Disruptive Innovation is at the heart of change in business models across several Industries. Amazon has literally eclipsed a generation of traditional retail chains with its transformative online business model. The traditional telecom Operator model is also undergoing significant change. A good parallel to draw will be from the Global Oil Industry. The changes in the Global Oil Industry has been driven by Innovation and fight for market share. Shale Oil producers using fracking technology have disrupted and are now effectively competing directly with the traditional Global producers. Saudi Arabia led a fierce fight for market share by driving a supply glut in the market to cripple Shale Oil production. Sanity has now prevailed with the recent production cuts and return to healthier crude oil price levels. The Global Industry is trying to recover to some kind of equilibrium while adjusting its operational structures to align with the new normal of $50-$60 per barrel price environment (down from the above $100 per barrel levels in 2014). The Oil Industry is now facing the new reality of increased US Shale Oil production with the attendant implications on the Industry in the medium to long term.
The same factors of Innovation and fight for market share is changing the telecom Operator environment. Fierce price competition among telecom operators on their primary voice and data services has reduced aggregate global industry revenues over time. Problem is with increasing internet penetration, operators need to increase capital expenditure (CAPEX) to build robust networks to meet astronomical demand for good quality data services. The Industry has also contended with Innovation from Over-the-top (OTT) players like Whats app, Snapchat etc. utilizing technology to convey voice calls/messages over the Internet at a fraction of the cost of a traditional voice call. At the same time, economic slowdown in several markets (slower GDP growth, rising inflation and weaker currencies) have impacted consumer spend significantly especially with increased mobile penetration into the lower-spending rungs of the population. These realities are also very obvious in the Nigerian telecom market.
At the biggest Annual Global Telecom Industry event, the Mobile World Congress held in Barcelona in February 2017, the Chairman of the GSM Association (GSMA), Sunil Bharti Mittal (also Chairman/Founder of Airtel) delivered a key note address on the state of the Industry which was very sobering. The GSM Association is an Industry body that represents the interests of 800 Operators Worldwide. He painted the following picture of the global telecom Industry on average: Massive data subscriber growth of 18% amidst slowing voice market, $200 billion annual industry CAPEX mainly to meet increasing data demands but declining Industry returns on capital employed and revenue tapering down to very low single digits. The question was how sustainable is a business model which required more CAPEX to deliver lower revenues. The GSMA Chairman joked that it may make more economic sense for the Investors to keep the $200B in a bank to yield interest while playing golf rather than investing in telecom given the present scenario. Not many people laughed.
Telecom Operations is now without doubt, a game of scale. With the contraction in Industry aggregate revenues, only a finite number of operators can pool resources to operate successfully in any market or across several markets. Even with all necessary cost-efficiencies, only an operator with significant scale can make a positive net margin. Operators without such scale will be perennially cash flow negative and will either have to consolidate with another operator to extract some margins, be acquired by bigger healthier operators or will die with creditors in their wake. Consolidations and rationalization of telecom operations is now becoming commonplace. In Europe, market consolidations have happened in countries like the United Kingdom, Spain, Italy and Germany with regulatory approvals. The Regulator in France is still dithering on market consolidations. Vodafone, one of the World’s largest telecom operators has resumed consolidation discussions with the Cable/fixed Operator, Liberty Blue to achieve a robust network and more cost-effective operations across Europe. In India, after a fierce six-month price war(which included free voice calls by a new 4G Operator), Industry revenues have contracted by 7%. It has forced consolidation discussions by leading operators like Airtel and Vodafone with other smaller players. It is expected that the operators will contract from twelve (12) players to five (5) players in the near future.
In Africa, Telecom Groups like Airtel and Tigo have taken steps to scale down operations in the Continent to reduce their debts and reposition them to consolidate their hold in their primary home markets in India and South America respectively. Airtel and Tigo have just agreed to consolidate their operations in the Ghanaian telecom market. With fairly mature telecom Operations across Europe, Orange Group has in the last few years expanded aggressively into Africa with recent acquisitions of operations in Sierra Leone, Burkina Faso and Liberia. The Regulators are recognizing this reality of consolidations especially with dwindling tax revenues from the sector. In Cote D’Ivoire, the industry regulator initiated the reduction of operators from seven (7) to four (4) operators. They acknowledged that the Industry needed fewer and healthier operators to grow the telecoms infrastructure in the country.
All of this does not all mean that the telecom operators cannot innovatively grow their businesses. Telecom Operators can still thrive with reinvention of their businesses to be more innovative and translate their assets to more creative services connecting to their customers’ everyday lives. These can create new revenue streams to mitigate the reduction in their traditional revenues. In Africa, for example Safaricom has revolutionized financial inclusion with the introduction of MPESA, the largest Mobile Money Operation in the World. The issue is that operators who cannot transition quickly will obviously be at risk.
In a nutshell, growth in the new Telecom World Order emerging can only be achieved as follows: More consolidations with fewer bigger mobile operators operating regionally or globally leveraging sheer scale, operators venturing into emerging ICT/multi-media space and services space leveraging existing platforms and partnerships.
Telecom is a global business. Investment capital for the Industry comes predominantly from the same global markets. So naturally, the shifts in the Global Mobile World Order also affects Nigeria which is the biggest telecom market in Africa. We need to reappraise the existing Policy and Regulatory environment in Nigeria taking the new Telecom World order into account and its implications for Nigeria.
1. With the internet, telecom now represents the infrastructural backbone powering socio-economic development in any economy. Telecom Infrastructure provides the backbone for the new digital economy which drives the development across all sectors of the economy (e-commerce, Mobile banking etc.). All the innovation by OTTs, Value added service providers, technology start-ups and other players in the Industry value chain can only happen optimally on the back of the underlying telecom infrastructure. Investments in building and operating this infrastructure is inescapable if we want an efficient high growth economy. No sector of the economy can operate efficiently without proper telecom infrastructure. It therefore follows that the Government should be looking at the telecoms/ICT sector with the same rigour as developing policy options to diversify the economy from Oil. Kenya has prioritized the ICT sector as a key driver to achieve the Country’s 2030 economic development plan. Kenya has become the technology hub of East Africa as an outcome of a deliberate National policy approach on ICT.
2. The present Nigerian Telecom marketplace needs to be interrogated in the light of the changing Telecom World Order as pictured above. There are presently several Operators in the Nigerian Telecom market: GSM, CDMA Operators, Operators with 3G/4G LTE spectrum etc. Some of the Operators are Global or Regional players. There needs to be a clear understanding of how vulnerable or otherwise the Nigerian market is to some of the imminent shifts highlighted. This should throw up what risks (if any) or opportunities exist to inform clear policy and regulatory action to protect the Industry. This will also inform institutional regulatory processes to be put in place to proactively monitor the health of the Industry with relevant triggers for remedial actions.
3. The National Broadband Plan 2013 to 2018 seeks to achieve 30% broadband penetration by 2018 by pursuing a five-fold increase in broadband penetration over the 2012 penetration rate. Pervasive broadband access is considered critical to support National economic growth objectives. It has been reported that broadband penetration was 14% by November 2016. This is not cheering news. Broadband growth targets will only be met with increased CAPEX investments by players in the market. Obviously, neither the NCC nor the Government can “impose” CAPEX investment targets on the industry. These are purely economic decisions to improve returns while taking other social, environmental and regulatory issues into account. CAPEX decisions by operators will obviously be much more rigorous in the light of the present realities. There is a real question of whether there will be adequate cumulative industry CAPEX commitments relative to the expected growth targets in the National broadband plan and expectations of relevant stakeholders. The following policy questions should be answered: How much CAPEX investments will be required in the Industry to achieve the Broadband policy objectives of Government and what specifically needs to be done to encourage the operators to make the said investments, as and when required. Investments are the tonic for the growth of any Industry. The approach to attracting same needs to be more deliberate with the right policy and regulatory instruments.
4. A situation where any commercial operator is consistently running its business below cost can only have negative consequences. A market with unending massive bonuses are good for the consumer in the short term but some of these offers are not predicated on sound economic fundamentals and if sustained as a “way of life” will put the whole Industry at risk. The market has seen generally above 80% decline in data tariffs between 2013 and 2016. It is critical to protect the future of the telecom Industry in Nigeria. The decision by the NCC to undertake a proper cost study to determine an empirical acceptable price threshold for data services is logical, appropriate and must be fully supported by all stakeholders. Attempting to “legislate”low prices in a commercial environment without due consideration to realistic operational cost factors is unscientific and can harm the Industry and compromise long-term consumer benefits.
5. The New Telecom World Order challenges the policy and regulatory approaches in managing the telecom markets. This new Order means in effect that the industry is now more mature and is shifting from managing traditional competition on basic services to providing the platforms for innovative, new services for customers across the economy. It means Governments and Regulators now need to play a more facilitatory role for the Industry. The changing realities of the Industry and therefore new expectations from Policy makers and Regulators is now subject of intense discussion in Global Telecom Industry and regulatory circles. Nigeria cannot be an exception.
Healthy telecom Operators committed to their markets can evolve to play a key role in investing and promoting technology innovation in their respective markets. Safaricom has a fund to work with local start-ups to create relevant services for Kenyans. One of such services developed is a local ride-hailing service competing with Uber in Kenya. At a Global level, Softbank (Japanese global telecom player) is raising a $100B Fund with other partners to invest in promising technology start-ups.
Any Industry with a challenged business model cannot grow and this will have negative implications on the economy in the medium to long term. We have seen the dramatic far-reaching consequences of the challenged business model in the Global Oil Industry. Oil-dependent economies like Nigeria, Angola and Venezuela have suffered severely. We faced economic recession in Nigeria throughout 2016, the first in 29 years! Nigeria has a very troubled electricity sector mainly because the Industry business model is fundamentally challenged across the whole value chain. Nigeria also has some challenges in the Aviation Industry with a significantly reduced fleet of aircraft's available today.
The telecommunications Industry has now become a critical part of the Nigerian economy. We cannot ignore some troubling signs with loan defaults by one of the major telecom Operators in Nigeria. There is a new Telecom World Order which will affect Nigeria whether we like it or not. We should choose to be prepared to proactively address the implications of this. Nigeria is at the cusp of an economic recovery. The Government now has a clear Economy Recovery Growth Plan (2017 – 2020).
We need to have a robust telecom Industry to support Nigeria’s medium-term economic recovery objectives. Nigeria needs to meet the set targets of the National Broadband Plan. It will require a deep, dispassionate and objective engagement of all the key stakeholders on the fundamental Industry issues in the light of the new Telecom World Order.