Why Africa Needs (Many) More Service Providers

by Sophie Papasavva, Partner at EMFC Loan Syndications
January 2013

 

Africa needs more telecom service providers - many more. The Continent boasts 500 million mobile SIMs and an estimated 500 million more people yet to acquire a telephone connection. Despite an average of four Mobile Network Operators (“MNOs”) per country, Africa’s mobile subscribers are still not serviced adequately. Mobile telephony is not only about competition and cheap tariffs, it is also about offering relevant services, which cannot be effected via a ‘one-size fits all’ model. Telecom operators should consider targeted services to relatively homogenous or closed groups of people. Africa needs more Mobile Virtual Network Operators (“MVNOs”) because this is precisely where they excel; MVNOs offer targeted services to users with certain commonality amongst them. To facilitate the emergence of MVNOs, Africa could benefit from a few Mobile Virtual Network Enablers (“MVNEs”), because they ensure service providers are up and running in little time and at lower cost.

Relevance of MVNOs

A mobile virtual network operator (“MVNO”) is a mobile communications services provider that does not own the radio spectrum or mobile network infrastructure over which it provides services to end-users customers. An MVNO enters into a business agreement with a mobile network operator (“MNO”) to obtain minutes in bulk and access to network services at wholesale rates, then sets its own retail prices independently and offers such to end-users.

Figure 1: MNO - MVNO - MVNE Relationship

Relevance of MVNOs

An MVNO acts as reseller of its host network’s capacity under its own brand, to its own customers, importantly, focused on providing a portfolio of segment specific value added services (“VAS”). This business model is most effectively achieved when the MVNO can leverage existing assets such as an established customer base, distribution, content, infrastructure or brand. As a result of not acquiring licensed frequency spectrum or building their own physical infrastructure (national network), MVNOs have a very different cost structure to MNOs. This attractive business model, the market’s maturity as well as an increasingly favourable regulatory environment have led to a significant growth in MVNOs across Europe and the USA in recent years. It is estimated that up to 20% of subscriptions in certain markets of Europe (eg. UK and Belgium) are via an MVNO, instead of being direct subscriptions with an MNO. So why not apply this to Africa?

The Continent is home to a plethora of national and international companies with strong brand names, a loyal (if not captive) customer base and a much better understanding of what content might be relevant to such customers. Consider a chain of grocery stores that through its own MVNO, can offer mobile users in-store vouchers or discounts on produce nearing the end of its shelf life; highly effective for both consumers and the grocer. Companies that have a captive customer base can develop an MVNO business that leverages not only their brand, but also their distribution channels to sell mobile services. Moreover, companies that serve or sell products to small, specific markets, can develop an MVNO business that leverages their exclusive and non-replicable content and value added services that can strengthen the mobile service value proposition.

What About the MNOs?

The cost structure of an MNO is biased heavily towards fixed costs. Conversely, the cost structure of an MVNO is almost completely the opposite as its fixed cost elements are relatively small. The variable cost proportions of an MVNO are dominated by wholesale airtime costs can often represent 60% to 70% of operating costs which immediately limits profit margins. It is therefore essential for the MVNO to develop a business model that minimises the cost of customer acquisition, retention and fixed costs in order for it to be commercially viable. Successful MVNOs are often those that can leverage existing distribution assets and channels to reduce such costs.

Table 1: MNO Motivating Factors

MVNOs Target Consumers Better

Host network often faces high churn resulting from one-size-fits-all brand positioning
MNOs find it very difficult to succeed in every customer segment
MVNOs have strong brands and niche focus, offering means to fight churn
Whether alone or with VAS partners, MVNOs are a way to implement a more specific marketing mix that can help target specific market segments

MVNOs Increase Reach and Scope of Mobile Offers

Host MNOs extend their “shelf space” as a choice for consumers
In addition to new retail and marketing channels, MVNOs offer MNO-hosted services greater visibility and increasing the chances of consumers choosing their network

MVNOs Lower Costs

Host MNOs can reduce marketing and customer acquisition costs, handset subsidies and running costs for customer maintenance by enabling a relatively independent MVNO to focus on supporting customers
Host MNOs can also avoid the ongoing cost of specific VAS, which is also covered by the MVNO

MVNOs Help Utilise the Network more Efficiently

Many MNOs have a network capacity which is not fully utilized
3G has created the opportunity to propose versatile content offers to possible clients but still lacks proper segmentation; MVNO strategy can fill this gap and generate economies of scale for better network utilization

In reality, MNOs’ one-size-fits-all brand positioning just doesn’t satisfy customer needs as adequately as a more targeted, customer-centric approach would. An MNO’s subscribers base is never homogenous, yet within this base, there exist numerous homogenous groups, who would be better served by a service provider that understands, targets and capitalises on this. As such, each of Africa’s individual MNOs should have every incentive to offer to host MVNOs. This is because the MNO gains all of the wholesale revenue but bares none or only some of the pain of additional competition (especially if they choose an MVNO partner that does not cannibalise their own customer base). The case becomes increasingly compelling if the MNO has unutilised capacity on their network or they operate in a market where the cost of customer acquisition is high (eg. with handset subsidies or similar incentives).

Analysts generally agree that the opportunity for MNOs to take advantage of MVNOs outweighs their competitive threat. Importantly, the main argument of ‘competitive threat’ is actually questionable when one considers that tariffs in many African markets would continue to fall even without the presence of MVNOs. The MVNO paradigm provides companies with access to revenue- generating goods and services and transfers their specific experience to the mobile markets. On the other hand, MNOs acquire access to new customer segments and also gain access to specialised content and services. Sharing some business processes will certainly result in MNOs’ overall performance improving and end-users ultimately benefitting. In summary, instead of taking the market share away from mobile operators, MVNOs create new business opportunities and increase revenues. With vast amounts of unused bandwidth to share and the inability to provide targeted services for all market segments, it appears to be a win-win situation with greater economies of scale and more value added for Africa’s end-customers.

MVNEs Are Here to Help

Mobile Virtual Network Enabler (“MVNE”) enable companies to become successful MVNOs and to do so at lower costs. An MVNO may use its own customer and billing support systems and its own customer service, marketing and sales personnel or it may employ the services of a MVNE to offer all or some of these functions. Europe and the US have seen an emergence of MVNEs in recent years, taking advantage of demand from smaller, homogenous groups interested in specific VAS that MNOs with a blanket positioning simply cannot fulfil. MVNEs have emerged from MVNOs’ need to lower upfront and ongoing investments, since costs associated with setting up operations, even for a virtual operator, remain significant. MVNEs do not compete with the MNOs, rather they extend their market reach. One of the reasons for MNOs to support MVNEs is the ability of the latter to offer economies of scale (through bulk buying of wholesale minutes) and their ability to support more customized solutions than the MNO. 

Few MNOs have the resources to allocate to several companies each wanting to launch a small-scale MVNO, ie one with less than 100,000 end-users. The cost and effort required to setup numerous small MVNOs is typically more than the MNO would want to invest. Moreover, MNOs have legacy networks and are not able to design custom offerings that the MVNO needs and is incentivised to offer its more ‘homogenous’ target customer base. Using an MVNE helps MNOs to leverage one setup and relationship to bring on many smaller players. This is precisely the landscape across many African markets, where smaller pockets of homogenous end-users remain underserved.

Table 2: MVNO Motivating Factors

Lower Upfront Costs

Reduced capex due to MVNE's pre-existing platforms 
Reduced wholesale airtime costs achieved through economies of scale of hosting multiple MVNOs on a single MVNE platform
Reduced operating costs (eg. headcount) by outsourcing management of business and technical operations

Know-How

Smoother launch process, benefitting from previous experience of MVNE

Negotiating Power

Negotiating channel for smaller MVNOs to reach a wholesale agreement with the host MNO

MVNEs specialise in planning, implementation and management of mobile services on behalf of MVNOs. As such, they enable an MVNO to outsource both the initial integration with the host MNO and the ongoing business and technical operations management. Outsourcing to an MVNE is typically the preferred option for companies with brand based offers or those seeking to compete on price. Outsourcing to an MVNE also applies to market propositions where the levels of customer take-up are hard to predict or for those business with limited funding. Added benefits of utilising an MVNE is the possibility to reduce churn and increase customer retention by providing better customer care within segments and by utilizing MVNO’s brand loyalty.

Conclusion

To-date, the primary leaders in MVNO growth have been retail and ethnic but this model is ready to expand to a wider variety of businesses. With smartphone shipments on the rise in many African markets, ultimately there will be an increasing need for mobile operators to fill their networks (3G and 4G), regulators will demand further roaming and interconnection reductions and Africa’s consumers will demand differentiation beyond just pricing.

There are already significant numbers of underserved, current and prospective mobile users across many African markets. MVNOs are better placed to serve targeted, homogenous groups of people than the blanket one-size-fits-all approach of many MNOs. Splitting sales, marketing and tariffs across just two segments (business and consumer) does not satisfy the diversity and mix of many markets, leading to a potentially large untapped source of revenues. By utilising an MVNE platform, companies are afforded the opportunity to offer customised mobile services, quickly and at lower cost. The benefit of MVNEs in deferring capital expenditure and effecting cost savings, allows an MVNO to focus on customer relationship rather than operations. Africa needs many more service providers who can understand and better serve end-users, with targeted, relevant VAS. Whilst this might be an impossible task for MNOs due to large subscriber numbers and limited internal resources, it is certainly not impossible for MVNOs.

Sophie Papasavva

Sophie Papasavva

Sophie Papasavva is the Founding Partner of EMFC Loan Syndications (“EMFC”), a boutique firm assisting companies seeking to raise bank debt. EMFC offers Loan Execution Support, acting as an additional ‘in-house’ resource to time-constrained finance teams. Prior to establishing EMFC, Sophie was a loans banker for 12 years, first as telecoms, media & technology relationship manager and later in loan syndications and sales, where she gained experience in multiple sectors such as oil & gas, mining, infrastructure, agribusiness and others. Sophie has originated, structured, executed, sold, restructured and syndicated loan financings ranging from simple bespoke bilaterals to complex multi-billion dollar, multi-currency syndicated transactions. Her expertise lies in arranging structured, bespoke financings for corporate borrowers operating in the emerging markets. To contact Sophie, please e-mail her directly at sophie@emfc-loans.com or follow her on Twitter at @Sophie_EMFC.