Nigerian operators face revenue pressure in crowded marketplace - Fierce competition and regulatory conditions impacting Africa's largest mobile market

Nigeria is Africa’s most populous country and has been a key investment target for many international operators in recent years. According to our latest forecasts, the country is also Africa’s largest mobile market by some distance and had just under 70 million connections by Q2 2009 (second-placed South Africa had 51.6 million). However, as our Q2 2009 data shows, Nigeria’s unusual regulatory situation has created a crowded and disparate marketplace consisting of nine mobile networks. Many of these networks are now struggling to remain profitable in light of fierce competition and slowing growth.

The current situation was shaped by the introduction of the so-called Universal Access Service Licence (UASL) in 2006, which paved the way for operators to launch services across all segments of the country’s telecoms sector, including mobile, fixed-line, Internet services and the enterprise. The strategy saw numerous fixed-line operators enter the mobile space, most notably Multi-Links (owned by South Africa’s Telkom) and Starcomms. Competition in the mobile market has also intensified recently following the launch of new entrants Etisalat (in October 2008) and ZOOMmobile (in August 2008).

Despite this activity, the market remains dominated by the country’s three large GSM operators, MTN, Glo Mobile and Zain (formerly Celtel), which together accounted for almost 86 percent of mobile connections in Q2 2009. However, in common with all the market’s players, there is evidence that increased competition and saturation in the high-end market segments is putting pressure on both revenue and growth. The situation was highlighted in Q1 2009, when four operators reported either negative (Zain, Glo Mobile, Multi-Links) or flat (Mtel) net additions. Our data suggests an improvement in Q2 2009 but the market remains highly volatile. For example, the two new entrants (Etisalat and ZOOMmobile) jointly accounted for almost a 12 percent share of net additions in the quarter, taking significant market share from the established operators.

At South Africa-based MTN, Nigeria accounts for 45 percent of the group’s total subscriber base and 47 percent of group revenue (as of March 2009). Subscriber growth at MTN Nigeria, the market-leader, remains strong but ARPU has declined from US$22 in Q4 2005 to just US$13 by Q1 2009. Nigeria is also the largest market at Zain, another pan-African mobile operator. As we noted in last week’s Snapshot, Zain Nigeria is the group’s largest contributor of customers (23 percent) and revenue (18 percent), but revenue, earnings (EBITDA) and market share all declined at the unit in Q1 2009. ARPU stood at US$7, almost half that recorded by MTN Nigeria in the same quarter. Both MTN and Zain – as international operators - have seen their respective Nigerian operations hit by the devaluation of the local currency, the Naira, which has dropped 25 percent against the US dollar since November 2008.

The next tier of mobile players comprises the CDMA-based UASL operators, Visafone, Multi-Links and Starcomms. These operators have successfully rolled out higher-speed EV-DO and/or EV-DO (Rev A) networks, and all three are recording triple-digit annual connections growth. Visafone, the country’s fourth-placed operator, was established following the merger of three earlier Nigerian CDMA mobile operators (including Cellcom) in 2007, and has set itself the target of breaking into Nigeria’s top three by 2012.

One operator in freefall has been the government-owned fixed-line operator Nitel and its mobile unit, Mtel. Growth at Mtel has stalled in recent years, and the government announced last month it is looking again at finding a buyer for the business after an earlier sale was declared void. Mobile connections at Mtel have dropped from a high of around 1 million five years ago. The operator has suffered from industrial action, equipment loss and vandalism, a chronic lack of investment and allegations of corruption.

Commercial WCDMA rollout in the country is already underway. Second-placed Glo Mobile launched Nigeria’s first live WCDMA/HSPA network in September 2008. According to our estimates, the operator had around 182,000 subscribers on its new network by Q2 2009, representing just over 1 percent of its total customer base. MTN, meanwhile, announced it had 551 live 3G sites by Q1 2009.

The regulator has recently called for network-sharing between operators as the solution to problems of over-capacity at urban sites, and weak coverage in rural areas. Network coverage is poor by the standards of most developed markets; MTN, for example, says its network covered just 62 percent of the country by population and a mere 5.4 percent of the country on a geographical basis at the end of 2008. As a consequence, the case for network-sharing is likely to strengthen as the operators begin WCDMA network rollouts.

Joss Gillet, Senior Analyst, GSMA Intelligence:

Nigeria needs more effective regulatory initiatives. With nine mobile operators in the market running different networks and often advertising unclear tariffs, it is creating confusion for consumers. In addition, the necessary improvements in quality of service are slow to happen as operators are struggling to invest in network expansion and better coverage. Mobile operators are also facing fierce price competition in a cash economy which is 98 percent prepaid; margins are low and cash flow often falls on the negative side as operators struggle to balance capital expenditure ratios. The regulator needs to be more pro-active at supporting mobile operators to rationalise their portfolio of services, improve network quality and profitability. Many international operators - most recently Vodafone - have been attracted to the market due to its high-growth potential. However, outside investment is unlikely to occur until the regulatory situation improves.