Towers of value

Dynamic and competitive, Ghana’s telecoms sector is one of the brightest spots of an economy that has had a bumpy ride over the past two years. Demand for mobile services in particular is resilient and rising. The market is an appealing prospect, as evidenced by the presence of half a dozen international telecoms companies operating mobile networks, and the competition between a host of other firms in segments such as network development and management.

Driven by liberalisation, increasing competition has led to lower call costs, making mobile telephony accessible to the majority of Ghanaians and resulting in above-average penetration. The next phase of development, already well underway, is seeing players compete for the growing higher-margin mobile data segment, which is substantial but still has ample room to expand. As operators focus on diversifying products and increasing data volumes, they are both investing and looking to divest some non-core functions.

Maturing Market

Ghana was one of the first countries in Africa to start liberalising and deregulating its telecoms sector. Ghana Telecom (GT), the state telco, was partly privatised in 1996, and its sale proved to be one of the catalysts of the growth of the sector. Initial investor Telekom Malaysia Berhad later exited GT, and the company was sold to the UK’s Vodafone in 2008, with the government retaining a 30% stake. The previous year, Westel, the second state operator, was also re-privatised following purchase by Zain Group of Kuwait. India’s Bharti Airtel then acquired Zain’s Africa operations in 2010, a takeover which shook up telecoms markets across the continent.

As of June 2015, Ghana had a total 32.36m mobile subscribers, indicating theoretical market penetration of 119.41%, according to the Ministry of Communications. This is not far off the levels of some economically developed countries. Total telephone penetration has risen rapidly in recent years, from 76.6% in 2010 to 86.1% in 2011, 102% in 2012 and 108.23% in 2013, according to the Ministry of Communications. The number of subscribers grew from 17.72m in 2010 to 21.45m in 2011, 25.90m in 2012 and 28.30m in 2013.

Mobile

Mobile subscriptions have driven this growth. Subscriptions rose from 17.44m in 2010 to 21.17m in 2011, 23.62m in 2012 and 28.03m in 2013. Penetration stood at 30% in 2005, and the growth of mobile telephony has had a substantial impact on lifestyles and the broader economy. The GSM Association (GSMA), an international grouping of mobile operators and related companies, estimates that every ten-percentage-point rise in mobile penetration boosts GDP by 1.4%. Research by professional services company Deloitte and the GSMA suggests that a 10% increase in mobile penetration can boost productivity by 4.2% Thus it is possible to argue that telecoms has been almost as transformative for Ghana’s economy over the past 10 years as the country’s natural resources.

Fixed-line subscriptions are a far smaller part of the market, with figures registering 261,814 in June 2015, a total penetration of 0.97%. There were a total of 277,897 fixed lines in 2010, 284,721 in 2011, 284,981 in 2012, and 270,422 in 2013.

While most individuals and households these days primarily rely on mobile telephones, the fixed-line segment does have a solid market among corporates and other non-residential subscribers, including government and public sector companies and organisations. Fixed-line connectivity is often purchased in a “triple-play” bundle with mobile and internet packages.

As elsewhere in the world, mobile penetration figures reflect the fact that many people have two or more SIM cards. Ghanaians switch between SIMs to take advantage of on-network tariffs and special offers, while some SIMs are discarded and replaced after brief use, but remain registered for some time. Others are used only for internet connections, rather than voice calls. A 2012 survey by the GSMA estimated “unique penetration” (that is, the proportion of the population with an active mobile subscription) at 49%, less than half of the overall penetration figure at the time.

It is likely that some millions of Ghanaians do not have a mobile subscription at all, but increasingly, this will be the very young, the very old and the poorest in the most remote areas. Ghana is, in penetration terms, a maturing mobile market. While there is still potentially scope for getting mobiles into the hands of the poorest segments of society, this avenue has limited growth prospects.

In a 2014 report, “The Future of Telecoms in Africa”, Deloitte identified a number of ways in which mobile companies can continue to grow their subscriber numbers: lower call prices and cheaper handsets to increase penetration in lower-income segments; better network coverage in rural areas and operating models that are suited to serving such areas, often geographically remote; and increasing mobile data connectivity.

However, it pointed out that new subscribers in lower-income segments often spend less than existing customers (“early adopters”) who tend to be more affluent. While competition for these demographic segments and geographical areas is lower, costs can also be higher, particularly for reaching more remote regions.

Operators’ diversification strategies entail not only straightforwardly increasing data volumes, but also the growth of other product categories, use of sub-brands and in some cases offering home internet connectivity. Partnerships with banks, utility companies, media companies, gaming outfits and social networks can help develop products and services. Advertising partnerships targeting under-penetrated demographic segments can also be a boon to penetration.

Deloitte identifies mobile banking as one of the ways in which mobile companies can bolster margins and maintain growth, while tapping into growing demand for 3G in middle- and high-income segments where voice growth has plateaued (see analysis). This sentiment was echoed by Gareth Townley, manager of Eaton Towers Ghana, an infrastructure company, who told OBG, “I believe that it will be 3G that drives market growth. The voice and SMS segments have become pretty saturated markets, but data demand is continually expanding in Ghana.” He added that the development of regional centres such as Takoradi – Ghana’s second port and the centre of its rising oil industry – will also be an important stimulus to growth.

Market Breakdown

The Ghanaian market has six mobile operators, five operating GSM and one CDMA. All of the mobile operators are associated with international telecoms companies. South Africa’s MTN entered the market in 2006 with the acquisition of Investcom; Ghana is one of MTN’s most significant markets.

The other players are UK-based Vodafone, Sweden’s Tigo, India’s Airtel, Nigerian Glo, and Expresso, owned by Sudan’s Sudatel.

As of June 2015, the most dominant player in the mobile market was MTN, with 14.87m subscribers. MTN was followed by Vodafone, with less than half that number at 7.30m. Third was Tigo with 4.49m, followed by Airtel in fourth place with 4.12m, and Glo ranking fifth with 1.45m. Expresso had 132,855 subscribers. This gave MTN a 46.00% market share, Vodafone 22.55%, Tigo 13.87%, Airtel 12.71%, Glo 4.47% and Expresso 0.41%.

Mobile Number Portability

Competition has been boosted in recent years through the successful implementation of mobile number portability (MNP), which allows subscribers to switch networks without charge and without changing their telephone numbers. MNP was launched in 2011, and by February 2015, after less than four years in place, 2m subscribers had shifted networks under the scheme, the National Communications Authority (NCA) announced.

Portability is considered a success story by the regulator, with 95% of “porting requests” (that is, applications to switch networks under MNP) completed in five minutes or less. Nonetheless, the ability to change provider so easily puts pressure on operators to retain customers through discounting and other offers, a market phenomenon known as “tariff innovation”.

Policy Oversight

The sector is overseen by the NCA, the Ministry of Information and National Orientation, and the Ministry of Communications.

The government’s policy towards the telecoms sector is guided in part by two over-arching policy documents: the National Telecoms Policy (NTP) and the Information and Communications Technology (ICT) for Accelerated Development (ICT4AD). The NTP broadly aims to make telephone and internet connectivity available and affordable to all Ghanaians. The related ICT4AD sees ICT as an important catalyst for economic growth and the development of a range of economic sectors.

Costs

Call costs in Ghana are fairly low, reflecting the price-sensitivity of the market, as well as its competitiveness. However, they range considerably depending on the operator and whether calls are on or off network, as well as between prepay and postpay. As of March 2015, the last period for which figures were available at the time of research, an on-network call with MTN cost GHS0.11 ($0.03) a minute for a prepay subscriber (the vast majority of Ghanaians are prepay customers). The rate for Tigo was GHS0.04 ($0.01), for Vodafone GHS0.11 ($0.03), for Airtel GHS0.10 ($0.03), for Glo GHS0.14 ($0.04), and for Expresso GHS0.10 ($0.03). The average on-network call cost was GHS0.09844 ($0.03).

Off-network calls from MTN cost GHS0.13 ($0.04), with the rate from Tigo GHS0.10 ($0.03), Vodafone GHS0.12 ($0.03), Airtel GHS0.10 ($0.03), Glo GHS0.14 ($0.04), and Expresso GHS0.15 ($0.04). The average is GHS0.1236 ($0.03).

As elsewhere, calls to foreign countries are more expensive, but again costs vary greatly. For a minute’s call to Nigeria, where many people in Ghana have business and social ties, MTN charged GHS0.50 ($0.14), Tigo GHS0.35 ($0.10), Vodafone GHS0.30 ($0.08), Airtel GHS0.20 ($0.06), Glo GHS0.17 ($0.05), and Expresso GHS0.21 ($0.06), with the market average GHS0.2885 ($0.08). Costs have little to do with geographical proximity. Average call cost to the UK was GHS0.6923 ($0.19), while to the US it was GHS0.1463 ($0.04), to South Africa GHS0.6043 ($0.17), and to China – an increasingly important investor and trading partner for Ghana – GHS0.1463 ($0.04).

Data costs also vary widely. For one MB of data, in March 2015 an MTN prepay customer paid GHS0.10 ($0.03), compared to GHS0.20 ($0.06) on Tigo, GHS0.20 ($0.06) on Vodafone, GHS0.10 ($0.03) on Airtel, GHS0.08 ($0.02) for Glo, and GHS0.05 ($0.01) for Expresso. The market average was GHS0.1217 ($0.03).

In its 2014 report on telecoms in Africa, Deloitte highlighted Ghana as an example of a country in which competition had led to heightened price pressure and driven down average revenue per user (ARPU), with rising traffic volumes not offsetting lower pricing. This was particularly the case in 2010, when Bharti Airtel took over Zain Group’s African operations, including its Ghanaian subsidiary, the formerly state-owned Westel. Deloitte identifies this takeover as the trigger for price wars in various African markets, as Airtel pushed highly competitive pricing models. ARPU has been pushed down by lower pricing, a drive to penetrate lower income segments, and customers cannily switching between SIMs to optimise value from various operators’ pricing structures and special offers. Deloitte notes that lower pricing has helped drive higher voice traffic volumes, with which operators have not always managed to keep pace through infrastructure and service quality.

Tariff Innovation

In competitive African markets, Deloitte notes that mobile operators have increasingly focused on tariff innovation with the aim of maintaining or building market share, stimulating demand and encouraging migration towards greater data take-up. Tariff innovation has become more important as competition has risen, markets have matured, and players have looked to reach out to specific niches, including the less affluent end of the market. It has also been deployed to boost asset utilisation. The strategy has had mixed results, eroding profitability in some cases. Voice remains the leading revenue generator, so the tool of tariff innovation has to be used with care. Deloitte notes that misjudgements include making special tariffs too widely available and appealing to too many users at once; not anticipating competitors’ reaction; failing to roadtest tariff packages properly and failure to monitor the impact of tariff packages (for example, on subscriber churn, which is driven by consumers’ desire to take advantage of the latest offer).

A range of tariff innovations is being used across Africa. Firstly, flat tariffs, which give subscribers a booster to use for a day or a week, rather than spending per second or kilobyte. These packages stimulate usage and are thought to boost loyalty. More sophisticated are “dynamic discounts” which depend on usage. For example, prices drop in areas and at times of lower usage – so it would be, for example, cheapest to call in the middle of the night in rural areas. Thirdly, there are benefit offers for subscribers whose usage crosses a certain barrier – again a stimulus to usage and a boost to capacity utilisation. Fourthly, there’s “service bundling”, which gives customers further “non-telecom” benefits from usage, for example special offers on entertainment.

One example of tariff innovation in Ghana is Vodafone’s tapering of data costs as usage rises. The company charges GHS20 ($5.55) for the first 3 MB of data, GHS15 ($4.16) for the following 3 MB, and GHS10 for next 4 MB ($2.78).

Data Growth

Ghana’s 2015 budget forecasts that mobile data volumes will grow to 6.3 times their size between 2013 and 2018, suggesting that data will become an ever more important revenue generator for the sector, and increasingly central to communications in the country, with very significant implications for the broader economy.

As across the world, operators see boosting data volumes as the key to longer-term growth. With voice costs so low, and the scope for expanding voice volumes limited in the maturing market, encouraging data take-up – and with it the use of value-added services (VAS) – will become an increasingly central priority for mobile telecoms operators. There is ample scope for growth.

As of June 2015, Ghana’s mobile data subscribers numbered 16.82m, indicating a penetration rate of 62.05%. However, as with overall subscription numbers, “unique” active data subscriber numbers are likely to be lower. Data penetration figures can be inflated not only by multiple SIM ownership, but by those who have data capability but do not use it, or use it only very rarely. As in the market as a whole, MTN is the leader in mobile data subscriptions, with 8.13m in June 2015, 48.34% of the market. It was followed by Tigo, with 2.57m and a 15.30% market share; Airtel, with 2.42m and a 14.79% mobile data market share; Glo with 586,819 subscribers and a 3.49% market share, and finally Expresso with a 0.27% share and 45,514 subscribers.

Infrastructure Investments

As mobile operators vie for market share and look to boost call quality, they seek to gain a competitive edge through ongoing investments in infrastructure and network equipment. “As the demand for more bandwidth continues to grow, Ghana will need to ensure it has sufficient backbone capacity – particularly with fibre optic – to accommodate the growth,” Yvette Adounvo Atekpe, regional managing director of IS Internet Solutions, told OBG.

In March 2015, MTN announced that, in 2015, it would be investing GHS460m ($127.65m) to improve its networks and keep pace with rapidly rising demand for mobile data services, following an outlay of GHS311m ($86.30m) in 2014. In the months before the announcement, MTN Ghana established more than 100 additional base transceiver stations (BTSs). MTN launched “third generation” (3G) services in Ghana in January 2009. As of the end of 2014, the company operated 2361 2G BTSs, 1201 3G+ sites and 4295 km of fibre optic cables, according to Telegeography, a telecoms information service. This followed an expansion and upgrade programme in 2014, focusing on data volumes and expanding coverage to remote parts of the country, with 1850 sites upgraded. Since its launch in 2006, MTN says that it has invested GHS2bn ($555m) on infrastructure developments, taking its number of BTSs to 3557.

In March 2015, Tigo announced that it had completed the $1m upgrade of its backbone infrastructure in the Volga region, as a process to upgrade network quality and enhance resilience. The six-month project encompassed towns including Tema, the country’s busiest port, and Akosombo, in the Eastern region. The company has pledged to continue to invest in infrastructure to improve quality through 2016.

In November 2014, Tigo announced that it had started work on a $3.2m overhead fibre optic cable project in the Western and Ashanti regions, on a 360-km stretch from Dunkwa to Kumasi, Ghana’s second city and capital of the Ashanti Region. The overhead project is intended to lower the network’s vulnerability to accidental or deliberate cuts to the underground fibre cable network. The project was executed in three stages, and included the erection of 6400 overhead poles.

In addition, in May 2015, Vodafone Ghana announced that it had completed a $700m investment project announced in 2009 to bring its network up to speed with the UK-based company’s international standards, following its entry into the market in 2008. This programme has included expanding the number of cell sites countrywide from 300 in 2009 to more than 2000 in 2015.

Cost Side

Boosting data and VAS take-up is one of two margin-boosting strategic prongs being adopted by mobile operators in Africa and other emerging markets around the world. The other market strategy is cost reduction.

Higher volumes of traffic (voice and now, increasingly, data), the need to expand networks to improve geographical reach, and investments in new services and products (as well as marketing) have all put pressure on operators to improve operational efficiency. This is particularly important in maturing markets such as Ghana, where margins have come under pressure. These trends have caused operators to reassess what are their core and non-core functions.

Across Africa, telecoms companies have lowered costs and reduced their involvement in non-core functions – like back office functions – through outsourcing labour processes.

Outsorcing Functions

Deloitte expects divestment of non-core functions to continue over the coming years, as mobile operators look to hold their own on increasingly competitive markets and diversify their offerings. This involves identifying activities to outsource or otherwise divest, as well as finding the best partners and striking beneficial deals. The company warns that activities seen as non-core now may be seen as important to keep in-house as the sector evolves. In turn, companies taking over non-core functions will tend to consolidate them, bringing cost benefits.

Business areas that can be outsourced include customer care, infrastructure site maintenance, and IT service functions. Outsourcing customer care is an obvious choice, with straightforward processes and scripts to follow, though for newer products, there can be challenges in adaptation. Security and power supply functions at network sites are fairly clearly non-core activities that can be pared off to contractors, while IT services – including server maintenance, charging and billing – are also candidates for outsourcing.

Amar Deep Hari, CEO of IPMC, told OBG,“There is significant potential for business-processed outsourcing (BPO) in Ghana. It must prove itself among local clients though, before targeting foreign business. The lower labour cost and linguistic capabilities of local staff make Ghana well placed to compete against other major BPO centres”.

In Ghana, as elsewhere in Africa, outsourcing and sharing communications towers has become increasingly common. Several multi-million dollar deals have been inked over the past years between telecoms operators and tower management companies, with one particularly notable wave of these deals occurring in 2010 (see analysis).

Tax

In November 2014, when unveiling the state budget for 2015, Finance Minister Seth Terkper announced that the government would abolish Ghana’s controversial 20% tax on imported smart-phones. Terkper said that the move was “in line with government policy of bridging the digital gap,” with the implication being that axing the tax would lower the cost of smartphones for Ghanaians and increase digital penetration among lower income segments of the population. The 20% tax was introduced in 2013 and exists in addition to a 6% tax on all calls, as well as pre-existing levies on all international calls.

The Alliance for Affordable Internet, a pressure group, had campaigned against the import tax, noting that after Kenya dropped its value-added tax on handsets in 2009, mobile devices in circulation quadrupled, while mobile penetration rose from 50% to 70%. However, at the time of research in mid-2015, the tax had not formally been lifted. One possible reason behind this perhaps is the government’s tough fiscal policies, implemented in part as a quid pro quo deal with the IMF. However, it is nonetheless an important step that the government has acknowledged that the lowering of taxes could help increase accessibility to mobile data, and the policy naturally has widespread support in the telecoms sector and among the public.

“Smartphone penetration is now 15% to 20% in Ghana, but with less taxation, the government plans to create more revenue by increasing the penetration by taxing on data instead,” Russell Xu, managing director of Huawei Ghana, the local national branch of a Chinese technology company, told OBG. “This is all part of a push to encourage long-term investment in the sector. Because 4G is so capital intensive, the government realises it needs to create more incentives to push its technology sector forward. But ultimately, macroeconomic stability is the major issue that will determine foreign investment.”

Outlook

The Ghanaian telecoms sector will continue to grow in the coming years, as demand for its services continues. While the space for voice growth is limited, new custom will continue to be found through organic population growth and the supply of services to under-penetrated demographic groups, most notably the less well-off and people in rural areas.

However, the bigger opportunities come from boosting data usage, including a wide range of VAS such as mobile banking, online media and social networks. The cost of both handsets and services is still something of a constraint to growth, but one that will ease greatly if the removal of the 20% tax on imported smartphones is implemented. Demand for data is rising rapidly, while competition – and potentially government regulatory changes – are expected to stimulate it further.

Investments in networks are continuing as operators look to handle growing volumes of traffic and reach remote areas However, trimming on the cost side is likely to continue, providing opportunities to the growing range of companies offering outsourcing services to telecoms companies.