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Africa calling: mobile phones open up new opportunities
Mobile telephone growth in Africa Africa
is the world’s second largest continent with over 800 million people in over 50 countries. Unfortunately, it is also the only area of the world that has experienced a real decline in personal wealth over the past 30 years. Some of the reasons have been well documented by the United Nations – war and conflict, disease including AIDS/HIV and political upheaval. Yet, after years of watching the rest of the world benefit from new mobile telephone technology, African countries are now beginning to catch up. For example, the number of mobile telephones in Africa’s largest country, Nigeria, increased tenfold between the years 2002 and 2007. Similarly, South African growth has also been dramatic – more than doubling, albeit from a higher base number, over the same period – see Table 2.2 for the data. By 2013, African mobile telephone growth was amongst the highest in the world – fuelled by increasing wealth and well-proven technology.
Some leading African mobile telephone companies
MSI Cellular becomes part of India’s Airtel
One of the earliest companies into the African continent was MSI Cellular. It began back in 1998 with a Ugandan subsidiary called Celtel. By 2001, it had operations in 11 countries. By 2006, the company had 8.5 million customers in 14 countries and claimed to be market leader in ten of them. Apart from its Sudanese operation, Celtel has chosen to own a majority share in all its subsidiaries: ‘in principle, we like to control the company,’ explained its chief executive Marten Pieters. ‘This supports our brand, our values, our strategy.’ In 2005, the Kuwait telecommunications company MTC acquired 85 per cent of Celtel for $3.4 billion. Given that Celtel itself only had annual sales of $58 million in 2000, this shows how sales, profits and valuations have grown over the succeeding years. The founder of MSI, Dr Mohamed Ibrahim, explained that the company has networks that achieve operational profits within six months and real profitability within two years. Return on capital was in excess of 30 per cent per year. ‘By any yardstick, these projects are more rewarding than in Europe,’ he commented. In the early years, MSI Cellular made its profits by acquiring government licences as each African country market opened up from government control. There was relatively little competition and the main aim for each operator was to set up a basic country network in the main centres of population. However, after the initial acquisition of licences, the company’s follow-up strategy was to deepen its coverage across each country and experiment with new services like higher quality 3G telephony. In addition, Celtel had sufficient coverage across the African continent in 2006 to launch a new service called ‘One Network’. This was claimed to be the first borderless network across Africa, enabling subscribers in some countries to roam free across neighbouring countries, scrapping roaming charges, making local calls and receiving incoming calls free of charge. Pieters explained: ‘Africa’s borders are colonial. They don’t reflect economic or language relations, so there is a lot of inter-country traffic.’ By 2007, Celtel coverage with its ‘One Network’ was working across 13 African countries – Kenya, Uganda, Tanzania, Gabon, Democratic Republic of Congo, Congo, Malawi, Sudan, Zambia, Burkina Faso, Chad, Niger and Nigeria. In 2007, MTC announced that it was re-branding its company name to Zain, which means ‘beautiful’ in Arabic. Zain continued to manage and extend its African interests over the next two years. However, these were then sold to the major Indian telecommunications company Bharti Airtel for around $10.7 billion in 2010. The African networks of Zain were then re-branded with the company’s Indian brand name ‘Airtel’ in 2010. Importantly, Bharti Airtel attempted to merge with the South African-based MTN Group in 2009 – see below. This was refused by the South African telecom authorities, who wanted to retain some influence over the merged entity but were prevented by the terms of the proposed merger. It was after this failed merger with MTN that Bharti Airtel then turned to the acquisition of Zain described above.
Headquartered in South Africa, MTN claims to be the largest mobile telephone operator in the African continent. Its most profitable business lies in South Africa itself, but it also has substantial interests in 11 other African countries, including a profitable venture in Nigeria. In 2006, MTN extended its mobile interests into the Middle East by acquiring a company called Investcom for $5.5 billion. This extended its franchise into five West African countries plus Sudan, Cyprus, Syria, Iran, Afghanistan and Yemen. As a result of the acquisition, MTN increased its total number of subscribers from 23 to 28 million – substantially ahead of the 19 million subscribers of its main South African competitor, Vodacom (described below). By 2013, MTN Group had a subscriber base of 180 million customers of which nearly 57 million were in Nigeria. A strong subscriber base is important for the profitability of any mobile telephone company: after its investment in networks and other infrastructure, increased profitability for a phone company comes from greater usage of the network – achieved both by larger numbers of subscribers and also by increased usage of the telephone.
One of the strategic problems for both of the leading South African mobile companies is that South Africa, as a country, has become a relatively mature mobile telephone market. According to World Bank data, mobile penetration had reached around 72 per cent of the South African market in 2005 – compared, for example, with only 13 per cent of the Nigerian market in the same year. MTN used its strong position in the South African market as the basis for expansion elsewhere: its position provided a useful cash flow and, more importantly, training and experience in the operation of a mobile telephone business. The company then used this knowledge as it expanded, sometimes by acquisition, and sometimes by setting up its own company in other African countries.
The maintenance of growth was the main reason behind MTN’s expansion into other parts of Africa and the Middle East. Some of the new markets acquired by MTN had even lower levels of mobile penetration than its existing operations. According to MTN’s Chief Executive Mr Phuthuma Nhleko, ‘The combined companies’ countries had, on average, just 9 per cent mobile penetration, giving [MTN] very meaningful potential for upside.’ Inevitably with its entry into some politically sensitive Middle Eastern countries, there was criticism of MTN with regard to political risk. Mr Nhleko commented: ‘Our job is to be a mobile operator that delivers infrastructure, not to try to second-guess the politicians. Political risk is a politically loaded term. [But] there are countries where there are certainly challenges.’
Also based in South Africa, this company was a 50:50 joint venture between South Africa’s largest individual telephone company called Telkom and the British-based, international mobile telephone company Vodafone until 2009. Telkom was for many years the leading South African provider of telephone services, particularly using fixed lines. It founded a mobile company in 1993, with Vodafone taking a minority share at that time. The British company then increased its stake to 50 per cent in 2005 because it was attracted by the growth potential of the African market. Vodafone then raised its share of Vodacom to 65 per cent in 2009 at a price of $2 billion. The British-based company was particularly interested because many of its existing European mobile phone markets – such as the UK – were highly mature and would no longer deliver its growth objectives. Behind this change in control, Vodafone identified Vodacom as being its gateway into the fast-expanding African telephone market. In addition to its major share of the South African market, Vodacom also had mobile interests in Tanzania, Lesotho, Mozambique and the Democratic Republic of Congo. However, Vodacom had not expanded as rapidly as its rival MTN because there was a legal agreement when Vodacom was founded that it would not enter markets north of the Equator. However, Vodacom also had a reputation born out of its relationship with its South African parent, Telekom – reputedly a quasi-public, unionised and more bureaucratic organisation – that was also not conducive to growth. Whatever the background, Vodacom came under the control of the international mobile telephone company Vodafone in 2009. By 2013, Vodafone had eight African subsidiaries with ambitions to grow further.
At the same time, the above move freed up the previous joint partner, South Africa’s Telkom, to expand beyond its business into mobile phones not only in South Africa but elsewhere on the African continent. Importantly, the company is still effectively controlled by the South African state and has a monopoly of fixed line provision and international calls originating in South Africa. Its dominance of the domestic South African market is reflected in strong complaints from both customers about high prices and from competitors about network access. This dominance was confirmed in June 2013 when Telkom accepted a fine of 200 million Rand (US$18 million) for abusing its domestic market position. In 2011, Telkom commented that it aimed to expand its fixed line and mobile business into other telecommunications areas and countries. Specifically, ‘our strategy is to differentiate ourselves from competitors by moving from a provider of basic voice and data connectivity to become Africa’s preferred ICT [Information and Telecommunications Technology] service provider, offering fully converged voice, data, video and Internet services.’ This strategy – essentially based on new broadband and 3G technology – has been successful: by 2013, Telkom was involved in 38 African countries with regional hubs in Nigeria and Kenya.
Other African mobile telephone companies
In individual African countries, there were also other major telephone companies. For example, Safaricom was one of the dominant companies in the Kenyan mobile market. It was formed in 1997 as a wholly owned subsidiary of the governmentowned Kenyan supplier of telephone services – Telkom Kenya. In 2000, the British company Vodafone acquired a 40 per cent stake in Safaricom and provided its international experience and coverage to its Kenyan associate. For reasons of space, similar companies in other African countries are not described here. The main characteristic of all such companies is that they were all seeking to develop their networks and usage substantially over the next few years. They all believed that substantial growth was still possible.
Reasons behind the continued growth in African mobile telephones
Beyond the obvious point that existing penetration of mobile telephones remains low at 15–20 per cent of the population, it is possible to identify at least three reasons for the rapid growth in African mobile telephones:
1 Political will. African governments were willing to support and encourage new forms of telecommunication. They identified real benefits for their relatively poor populations through the wider spread of information technology. They accepted that the provision of fixed line telephone cables was so expensive as to be virtually unachievable in rural areas – better to have mobile than nothing at all.
2 Risk-taking companies. Companies like MSI Cellular and MTN took significant risks in investing in the mobile telephone infrastructure. For example, it was reported that MTN had to overcome significant infrastructure problems when it was building its Nigerian network in 2004 at a cost of $900 million. Commenting on its early investment in Africa, the Chairman of MSI Cellular, Dr Mohamed Ibrahim said: ‘There is money willing to go to Africa as long as it is backed by credible people. African telecoms is no place for opportunists or amateurs. To survive requires a very experienced management team, a successful record and the ability to attract finance.’
3 Increased demand for communication. As the world has become more integrated and – in that sense – global, the demand for increased and instant communication has grown in Africa both for individuals and for multinational companies. Fixed line cables were incapable of providing enough links and capacity. Both companies and individuals needed more opportunities for contact. Two examples: individual farmers were able to check prices using their mobile phones and head for the best market; relatives were able to use a new mobile telephone service to transfer funds between families – it was no longer necessary to trek two hours by minibus to the local bank.
Importantly, these reasons suggested that there was still substantial growth in African mobile telephones over the next few years. But there would be some risks – political, economic and social. There was also one remaining structural problem associated with the small number of fixed line telephone services in Africa. The growth of the internet and web relies, at present, for technical reasons on fixed lines rather than mobile phones. However, the new technologies associated with 3G and 4G mobile networks were overcoming this problem as such networks became widely available in Africa. Moreover, new and fast undersea cables had been laid that link Africa to regional and world markets. There were still plenty of opportunities for mobile telephone services in the African continent.
1 Where would you place the strategies of MTN and other African phone companies – prescriptive or emergent? And within this, which strategic theory represents the most appropriate explanation of the company’s development?
2 What are the risks and benefits of African companies expanding beyond their home countries? What are the dangers of having a competitive advantage that relies largely on brand and geographical coverage?
3 Are there any more general lessons to be drawn for companies from the approach to expansion from Africa’s leading mobile telephone companies?