Moving up: Additional investments in infrastructure are needed to take the sector to the next level

With a large population that avidly seeks out the latest technologies and a mobile market that now has close to 100m active subscribers, the telecoms sector has had little difficulty attracting foreign interest and investment. The mobile segment, which remains the sector’s main driver for growth, has four GSM operators, the majority of which are internationally owned. In the major cities of Lagos and Abuja, competition among operators for retaining or attracting subscribers is now fierce.

EXTENDING ACCESS: As the market matures, attention has switched to building and extending mobile networks across the country to more rural areas. Despite a large and growing number of mobile subscribers, the country has a teledensity (the percentage of the population with a fixed or mobile line) of just 69%, according to the national regulator, the Nigeria Communications Commission (NCC). Extending coverage by building new fibre-optic lines, microwave radio sites and base stations is now under way. Not only is the NCC encouraging operators to invest in new infrastructure, but market also play a role. With four operators competing for market share, the average revenue per user (ARPU) is now $5-6 and is starting to plateau. Firms are increasingly seeking out future sources of revenue such as developing mobile money systems and offering 3G mobile internet broadband and data services, which will require additional investments in fibre networks.

IN FIGURES: Telecoms remains one of the most dynamic sectors and a key contributor to the economy, representing 5.67% of GDP in the fourth quarter of 2011, according to the National Bureau of Statistics. Private investment in the sector reached $18bn in 2009, a 44% rise on the $12.5bn secured in 2008, according to the NCC. But the indirect contribution of telecoms to the economy is expected to increase markedly in the near future, particularly in the area of mobile money, which is seeing substantial interest from local financial services firms and banks. In other sectors, like agriculture and commerce, secure mobile payment transfers are likely to have a significant effect on the speed and security of transactions and on growth in these sectors. Wider mobile and internet coverage and the introduction of new technologies are transforming the economy.

DIGITISING ECONOMY: Nevertheless obstacles remain. While the mobile segment strides ahead, fixed-line infrastructure still lags behind. Attracting foreign investors to compete for GSM licences is not hard but enticing firms to invest in the main fixed-line operator, Nitel, remains a challenge. Moreover, the lack of capital investment in a fully fledged fixed-line network in the past has restricted current access to internet and broadband services across the country. However steps are under way that should move Nigeria closer to realising a digital economy.

For example, the Federal Executive Council (FEC) gave its approval for the merger of the NCC and the National Broadcasting Commission (NBC). While further guidelines on the structure of the new body are yet to be disclosed, industry players have expressed their contentment with the ruling. The president of the Association of Telecommunications Companies of Nigeria (ATCON), Lanre Ajayi, told local media that the merger was a welcome development that would help the industry to grow rapidly, just like in other economies. “Technologies are converging and the regulators of such technologies need to converge as well.” With a single device, people could listen to the radio, watch TV, make calls, make and stream videos. “It is just appropriate that NCC and NBC merged into a single large regulator in order to move the country forward,” he added.

As operators jockey for position, investment in infrastructure and a focus on coverage and quality of service will be the salient features of the sector over the coming years. International consultancies are optimistic on prospects for future growth. London-based Pyramid Research, for example, forecasts that the mobile services sector will expand at a rate of 5.9% in dollar terms between 2011 and 2016, thanks to investment in infrastructure.

REGULATORY FRAMEWORK: A new structure for the sector may also help to guide it on the path to future growth. Following national elections in 2011, the Ministry of Communication Technology (MCT) was set up, and now controls the NCC, the National Information Technology Development Agency and NIPOST, the national postal service. The ministry is also responsible for NigComSat, the satellite that provides telecoms, navigational and broadcast services to the country. The Galaxy Backbone is the ministry’s other state-owned infrastructure firm. Established in 2006, the Galaxy Backbone provides information and communications technology (ICT) infrastructure to government ministries, schools and universities throughout the country.

Convergence and streamlining are terms now frequently heard at the MCT, referring to the consolidation of telecoms, broadcast and IT regulation under one body, with the MCT minister, Omobola Johnson publicly stating in March 2012 that combining the NCC and the NBC would allow the government to meet its target of full digital transmission by 2015. Johnson added that bringing together regulators would create more frequencies for telecoms operators, allowing them to expand their voice and data services. Currently, the 2.5-GHz and 700-MHz bands are regulated by the NBC, rather than the NCC.

Those in the private sector are cautiously optimistic about the merger. “Convergence of the NCC and the NBC makes sense as there is a lot of frequency sitting with broadcasting services under the NBC that is really more suited to broadband. Having the same regulator for telecoms and broadcasting would bring greater efficiencies, but I don’t think this will happen immediately. Such a merger is complicated and the government must make sure the telecoms sector is ready for such a change. While, while it may not be possible to merge as one regulator straight away, it should not deter from the efficient use of spectrum,” Akinwale Goodluck, the corporate services executive at MTN, a South Africa-based operator that is the largest player in Nigeria’s mobile phone market, told OBG. Although a merger of the NCC and NBC may not be imminent, the merger could bring greater clarity to the sector and enhance efficiencies in the public management of the sector.

MOBILE MARKET: In the private sphere, it is the booming mobile telephone market that is driving overall growth in the telecoms sector. This segment now has 92m active subscribers, according to the latest data from the NCC, making it the main engine for growth in the sector. The number of code division multiple access (CDMA) subscribers stood at 4m as of February 2012. Mobile holds a 94% share of the telecoms market, while CDMA has only 5% and fixed-line networks account for about 1%.

MTN first entered the market in 2001, and had 42m subscribers at the end of 2011, according to NCC data. The firm has 46% of the market, with revenues from its Nigerian operations reaching $4.2bn by the end of 2011, according to the company’s annual report. MTN is aiming to spend at least $1.2bn over 2012 in capital expenditure on infrastructure , which represents a 66% increase on the $773m it spent during 2011. Both local firm Globacom, owned by Nigerian entrepreneur Mike Adenuga, and India-based Bharti Airtel (Airtel) each hold a 22% share of the mobile market, according to NCC data. Airtel purchased the licence and Nigerian assets of Kuwait-based Zain in June 2010 and has been restructuring the firm since then. The firm had 18m subscribers at the end of 2011, to Globacom’s 19m. UAE-based Etisalat entered in 2007 and is the fourth major operator, with 10m subscribers as of end-2011.

RISING COMPETITON: The entry by Etisalat and Airtel increased price competition significantly, according to industry participants. Current GSM calls per minute average N30-40 ($0.18-0.24), Avneesh Bagga, the chief operating officer of McDorsey Service Company Nigeria, a local handset company, told OBG. By comparison, NCC data show that off-network peak period tariffs stood at N42 ($0.26) in 2008 and N36 ($0.22) in 2009, while on-network peak tariffs averaged N36 ($0.22) to N26 ($0.16), respectively, for the same years. Greater price reductions are expected to come with the arrival of mobile number portability, which is due to launch by the end of 2012. This will enable mobile phone users to switch service providers when they want, and still keep the same number (see analysis). The NCC hopes this will motivate GSM and CDMA operators to improve quality of service or risk losing subscribers.

CDMA: Although representing only 5% of the overall telecoms market, the CDMA segment has attracted four operators: Starcomms, Visafone, Multilinks and Reliance Telecoms, which operates under the brand name of Zoom Mobile. CDMA subscriber numbers have continued to decline in the face of rising subscriptions to GSM operators. According to data from the NCC, total CDMA subscriptions for all four operators dropped from 6.13m in March 2011 to 4.6m in December 2011, a decline of 25%.

This fall has been attributed to issues such as quality of service, tariffs, availability and competition from GSM. As a result, attempts to consolidate have been under way. In April 2011 Visafone bought Multilinks for $52m, bringing its total subscriber base (Visafone and Multilinks combined figures) to 3.3m as of December 2011, according to the NCC. However, following a legal tussle between Multilinks and Helios Towers Nigeria which built the towers rented to the telecoms company, the deal eventually fell through and was annulled two months later. The only other significant competitor is now Starcomms, with its 980,109 subscribers. Meanwhile Zoom had 315,619 customers as of the end of 2011.

FIXED-LINE: While the GSM segment continues to grow, the fixed-line market has faced challenges, and the future for state-run, fixed-line operator Nitel appears uncertain. After 10 years of trying to find a buyer for Nitel, the government announced in early March 2012 that it had decided to liquidate the firm. The Bureau of Public Enterprises (BPE) stated that given the company’s debts had reached N300bn ($1.92bn) a “guided liquidation” was now considered the best strategy, as the government did not wish to continue to service Nitel’s debt. A month later the Senate Committee on Privatisation rejected the BPE’s advice and that of the National Council on Privatisation to liquidate the company. At a meeting in Abuja in late April the chairman of the committee, Senator Gbenga Obadara, stated that the committee would inspect Nitel’s offices and assets to determine the precise value of the firm before deciding upon a future course of action.

A number of buyers have considered purchasing the state-run company since it was first put up for sale in 2001, beginning with a $1.3bn offer from a Nigerian-led consortium. In 2005 a similarly led group that included UK-based BT Group bought a majority stake in the company for $500m, but in 2009 the government reversed the sale. In 2010 the New Generations consortium, including China-based Unicom offered $2.5bn for a 75% stake in the firm, but again the deal did not materialise.

Although the firm has assets including a fibre-optic network and a share in the SAT-3 submarine cable, its future prospects are unclear until the senate committee decides upon a new strategy. Meanwhile, while all the proposed privatisation deals have collapsed, the mobile market has grown and Nitel has lost significant numbers of subscribers. As the country has opened up its telecoms sector to privatisation, the Nitel saga will likely continue to serve as a cautionary tale for both the public and private sector, and stands in stark comparison to the activity and interest shown in the mobile market.

INFRASTRUCTURE: The mobile market may be growing quickly, but the lack of terrestrial infrastructure capacity is starting to act as an obstacle to the sector’s future potential. Put simply, infrastructure has so far failed to keep pace with the growing number of mobile subscribers, and the main problem that operators face is the high cost of building and maintaining fibre-optic networks in Nigeria.

“We did not inherit a fixed-line infrastructure upon which we could build,” Goodluck told OBG. To construct new fibre networks, operators must gain approval for right of way, as well as an assortment of licensing, regulations and fees on a local, state and federal level, which can prove bewildering. “There are all the physical and engineering challenges one would expect from building new networks. On the community side, digging up roads and laying cable can naturally upset neighbourhoods, and coordinating these procedures with government ministries and agencies is a time-consuming and complicated process,” he said. Additionally, in more rural areas, operators may lack the financial incentive to expand their networks. “Based upon the ARPU, there is yet to be a profitable business model to increase rural coverage as basic usage is too low,” Gary Dewing, the manager director at Ericsson, told OBG.

CABLE SYSTEMS: There are four submarine cables, providing a total of 7.78 TB ps of capacity: the West Africa Cable System, which went operational in early May 2012; the Glo1 cable managed by local firm Globacom; the submarine cable operated by the Main One Cable Company; and the SAT-3 cable managed by Nitel. These have allowed for high-bandwidth services, as well as increased speeds and better quality in data and voice provision.

Nevertheless, a huge amount of capital expenditure is required for network roll-out across the country and a number of operators, encouraged by the NCC, have announced infrastructure investment plans (see analysis). MTN, which runs the largest fibre-optic network, will spend at least $1.4bn over 2012 as part of a forward-planning programme, according to Brett Goschen, the company’s CEO. “The network still has issues around capacity and quality of service, so the management focus is now very much on investment on improving access to the network by building fibre-optic and radio networks,” he told OBG. Globacom has also sought to develop its backhaul infrastructure and has signed a $6m contract with Israeli firm Ceragon to modernise and expand capacity on the firm’s 3G network as well as providing support and making improvements to its existing 2G network in Lagos.

FIBRE NETWORKING: CDMA operators are also investing in their networks. In 2012 Visafone signed a $20m contract with China’s Huawei Technologies to improve its broadband infrastructure in Lagos and plans to increase its services from 26 to 36 states across the country. Similarly, GSM operator Etisalat signed an $118m contract with Huawei in August 2011 to expand its 2G network and provide a 3G network. Expenditure on infrastructure is driven not only by a need to secure more subscribers in a competitive market but also from pressure from the NCC. “The regulator is insisting operators modernise and increase their capacity, and backhaul infrastructure is a key area for foreign firms like ourselves and the Chinese to provide services,” Bekele Tadesse, the managing director and Nigeria country manager for Ceragon, told OBG. Indeed, Eugene Juwah, the executive vice-chairman of the NCC, met with a group of Chinese equipment and infrastructure manufacturers at a March 2012 mobile telecoms conference in Barcelona, seeking their involvement in developing the broadband network (see analysis).

However, encouraging foreign firms to either invest or compete for infrastructure contracts is just one part of the government’s strategy. The other option to move the sector forward is to punish operators for failing to meet standards for quality of service. In May 2012 the NCC fined all four GSM operators a total of $7.3m for incomplete calls and for the poor quality of telephone calls that were successfully made. MTN and Etisalat were fined $2.25m each, Globacom had to pay $1.1m and Airtel was fined $1.68m. The NCC also warned that, “the current penalties signal a new regime of quality of service management in the Nigerian telecoms industry.”

CONSTRUCTION & MAINTENANCE: Insisting upon quality and enforcing regulations is the mandate of the NCC, however, operators continue to face a variety of challenges in building and maintaining their fibre-optic networks. For example, a lack of a regular and reliable power source requires significant spending on diesel generators. “In the Nigerian market, electricity can determine the success or failure of telecommunications,” Tadesse told OBG.

“The cost of diesel generators, maintaining them and purchasing fuel has all proved expensive for operators. It is estimated that every 2500 hours, operators have to change generators and buy new ones to replace them. The power sector is in urgent need of modernisation, but for operators it is still a question of managing the problem,” he said.

There is also the need to gain approval for right of way to lay cable on community land across states, while accidental damage to fibre-optic cables, transmission lines or base stations is a regular feature of these firms’ operational expenses. Sabotage and security issues in certain parts of the country also play a role in contributing to maintenance costs.

To cut costs, operators have looked at a number of alternatives. For example, Globacom is using Ceragon, which is providing the firm with microwave high capacity radio for its backhaul infrastructure. “We cannot replace fibre optics but we can prioritise their traffic by giving them up to 4 GB of capacity,” Tadesse told OBG. “With microwave radio we can secure two locations point-to-point along 200 km on a clear line of sight. Even if there is a large physical obstruction we can compensate.”

Indeed, microwave radio has proven to be one of the most popular forms of network transmission. Data from the NCC for 2006-08 shows that 39,234 km of microwave radio was installed in 2006, rising to 103,632 km by 2008. By comparison, in 2006 just 3774 km of fibre-optic cables were deployed, and by 2008 this increased to just 11,203 km.

Other operators have looked to renewable technologies to help reduce their maintenance bills. In November 2011 Airtel signed an agreement with Sweden’s Ericsson to provide solar panels and wind turbines at 250 base station sites across the country that were formerly diesel-powered. Co-location, or the sharing of base stations and towers, between operators is another possible way to reduce costs. Some firms have gone even further in seeking to reduce costs. For example, in August 2011 Visafone announced that it was selling more than 450 of its towers to infrastructure provider IHS Nigeria, from which it would then leaseback these assets. According to the CDMA operator, this deal, valued at $67bn, would create efficiencies and allow the firm to focus on its core business of providing mobile services.

MOBILE MONEY: Operators are aware that to protect ARPU, better quality of service and coverage should stand them in good stead in a competitive market. Investment in infrastructure is seen as the best way to do this. Meanwhile operators are looking closely at other sources of revenue generation, including mobile money systems.

The main driver behind the development of mobile money is the Central Bank of Nigeria (CBN). Under its 2009 regulatory framework for mobile payments, the CBN seeks to create a cashless society, with mobile money the main means of doing this. Since late 2010 the central bank has licensed 16 mobile money service providers. There are three models: these providers can either be local banks, a consortium of local banks or non-banks, such as local payment transaction firms like Eartholeum, eTranzact, MoneyBox Africa and Pagatech.

MONEY MAKER: The system’s potential as a revenue-earner for operators, local banks and payment service firms cannot be overstated. A 2011 World Bank study that looked into the future prospects in Nigeria estimated that monthly transactions relying on mobile money could reach N18bn ($115.7m).

That figure reflects utility bill payments (21.6m transactions), person-to-person transfers (46m), government-to-person payments, such as social welfare and salaries (40,000), informal sector payments (37.8m) and public transport (10m). One of the major drivers is the large remittance market, with many Nigerians living and working in Europe and the US. Indeed, the World Bank has estimated that inward remittance flows for 2010 stood at $10bn. Moreover the central bank has banned exclusivity agreements between local banks and international money transfer operators such as Western Union, increasing the number of potential remittance providers.

For mobile operators, mobile money is attractive, because it offers an alternative revenue stream, helps reduce churn or loss of customers and develops brand loyalty if they provide an effective system. So far all the major operators have expressed interest. In December 2011 Globacom signed partnership agreements with United Bank for Africa and Stanbic IBTC Bank, and in April 2012 the latter partnered with MTN following a similar agreement in December 2011 between the South African operator and GT Bank. Both Airtel and Etisalat signed a memorandum of understanding (MoU) with the locally based First Bank in February 2012.

This could be a significant opportunity for operators, but they will likely adopt a cautious approach. The World Bank’s report notes that although mobile money initiatives such as M-PESA in Kenya have proved successful, in Nigeria there are additional issues to contend with: “distrust of banks is based on their spotty track record over the past few years, including a number of ATM and debit card scares. The distrust of mobile operators is based on their unreliable network coverage. Any mobile money initiative is going to have to address these issues directly.” Managing the perception of these new schemes set against this backdrop will be a challenge for operators and will likely involve public awareness campaigns to instil confidence.

DATA SERVICES: Another potential area for growth in revenues is data services via mobile platforms. “Overall there is a general shift to data services from voice, where revenues are starting to plateau. There is a growing focus on data plans and operators want handsets to reflect this,” James Rutherford, the general manager for West Africa at Nokia, told OBG. However, there is a question over how much demand there is for these types of services. “For smartphones we are still talking about the top 5% of the market and these are still heavily dependent on per capita income,” said Rutherford.

Growth in data services has been slow. A report carried out by Pyramid Research in March 2010 found that average revenue per subscriber (ARPS) from data services accounted for only 8.3% of total ARPS in 2009. Much of this is attributed to the cost of data packages, although Rutherford said that this will start to change. “Prices of smartphones are likely to decline. The sub-$100 smartphone is steadily becoming a reality. Low-end smartphones are increasingly available and these types of phones will likely grow at a compound annual growth rate of 15% over the coming years. RiM dominates currently, but it will lose ground to the low-end smartphones that are expected to drive growth. Data services will increase dramatically among the target market between the ages of 12 and 30,” he told OBG.

APP STORE: Local content in terms of applications for smartphones is still in an early stage of development. Most content so far is in games or music and film. Examples include Afrinolly, which focuses on the local TV and film market and Danfo, a game that takes its origins from the yellow Volkswagen transit vans used for public transport in Lagos. Nokia provided the platform for Danfo at its Mobile Lab in the Co-Creation Hub in Lagos, a not-for-profit IT incubator that was recently set up by two Nigerian entrepreneurs, Femi Longe and Bosun Tijani.

What is more likely to drive the development of low-cost smartphones is the advertising potential these devices represent for operators seeking additional sources of revenue and corporations looking to reach out to an increasingly sophisticated local market. According to a research study carried out by InMobi, an independent mobile advertising network firm based in India, the Nigerian mobile advertising market is the fastest growing in Africa, with 8bn mobile advertising impressions recorded in the first quarter of 2012, a 37% rise in three months from the 5.8bn recorded over the last quarter of 2011.

CHALLENGES: However, infrastructure remains the main barrier to the development of data services. Until better coverage and quality of service standards are met in the mobile market, as well as a reduction in prices, data services will likely remain a minority activity restricted to the top 5% of the population.

“The challenges facing mobile data services are three-pronged,” said Goodluck. “The market is becoming more sophisticated and data-intensive. Customers want data and broadband and they want it now. So, in terms of being able to access data, there is a great need to leapfrog on infrastructure development. Moreover, given the lack of a fixed-line network to build upon, there are physical difficulties in building the infrastructure that is required, as well as bureaucratic obstacles, and this will take time and investment to overcome. Finally, there needs to be enough local content in the market to excite people to want to buy data packages in the first place. There is no point building a highway to ride a bicycle.”

OUTLOOK: The telecoms sector is expected to continue to expand and improve. Competition in the GSM mobile market is leading to a reduction in prices for subscribers, and number portability is expected to advance this process. Significant investments by all operators in their terrestrial infrastructure should bring about better coverage and quality of service, but these firms still face challenges in terms of power costs and security issues. Encouraged by the central bank, mobile money systems will help Nigeria move towards a cashless society and mobile phones and mobile PCs will play a central role in facilitating this process across economic sectors. The opening up of the mobile market since 2000 has brought rapid growth, with the country now having close to 100m subscribers, and the effects this will have on the economy are just starting to be glimpsed.