Talk time: Rapid growth in the mobile segment is driving the sector forward

Over the past decade Nigeria has become the largest and one of the most vibrant telecoms markets in Africa, due primarily to rapid growth in the mobile segment. As of July 2013 there were more than 114m telecoms subscriptions in the country, equal to a penetration rate of 82%, according to the Nigerian Communications Commission (NCC), the government regulator. This is up greatly from 2003, when just 4m Nigerians – 3.4% of the population – subscribed to telecoms services.

Four GSM operators – MTN Nigeria, Etisalat Nigeria, Airtel Nigeria and Globacom – dominate the mobile market, which accounts for over 99% of the telecoms sector. In a move to cater to steadily rising demand for both voice and revenue-intensive data services, there has been heavy investment in fibre-optic networks and other infrastructure, alongside new payment plans and other value-added services. With these investments in mind, telecoms services in Nigeria are set to continue improving in the years ahead.

CHALLENGES: That said, the sector faces a wide range of challenges. While most operators have worked to expand their networks in line with the rapid pace of subscriber growth over the past decade, issues persist concerning quality of service (QoS). This has been compounded by a number of broader issues, including a lack of reliable power supply and security concerns, particularly in the north.

“Delivering consistently high QoS is a complex task at the best of times,” Kamar Abass, the managing director of Ericsson in Nigeria, told OBG. “In less challenging markets, there are environmental and seasonal factors that get in the way. In Africa, these are compounded by acts of vandalism and power supply issues.”

The public sector’s role is also currently a topic of some debate, particularly in terms of expanding telecoms services into rural areas. “In order to expand service to the rural areas, the government must lay the foundation and then allow the private sector to build upon it,” said Taj Onigbanjo, the CEO of Africa Digital, a local digital services and consulting company.

PLANNING FOR GROWTH: Despite these hurdles and the increasingly tight margins resulting from greater competition, most telecoms players are looking forward to continued growth. Indeed, a number of recent developments bode well for the sector. In April 2013 the NCC introduced a five-year Strategic Management Plan (SMP), with the goals of boosting capital investment in telecoms, improving the regulatory framework and ensuring universal access to communications technology throughout the country.

Other potential growth drivers include data services, which are relatively underdeveloped in Nigeria; and mobile payment systems, which allow users to send and receive money via mobile handsets. These developments, and rising mobile penetration rates, are fostering an investment-friendly environment.

REGULATION: The rapid expansion of Nigeria’s telecoms market is in part the continuation of a change that began in 2000, when the newly elected government auctioned off a handful of digital mobile licences under the National Policy on Telecommunications, the country’s first telecoms market liberalisation programme. Since then the state has been instrumental in the development of a modern telecoms industry. The NCC, which was established as an independent body in 1992, continues to serve as the primary regulatory entity. In 2011 the commission came under the purview of the Federal Ministry of Communication Technology (FMCT), a newly established umbrella entity also put in charge of the National Information Technology Development Agency; Nigerian Postal Service; Nigerian Communications Satellite; and Galaxy Backbone, which provides ICT services to the government.

Broadly, the FMCT has the mandate to develop policies for the communications sector, particularly in areas where it will have a positive impact on the delivery of public services. The NCC has taken on an increasingly interventionist role in recent years, encouraging operators to expand their fibre-optic networks, introducing a number of new regulations and issuing fines to those that have fallen short of QoS. In November 2012, for example, in an effort to address complaints of billing irregularities, the commission issued a directive that required all operators to provide details – including both the cost of a call and the customer’s remaining prepaid balance – in a free SMS to be sent to mobile subscribers after every call.

In the first half of 2013 the regulator oversaw the implementation of a cut in SMS rates; the introduction of a three-year plan to reduce interconnection rates; the launch of mobile number portability; and, perhaps most importantly, the introduction of the SMP (see analysis), among other initiatives.

HIGH-SPEED DATA: The NCC is also expected to oversee the allocation of additional telecoms spectrum in the coming years, which could have a transformative effect on the nascent high-speed data market.

Nigeria’s cabinet, the Federal Executive Council, has approved the merger in principle of the NCC and the National Broadcasting Commission (NBC), the country’s broadcasting regulatory body. Both the 2.5-GHz and 700-MHz bands, which are currently used for broadcasting and regulated by the NBC, may eventually be transferred to the NCC. “There is fast-growing take-up of 3G and potentially demand for 4G. However, spectrum limitations for 4G are constraining the effective launch of these services,” Brett Goschen, group CFO of MTN Group, which controls a majority of the mobile market, told OBG. “We expect to see spectrum in the 2600-GHz range made available to mobile operators by 2015, at which point 4G long-term evolution (LTE) services should be available.”

BY THE NUMBERS: Since the market was liberalised, growth has been rapid. In 2001 Nigeria had 866,782 primarily fixed-line telecoms subscribers, which represented a telephone density (teledensity) of 0.73%, according to NCC data. The majority of these early customers subscribed to Nigerian Telecommunications (NiTel) – the government-owned fixed-line operator – which had a monopoly on telecoms until 2000.

As new mobile operators rolled out their services – starting with Econet in August 2001 – total subscriber numbers grew rapidly, reaching 2.27m in 2002, 4m in 2003 and 10.2m in 2004. Since then the rate of new telecoms subscriptions has expanded dramatically, now predominantly mobile. As of the end of July 2013 Nigeria was home to 114.76m subscribers, making it the largest telecoms market in Africa.

This figure is up from 113.2m at the end of 2012, 95.9m at the end of 2011 and 88.3m at the end of 2010. However, this followed the NCC’s campaign to deactivate unregistered subscriber lines, and thus the figure is a decrease from the number of subscribers seen in June 2013, which totalled 120.36m.

A substantial percentage of these subscriptions can be attributed to existing customers registering a second or third SIM card, a common practice in frontier economies in Africa. Indeed, in a 2012 study carried out by international telecoms trade organisation GSMA Intelligence, Nigeria had the highest multiple SIM ownership rate in Africa, with subscribers owning 2.39 SIM cards on average. According to UK-based research firm Informa Telecoms and Media (ITM), the mobile market is forecast to top 200m subscriptions by 2017.

The frenetic pace of mobile market growth can be seen in the segment’s share of the telecoms sector. As in most emerging markets, fixed-line services have seen their market share dwindle as mobile use rises, and as of the end of April 2013, the four GSM mobile operators had a 97.5% share of the telecoms market in terms of total subscribers, while code division multiple access (CDMA) mobile operators had a 2.2% share. Fixed-line operators account for the remaining 0.3%.

With the telecoms industry’s growth over the past decade, it has become an increasingly important economic contributor. According to NCC data, the sector supplied more than 8.5% of GDP at the end of March 2013, up from 7% at the end of 2012, 5.7% at the end of 2011 and 4.6% at the end of 2010. These figures show a considerable rise from 2001, when the sector made up just 0.6% of GDP. In the second quarter of 2013 the telecoms sector recorded real GDP growth of 22.1%, down from the 24.5% recorded in the first quarter, according to the National Bureau of Statistics.

MOBILE: As of July 2013 MTN, a subsidiary of the South Africa-based MTN Group, was Nigeria’s largest telecoms operator, with 52.2m subscribers, or 47% of the mobile market, according to the NCC. The firm, which launched in Nigeria in August 2001 after winning a 15-year digital mobile licence from the NCC in February 2001, invested some $1.6bn in expanding and upgrading its Nigerian operations in 2012.

Most local operators utilise a variety of technologies to serve Nigeria’s sizeable rural population, which is spread out over a very large area and, in many places, covers challenging terrain. Indeed, MTN Group oversees the largest privately owned fibre-optic cable network in Africa, spanning a number of countries on the continent, as well as a domestic digital microwave transmission network in Nigeria (see IT overview).

Globacom, which was awarded a mobile licence in 2002 and has been active in Nigeria since 2003, had 22.83m subscribers at the end of July 2013, which represented 20% of the mobile market, according to NCC figures. In the past decade the Nigerian-owned firm has also begun operations in Benin, Ghana and Côte d’Ivoire. In addition to Glo Mobile, Globacom’s mobile telecoms arm, in 2011 the company completed work on the Glo-1 cable system, a 9800-km submarine fibre-optic cable that stretches from the UK to Nigeria, with additional landing points in Spain, Portugal, Morocco, Mauritania, Senegal and Ghana.

INDIAN INVESTMENT: Airtel, which is a subsidiary of Bharti Airtel, an India-based telecoms company, acquired its Nigerian licence in 2010 as part of a $10.7bn purchase of all of the Kuwaiti telecoms firm Zain’s African assets. Since then the company has spent more than $1.5bn on new infrastructure in Nigeria to improve call quality and coverage throughout the country. As of July 2013 the firm had 21.1m subscribers, for a market share of 19%. In mid-March 2013 Bharti Airtel upped its investment in its Nigerian subsidiary by 13%, bringing its total ownership stake in the company to approximately 79%.

Etisalat, the local subsidiary of the UAE-based telecoms provider of the same name, bought its licence from the NCC in 2007. As of July 2013 the firm had a local subscriber base of 15.5m, or 14% of total mobile subscribers. Etisalat has also invested heavily in infrastructure in recent years. In April 2013 it announced plans to invest $500m in expansion projects in Nigeria, with most of the capital expected to go towards increasing its number of mobile base stations.

The latest figures for MT el, the GSM mobile arm of NiTel, the government-owned telecoms company, show less than 260,000 subscribers as of June 2013. After a decade of unsuccessful attempts to sell the state-owned NiTel to a private operator, in July 2013 the state declared that it planned to liquidate the firm.

CDMA PROVIDERS: In addition to the GSM operators which dominate the mobile market, Nigeria is home to a handful of CDMA mobile service providers. As GSM technology has become increasingly popular over the past decade or so, CDMA activity has become more limited in scope, prompting a shift in strategy. In February 2013 three of these companies – Starcomms, Multilinks and MTS Wireless – received initial approval from the NCC to pool their assets in a merger. The resulting company, which will operate under the brand Capcom, is expected to boost competition in the mobile market, particularly for high-yield 3G and 4G subscribers in urban areas. Other CDMA operators include Visafone and Reliance Telecoms.

MVNOS: According to an early 2013 report from Ciuci Consulting, a local company, the Nigerian telecoms market will likely eventually attract mobile virtual network operators (MVNOs). MVNOs do not operate their own infrastructure, but instead purchase minutes on an existing GSM or CDMA network and resell them to end-users under a different brand name. MVNOs typically target niche segments of a given population, and work to differentiate themselves from other operators via branding and customer service. In a developing market such as Nigeria, according to Ciuci, a successful MVNO would likely compete primarily on price. While Nigeria has yet to attract MVNOs, a number of other sub-Saharan countries have already seen activity in this area. In July 2013, for example, Ghana’s National Communication Authority announced that it would begin issuing MVNO licences in 2014.

FIXED-LINE: In addition to the state-owned firm NiTel, which was in the early stages of liquidation at time of publication, as of mid-2013 an additional 16 firms offer fixed-line telecoms services in Nigeria.

As in most rapidly developing mobile markets around the world, the country has seen steadily declining fixed-line subscriptions in recent years. According to data from the NCC, as of June 2013 Nigeria was home to 382,678 fixed-line subscribers, down from 428,768 at the end of 2012, for example.

The most recent figure was equal to just 0.32% of total telecoms subscribers. As of June 2013 the largest fixed-line operators included 21st Century Communications, with just over 90,000 subscribers; Starcomms (which also offers CDMA mobile services), with around 60,000 subscribers; and NiTel, with some 59,000 subscribers. The remaining fixed-line operators have anywhere up to 35,000 subscribers.

FIBRE OPTIC: In terms of international connectivity, Nigeria is well situated. Four submarine cables with a total capacity of 7.78 TB ps link the country with the rest of the world. These include the NiTel-operated Sat-3 cable; the Main One cable system; the Glo-1 cable owned and operated by Globacom; and the West Africa Cable System, which is majority-owned by MTN.

These international links have served as a catalyst for the introduction of high-speed data services in Nigeria since 2007. However, due to the bureaucratic challenges involved and the high cost of installing terrestrial fibre-optic cable networks, many rural areas have yet to benefit from this new capacity.

“Telecoms firms in Nigeria generally need to spend in the upper end of the typical target range of 12-20% of turnover on capital expenditure – and much more for recent entrants,” said Abass.

DEMAND FOR DATA: In line with trends in other major African markets, mobile tariffs have fallen considerably in Nigeria over recent years, primarily as a result of steadily increasing competition among the four major players and pressure from the NCC. According to Wael Ammar, Etisalat Nigeria’s commercial officer, voice average revenues per user are expected to decline to around $5 per month in the next five years, down from $6-7 in April 2013 and $10 in 2008. With this in mind, local operators have been working to build up alternative sources of revenue.

Data services are considered a key driver of future growth in the sector, though as of mid-2013 the data market was still relatively small. According to the World Cellular Information Service, which is operated by ITM, as of the end of 2012 around 10% of mobile subscribers in Nigeria used smartphones. Most of the major carriers in Lagos, Abuja and Port Harcourt provide 3G services, but coverage is lacking elsewhere, and customers regularly complain about insufficient bandwidth and low data speeds. “The industry must get creative to decrease costs and increase coverage,” Wande Adalemo, the managing director of local WiFi provider Oxygen Broadband Networks, told OBG.

Local operators have been investing in infrastructure to improve QoS and expand coverage areas. In April 2013 MTN, which launched 3G services in Nigeria in 2007, secured a $3bn loan from a consortium of local and international lenders to invest in the company’s 2G and 3G networks, for example. Similarly, as of early 2013 Globacom was in the midst of a $1.25bn network expansion plan and Etisalat had recently announced a $1.2bn investment strategy, while Airtel wrapped up a roughly $1.5bn infrastructure spending programme over the preceding three years or so.

While the majority of this expenditure will be put towards expanding 2G and 3G technology, operators have also taken steps towards introducing 4G services recently, despite the fact that, according to most local players, the market for LTE services is limited at present. “Currently, we don’t have a large ecosystem of 4G devices,” said Segun Ogunsanya, Airtel Nigeria’s managing director and CEO. “This may slow down penetration but ultimately, 4G is the way to go.” LTE networks are being rolled out in select urban areas by a number of providers, including Smile and Swift.

SMARTPHONES: Most local operators agree that while margins are growing tighter, voice will account for the great majority of business for years to come. According to Goschen, in early 2013 only around 25% of the company’s data customers subscribed to 3G services, while the remaining 75% used slower, cheaper 2G services. “I expect high-speed data services to be a relatively small niche market for some time,” he told OBG. “Smartphones and other devices are expensive for most Nigerians and availability is limited.”

According to a report by research and consulting firm Gfk, just 2-4% of the 21.5m mobile phones sold in Nigeria in 2012 were smartphones. While the average cost of a new standard mobile phone in the country in 2012 was $43, the average cost of a smartphone was more than $400. With this in mind, the introduction of low-cost smartphones could be a catalyst for the rapid development of the domestic 3G market. “Low-cost smartphones being introduced by Indian and Chinese manufacturers will be significant,” Ogunsanya said. “Prices are dropping to $150 per handset. When that figure reaches $80, demand will really take off.”

A CASH-LITE SOCIETY: Mobile payment systems, which enable subscribers to send money to other users via a mobile device, have been in development in Nigeria since 2009, when the Central Bank of Nigeria (CBN) introduced a series of new regulations on requirements for transactions, settlements and limits. While Nigeria’s mobile banking initiatives have yet to achieve the same dramatic success as Safaricom’s M-Pesa programme in Kenya, growth has nonetheless been impressive thus far, and in 2011 the CBN issued 16 mobile money licences. The majority of these went to local banks and other local financial institutions, although a handful of digital transaction firms were also licensed.

Under the bank-led model currently in place, licensed banks and other entities have partnered with telecoms operators to launch mobile money services. MTN, for example, works with Guaranty Trust Bank and Fortis Micro Finance Bank, while Airtel has partnered with First Bank of Nigeria and Globacom with the United Bank for Africa and Stanbic IBTC.

According to the CBN, as of the end of May 2013 some 5.73m Nigerian mobile subscribers had signed up for mobile money programmes, representing a penetration rate of around 5% of total mobile customers. While this figure is relatively low compared to some neighbouring countries – in Kenya, for example, an estimated 68% of all adults used mobile money services in 2012, according to The Economist – the country is poised to become a major mobile money market in the coming years. Growth drivers in this area include the rapid mobile uptake seen in Nigeria over the past decade or so, and the fact that around 68% of the population does not have a bank account, according to a 2012 survey by Enhancing Financial Innovation & Access, a local non-governmental organisation.

OUTLOOK: The Nigerian telecoms sector faces a number of pressing challenges. A lack of nationwide, high-quality infrastructure, particularly in rural areas, remains a key issue, for example, and is largely to blame for the ongoing complaints of spotty service and slow data speeds in recent years. As a result of the recurring failure of the national power grid, most mobile network installations and other telecoms infrastructure is currently powered by a mixture of expensive diesel generators and, increasingly commonly, solar power.

Until the national telecoms network is expanded considerably, however, new services will not reach many rural areas. According to the NCC, as of June 2013 Nigeria had just 27,000 base stations, compared to 65,000 in the UK, for example. Overcoming this hurdle is a top priority, with the NCC and private players alike laying out plans for a number of large-scale infrastructure investments over the course of the coming five years (see analysis). Related challenges include vandalism and power supply issues, both of which regularly disrupted telecoms services in Nigeria in 2011 and 2012. Despite these issues, the sector’s potential remains considerable. With a high rate of growth already being seen, along with Nigeria’s status as the most populous country in Africa, mobile operators expect further expansion for the foreseeable future.