Expansion and investment continue in Nigeria's telecoms and IT sector

Even amid the macroeconomic uncertainty of 2015 and the first half of 2016, the performance of Nigeria’s telecoms sector was marked by steady subscriber growth, a renewed regulatory mandate and continued infrastructure development. By July 2016 the country was home to 150.3m active telecoms subscribers, according to the Nigerian Communications Commission (NCC), the federal telecoms regulator. This user base represents 107.3% of the total population in 2016, according to the IMF, with the mobile segment accounting for more than 99% of subscriptions.

The mobile sector is dominated by four major mobile operators: Globacom, a locally owned firm; MTN Nigeria, a subsidiary of South Africa’s MTN Group; Airtel Nigeria, a subsidiary of Indian telecoms conglomerate Bharti Airtel; and Etisalat Nigeria, a subsidiary of Etisalat, UAE-based firm. In recent years these companies have ramped up their efforts to launch high-speed data services, which are increasingly considered to be a key revenue growth driver amid declining income generated by voice calls (see analysis).

STRATEGIC VISION: In July 2015 Nigeria’s newly elected government appointed new leadership at the NCC, which in early 2016 released an eight-part strategic vision, titled the Eight-Point Agenda, for the future of the industry, covering the period 2015-20. “2015 was challenging for a variety of reasons, but we are cautiously optimistic about the future,” Segun Ogunsanya, CEO of Airtel Nigeria, told OBG. “Telecoms is a rapidly changing industry. Every decade or so there is a major change that requires significant investment on the part of the operators. 4G services, for instance, will reach their full potential in one to two years, once more of the population has the devices needed for data.”

As of mid-2016 the telecoms sector had attracted an estimated $32bn in total investments since the early 2000s, according to NCC data. Adebayo Shittu, the minister of communications, told local media this figure is expected to rise five-fold by 2020, signalling unprecedented investment growth. The majority of this expansion is expected to take place in areas related to data connectivity.

The four established mobile operators have invested heavily in 4G LTE networks in recent years, while simultaneously building out existing 3G capacity in an effort to provide basic data services to remote areas and rural populations. “Wider availability of 4G LTE connectivity by both mobile network operators and internet services providers (ISPs) in Nigeria will be a boost for all service-oriented industries,” Abdlrazaq Ayodeji Shittu, CEO of Intertel Nigeria, a local ICT solutions firm, told OBG.

TELECOMS HISTORY: The telecoms sector has changed significantly over the past 30 years. By the early 1990s the Nigerian telecoms network had a total capacity of around 780,000 fixed lines, 10,000 mobile lines, 15,000 voicemail lines and 14 telex exchanges. During this period the system was almost entirely government managed, with state-owned Nigerian Telecommunications (NiTel) providing most services. The Federal Ministry of Communications provided planning and regulatory services until a 1992 government decree resulted in the establishment of the NCC, which took over as sector regulator in 1993. While the telecoms sector was partially liberalised in the late 1980s and early 1990s, by the late 1990s NiTel was still the dominant player with monopoly status in a number of key areas in the sector. During this period, telecoms services were largely underfunded and inadequate for meeting the demands of the country’s rising population, with a penetration of around eight lines per 1000 inhabitants, according to data from the Columbia Institute for Tele-Information, a research institution based at Columbia University.

MARKET LIBERALISATION: The sector underwent a major shift in 2003, when the NCC – newly empowered by the 2003 Nigerian Communications Act – issued a series of new licences for mobile, fixed and internet services. As a result of this liberalisation, telecoms grew into one of Nigeria’s most important sectors in the ensuing years. In 2002 the country’s “teledensity” – a measure of the number of active telecoms subscribers as a percentage of the total population – was 1.9%. By 2006 this figure had jumped to just under 25%, and by 2010 it had more than doubled again, reaching 63.1%, according to NCC data. By July 2016 the country’s teledensity had reached 81.7% of the population.

The mobile segment has been the driving force behind this rapid expansion. The multinational telecoms firm MTN was the first GSM operator to set up a network in Nigeria, entering the country in 2001 after winning a 15-year digital mobile licence from the NCC. In 2003 Globacom, an indigenous operator, began installing its own GSM network in Nigeria. They were followed in the years to come by a number of other service providers, ranging from ISPs to global players like Airtel and Etisalat.

Competition was tight during this period, with prices and margins waning as a result. Consequently, most smaller and some larger, companies were either acquired by larger firms or were forced to shut down during this period. By 2012-13 MTN, Globacom, Airtel and Etisalat had emerged as the country’s major telecoms players.

REGULATORY FRAMEWORK: Nigeria’s telecoms regulatory apparatus has undergone a series of overhauls over the past decade. In 2011 the government established a new umbrella entity, the Federal Ministry of Communications Technology, to take charge of the NCC, plus a number of other communications-related regulators, including the Nigerian Postal Service and the National Broadcasting Commission (NBC). The ministry, which was rebranded as the Federal Ministry of Communications (FMC), has a mandate to “facilitate universal, ubiquitous and cost-effective access to communications infrastructure throughout the country”.

In 2014 the FMC floated but subsequently scrapped a plan to combine these three entities – the NCC, the postal service and the broadcasting commission – into a single regulatory body. Currently, each organisation carries out regulatory functions semi-independently, while the FMC primarily oversees development planning and other sector-wide functions. Other entities currently housed under the FMC include the National IT Development Agency (NITDA); Galaxy Backbone, a state-owned ICT service provider; and Nigerian Communications Satellite, an independent state-owned firm that operates Nigeria’s geostationary satellite, NigComSat-1R.

While it was initially launched in 1992, the NCC’s mandate was expanded considerably as a result of the 2003 Nigerian Communications Act. Broadly, the commission is charged with “creating an enabling environment for competition among operators in the industry, as well as ensuring the provision of qualitative and efficient telecoms services throughout the country”. More specifically, since the early 2000s the NCC has overseen all activities related to telecoms licensing, including staging licence auctions, issuing licences, suspending and revoking licences, and updating licensing requirements, among other functions. The NCC also oversees telecoms-related spectrum allocation, which is currently a major growth area in Nigeria. In July 2015 Nigeria’s newly elected president, Muhammadu Buhari, appointed Umar Garba Danbatta, an engineering professor, as the new executive vice-chairman and CEO of the NCC.

DEVELOPMENT PLANNING: The NCC is currently in the process of implementing a number of medium-term development strategies, including the government’s National Broadband Plan (NBP) 2013-18, a core component of the state’s overarching National ICT Policy. Under the NBP the government initially aimed to boost broadband penetration to 30% by 2018, from around 6% at the end of 2012. As of mid-2016 NBP implementation had reportedly flagged, and, according to the NCC, the country had reached broadband penetration of just 13%. In April 2016 Danbatta told local media that the 30% target was likely unachievable by 2018 due to inadequate infrastructure outlay.

EIGHT-POINT AGENDA: In early 2016 the NCC published its new eight-point development agenda for the period 2015-20. Known as the Eight-Point Agenda, the plan encompasses the immediate priorities for Nigeria’s telecoms sector. The first point of the strategy involves facilitating broadband penetration, including both fixed and mobile services, across the country. Second, the NCC aims to improve quality of service (QoS), which has become an important issue in recent years (see analysis). Third, the commission plans to optimise public usage and benefits of Nigeria’s telecoms-related spectrum resources. The fourth and fifth points of the agenda involve plans to promote investment in ICT start-ups and small and medium-sized enterprises (SMEs), as well as facilitate strategic collaborations with relevant stakeholders to leverage ICT development in areas such as agriculture, health care, security and education. The sixth and seventh points are initiatives to protect and empower consumers, and to promote fair competition and inclusive growth, the latter of which is an oft-cited focus of President Buhari’s government. The final point involves streamlining the ICT regulatory environment with an eye towards ensuring operational efficiency and transparency. “Smart cities have huge potential in Africa, and urban technological advances can help governments improve the performance and efficiency of urban services such as mass transport and health,” Frank Li, managing director of Huawei Nigeria, told OBG.

UPCOMING DEVELOPMENTS: A number of new legislative reforms are currently either being debated in Nigeria’s parliament or have recently been passed or proposed, which should have a significant impact on the sector’s attractiveness. The draft Telecoms National Infrastructure Bill, for instance, which is currently under review at the National Assembly, would recategorise telecoms equipment – including mobile base stations, fibre-optic cables and other industry assets – as critical infrastructure, similar to power stations and other high-value networks. The legislation would criminalise the vandalisation of telecoms infrastructure that has become common in some parts of the country, and is in part responsible for a considerable amount of the QoS issues that continue to characterise the industry (see analysis).

In 2015, meanwhile, the government passed the Cybercrime Act and inaugurated the Cybercrime Advisory Council, both of which were a result of the NITDA-managed National Cybersecurity Policy and Strategy. Developed to respond more effectively to terrorism-related use of Nigeria’s digital resources, the new advisory council has a broad mandate covering threats to national security, but also software piracy, identity theft, electronic fraud, spam, malware attacks and intellectual property crimes. According to a 2014 report by the Centre for Strategic and International Studies, a US-based think tank, Nigeria loses some N127bn ($400.9m at the time of printing) – around 0.08% of GDP – to cybercrime each year. “Prioritising data security must start from the top, and the government must take these issues seriously to demonstrate their importance,” Martins Ndigwe, managing director and CEO of Mayakorp, a Nigerian IT service firm, told OBG. “Cybercrime is constantly evolving, and keeping abreast of the latest protective techniques is critical for all countries.”

LICENCE AUCTION: In March 2016 the NCC resuscitated a much-anticipated 2.6-GHz spectrum licence auction that had been suspended by the commission’s previous leadership. In June 2016 MTN announced that it had won the auction, after being listed as the sole approved bidder for the spectrum block. The 2.6-GHz band is a useful, albeit not necessary, component of 4G LTE service provision. Currently, a number of Nigerian operators offer 4G data services, primarily in Lagos and other urban centres. As the winner of a 10-year radio spectrum licence for mobile broadband services, MTN expects to expand the reach of both its existing 4G and 3G services. Indeed, according to media reports, the company plans to expand its 3G coverage from around 67% of the population to some 90% in the coming years. The licence reportedly netted the NCC some N18.96bn ($59.9m). The country has plans to eventually auction off the 700-MHz and 800-MHz lower band spectrum, which is generally seen as more useful for 4G services outside of densely-populated areas. Few African markets have released the 2.6-GHz spectrum in a standalone sale. Nigeria’s NBC is in the process of preparing the country for the planned switch from analogue to digital television broadcasting, which is scheduled to take place on June 20, 2017 and will help free up additional spectrum. The NBC has twice before planned to make the jump from analogue to digital television broadcasting – once in 2012 and again in 2015 – but cancelled the plan both times due to inadequate broadcasting infrastructure. A considerable number of bands are expected to be freed up as a result, including the 700-MHz and 800-MHz spectrum lots – although the latter has also historically been used by the country’s CDMA operators.

FIXED-LINE MARKET: As is the case with most economies in Africa, fixed-line services have been on the decline in the country over the past 15 years, as subscribers have switched to mobile-only lifestyles. In July 2016 fixed-line subscribers made up only around 0.1% of all telecoms subscribers, according to NCC data. Until recently, NiTel was the largest fixed-line service provider in Nigeria. However, in 2015 the government’s Bureau for Public Enterprises oversaw the sale of NiTel to ntel, a private operator that plans to use NiTel’s old assets – plus those of MT el, the government’s mobile telecoms provider included in the sale – to compete with the big four mobile operators with high-speed mobile, data-only services. A handful of other privately held firms have continued to offer fixed-line services across the country, including both MTN and Globacom, as well as ipNX Nigeria and 21st Century Technologies – both ISPs.

MOBILE MARKET: The mobile segment is dominated by the big four operators, which together had some 149.7m GSM subscribers in July 2016. This figure is down slightly from a high of 149.8m GSM subscribers in November 2015, which signals the first period the mobile segment has seen user figures decline. The decrease is due in part to the challenging economic situation in recent years, along with a crackdown on unregistered SIM cards. However, the July 2016 numbers still represent growth over July 2015, when Nigeria was home to 148.5m active GSM subscribers. Furthermore, the number of active GSM subscribers has increased, up 165% from 90.6m in 2011. This figure – while high by international standards – represents a slowdown in Nigerian mobile subscriber growth compared to other periods over the past decade. Indeed, from 2007 to 2010 the sector more than doubled in size, with GSM subscriptions rising from around 40m to 81m, according to the NCC.

In addition to the big four GSM operators, a handful of firms offer CDMA mobile services, though these have declined in popularity over the past decade and a half. In July 2016 only 0.25% of total active telecoms subscribers had CDMA subscriptions. Visafone, which controls the bulk of this user base, was acquired by MTN in early 2016, largely on the basis of the company’s fibre holdings. MTN reportedly plans to deploy Visafone’s data resources in the service of expanding its high-speed broadband network.

MAJOR PLAYERS: Nigeria’s mobile sector is extremely competitive and in recent months has seen dynamic changes in subscriber figures. South Africa’s MTN is the oldest and biggest provider currently in the country, having won the first GSM licence in 2001. The firm had a subscriber base of 57m users in the first quarter of 2016, according to NCC data, giving it the largest share of mobile subscribers. MTN has announced it will continue to invest heavily in its Nigerian operations. In addition to its acquisition of Visafone in early 2016 and the 2.6-GHz spectrum band in June 2016, the firm announced plans to invest N141bn ($445.1m) on network expansion before the end of 2016. Much of this investment is expected to go towards fibre-optic cable installation.

However, in recent months the company has had to navigate a number of challenging situations, including a record fine of N1.04trn ($3.3bn) in October 2015 – subsequently reduced during negotiations in June to N330bn ($1.04bn) – for failing to disconnect the lines of more than 5m unregistered subscribers. The 2011-14 SIM card identity registration drive was carried out by the regulator in an effort to facilitate a proper record of telecoms users, better monitor telecoms activities and, perhaps most importantly, to address the issue of phone-related crimes, including terrorism and other criminal behaviour in Nigeria’s north-east. The disconnected unregistered users resulted in a decline in subscriber figures, but MTN Group as a whole nonetheless increased its revenue by 14% year-on-year in the first half of 2016. Data-related revenue, meanwhile, posted a 32% increase. An additional stipulation of the fine resolution agreement was that MTN Nigeria would carry out an initial public offering on the Nigerian Stock Exchange as soon as possible. This is expected to have a major positive impact on the country’s bourse, with even a partial sale resulting in a dramatic increase in capitalisation, which has lagged recently due to the challenging economic conditions.

COMPETITION: Globacom is the next-largest provider, with 34.6m subscribers in the first quarter of 2016, according to NCC data. The firm has added a significant number of customers in recent years, recording more than 5m new users in the 12 months to the end of July 2016. Since 2011 Globacom has carried out noteworthy network upgrades, replacing more than 3000 base stations and adding a number of new towers across the country. Unlike the other three mobile operators, which co-own or lease towers from tower operating firms, Globacom owns and operates its own tower network. Additionally, the firm built and currently manages the Glo-1 submarine cable, which stretches from the UK to Nigeria (see IT overview).

Airtel has a similar number of subscribers, with 33.7m in the first quarter of 2016, a nearly 5% rise quarter-on-quarter. The Indian multinational entered the Nigerian market after purchasing the entire African portfolio of the Kuwaiti telecoms player Zain in 2010 at a cost of $10.7bn. Like its competitors in the market, Airtel has invested heavily in its Nigerian operations. In April 2016, for instance, the firm tested its new Nigerian 4G network in Lagos. The company, which also has operations in 16 other markets on the continent, has seen notable growth in subscriber numbers as a result, adding 2.4m new users in the 12-month period leading up to August 2016.

SME FOCUS: Etisalat, meanwhile, had some 21.9m subscribers in the first quarter of 2016. The company, which acquired a local licence in 2007 and began operations in 2008, gained market share rapidly upon its arrival. In recent years the UAE-based firm – which has expanded its presence in Africa recently through the acquisition of Moroccan regional operator Maroc Telecom – has focused on developing high-speed data offerings and providing services to the entrepreneur and SME segments. In line with this, in August 2016 the firm launched an e-commerce platform called SME Arena in partnership with Singapore’s YuuZoo. The firm has continued to post profits in 2015 and 2016, despite the challenges associated with the weakening naira and economic tightening.

HARDWARE MARKET: Nigeria’s four mobile operators are currently investing heavily in 4G network expansion with an eye towards capturing the future business of smartphone users, which represents a key growth segment in the country’s telecoms market. According to MTN, average revenue per user for smartphone subscribers is around 3.5 times higher than for non-smartphone users.

As of mid-2016, however, only around 30% of mobile subscribers owned a smartphone, according to re data from the domestic research firm Africa Infotech Consulting, with feature handsets making up the remaining 70%. According to the US-based digital marketing firm eMarketer, Nigeria was home to 23.1m smartphones at the end of 2015, with this figure forecast to rise to 34m by 2018. Furthermore, a 2015 survey run by the Pew Research Centre’s Global Attitudes Project found that some 28% of Nigerians own a smartphone. However, as in many other sub-Saharan African countries, smartphone ownership is concentrated in younger, better-educated and wealthier nationals. Indeed, according to the Pew survey, some 39% of Nigerians between the ages of 18 and 34 owned a smartphone, compared to just 13% of Nigerians aged 35 and up. As data from these different sources indicates, reliable, up-to-date statistics about handset usage in Nigeria should be taken with a grain of salt. Nonetheless, the growing popularity of Nigeria-based digital streaming websites and other online-only applications strongly indicates that smartphones are becoming increasingly common in the country.

QUALITY CONTROL: A key priority of the government has been to regulate and monitor QoS indicators. Mobile operators in Nigeria generally face a wide variety of QoS challenges, including dropped calls, voice quality impairment, busy signals and SMS delivery failures. Under the EightPoint Agenda, increasing government oversight regarding service quality and its ability to enforce QoS standards has become a priority (see analysis).

OUTLOOK: The relatively low rate of smartphone penetration is only one of a handful of key challenges currently facing telecoms providers in Nigeria. Despite tightening oversight on the part of the NCC in recent years, QoS in the mobile segment is still relatively poor, as measured by a number of key metrics. Mobile operators, meanwhile, face multiple, overlapping taxation regimes in different states across the country, as well as repeated vandalisation of base stations and other equipment in some remote areas (see analysis). More broadly, despite significant amounts of investment in infrastructure in recent years, Nigeria’s vast, rural hinterland remains underserved in terms of connectivity, an issue that the NCC intends to fix.

Lastly, the so-called big four GSM providers – who are already facing macroeconomic headwinds – are also dealing with new competition from a handful of upstart operators, which aim to disrupt the high-speed data segment, in particular, by offering fast connections at low subscription rates. In the already competitive market of Nigerian telecoms, this additional pressure could have negative long-term effects for the industry. However, most players agree that the future looks bright. With the largest population in Africa, a burgeoning middle class and rising incomes in many sectors, Nigeria boasts strong economic fundamentals and, consequently, good prospects for ongoing growth in telecoms, not to mention across a wide range of other industries. With this outlook in mind, communications infrastructure investment levels have remained high in recent years, economic volatility notwithstanding. This must be accompanied with training and development, so that the field can continue to grow and evolve. “Technology parks and other areas of innovation can bolster the efforts of universities to achieve this goal through more holistic capacity building backed by access to resources and markets,” Hauwa Yabani, managing director for ATV, a Nigerian special economic zone.