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Analysis: Will telco sector reach watershed in 2016?

By Francis Hook, director, digitalfrontiers.
Johannesburg, 16 Mar 2016
Francis Hook, director, digitalfrontiers.
Francis Hook, director, digitalfrontiers.

Various developments in the telecommunications sector in Africa over the past couple of months - ranging from the business environment to emerging regulatory and policy issues - may see the sector arrive at a watershed point in many respects during 2016. This will set the stage for operators to embrace new survival strategies and compel policymakers and regulators to review the current legal framework.

For the greater part, the African telecoms market currently possesses two key attributes, which - to a good extent - are shaping operator survival strategies for the years to come, and placing a burden on policymakers and regulators who are grappling with myriad issues as they try to meet their core objectives of developing the sector.

The first is the slowing growth (and market saturation) that is affecting their ability re-invest in expansion and new services. The other includes changes in the current ecosystem, including the threat posed by over the top (OTT) operators whose services are increasingly exerting some pressure on data, SMS and voice revenue, and causing a great deal of chagrin among operators which find themselves on an unequal footing with OTTs.

In the periphery are policies and regulations that have not been agile or forward-looking enough to anticipate these changes in the market, and which are encumbered by the inherently slow pace of policymaking.

Against this backdrop, a number of emerging trends will set the scene and determine how the sector in Africa continues to develop, and to an extent, dictate existing operators' strategies, and for some of these trends, prompt policy and regulatory reform.

OTT operators - is it too late to close the stable door?

The nascent issue of regulating OTT providers has now come into sharp focus after Netflix's launch of its streaming services in Africa early this year, with operators crying foul and renewing their platitudes for the industry's regulators to intervene and level the playing field. The key premise offered by operators is that OTTs have not invested in infrastructure, and cleverly point out that OTTs do not pay taxes like existing licence holders.

Be that as it may, it is highly unlikely that African regulators would want to pit themselves against consumers and be the forerunners to address an issue that remains largely unresolved in most countries, including developing countries.

At the end of the day, operators may merely prevaricate for a while longer as they silently cede ground and either grudgingly retreat to accept their place as a utility or evolve into different players whose mainstay is no longer voice and data services.

Renewed focus on universal service funds

Despite the high growth of mobile, attaining universal access in most countries seems elusive as approaches to address this have largely been ineffective and haphazard in most countries. Further, there seems to have been a gradual departure from the initial premise of using USF to subsidise backhaul and last-mile access, with more focus on covering the cost of terminal equipment, paying for connectivity, building shared access centres, etc.

Looking ahead, it is likely that focus will shift to address the following three areas, and also in this order of priority:

1) Extending national transmission backbones to rural areas, either through fully government-funded USF or government-led initiatives to put in place as private public partnerships with open access principles.

2) Addressing backhaul gaps will also reduce the entry barriers for existing operators, foster public private partnerships as well as allow the entry of community and donor funded operators to provide last mile access.

3) Even after backhaul and last-mile access issues are addressed, the issue of cost of services and devices will remain and will merit some subsidies as well as strategies to identify anchor tenants (such as hospitals, schools, etc,) which can help grow adoption and further subsidise the cost of services.

4) Even with the right approach to rural access, two more issues must be addressed: Digital literacy and content. It must be noted that even for markets with 100% population coverage and high literacy levels, actual usage may not exceed 80% since there are those that have no use for the Internet or can't find anything useful to them.

Emerging rural access models

Following decades of discourse about how to address the digital divide - which still remains in most parts - and in addition to the ambitions set out for the use of USF's new technologies, certain policy and regulatory reforms could finally help tip the scales to favour rural areas.

Outside of using USF to cover rural areas, there is need to create an environment that allows non-traditional models (eg, community GSM, TVWS, satellite, etc) to thrive and become commercially viable in rural areas. Already, various models are emerging, including those proposed by global players like Google (Project Loon) and Microsoft (Mawingu), as well as models proposed by Facebook in which they propose to work with ISPs and to supply satellite coverage to end-users and small businesses in remote areas.

However, most of these are still in a pilot phase and require some reform to existing policies and regulations. These include issues around licensed spectrum, taxation, interconnection with existing market players and open access to national backbones.

An interesting example of a rural access project that can be easily emulated in Africa comes from Mexico. A non-profit organisation, Rhizomatica is taking advantage of open source software, unlicensed spectrum and low-cost radio equipment to operate a community GSM network. Following successful deployment of its model, the Mexican regulator has set aside spectrum that will be unlicensed for use by such operators.

At the end of the day, regulators would do well to create an environment that allows these new models to thrive, and in turn help foster innovations that will help close the digital divide, enable rural access and reap some of the dividends, such as providing access to healthcare information, complementing education content and connecting rural businesses.

Competition and consolidation

A trend that started more than three years ago will continue into 2016 and beyond, with some significant entries into and departures from several key markets. Some recent examples include Orange and Airtel, which have sold their networks in certain markets in order to focus on others.

It is also highly likely that by 2017, the number of operators in most markets will have whittled down to at least three operators, especially in markets where penetration is currently relatively high and which have a dominant player, meaning other players have little latitude to grow their market shares and instead elect to leave the market.

In light of this consolidation, regulators will need to be stricter when addressing uncompetitive practices, mobile termination, tariffs and market dominance, in order to retain existing operators and allow them to continue investing in infrastructure.

Collaboration and diversification

In the present market environment, which is marked by slow subscriber and revenue growth, increased regulatory uncertainty as well as threats from OTTS, many telecoms providers are looking at their regional strategies, both for enterprise offerings (such as cloud services, VPNs, managed services, etc) as well as offering online services to broaden their consumer market bases.

To this end, some players are collaborating and sharing infrastructure, with a recent example of MTN and Liquid Telecom swapping capacity and sharing infrastructure in eastern and southern Africa - virtually extending each other's footprint and offering multinational corporations in the region with a single provider for various enterprise services. Such collaboration puts them ahead of operators with single operations (and which may also lend itself to further market consolidation).

For the consumer markets, some players are placing their bets on e-commerce, with a good example being Africa Internet Group (AIG), in which MTN, Millicom and Rocket Internet are the main investors. AIG has successfully rolled out various e-commerce businesses in different verticals, such as travel (Jovago), retail (Jumia), transport (Easy Taxi) and real estate (Lamudi). AIG operates in 26 countries, including those where neither MTN nor Milicom (Tigo) have a presence.

Given the emerging policy and regulatory issues in the market, it can be expected that regulators will seek to continue prioritising universal access ahead of concerns raised by telecoms providers - the premise behind this being existing market forces, technological advances and the already demonstrated ability of some players to innovate, diversify and evolve.

In terms of market opportunities, African operators will seek to innovate and explore new opportunities (diversification, collaboration), though the window of opportunity may be fast closing, as players with first-mover advantage will leverage on their existing assets to increase their service offerings and reach more markets.

And despite the current clamour by operators, the issue of regulating OTTs may have to die a natural death, as regulators are not quite equipped to properly tackle global players and will neither be inclined to take actions that may be perceived as protectionist, or go against consumer interests.

About Francis Hook

Hook is an independent ICT researcher and consultant, with more than 18 years' experience in the ICT market in sub-Saharan Africa. He has served as the GSM Association's director for Africa, as well as regional manager, East Africa for International Data Corporation. He has a background in journalism and has been published in various local, regional, and international magazines and newspapers. He is also a speaker at numerous ICT events across the region.

Follow @FrancisHookDF on Twitter

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