African telecoms at a crossroad final

African Telecoms at
a Crossroad

A.T. Kearney | African Telecoms at a Crossroad 2
Introduction
Africa is the last frontier for the telecoms industry and has been attracting significant interest
and investments. The market certainly offers attractive fundamentals: a population roughly
as large as China and India, strong economic growth forecast at 6% p.a. over the next five
years, an emerging middle class and still low penetration levels for telecoms services.
However, after years of vibrant double digit growth, the rate of new subscriber acquisition
has sharply decelerated. Intense competition is also driving a free-fall in prices and is placing
pressure on margins.
The African telecoms market is at a crossroad. The market will shift from being focused on
upper classes and largely voice-centric, to a mass-market with a much more significant
share of data services. This paradigm shift certainly offers substantial long-growth prospects.
However, the transition process period, underway in most countries, might prove challenging
given the adjustments required in price levels, cost base, offers and investments.
Figure 1 - The Paradigm Shift in the African Telecoms Market
Market Characteristics Today Tomorrow
Target Customers
High and Middle Class
(Urban)
Mass Market (urban and
rural)
Market Segmentation Largely undifferentiated
Highly segmented and bi-
polar market
Prices High (>10$c/min.) Affordable (3-6$c/min.)
Competitive Landscape Fragmented Concentrated
Share of Non-Voice
Revenues
Negligible (<5%) Significant (>30%)
Networks 2G 2G/3G/4G
To successfully navigate through this transition process, we argue that industry leaders, with
hopefully positive support from local governments / regulatory authorities, need to act today
to find a new, robust growth path on the long-term.

Egypt
Morocco
South Africa
Nigeria
Ghana
64%
128%
80%
116%
Ivory Coast
79%
126%
Recent Developments in the African
Telecoms Market
The End of a Boom Era?
Recent growth in adoption of telecoms services has been breath-taking, largely driven by
mobile voice services. There are now over 730MM mobile subscriptions, corresponding to a
SIM-card penetration rate of over 65% and total revenues of US$40 Bn. Adoption of mobile
services has been fuelled by increased network coverage and reducing prices for both
services and mobile handsets (some now sell well under US$10).
Figure 2 – Growth in Mobile Subscribers in Africa
Growth in Mobile Subscribers (MM Sim Cards)
Mobile Penetration Rates
for Selected Countries
(H2 2012)
Source: GSMA, Merrill Lynch; A.T. Kearney Analysis
In 2011, growth in mobile penetration seems to have abruptly decelerated, with subscriber
growth rates now in single digits in most countries. Industry observers attribute this to a
variety of factors – including a tougher economic climate in some countries, prices still above
affordability levels for the more modest socio-economic segments, and penetration rates
gradually approaching so called saturation levels.
Whilst all these facts are certainly relevant, they are in our view partly misleading. Multi-SIM
ownership, which stands at approximately 30-50%, means that real penetration rates are in
reality closer to 35%. Also, the abrupt deceleration in subscriber growth in 2011 is to a
significant extent explained by the implementation of mandatory subscriber registration in a
number of countries.
As a result, the African telecoms market still offers ample room for growth from the current
real population penetration rate of 35% to what we estimate to be saturation penetration
rates of circa 60%-70%. Further adoption of data and Internet services, still in their infancy,
will provide additional momentum to the development of telecoms services in Africa.
+37%
+7%
2015F
910
2014F
860
2013F
807
2012F
735
2011
620
2010
552
2009
458
2008
379
2007
283
2006
201
2005
136
2004
83
2003
53
2002
37
2001
26
2000
17

Intense Competition (and Plummeting Prices)
The telecoms market in Africa has attracted a flurry of both international and local investors.
Global telecoms operators, such as Vodafone, France Telecom, Etisalat, Bharti Airtel and
Millicom are particularly active on the continent. At the same time, Africa has seen the
impressive development of home grown players such as MTN (South Africa), Glo (Nigeria)
or Morocco Telecom (partly owned by Vivendi). The Sub-Saharan African telecoms market
is largely controlled by five players, which represent over 70% of revenues.
This apparent concentration is, nevertheless, misleading. The reality is that there are today
over 3.5 mobile operators per market, with some countries such as Tanzania or Nigeria with
over 8-9 operators. This situation is untenable given the importance of scale effects in the
telecoms industry – in fact, it is incredibly rare to find a number four operator profitable
anywhere in the world.
Figure 3 – In-Country Scale Effects in Africa:
The Relationship between Market Share and Profitability
Note: Data for 2008, 2009 and 2010 (depending on availability)
Source: Companies annual reports; ML Wireless Matrix; A.T. Kearney Analysis
With over-supply, competitive intensity has been amplified by the deliberately aggressive
pricing strategies of some players in an attempt to gain market share and grow the market.
For instance, Bharti Airtel, following its acquisition of Zain’s African assets in 2010, tested its
minute factory model in Kenya by halving price levels. Price reductions in the last two years
have been, in some markets, quite staggering: from US$c 20/min to US$c 6/min in Nigeria
for instance.
0
5
10
15
20
25
30
35
40
45
50
55
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80
EBITDA%
Market Share
Top Quartile
Bottom Quartile
Operators
target for
consolidation
Operators
vulnerable to
liberalization
Operators to
Focus on Cost
Optimization
Operators
vulnerable to
market share
loss

Figure 4 – Price Reductions in Selected African Markets
(March 2011 – Jun 2011)
Source: GSMA African Observatory, A.T. Kearney analysis
Decelerating revenue growth and price reductions are already placing telecoms operators
under financial pressure. MTN Nigeria has seen its EBITDA margin drop by 4 points in one
and half years, mainly driven by an ARPU decrease of 12%. Equally, from Q3 2011 to Q3
2012, the EBITDA margin of Millicom’s African operations dropped by 11%, following a
decrease of 5% in ARPU.
The impact of these market changes will be substantially different across markets – we
expect markets with already high penetration levels and a large number of players (such as
Nigeria, Ghana, South Africa) to face more challenging times than less competitive and
developed markets (e.g., Togo, Zambia). The figure below provides a summary of the
relative attractiveness of telecoms markets across Africa, taking into account market
development and competitive intensity.
Namibia Libya Ethopia
61%
57%
35%
Togo Gabon Mali Congo Djibouti Cape
Verde
Zimbabwe
17%
15%
13% 13%
11%
9%
26%

Figure 5 – African Telecoms Markets Heat Map
Source: ITU, Blycroft, A.T. Kearney analysis
Substantial Growth Potential for Data Connectivity and Value-
Added Services
Not all is doom and gloom however. In fact, data connectivity and valued-added services
(VAS) are poised to grow strongly – starting admittedly from a particularly low base.
Mobile data services (including SMS) represent on average 12% of African telecom
operators’ total revenues. However, the average is skewed by a few Tier 1 markets such as
South Africa and Kenya. In most other African countries, mobile data services are still at
particularly low levels, with an average of 6% of total revenues. This is very substantially
lower than in other emerging markets and, naturally, developed economies.
High penetration, high competitiveness
High penetration, low competitiveness
Low penetration, high competitiveness
Low penetration, low competitiveness

Figure 6 – Comparisons of data as % revenues and ARPU for Selected African and
Global Markets
1st
Tertile: Top markets in Africa in data % rev, e.g.: South Africa, Kenya
2nd
Tertile: Second markets in Africa in data % rev, e.g.: Nigeria, Ghana
3rd
Tertile: Bottom markets in Africa in data % rev, e.g.: Ivory Coast, Togo
Source: African operators, Merrill Lynch, A.T. Kearney analysis
There is ample evidence that the African consumer has significant interest in accessing
Internet services, provided services are affordable and relevant. Today, ten per cent of the
African population accesses the Internet on a regular basis, mainly through public access
points such as cyber cafes, work or school. There are now close to 50MM Facebook
accounts across Africa. However, Internet access through PCs remains quite limited, at
approximately 1%, with some notable exceptions such as South Africa or Egypt.
Looking forward, we expect strong growth of broadband access growth. Stronger diffusion of
smartphones, with low cost versions expected to sell as low as US$30 in the upcoming
future, will be the main driver of Internet access growth. However, mobile broadband will
also constitute an important market and represent the bulk of PC-based access to the
Internet. Broader access to the Internet will be an important enabler to develop the small
VAS market in Africa – including services such as social networking, mobile content /
entertainment or mobile financial services
As a result, the market for Data and mobile VAS in Africa is expected to grow at 16% p.a. to
reach US$14 Bn by 2016, representing close to 32% of total mobile revenues.
14%
52%
1%
5%
2nd Tertile
15%
15%
1st Tertile
33%
43%
Europe
6% 2nd & 3rd Tertile
Average
South East AsiaIndia
12% Total
African Average
6%
3rd Tertile
25%
28%
African Markets
ARPU range
(USD, 2011) $18-$20 $7-$9 $2-$6 $12-$35 $3 $4-$37
Data as % of revenues

Figure 7 – Growth of Data (incl. SMS) and VAS in Africa (2010-2016, USD Billion)
Source: Pyramid research
In summary, the African telecoms market still offers room for growth, estimated at 2% p.a.
over the 2012-2016 period. This growth will be essentially driven by data / VAS services,
with voice revenues eroding slightly.
Figure 8 - Growth in Mobile Revenues in Africa (US$Bn)
Source: Pyramid; A.T. Kearney Analysis
+16%
2016
14.0
10.0
1.7
2012
7.7
6.4
1.2
2011
6.4
5.5
0.9
2010
4.9
4.2
0.7
4.0
2015
12.1
9.1
3.0
2014
10.5
8.2
2.3
2013
9.0
7.3
VAS Data
2014
42.3
31.8
10.5
2013
41.3
32.3
9.0
2012
40.1
32.5
7.7
2011
38.9
32.5
43.4
2010
35.2
30.3
4.9
2009
31.2
+8%
2016
44.2
30.2
14.0
2015
+2%
12.1
32.0
28.5
3.5
6.4
30%
4%
CAGR
2009-2012
CAGR
2012-2016
VoiceData
16%
-2%

A Call to Action: Create the Path for
Renewed Profitable Growth
With an African telecoms market at a crossroad, industry executives will have a tougher task
ahead to drive further profitable growth. Growing a telecoms business in Africa is no longer
just about putting up radio base stations and distribution networks faster than competition. In
fact, we see six important priorities for leaders of telecoms operators in Africa.
Figure 9 – The African Telco CEO Agenda
1. Create a Sounder Economic Environment for the Industry
Escaping fundamental economics is impossible: only under exceptional circumstances do
we see room for more than three mobile operators per country. With prices declining and a
surge in capital expenditure requirements expected over the next few years, we anticipate
that dozens of sub-scale operators will disappear. In some cases, this will be through in-
country mergers, in others simply through shutting down loss-making operations. As a case
in point, Telkom has recently shut-down its loss-making operation in Nigeria (Multi-Links).
Beyond industry consolidation, telecoms operators face a number of regulatory and tax
impediments to further profitable growth. Some governments and regulatory authorities view
telecoms operators essentially as tax collection machines. They should also consider their
broader role in stimulating economic growth.
CEO
Agenda
Transform the
Operating
Model and
Grow New
Talent
Keep
Investing in
the Network
Drive a Step-
Change in
Operational
Excellence
Sounder
Economic
Environment
for the
Industry
Drive Growth
through
Smarter
Pricing &
Value
Proposition
Differentiation
Accelerate
the
Development
of New
Services

To support the further growth of the industry and stimulate wider adoption of ICT services,
we would encourage African governments to focus on the following initiatives:
 Encourage wider and more affordable access to Internet devices. Governments
should consider reducing import tariffs on devices such as mobile handsets or PCs,
which amount to 20-50% in most African markets. We believe that programs to
encourage computer literacy and ownership are also essential to digital inclusion and
productivity improvements. For instance, the Ghanaian government removed in 2012
the import duties (10%) and import VAT (15%) on mobile handsets, which had a
positive impact in increasing mobile penetration. In this case, it is expected that the
increased tax revenues from a bigger mobile market will largely offset any losses on
import taxes. In fact, total tax revenues are expected to be 24% higher1
.
 Provide access to additional spectrum to qualified operators. It is estimated that
by 2016, Internet traffic in Middle East and Africa will reach 3,714 PB per month,
driven mainly by Internet video2
. However, spectrum allocation for mobile services is
much lower than in most other regions in the world (Figure 10). In particular,
essential spectrum for mobile broadband in the 800Mhz and 2.1Ghz range, has yet
to be allocated. Other important spectrum bands – e.g., 2.3Ghz, 2.6Ghz and 3.5Ghz
– have in many countries been attributed to a flurry of small, niche Wimax operators,
which in many cases sub-utilize the spectrum;
Figure 10 Spectrum Licensed in Selected African Countries vs. International
Benchmarks
Source: GSMA
 Adopt a more balanced approach to taxation of telecoms operators. Regulators
/ governments generate a substantial amount of revenues from the mobile industry in
Africa. In 2010, the mobile ecosystem contributed around US$16bn to public funding
in Africa, which represented 4.1% of total African government income. In some
markets, individual operators account for a disproportionate amount of government
income. For instance, MTN represented 5% of total tax income in Ghana in 20083
.
Beyond normal corporate taxes, operators are imposed various special taxes,
ranging from revenue share, license fees, and special telecoms taxes. One specific
issue which is now emerging is the high costs of recent license / spectrum
attributions, which, in some cases, are considerably higher than in developed
1
GSMA, Taxation and the growth of mobile services in sub-Saharan Africa, 2012
2
Cisco Visual Networking Index, 2011
3
GSMA Africa Mobile Observatory
1662
73
70
Morocco
205
50
155
Tunisia
220
70
150
Nigeria
273
40
153
80
Mexico
360
240
120
China
395
70
110
215
Hong
Kong
434
65
140
229
United
States
513
108
120
285
Sweden
585
118
142
325
Germany
594
130
150
314
204
Cote
d’Ivoire
36
20
Botswana
94
34
60
Uganda
98
50
48
South
Africa
700-900MHz
1800-1900MHz
2100-2600Mhz

markets (in relative terms). Therefore, African governments need to carefully balance
the legitimate need to collect public funding with the ambition to encourage broader
access to ICT services.
 Encourage the development of cheaper, high bandwidth backbone capacity
(national and international). US$2.8 Bn has been invested between 2010 and 2012
in building new submarine capacity in Africa. There are now eight submarine cables
laid along the West and East coasts of Africa with a lit capacity of 1.57 Tbps4
. Two
additional cables, WACS and ACE, are expected to go live by 2012-2013, bringing
the number of connected countries to more than 25. This submarine cable system
offers a tremendous opportunity to finally bring a true broadband service to end-
consumers in Africa at affordable prices. However, cheap access to this submarine
cable capacity is not pervasive. In land-locked countries, links to submarine cables
either do not exist or are priced dearly. Also, in countries such as Cameroun, mobile
operators are obligated to buy national backbone capacity to the local incumbent, at
particularly high prices. African governments should more actively seek to encourage
the development of cheaper and higher bandwidth capacity, either through
deregulation or government sponsored national / international backbone
developments.
 Adopt more ambitious ICT policies. ICT sector is crucial to the development of
education, healthcare, agriculture and business services. Some African governments
have already begun to adopt ICT policies that align with their development goals. For
example, Ghana has established ICT as the cornerstone of its development of the
economy:
“The Government of Ghana is committed to pursuing an ICT for Accelerated
Development (ICT4AD) Vision aimed at improving the quality of life of the
people of Ghana by significantly enriching their social, economic and cultural
well-being through the rapid development and modernization of the economy
and society using information and communication technologies as the main
engine for accelerated and sustainable economic and social development.” 5
Other African governments need to adopt similarly ambitious ICT policies in order to
drive the “rapid development and modernization of [their] economy and society”.
2. Drive Growth through Smarter Pricing and Value Proposition
Differentiation
Affordability of telecommunications in African countries is well below other markets – while in
South Africa one minute of work is worth half a minute on the phone, in the US a minute of
work is worth 19 minutes of telecommunication consumption. In fact, challenges in Africa are
well known with a substantial percentage of the population living below the poverty level.
However, the importance of the high and middle class has tripled over the last 30 years to
313 million people, with the correspondent increase in size and purchasing power. As a
result, a small proportion of the population is today driving the lion’s share of
telecommunications consumption, with less than 15% of the subscribers typically accounting
for 50% of the revenues.
4
Telegeography
5
Ghana Ministry of Communications

Figure 11 - High-Value Segment – A key Source of Value
Source: Client Finance Department; A.T. Kearney
For telecoms operators, the structure of the customer base is critical in defining their growth
and commercial strategies looking forward. The bulk of new subscriber growth will come
from youth and the bottom-of-the pyramid. However, ARPU growth from greater data usage
will come from high value customers.
As a result, operators will need to increasingly operate in a bi-polar business model: ultra-
low-cost services for the masses, combined with more sophisticated products and customer
service for the higher value customers. This will require African telecoms operators to design
and deliver greater value proposition differentiation.
To maximize value capture, African operators will have to get smarter about pricing. On the
one hand, they will certainly need to further reduce prices to maximize affordability for the
masses and stimulate usage. On the other hand, they will need to move away from pure
price competition on high value customers to create economic space for investing in
products and customer service.
In fact, in the last couple of years, we have seen African operators introducing quite
innovative pricing plans. MTN Zone, a dynamic price plan – with discounts available
throughout the day, depending on location and traffic per radio base station – is a clear
success, in maximizing value and network usage, building customer loyalty and satisfaction
(through superior network quality) and limiting competition (as tariffs are not known in
advance).
However, more needs to be done. It is critical to have clear and differentiated value
propositions for the different segments, addressing customer needs in the right way. African
operators can leverage the experience of operators in more developed markets, where
outperforming operators combine different strategies such as segmentation / customer base
management and innovation. A strong focus on segmentation with insights into evolving
consumer behaviour has been used by several players in developed markets (e.g. Vodafone
or O2). Some have even adopted a multi-brand strategy, which gives them flexibility to tackle
the market and competitors in different ways.
LV
MV
HV
VHV
Total subs
100%
53%
33%
9%
5%
Subscribers MoUs
LV
MV
HV
VHV
Total MoU
100%
15%
41%
24%
21%
On-net voice revenues
LV
MV
HV
VHV
Total revenues
100%
12%
40%
25%
23%

Addressing the high value segment is not about having the lowest price – it is about having
the right price for the right customer experience. Price differentiation is thus a tool to been
introduced – e.g. integrated offers to increase stickiness, quality of service differentiation,
smart tariffs structure (e.g. flat rates for voice and sms, etc), among others.
However, the low value segment cannot be forgotten by operators while remaining
competitive without further decreasing prices. The optimization of on-net / off-net price
differences, carefully balancing network effects vs. multi-SIM is a key issue. Moreover,
operators need to follow a few key rules:
 Keep it simple as complex pricing doesn’t work in low income markets (e.g.,
digressive pricing where 1st min is offered at a premium to subsequent mins);
 Use volume to build affordability (e.g., sell bundles with lower volume at higher price);
 Base pricing on overall customer yield concept (i.e., avoid a siloed view on pricing;
measuring the pricing impact from just one of customer’s many revenue streams);
 Adapt to the recharging behaviour of your customer base (e.g., pricing products
within the most commonly used recharge denomination limit)
As a result, we expect to see more differentiated strategies in Africa, with operators clearly
moving away from largely undifferentiated offers to more sophisticated value propositions
and customer management practices.
3. Accelerate the Development of New Services
As discussed in the previous chapter, data and VAS are expected to generate revenues of
US$4.8 Bn and US$4.0 Bn respectively by 2016.
Data
The African data market presents two distinct segments: large and small screen.
The large screen market consists in accessing the Internet through a PC, notebook or
potentially even a television set through a 3G or 4G datacard. This is an important market for
telecoms operators, given the absence of a proper fixed network in most countries.
However, the main challenge in expanding this market will be growing the penetration of
large screen devices such as PCs. Some operators in Africa are actively selling PCs now
and, in some cases, subsidizing them.
The small screen market consists in accessing the Internet from a smartphone or tablet.
Declining prices for smartphones will help drive adoption for the mobile Internet. Retail prices
for smartphones are today on average at US$250, but entry smartphones come as low as
US$70. In the future, we expect ultra-low cost smartphones to be as low as 35$. The
combination of lower handset and data service prices will enable the mobile Internet to
become truly mass-market in Africa. We expect that 50% of mobile phone subscribers will be
using the Internet in the next five years, largely from mobile devices.

Value-Added Services
The most prominent of Value-Added Services are Mobile Financial Services (Figure 12),
which had a phenomenal growth in the continent since it was first launched in Kenya in
2007. In an effort to “bank the unbanked”, after 30 months in services, Safaricom’s M-Pesa
in Kenya had 8.5M users who have transferred US$3.7Bn (~10% of Kenya’s GDP) worth of
transactions6
. Other operators have followed suit and launched mobile payment services in
several African countries. For example, Millicom launched its mobile money wallet in
Tanzania in September 2010 and reached 10% penetration of its subscribers in less than
one year later. In Ghana, Millicom launched a micro-insurance service as a loyalty tool. The
results showed a 15% increase in ARPU and 20% churn reduction. 7
Figure 12 - Sub-Saharan Africa, mobile VAS announcements, by service type, Jan
2009 – Aug 2012
Source: Informa, A.T. Kearney analysis
Other VAS opportunities that are growing in the region include entertainment (music, ring
tones …), m-Health, m-Learning, and m-Agri. New entrant VAS providers, Comviva and
Spice, have brought their expertise from India and are putting great emphasis on voice-
based services and content such as ring-back tones and radio channels, which were very
successful services in India. The success of these content services will vary dramatically
from country to country depending on the local culture and taste, literacy rate and GDP /
capita. In Nigeria for example, operators are making close to $150 million per year from
mobile music, driven mainly by ring-back tones. MTN generated $3 Million a month in 2011
from this service and reached 4.4 million subscribers (30% of total subscriber base)8
.
By providing new value-added services to their customers, operators will benefit from
several ways:
 Increase the ARPU
 Increase customer royalty and reduce churn
 Increase total revenues
6
Mobile Banking: The impact of M-Pesa in Kenya. Mbiti, I. and Weil, D.N. (2011). National Bureau of Economic
Research Working Paper Series.
7
Millicom, Capital Markets Day, 2011
8
Informa telecoms & Media, 2012
Financial Services
55%
Messaging
13%
Entertainment
7%
Web and apps
8%
Other
18%

Operators should carefully evaluate the VAS opportunities in their local markets and
develop/invest in the most promising one.
4. Drive a Step-Change in Operational Excellence
The focus for telecoms operators in Africa has until now been on keeping up with the
astounding growth of subscribers and traffic. Improving operational excellence and reducing
costs is more recent on the CEO agenda, but is certainly gaining more attention as markets
mature and prices decline.
In fact, costs in Africa are still significantly higher than in other comparable emerging
markets. For instance, costs per subscriber in Africa are 50% higher than in India.
Based on A.T. Kearney’s experience in cost benchmarking and structuring cost reduction
programs in Africa, the potential for performance improvement is very significant. In our
recent work with several operators, we have identified free cash flow improvement potential
of at least 20%-30%.
Figure 13 – Financial Performance Improvement Potential for a Telecom Operator in
Africa (Average OPEX+ CAPEX savings potential by lever)
Source: A.T. Kearney Analysis
As a result, operators active in Africa need to amplify initiatives to substantially improve their
operational excellence. This is not just about reducing costs, but also improving the
effectiveness of key processes (e.g., faster network roll-out, better quality of service). In our
experience, some of the highest impact initiatives include:
 Network. Most operators have engaged initiatives such as sustainably reducing fuel
consumption (which can account for over 50% of network operating expenses in
Africa in comparison with 15% in mature markets), tower sharing / outsourcing and
migrating to a managed services model. In fact, a large number of tower and network
outsourcing deals are currently in the pipeline. These are all necessary measures,
but the real issue is that there are simply too many networks per country. Operators
will now have to look at more structural ways to reduce network costs, in particular
through active network sharing.
TotalOthersRoaming
& Interco
SourcingMarketingSalesITNetwork ops
&
deployment,
optimization
Site
sharing
Power
Capex
Opex
Top Line (Gross Margins)
% total
impact
20%
60%
20%
35% 30% 15%10% 15% 3% 13% 35% 5% 22%
Cost savings
as % of
addressed
baseline

 Procurement. Aside from the more global operators, regional players are still in the
early stages of re-enforcing their procurement teams. Significant room for
improvement exists in the procurement area and different levers can be used – from
the straightforward supplier consolidation to a more complex review of specifications
to generate savings of 10 to 15% of baseline spend (Opex and Capex), with a
particularly high impact in network costs (which typically account for over 35% of total
spend).
 Distribution. Distribution of mobile services in Africa relies essentially on indirect
distribution, although operators are actively building direct channels as they seek to
sell a broader range of services and devices and increase market share. However,
distribution costs in Africa are particularly high – 10% of revenues on average vs. 5%
globally, partially driven by higher churn rates and by distribution networks with too
many layers. In this context, revisiting the distribution strategy (e.g., reducing the
number of intermediaries) and the commission model (e.g. focusing more and more
in quality of service provided and in the ability to perform) are two key levers to
optimize distribution costs, while sustaining and even increasing gross adds and
retention.
 Shared services. Another important change is the need to better capitalize on global
scale effects. This is of particular importance in Africa where the vast majority of
operators are below scale effects (close to 130 operators have less than 5MM
subscribers). As a result, there is value in consolidating globally or regionally a
number of activities. The most obvious candidates include procurement, wholesale
services, selected product developments, and selected IT developments and
infrastructure. In a second stage, one might consider centralizing other less obvious
candidates - e.g., creating shared services for support functions (e.g., finance, HR).
5. Keep Investing in the Network
Telecoms operators in Africa have committed substantial investments to build networks with
sufficient coverage and capacity. With more modest revenue growth and pressure on
margins, reducing capital expenditures budgets has been the main driver of free cash flow
appreciation for many operators active in the region. To the extent, that Capex budgets for
some operators are now at dangerously low levels, at 10%-12% of revenues in some cases.
Figure 14 –Capital Expenditures of Mobile Operators in Africa
(USD per subscriber, 2012)
56
2525
16
9
14
Mature
Market
Nigeria South
Africa
Algeria MoroccoEgypt

Source: ML Wireless Matrix A.T. Kearney Analysis
Pressure to increase capital expenditures is mounting intensely – networks are saturated in
dense urban areas, the launch of 3G/4G services requires substantial investments in new
radio and transmission capacity and most operators need to embark in heavy network
modernization programs, particularly for their core network. As a result, we expect a surge in
capital expenditure requirements over the next three to four years.
6. Transform the Operating Model and Grow New Talent
Until now, operators’ main challenge has been to build networks and distribution channels as
quickly and cheaply as possible. With limited capabilities available from external service
providers, they have had to build up capabilities to large extent internally.
Looking forward, telecom operators’ organizations will face new challenges, including
increasing customer differentiation, selling a broader range of services, being more agile in
an intensely competitive and fast moving environment whilst reducing costs.
As a result, they will need to transform their operating model and improve their core
capabilities. Some of the key priorities include:
 Create a more customer centric organization, which could lead in some cases to re-
organizing against customer segments (at a basic level consumer vs. business);
 Outsource non-core activities, particularly in network, IT and call centres;
 Re-enforce marketing and distribution skills / capabilities;
 Attract new and different talent, to grow adjacent businesses such as mobile financial
services or ICT;
 More extensively rely on IT systems to automate core processes, enabling the
organization to focus on higher value-added tasks;
 Drive tighter and more balanced financial management, by re-enforcing management
controlling capabilities.

Conclusion
Ten years ago, who would have imagined the phenomenal growth the African telecom
market has witnessed. We believe that the next ten years will be equally exciting and that
Africa will face a digital revolution, enabled by ubiquitous and affordable access to Internet
services. Telecoms operators will play a central road in making that vision a reality.
At the same time, telecoms operators will face a challenging two to three year transition
period which will require much stronger, precise and balanced management. Executives of
telecoms operators will be faced with difficult, and sometimes contradictory, decisions.
Striking the right balance between more aggressively reducing costs whilst still investing in
the business will separate the winners from the losers.

About the Authors
Laurent Viviez
Partner, Head of African Telecoms Practice
laurent.viviez@atkearney.com
Marc Biosca
Partner, Telecoms Practice
marc.biosca@atkearney.com
Isabel Neiva
Manager, Telecoms Practice
isabel.neiva@atkearney.com
Makram Atiyah
Manager, Telecoms Practice
makram.attiah@atkearney.com

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