinking pool of new customers and low ARPU. ABCs OF GOVERNANCE: The Ministry of Communication (MoC) oversees policy development for the telecoms market, while the NCA is directly responsible for regulation and oversight. Meanwhile, the National Information Technology Agency (NITA) is in charge of implementing the government’s wider ICT plan, known as ICT for Accelerated Development (ICT4AD). An assortment of other agencies, projects and funds, including the Ghana Investment Fund for Electronic Communications (GIFEC), the Millennium Village projects and the eGhana project, also fall under the purview of the ministry.

In 2011 the MoC’s budget for implementing projects, most of which focus on the development of e-governance and providing last-mile internet solutions to rural communities totalled GHS29.5m ($17.49m). Of this, 21% (GHS6.3m, $3.38m) was provided by the government and 79% (GHS23.2m, $13.76m), came from international donors and aid organisations. The MoC’s 2012 budget has more than doubled thanks to the inclusion of internally generated funds from government coffers. The MoC’s budget for 2012 totals GHS66.1m ($39.19m), of which 10.7% or GHS7.1m ($4.21m) is supplied by the government, 40.1% or GHS26.5m ($15.71m) by internally generated financing, and 49% or GHS32.5m ($19.27m) from funding provided by international donors.

TIMES GONE BY: Ghana has been at the forefront of telecommunications development in Africa since 1992, when Millicom Ghana launched the first mobile network under its Mobitel brand. The network is still in existence today, though it is now known as Tigo. However, it was not until the late 1990s that the mobile market truly began to take shape. The government has often led the way in terms of deregulation of the telecoms market, and Ghana became among the first countries in Africa to partially privatise its formerly state-owned firm, Ghana Telecom (GT), when it sold a 30% stake in the company in 1996 to Telecom Malaysia. Shares in GT were traded among several players in the interim, but by end-2008, Vodafone had purchased a controlling 70% stake in the company.

The NCA has continuously encouraged competition in the market through the awarding of new licences and the implementation of policies, such as the introduction of mobile number portability (MNP) in July 2011. There are currently six mobile network operators, 128 registered very small aperture terminal (VSAT) operators, 167 registered internet service providers (ISP), three direct-to-home (DTH) access providers and two fixed-line operators licensed in the country, though not all VSAT and ISP firms have active operations. The relatively quiet fixed-line segment, however, is a de-facto monopoly as Vodafone maintained a 96.7% market share of the country’s 276,614 fixed lines at the end of the first quarter of 2012.

FIXED LINE: At the close of 2011 the NCA reported fixed-line market penetration of just 1.1%. Though both Vodafone and Airtel operate in the segment, Vodafone’s purchase of GT has provided it with 96.7% of the country’s fixed-line market, against Airtel’s 3.3% – though this represents a vast increase on the 0.7% market share Airtel enjoyed a mere 24 months prior, at the beginning of 2010.

In total, at the end of March 2012, there were 285,863 active fixed lines in the country. The spread of fixed-line infrastructure and services peaked in 2006 at 360,373 after a decade of strong growth saw fixed lines increase more than three-fold from just 105,054 in 1997. However, the onset of mobile telephony appears to be taking a toll on the segment, a common theme in both emerging and developed markets throughout the past decade. Yet, after consecutive years of decline the fixed-line segment has begun to recover, with growth of 3.9% in 2010 and 2.6% in 2011. While the growth is minimal, contemporary telephony is characterised by declines in fixed-line subscriptions, increasingly viewed as obsolete. Thus, any measurable growth should not be ignored. Both Vodafone and Airtel are likely to continue targeting the business segment, since price competition keeps mobile tariffs in Ghana extremely low and, as a result, most individual consumers prefer to simply go mobile.

MOBILE PENETRATION: Ghanaians are increasingly going mobile in the 21st century and penetration rates have soared from just 2.4% in 2001 to 84.9% in 2011. The latest figures available from the NCA at the time of press indicated penetration had reached 87.1% at the end of the first quarter of 2012. When measured against the African average of 53% and the developing world average of 78.8%, Ghana’s mobile penetration is comfortably ahead of the game.

There are several reasons for this, though two chief factors have arguably been the most influential. First, rapid growth in the wider economy has led to increased GDP per capita and in turn elevated consumer spending. However, perhaps more prominently, NCA policy and licensing have encouraged and driven private sector competition, resulting in some of the lowest mobile tariffs on the continent (see analysis).

MTN holds the largest market share, at 47% of the total, with 10.64m customers as of the end of May 2012, according to figures from the NCA. Vodafone comes second with 4.67m (21%) and is followed by Tigo with 3.46m (15%), Airtel (3.02m, 14%), the newly launched Glo (470,000, 2%), and the primarily corporate-oriented Expresso (200,000, 1%).

NON-VOICE: To increase ARPU, which remains low, at roughly GHS10 ($5.08) per month (although not all operators report ARPU), telecoms outfits are increasingly looking at the potential in non-voice services to boost revenue. Ebenezer Asante, a sales and distribution executive at MTN, told OBG, “Now that 3G services are firmly established, mobile data services are beginning to take off, but the mid- to long-term future of the non-voice segment is not limited to just data, as other services, such as mobile money and even micro-insurance, have shown promise as well.” However, according to El Amir Ahmed El Amir, the managing director of Expresso, “The problem with data at this point is that traffic is increasing quite quickly, but revenues are still low.”

Mobile financial services, and more specifically mobile money, have taken off across Africa in a way few could have predicted 15 years ago. Many of the services in Ghana are still nascent, and although based on demand in other middle-income African nations, the potential is sizeable (see analysis). “The money transfer system is becoming more and more popular. Now the question is how to enhance this into other products including, billing services, and payment of school fees or small and medium-sized enterprise transactions,” Micheal Ikpoki, CEO of MTN, told OBG.

For now, however, the bulk of activity is concentrated in mobile data services and most internet users access the net via mobile phones. According to Alan Triggs, former vice-president and head of operations for Ericsson sub-Saharan Africa, “Though terrestrial landings in Ghana have increased, until the land-based broadband network becomes significantly more developed mobile broadband will likely remain the best option for the vast majority of consumers.”

Operators are certainly also looking beyond selling mobile data packages and creating new products with which to capitalise on the spread of mobile telephony in the country. Services such as mobile commercial advertising have become popular recently, with businesses and some providers now also offering mobile radio services, which subscribers can top up using scratch cards. Bill payment, phonebook backup and e-commerce are some examples of other non-voice services that operators are beginning to offer. In general, non-voice services, particularly mobile data, have been taken up in higher proportions by postpaid subscribers compared to prepaid; however, the post-paid subscriber is an anomaly in Ghana.

PAYMENT SCHEMES: Although tariffs are generally lower for post-paid accounts, as is true in many emerging markets, the overwhelming majority – roughly 95% – of mobile users are on a prepaid plan. Percentage growth in post-paid accounts is slightly higher than prepaid, albeit from a much smaller base. At present, many Ghanaians do not have bank accounts, a requirement for signing a post-paid contract.

REGULATION: In January 2012 the NCA replaced existing interconnection rates, which expired on December 31, 2011, with a new regime that will run from 2012-14. The new interconnection termination rates, which only apply to domestic calls, have been set at GHS0.05 ($0.03) for voice calls in 2012, and will decrease to GHS0.045 and GHS0.04 in 2013 and 2014, respectively. The interconnection termination rate for SMS on all mobile networks in Ghana will be GHS0.007 ($0.004) for 2012, before dropping to GHS0.006 and GHS0.005 in 2013 and 2014, respectively. The NCA’s statement regarding the new regime underlines that the asymmetric rates will apply to all operators equally, and in line with general policy will act as a catalyst to further deepen competition in the market.

In 2011, as part of its ongoing policy of encouraging competition, the NCA was among the first regulators in sub-Saharan Africa to introduce MNP in July 2011. MNP has removed a crucial deterrent to changing networks, allowing customers to switch carriers while retaining their original phone numbers. Prior to MNP, many customers may have decided not to switch to a rival network provider, even despite the offering of better savings or service, simply because it was more attractive to retain their mobile number.

At present, churn – the rate at which customers switch between operators – is fairly low, according to Kyle Whitehill, the CEO of Vodafone Ghana. “The level of churn is currently about 5% a month, which is very good compared to a lot of other African markets. The issue here is that a lot of people have three or four SIM cards, so there is a lot of spread usage”

In July 2010, the NCA, with the cooperation of operators and subscribers, began the process of SIM identification. Prepaid phones, which are both cheap and disposable, have become an essential component of criminal operations. Under the new regulations, all SIM purchases must be accompanied by some form of national identification, and unregistered cards will not operate on networks until registration is complete. In March 2012 the NCA reported having deactivated over 1.5m SIM cards during the process.

The industry watchdog also actively monitors network operations through periodic quality-of-service (QoS) testing. In the third quarter of 2011 the NCA fined all five network operators at the time a total of GHS1.2m ($610,080) due to poor QoS caused by dropped calls, call setup failures, network congestion and a variety of other issues. MTN, Vodafone and Tigo received QoS fines totalling GHS250,000 ($127,100) in the first quarter of 2012, while Expresso and MTN again received GHS250,000 ($148,225) in fines in the second quarter. Meanwhile, Glo was fined GHS386,400 ($196,445) after its launch was delayed by nine days.

INVESTMENT: According to a World Bank report, between 1998 and 2008 the public and private sector invested a total of $1.13bn in telecoms. Much of this was capital in nature, and stems from the creation and expansion of telecoms infrastructure projects.

In preparation for its launch in April 2012, Glo invested heavily in establishing its physical network in the country, which includes the Glo-1 submarine cable, spending $750m over the past three years in base stations. MTN has reported investing $1.2bn since its arrival, while Vodafone has invested $600m over the past three years. Airtel – which was formerly known as Zain, after its Kuwaiti parent company, prior to its purchase by India’s Airtel in 2010 – spent $420m on setting up one of the first 3.5G networks in sub-Saharan Africa in 2008. Indeed, recent investments in the sector have been focused on deploying, upgrading and expanding 3G networks across Ghana, and the trend is likely to continue as operators upgrade further to 3.5G and 4G networks. Investment has also been poured into the development of communication towers, though infrastructure sharing, known as co-location, is a growing trend that could save a significant amount of money within the industry.

SHARING TOWER: Concerns over the health and environmental impact of telecoms towers have led to a movement to reduce the number being built in Ghana. Capital expenditures on infrastructure development and maintenance are quite high among telecoms operators, and while some are willing to share in non-essential passive infrastructure, which includes non-electronic infrastructure such as masts, antennas and generators, the sharing of active infrastructure is still a long way away. Triggs explained that the government is encouraging the sharing of passive infrastructure among operators – a positive sign that should help to reduce redundancies and costs in infrastructure development – as well as minimise environmental and health-related concerns. Each operator has contributed 1% of annual profits to the GIFEC funds that are specifically used for providing co-location towers in underserved areas.

Limiting the duplication of infrastructure should also help to gear investment towards underserved areas where it is most needed. The sharing of infrastructure is highly beneficial to new entrants, such as Glo, which came onto the market without any proprietary infrastructure to speak of. Though not as rigidly regulated as in many Western economies, the NCA has already reformed its “Guidelines for Deployment of Communication Towers” to specify the ground rules for co-location among operators. Infrastructure development is always an obstacle in Ghana, regardless of the development status or location of the project, but if operators can continue to develop this growing trend there are enormous cost benefits for all involved.

CHALLENGES: Aside from the obvious challenge faced by telecom operators – principally the presence of many rival firms (see analysis) – expanding network capacity to rural areas and increasing penetration among the lowest-income segments of the population are arguably the most visible challenges facing the wider industry in the short term. Nearly a third of Ghana’s population still lives under the poverty line, many of whom are in remote villages. Financially justifying expanding coverage to such areas is only the first problem operators face – they must also deal with a dearth of other vital infrastructure in these areas, primarily sufficient electricity.

Ericsson Ghana, in partnership with the UN Office for Project Services and the Earth Institute at Columbia University, which is run by Jeffrey Sachs, the head of the UN Millennium Project, have partnered with Tigo to provide mobile services to 30,000 people in Ghana – out of a total of 500,000 beneficiaries across sub-Saharan Africa – as well as offering connectivity to 16 schools and five health clinics. The project utilises hybrid power, which allows the scheme to extend mobile services without connecting to the national grid. While such last-mile solutions, which are often donor-funded, are essential to providing access to selected regions in the short term, spreading economic and infrastructure development to remote areas remains the long-term solution.

OUTLOOK: Ghana’s relatively young population (over one-third of the population is under 14) and its underserved rural and low-income segments will continue to drive mobile market penetration in the future, although the fixed-line market is likely to remain relatively stagnant. Non-voice products will continue to grow, as will the popularity of post-paid accounts, amidst sustained economic growth.

Fierce competition among mobile operators has already produced the desired effect – principally some of the lowest mobile tariffs on the continent and relatively high market penetration. However, this is unsustainable in the medium and perhaps even in the short term as low ARPU has operators working with very thin margins. The question of consolidation within the market certainly appears to be on of ‘when’, not ‘if’.