Connecting Africa with GSM

There will be 300 million users worldwide in the overall cellular market by the turn of the century, says Tom Jaquette, VP of Gemini Consulting in Europe.

If this number is correct, the amount of subscribers is expected to increase six-fold, while it is predicted that revenues will only triple. In order to understand this situation, says Jaquette, we need to look at the three phases all cellular markets go through.

The first is the birth phase, which is characterised by little competition and its focus on customer acquisition as opposed to customer retention. Key in this phase is getting the network going. Prices are usually high and the customers are from the business community.

The growth phase comes next. During this phase you begin to see strong competition with the focus shifting toward price, with affluent customers entering the picture.

The final stage, the maturing phase, is characterised by sophisticated competition. The focus shifts toward a slower growth rate and lower prices. Products and service development become more important and cost is no longer the only differentiator. Operators now begin to target the mass market.

As the market moves into the maturing phase, the battle centres on general consumers. In order to deal with the mass-market, operators begin to adopt more sophisticated marketing, segmentation and packaging strategies. This results in falling prices and a decrease in average revenue per user.

"That is why you can have such a high growth rate but very low returns," says Jaquette.

Moving closer to home, Andre Wills, director at BMI-TechKnowledge, says GSM has become the de facto standard for the African wireless market. It is estimated that by 2004 there will be nine million subscribers in Africa. Of that, 6.4 million will be in SA. To put matters into perspective, it is said that GSM will make up 90% of the overall cellular market in Africa.

Wills elaborates on the flurry of activities in the African cellular market during 1998. "The Congo invested $30 million to build a network with Nortel. Egypt forked out $273 million in expanding its GSM capacity to Motorola/Alcatel and Ericsson. In Tanzania the country spent $13 million to expand its GSM network with Siemens. Ethiopia used $7 million to build a GSM network with Ericsson."

Wills adds that there are certain key African markets to watch this year. "One is Mozambique, which is about to make a substantial investment in basic infrastructure. Another market to keep an eye on is Tunisia, which is switching from old to new technology." He notes that the SA cellular market has developed among the fastest in the world.

In an overview about the local market, BT says that when cellular telephony was launched in SA, it was forecast that there would be 500 000 subscribers within five years. Four years later, there are over two million. One in every three phone calls made in SA involves a cell phone, according to a report.

Wills highlights the development of the local market as follows. During 1996 demand for infrastructure equipment tailed off as the operators slowed expansion to allow the number of subscribers to catch up to network capacity. In 1997, the operators started expanding their networks again and growth increased to 38%. The growth in 1998 was further bolstered by the introduction of prepaid services. The cellular infrastructure market grew 26% in 1998 and is expected to grow 63% in 1999 as a result of the introduction of third and fourth cellular operators. However, this growth could possibly be delayed to 2000, adds Wills.

SA has also seen a fundamental shift in the cellular market as a result of the introduction of prepaid solutions last year. According to BMI, there were 700 000 prepaid subscribers added to the networks in 1998, with a large growth occurring over December.

This was mostly due to SA's unbanked population now being able to pay up-front, after previously not being able to get past the rigid credit checking mechanisms.

This group forms a large part of the prepaid market. BMI estimates that 18% of the prepaid market makes up the informal or unbanked market. They spend an average of R1 300 per month on calls. This is a huge figure if you consider that a typical business user spends R550 per month.

The prepaid service also introduced certain gains for businesses. "Prepaid lends itself to budgetary control," says Wills. "Certain companies now give prepaid cards to their staff in order to control cellular phone expenses."

Prepaid has provided the local cellular industry with the opportunity to move into the mass-market and this is why Wills sees the local market somewhere between the growth and maturing phases.

He concludes that the local market is set to grow by another million in 1999. However, after 1999, a reduced growth is expected. "It is therefore essential that the third and/or fourth cellular license be awarded soon otherwise the new operators will not be able to survive."