Fully charged: Competition continues to grow as operators chase narrowing margins

In 2013, President John Dramani Mahama took a moment during the annual “State of the Nation” address in Accra to hail the rise of the domestic telecom sector, noting that telephone subscriptions in Ghana had more than doubled since December 2008. The remark highlighted the industry’s success in increasing penetration beyond the regional averages. Having reached 100% by the end of 2012, penetration figures touched 102.7% as of February 2013 – figures that are well above the 53% norm for African countries and even the developing world average of 89%. By contrast, Nigeria, despite being Africa’s largest telecoms market, only reaches 70%. As in other countries, however, average revenue per user (ARPU) rates are beginning to fall as penetration rises; this has prompted operators to increasingly focus on selling data, providing valueadded services (VAS) and lowering infrastructure costs.

COMPETITIVE MARKET: With six operators, sector growth has been aided by a competitive environment, which has led to a host of ancillary benefits for the country as a whole; according to figures provided the Ghana Chamber of Telecommunications (GCT), the sector has created 1.5m jobs locally. A report released in 2012 by Delta Partners, a UAE-based investment firm, calculated that in recent years, the taxes, tariffs and licences issued to the telecommunications sector accounted for 10% of all government revenue. With six operators serving a population of 26m – including five GSM operators (South Africa’s MTN, UK’s Vodafone, Luxembourg’s Tigo, Nigeria’s Glo and India’s Bharti Airtel), along with one CDMA operator, Sudatel-owned Expresso – Ghana is home to a telecoms market that is, in many respects, as diversified and competitive as some of its more populous African counterparts. Among these mobile operators, MTN holds the majority of the market share for voice service, with 45.43% of voice subscriptions as of February 2013, as per figures provided by the sector’s regulator, the National Communication Authority (NCA). They were trailed by Vodafone with 21.09% and Tigo with 14.1% of total subscriptions, respectively. The remaining operators control smaller portions of the market – Airtel held a 12.69% market share, newcomer Glo had 6.34%, and Expresso took just 0.63%.

Key to this market diversity was the introduction by the NCA of mobile number portability in 2011, which allows users to switch between providers while maintaining their existing number. Competition in the sector has also kept price inflation at just 0.4% in 2012, according to the Consumer Price Index (CPI). This figure is lower than that of other sectors of the economy, according to the annual inflation report by the Ghana Statistical Service.

GROWING PAINS: Competition among carriers will likely encourage the development of new services, particularly given that the country’s market is saturated and margins are slim. Voice usage is high in Ghana – the second-largest market in the MTN’s 21-country network in terms of monthly minutes per user, for example – but prices are vulnerable to downward pressure because of competition.

As a result, ARPU, which has been reliant on voice usage, is fairly tight. MTN reported monthly ARPU of GHS11.6 ($5.96) as of the third quarter of 2012. Figures for 2012 from the World Cellular Information Service, a UK-based consultancy, show ARPU rates of $7.50 per month for Airtel and $3.19 per month for Vodafone. This compares to an average monthly ARPU of N912 ($5.75) across all carriers in neighbouring Nigeria, which has a similarly competitive market.

Costs are also a challenge for the country’s mobile operators, prompting many to outsource infrastructure and engage in tower co-location. As with firms in other sectors, even basic costs represent a burden on company balance sheets. According to Ghana’s CPI, for example, the price of electricity rose 8% in 2012, one of the largest operating costs for telecoms providers.

MOBILE PHONE PRICING: As in many cost-sensitive markets across Africa, there is an abundance of promotional schemes in Ghana, which reflects in large part the stiff competition for users in the telecoms space. The sensitivity of the majority of users, particularly in the low-income segments, is one of the reasons for the tight ARPU margins and also forces operators to reduce rates as much as possible to remain competitive. For some providers, off-peak rates can drop to as low as between GHS0.84 ($0.04) and GHS0.015 ($0.01) per minute. Peak in-network calls for most operators are fairly comparable, averaging around GHS0.09 ($0.05) per minute, although in some cases rise up to GHS0.144 ($0.14) for bundled packages.

These competitive prices – even by West African standards, which are lower than many other emerging market regions – do not take into account the vast number of special deals and creative promotions on offer, including "friends and family" bundles, which offer substantial discounts on calls to closed user groups, or free air-time and in-network calls made during specific set hours.

DATA USAGE: Given that ARPU for mobile customers has been declining in recent years, (MTN’s $5.75 monthly ARPU in the third quarter of 2012, for example, represents a 25% decline on the first quarter of 2009, when it averaged $8 per user per month), one of the most salient trends emerging in the sector, mirroring the dynamic seen elsewhere in other emerging markets, is the increasing importance of data usage.

The NCA, which is in charge of spectrum licensing in Ghana, granted Glo a 3G licence in 2008 for $50.1m, while Vodafone got one for $28.1m as part of its $900m acquisition of Ghana Telecom in 2008. Zain acquired Westel’s 3G licence through its purchase of Westel in 2008, a licence that has since passed to Airtel; Tigo and MTN followed suit in the same year. Telecoms operators began to roll out 3G services in early 2009.

Currently most data usage occurs via USB fobs or data cards, but there is a push to increase smartphone penetration and related value-added services. According to the NCA, there were 8.69m mobile data subscriptions as of April 2013, a 34.5% national penetration rate.

According to the NCA, MTN has the largest share of the data market with 66.93% of data subscribers. The remainder is more closely bunched together: Tigo has 13.16%; Airtel, 9.70%; and Vodafone, 7.03%. Finally, new entrant Glo Mobile has achieved 2.63% market share, followed by Expresso with 0.54%.

3G technology has yet to reach market saturation in the Ghanaian market, and it is most likely that many mobile operators will continue to develop this segment in the short term rather than focus on rolling out fourthgeneration long term evolution (4G LTE) solutions.

Mobile data market share, July 2013 MTN, for example, has launched a $105m upgrade to its network that will focus on boosting the provider’s 3G capacity. Given the government’s recent move to grant 4G LTE licences to three broadband internet providers in 2013, market incumbents will not be made available until Ghana’s TV broadcasting migrates from analogue to digital broadcasts.

Finally, pricing 4G LTE services will take some careful modelling given a market in which the majority of customers are prepaid users. As Thomas Sonesson, CEO of ATC Tower Ghana told OBG, “The Ghanaian telecoms market is a dominant pre-paid market, so the implementation for LTE services will be a big challenge.”

The expansion of data services is aided by the rollout of 3G networks, although there is still scope to boost content further. Currently, data usage is limited, partially due to the lack of local content, although products such as Google Trade or mobile banking have been introduced in recent years to help boost demand.

“The introduction of mobile money services has helped drive the development of other mobile services such as insurance. You can pay bills and conduct a number of transactions without having to visit a mobile outlet, an important innovation for customers in rural areas.” Kwaku Addo Sakyi-Addo, the CEO of the Ghana Chamber of Telecommunications (GTC) told OBG.

Indeed, the stiff competition within the sector has also helped to open up new opportunities. Michael Ikpoki, the CEO of MTN Ghana, has urged both large corporations and domestic small and medium-sized enterprises to develop more innovative business solutions for mobile platforms. One such endeavour is Prymo Company, a local ICT firm that has won praise from the government for developing a universal recharge voucher card that can be used on all mobile lines regardless of operator, named “One4All”.

RECENT ENTRANTS: New mobile providers have seen surprisingly robust growth despite stiff competition and despite the fact that Ghana is still a maturing market by West African standards. Before it was acquired by Bharti Airtel in 2010, Kuwait’s Zain, for example, attracted 750,000 new additional subscribers in its first year of operation following its acquisition of Celtel.

Glo is the most recent arrival in Ghana’s already crowded telecoms sector, beginning operations – after a few delays – in April 2012. The firm has expanded rapidly, with a total of over 1.6m subscribers as of February 2013. This gave it fifth place in market share amongst the country’s mobile operators, but it was also the fastest-growing player over those 12 months.

DEVICES: Key to maintaining bottom lines for operators in the country is growth in the smartphone segment, which will help pave the way for higher data usage. The greatest challenge in previous years has been high cost of the devices and customer price-sensitivity. As a result, there has been a concerted effort to roll out more affordable smartphones, such as Nokia’s Asha 501 model and Huawei’s 4Afrika models, as well as Tecno’s N7. The high rate of consumption is also pushing handset manufacturers to expand their presence in the country. Nokia, for example, unveiled two new after-sale service centres for its phones in 2012, bringing its total number of such facilities to three in Accra. Nokia plans to add centres in other Ghanaian cities including Kumasi and Takoradi.

As smartphones become more affordable, penetration rates will increase. In a survey of Ghana’s telecoms market released by Google in 2012, cost was the primary reason listed for forgoing a smartphone purchase. Lisbon-based Greenwich Consulting estimates that smartphones will need to come down to a price of $30 to meet consumer demand in West Africa.

“The demand for smartphones in Ghana is rising sharply, and there is a lot of demand coming from the lower- to middle-income segment,” Maxwell Techie, the managing director of Tecno, told OBG. “It would not be surprising if smartphone penetration within five years reached nearly 100%.”

INFRASTRUCTURE: For the most part, Ghana’s telecoms companies all use co-location of cell towers to help reduce costs. The exception is Glo Ghana, which has put emphasis on developing its own network of towers to increase vertical business integration. Although Mobile voice market share, March 2013 NCA regulations require shared use of towers under normal circumstances, these were waived in the interest of Glo Ghana because the NCA felt such a restriction would put the company at a competitive disadvantage.

In early 2013, there were around 6500 telecommunications towers located throughout the country, with most of these situated in the nation’s southern half. Four tower companies currently operate locally: Helios Ghana (a subsidiary of Helios Africa), American Tower Corp (ATC), London-based Eaton Towers and the American firm Airtel Towers. The firms have benefitted from the move by mobile providers (such as MTN) to pull out of the ownership, operation and management of towers and focus instead on their core business.

Currently, 85% of the country’s towers, which often cost in excess of $200,000, are connected via fibre-optic cable. In fact, Ghana is the only country in Africa with such a wide array of tower providers; South Africa and Uganda, in comparison, have just two providers.

With the expectation of increasing network demand following the roll-out of greater 3G coverage (and eventually 4G LTE), combined with the tightening margins of operators, the trend within the market towards greater co-location is likely to continue. There is certainly scope to increase density and improve coverage, particularly since 4G services generally require a larger number of towers. In Accra, the distance between towers is currently only 250 metres while the distance between towers outside of Greater Accra is often more than 500 metres. The Millennium Development Authority has subsidised the installation of towers in some rural areas and private sector entities have also made contributions toward the project.

However, expansion has been held up in some areas by municipal regulatory practices. In 2012, a total of only 100 new towers were erected; however, the NCA plans to roll out new regulatory processes in 2013 to help address this issue. Projections from ATC suggest the market will need roughly 500 new towers per annum over the next few years.

FIXED GROWTH: The fixed-line sector has just 1% market penetration within Ghana. While the story in most telecoms markets has been one of rapid fixed-line decline, subscriptions actually grew slowly but steadily in Ghana during 2012, and were up an additional 1% in the first quarter of 2013. The country’s fixed-line service is divided between Vodafone, which has just under 279,000 subscribers, and Airtel, which had just over 10,000 in February 2013. While the growth continues, it is unclear if fixed-line subscriptions will again reach the 2006 peak of 360,373. Most new customers are businesses attracted by the bundling of mobile and fixed-line services. The government of Ghana is aiming to reduce its fixed-line usage through the creation of a needs-specific Voice over Internet Protocol (VoIP) technology that is being developed for government use as part of the broader e-Ghana initiative.

REGULATION: The sector’s chief regulator is the NCA, responsible for overseeing telecoms and IT under the auspices of the Ministry of Communications. The NCA’s portfolio also includes oversight of television and radio broadcasters, which should allow for a cohesive regulatory framework for frequency distribution as the country rolls out new 3G+ and potential 4G LTE networks. Ghana is planning to begin switching from analogue broadcasts to digital television broadcasts in December 2014, in a process that will take several months to complete. But when this digital migration is complete, the NCA, which has the independent authority to distribute licensees to broadband spectrum, will have 168-MHz band available for distribution to the telecoms sector. One CDMA telecoms operator in Ghana, Expresso, already holds the rights to 10 MHz of this spectrum, but the rest of it has yet to be awarded. The NCA is studying several possible plans on how to best allocate it: two options include auctioning the bandwidth to telecoms providers, or using it to provide broadband access across the country. By some estimates, an auction could generate $19m in revenue for the state.

FINE TIME: The NCA has sought to improve domestic call connection times in 2013 by imposing a total of GHS900,000 ($462,690) in fines on five mobile operators who failed to meet minimum standards with call congestion. Vodafone was the sole mobile phone operator to avoid the measure – MTN and Glo Ghana were each fined GHS300,000 ($154,230), while Tigo, Airtel, and Expresso were given fines of GHS100,000 ($51,420). However, the NCA has also signalled an interest in moving to a more hands-off approach to regulation in the near future, despite its vested interest in improving call congestion and call setup times.

TAX POLICY: Since the adoption of the Electronic Communication Amendment Act (Act 876), in the year 2010, regulations have imposed a fixed rate of $0.19 per minute on all overseas calls coming into Ghana. The presence of a tariff on incoming international calls, which is greater than that on domestic calls has created a policy paradox. The government of Ghana had set the rate of incoming international calls at $0.19 per minute. Currently, $0.06 of this tariff is collected as revenue by the Ministry of Finance. Since the passage of the act, telecoms companies acted at their own discretion in determining if the rate of $0.19 per minute for international calls was a price ceiling or a price floor inclusive of the $0.06 per minute tariff.

The NCA has moved clarify its policy in 2013 by stating that $0.19 per minute is a price floor, not a ceiling. Companies that had previously charged their customers a cheaper rate have now had to raise their prices. Operators have been issued fines equal to 200% of their divergence from the set price. For example, if an operator connects an international incoming call at $0.14 per minute he would be fined at a rate of $0.10 by the NCA.

CABLE CUTS: In many areas, telecoms infrastructure is located close to the road; for this reason, cables are often accidentally severed, creating a large operating cost for the industry. In some regions, soil composition can make it difficult to bury cables at the uniform depths found elsewhere. According to the NCA, some 1600 disruptions occurred in 2012 alone. The first half of 2013 saw over 650 cable cuts, according to the GTC. According to operators’ records, roughly 70% of these cuts are believed to be caused by road construction. Also, some companies have had their fixed-line cables cut or stolen by thieves hoping to sell the copper for scrap. To prevent further vandalism and theft of copper cabling, the Ministry of Trade and Industry have announced a firm ban on all copper exports, as largescale copper production is not indigenous to the country. A cut can be a serious operational cost for a company, as repairs typically cost a minimum of GHS17,000 ($8739), a figure that excludes reputational damage and loss of business during service disruption.

OUTLOOK: Despite achieving the symbolic growth target of 100% mobile penetration in 2012, there is still much room for expansion in Ghana. But with competition tight, operators will need to move nimbly to maintain steady revenue growth. Thus far, the trends in the mobile sector – such as tower co-location and a shift towards greater data usage over 3G+ networks – augur well for the short- to medium-term health of the firms.

In 2013, the NCA’s largest undertaking is to focus on rolling out digital television broadcasts and planning for the distribution of bandwidth, although there is also scope for reform of the tariff on incoming international calls, which would allow telecommunications providers to compete for international minutes like they do for domestic ones. This mirrors the movement seen in the broader African telecoms landscape.

While the largest operators will continue to earn the lion’s share of the revenues, smaller companies have demonstrated the ability to recruit subscribers, which means market shares may fluctuate in years to come.