Africa - Making money at the bottom of the market

Telecom Investment Research Note

Synopsis

Mobile phones represent more than 90% of all telephone lines in Africa. As market penetration passed the 50% mark in 2010, subscriber growth slowed to below 20% p.a. The bottom of the pyramid (BoP), referring to the majority of the population that is poor, has clearly been penetrated in some of the continent’s most dynamic markets which have passed or are close to the 100% penetration mark. Most other African markets are just about to enter this stage of their development which is worrying some investors while it is exciting others.

The introduction of prepaid services and a steady decline in tariffs has meant that about half of Africa’s close to one billion people can now afford a mobile phone. However, as lower and lower income groups are being targeted, the declining Average Revenue per User (ARPU) is putting pressure on the network operators' profit margins. Literal price wars have broken out in some markets where a large number of operators have been licensed. Despite this, international investors are still very keen to enter the market through new mobile licences or shares in existing mobile operations in Africa. Some operators make more than twice the ARPU of some of their competitors in the same markets.

Newly introduced converged licensing regimes have increased the competitive pressure in a number of key markets but also allow the mobile operators to branch out into new service segments. Due to the continent's poor fixed-line infrastructure, the mobile networks are playing an increasing role in broadband Internet service provision, following the launch of third-generation (3G) services – a welcome new revenue stream in an environment of low ARPU levels. Mobile banking services are another growth area, so successful that they are threatening the traditional banking system which many people in developing countries do not have access to.