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Radical new pricing strategies required to support future mobile growth in Africa

Africa on track to become second-largest mobile market but local operators face challenges

Africa is on track to become the world's second-largest mobile market by year-end, but the region remains highly dependent on prepaid voice income and is characterised by pricing wars, low usage and the relatively high cost of device ownership, says GSMA Intelligence.

According to the latest Q3 2011 figures, Africa is the fastest-growing mobile region in the world, growing connections by 19 percent year-on-year (to 620 million) and is poised to overtake the Americas during the current quarter to become the world's second-largest mobile region after Asia-Pacific. There were 26 million new African connections (net) added in the third-quarter.

Pricing wars have been affecting connections growth in several African markets, including Kenya, Uganda, Tanzania and Egypt. This phenomenon is exacerbated by the dominance of prepaid users - accounting for 97 percent of the region's connections - who are susceptible to pricing fluctuations and more likely to churn.

In Kenya, Airtel (Bharti) has reduced its per-minute voice calls from KES6 (US$0.06) to as low as KES1 and has been offering free data modems since taking over the country's second-largest network. Rival yu (Essar Telecom) responded by introducing modems priced at KES2,599 (US$26.5) with two months free unlimited browsing while market-leader Safaricom had to reduce the price of on-network SMS to KES1 from KES3.5. Consequently, Airtel managed to double its customer base in 12 months at the expense of its competitors but was also strongly criticised by Safaricom, which asked the regulator (CCK) to set a minimum threshold for prices. The market leader warned that such low prices are not sustainable and could cost the industry some KES20-26 billion (US$270 million) in lost revenue.

There is a similar mobile price war underway in Uganda where the regulator recently backtracked on plans to establish a floor price for on-net calls at UGX92 (US$0.03) per minute and limit price promotions. This has allowed the country's number-three player Warid Telecom, for example, to cut voice prices to just UGX60 per minute for on-net calls and UGX180 per minute off-net. Rival UT Mobile has also recently introduced unlimited on-net calls for UGX500 (US$0.19) per day. One player in the market that has spoken out against the Ugandan price war is MTN, the market leader, which recently increased both its on-net and off-net tariffs.

Amid intense competition, customers' price sensitivity is also a growth hurdle for Orange in Egypt which, earlier this year, stated that lower ARPU levels are due to tariff inelasticity, aggressive promotions and the addition of new "bottom of the pyramid" customers. The contrast between Africa and other emerging mobile markets is aptly demonstrated by recent figures from Bharti, which entered 15 African markets following its acquisition of Zain Africa last year. The operator said that in 2010 its African subscribers were averaging 112 voice minutes-of-use (MoU) per month and generating US$7 per month (ARPU). This compared to 454 MoU and US$5 ARPU in India. The operator described India as a "high usage, low pricing model" compared to the "low usage, high pricing model(s)" seen in Africa.

The Kenyan market also serves as a useful example of the impact of mobile-specific taxation in Africa on price-sensitive demand. A recent study commissioned by the GSMA (conducted by Deloitte) found that mobile handset sales in the country soared by 200 percent following the government's 2009 decision to slash the 16 percent VAT levied on handset sales, with mobile penetration rising from 50 percent to 70 percent over the same period. This suggests that taxation is a key contributor to the total cost of mobile ownership (TCMO) in low-income African markets. Indeed, the research found that taxation as a proportion of the TCMO in Kenya has fallen from 25 percent to 17 percent over the last five years as the tax burden has been reduced.

However, the study found that this trend is not being replicated elsewhere in Africa with users in Gabon paying 80 percent tax on handset purchases, followed by Niger at 65 percent; and Congo Brazzaville, the Democratic Republic of Congo, Guinea, Madagascar and Rwanda all paying more than 40 percent. It notes that in several African markets, users are paying twice as much tax as they were four years ago.

A new type of African mobile tax emerging is the so-called 'Surtax on International Inbound Call Termination' (SIIT), which centrally fixes the prices that operators can charge when terminating international inbound calls. The GSMA/Deloitte research found that where the SIIT has been imposed, the level of inbound international traffic has fallen and prices of outbound calls have increased due to the reciprocation of higher termination prices by operators in other African countries. For example, in Congo Brazzaville, the price of inbound traffic has risen by 111 percent and operators report that inbound traffic fell by 36 percent between May 2009 (when the tax was introduced) and May 2011. There were similar trends identified in Gabon, Senegal and Ghana.

Joss Gillet, Senior Analyst, GSMA Intelligence:

The price sensitivity levels that we have observed in Africa are long-term growth hurdles for the mobile sector in the region. On the one hand, price competition boosts penetration and operator market shares but, on the other, rock-bottom low prices are not sustainable and negatively impact the solvency of a country's telecom sector, further delaying its expansion. In several African markets, local authorities must regulate price competition to ensure that local providers can generate positive margins to finance their daily activities as well as to reassure investors about 'next-generation' opportunities. To date, 3G only represents 10 percent of Africa's total connections base, which highlights a substantial potential for growth that will only be fulfilled if pricing models are rationalised and if investors are confident that they will generate short-term return on investments. The situation was similar in India where long-lasting pricing wars have led to the lowest prices in the world, yet mobile operators are progressively increasing their tariffs, notably to meet coverage targets for rural demand. Such controversial strategic changes need to be implemented in Africa if current growth rates are to be sustained.

    Africa World
Connections (million)   620 5,883
Net Additions (million)   26 167
% Connections Prepaid 97% 74%
Contract 3% 26%
2G 90% 74%
3G 10% 26%
Growth (Connections) Quarterly 4% 3%
Annual 19% 14%
Market Penetration   63% 85%

Africa mobile connections, Q3 2011
Source: GSMA Intelligence

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