The contribution of the telecoms sector to African development over the past fifteen years has been truly transformational. And yet, seldom have the fundamentals that have long underpinned its success been so much under threat.
Rarely has an industry been as celebrated as the African mobile industry over the past decade – and deservedly so. From its unprecedented ability to alter human interaction and communication, change the fabric of entire economic sectors, attract massive infrastructure investment, the contribution of the telecoms sector to African development over the past fifteen years has been truly transformational.
And yet, even as the industry continues to bask under such well-deserved plaudits, seldom have the fundamentals that have long underpinned its success been so much under threat and its future so unremittingly cloudy. Our research suggests that the African mobile market has entered a phase of acute turbulence, at the exit of which many players will come transformed, no longer mere telecoms operators, but full-fledged platforms for digital service innovation. Others will not make this great trek, felled as they will be by the combined effect of OTT service cannibalization, destructive competition, regulatory apathy and shortsightedness, voracious and misguided tax policies, weak supporting infrastructure, shareholder impatience, and their own inability to acknowledge that they’re in trouble and act accordingly.
Building on months of research, extensive quantitative analysis, interviews with market players and one of the region’s most extensive market projection models, Xalam Analytics has released its Future of African Mobile Profitability Report, a comprehensive analysis of mobile service provider profitability in Africa. The report focuses on a difficult, yet increasingly inescapable question: African mobile operators are adding subscriptions in record numbers, have one of the world’s highest capital intensity ratios (20%), are growing their data revenues by 30%+ or more and are transforming the African payments landscape. So why are they making less and less money – and for the most part, losing value?
The answer, as one might imagine, is complex – but in the Future of African Mobile Profitability, we’ve taken an extensive stab at it. The 140-page analysis pulls no punches, and at times, makes for glum reading. But it also lays out the pathway to the African digital service provider of the future. The report offers some views on some of the most critical questions facing African operators, from voice/data cannibalization to the impact of OTT Players, the purported necessity of 4G in Africa, the bottom-line impact of cellular tower sales, the declining valuation of African mobile assets, what the digital service provider model of the future will look like – and more.
We say a lot of things in this report that cannot all be regurgitated here. A sample nonetheless:
- The African mobile subscription market will likely hit the 1bn mark within the next two years. It will be a great milestone – but one with negligible bottom line impact.New subscriptions are now inconsequential at a macro level;for the most part, they have no direct impact on the ability of the African mobile market to expand its revenue base;
- The overall African mobile revenue picture reflects the evolution of different phases of market growth .Between 2005 and 2010, the size of the African mobile market more than doubled, leaping from around $21bn to nearly $50bn.Those times are gone. Between 2010 and 2014, compound average annual revenue growth was 1.4%, the sign of a market that is essentially flat.
- Current mobile data only starting to scratch the surface of the mobile data potential in Africa.The market is at the very inception of what we call the “Age of Data” and the broader outlook for mobile Internet revenue in Africa is excellent – we expect mobile connectivity revenue to double over the next five years. All the same, strong data growth has not yet had a material net uplift on top line mobile revenues. Thus, the fundamental question now at the heart of the African business model is whether the data boom will ultimately translate into higher overall revenue and margin growth for mobile operators.
- African operators face a substantial predicament in monetizing data – investing in new technologies while not funding the instruments of their own demise.And 4G, in our view, is arguably the biggest OTT Trojan horse to date. How operators resolve the antithetic objectives of driving data growth while mitigating the purported impact of data cannibalization will be one of the trickiest balancing exercises MNO executives will face over the medium term. We say there’s no easy way out of this one.
- At a deeper level, we find the challenge posed by OTTs in Africa, if not well addressed, to be substantially more pernicious than the threat to mobile operators in more developed economies.In postpaid-heavy markets, OTT cannibalization is primarily a cannibalization of the revenue upside. In African countries the OTT risk is to both the revenue floor and the upside. It is a threat to the very structure of the African mobile service provider model.
- Our analysis has led us to develop a broader theory on the monetization and net contribution of mobile data services in Africa, built around three main phases. An initial data growth phase (marginal net impact), a phase of negative data contribution (materially negative impact) and a third, post-transition, data-centric phase (materially positive impact). Most operators are stuck in first or second phase. That’s a problem, and they can’t get to the third phase fast enough.
- It will be a challenging path – for profitability has been tough. We estimate that at least half of the 40+ operators analyzed for this study have seen a sharp contraction in their profitability over the past few years. Only around 25% of the operators we analyzed have shown positive growth in free cash flows over the past three years.
- Our analysis leaves us unconvinced of the operational, bottom-line upside of tower asset sales– but we find the financial underpinnings of such transactions to be excellent. In truth, tower sales primarily represent a recalibration of the mobile network value chain as operator business models evolve. A market-driven reallocation of cash in search of better return efficiency across the chain. At a time when returns have been terrible, that’s a good thing.
- Substantial value has been lost in the African mobile marketplace since 2009.A review of the Xalam Analytics African telecoms transaction database, covering around 100 transactions since 2000, highlights the overall downward trending of the value placed on African operators. Between 2006 and 2011, the median EBITDA multiple on African mobile transactions was around 6.7x. Between 2012 and mid 2014, that multiple has fallen to around 4.5x. We see three main types of value in the African market: stars, mid-level plays and distressed assets.
“The Future of African Mobile Profitability: Surviving the End of the Mobile Golden Age and the Rise of Digital Applications Platforms” – A Xalam Analytics Report is now available. Please find a free Executive Summary sample and more information at xalamanalytics.com and www.heavyreading.com.