Chris Gabriel, CEO, Zain Africa

Telecoms.com spoke to Chris Gabriel, chief executive officer of Zain Africa and keynote speaker at the Africa Com 2009 event in Cape Town.

What are the main points and conclusions you will be making in your presentation?

There is still plenty of growth potential in Africa. The rules of the game have changed with a paradigm shift from Customer Numbers to Customer Value (share of wallet). Business models must adapt to optimising asset utilisation through right sizing, outsourcing, infrastructure sharing etc. Collaboration between regulators, industry players, carriers and vendors is key to success in creating new products, services, ventures and partnerships. And consolidation in the number of industry players is inevitable.

At present, Africa leads the world in mobile growth. But when will that growth start to slow and how do you propose to counter it?

The potential for future growth remains. The pace has slowed somewhat due to the recent economic crisis. Focus on Customer Value and retention/loyalty together with Data/VAS & Content/M-Commerce etc. will be the focus to grow returns.

We’ve seen some big regional merger proposals fail recently. Does the African mobile sector still offer potential for foreign investment?

Most definitely – the medium term will see the emergence of three to four major players and many small niche vendors – few medium scale operators will remain – scale is king.

Are there enough home grown investors within Africa?

Future investment will be on a global scale.

What can the African communications sector teach the rest of the world’s telecoms markets?

There is great potential and value in emerging markets – relevant, affordable and localised products and services together with a lean optimised business model are key to creating value in low ARPU markets.

How well are the region’s governments responding to the needs of the continent’s telecoms sector?

In the context of the economic crisis, governments are caught between short term economic needs versus medium/long term sustainable industry development. Stronger collaboration between Governments and industry is required to optimise and create a win-win for all.

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Zain expands One network into Egypt

Middle East and African operator Zain said Wednesday that it is expanding its pioneering One Network to Egypt via a strategic partnership with Mobinil.

The deal means over 27 million Zain customers in Bahrain, Iraq, Jordan, Kuwait, Saudi Arabia and Sudan can benefit from One Network services – effectively being treated as local customers -  when visiting Egypt, while Mobinil’s 24 million customers will benefit from similar treatment when visiting any of these Zain countries.

The One platform allows subscribers to make calls, send SMS and access the data services at local rates of the visited country and to receive incoming calls from their home country at free or minimal charge.

Middle East and African carriers are known for their innovation in the face of falling ARPUs, rising competition and the recession  – something which has attracted many investors but also dissuaded them from moving into Africa markets. In Zain’s case, the company’s soaring ambition and presentational verve has not yet been matched by the performance of its operations in sub-Saharan Africa, where many of its units are loss-making.

This week Zain reported that net profit for the nine months to the end of September fell 17 per cent year on year to KWD195.7m ($677m), although revenues for the period were up 24 per cent year on year to KWD1.78bn. But Africa is causing much of the company’s financial pressure. The vast and capital intensive expansion of Zain’s network in key operations such as Nigeria, Zambia, Sudan, and Iraq, has resulted in increases in fixed costs from depreciation and amortization, with the company being further burdened by increases in financing costs.

In late September, confusion reigned as a consortium of buyers that included Indian operators BSNL and MTNL were thought to be carrying out due diligence on Zain in a bid to acquire some or all of Zain Africa. But nothing came of the supposed interest and at the recent Africa Com 2009 event in Cape Town, South Africa, Chris Gabriel, CEO of Zain Africa repeated a number of times that “Zain Africa is not for sale. We are focused on our objective to become a top ten player by 2011 and we still have an appetite for expansion,” he said.

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African development continues apace

At the start of 2006 it was clear that the African market was making an appearance on the radars of international companies. The following three years have been characterised by increased investment into the African continent, and the telecommunications industry can be seen as the perfect showcase for this activity.

The prominence of this industry and the international attention it has garnered could be put down to the simple fact that it is critical to the broader industrial development of Africa. Without the enabling technology provided by the telecommunications sector, the ability of any industry segment to be a viable competitor on the world stage is severely curtailed.

In the past, the regulatory environment for communications in Africa has proved to be cause for concern as many governments adopted measures tantamount to protectionism. This trend has changed dramatically as the benefits of ensuring an open market have been proved time and time again. In some cases, the other extreme is true and regulators allowed too many operators into the market as they enjoyed the financial gains earned from pricey license fees. This practice is now less common, although it is still something to be monitored. The greatest challenge resulting from this trend is the lack of available spectrum for operators. This has occurred in markets such as Ghana, Nigeria, Tanzania and the Democratic Republic of Congo. Operators, regulators and infrastructure providers alike are now challenged to overcome this issue.

The implementation of international best practice in terms of regulation continues to gain momentum and most operators have started the process of change in their respective markets. Importantly, this is true of the satellite market as well and there are a number of regional agencies working together to achieve the harmonisation of regulatory frameworks. This example is being followed at a national level by various regulators and there are hopes that the entire process will be almost complete by 2015, in line with the Millennium Development Goals.

Improved regulation has paved the way for the progress made in the various undersea cables destined to bring the African continent closer to the rest of the world. A shining example of the promise of these cables is the SEACOM project, which was completed earlier this year. The landing of the cable in countries such as South Africa, Tanzania and Kenya was watched from a global stage and the success of this project shows what is possible when the true spirit of international cooperation is followed.

This is just the first of many cable projects underway for Africa. Angola has a noteworthy project that will connect six of the country’s coastal provinces and the length of the west coast of Africa is to be serviced by two additional cable projects. These cables are not only to support the existing SAT3 cable (which was recently upgraded), but are destined to eventually replace the aging infrastructure, which has a lifespan of about fifteen years.  The Uhurunet and Cable One projects are examples of this. The much publicized EASSy cable looks set to reach conclusion in 2010 or 2011 and the TEAMS cable is also expected to make landing during this period.

While the significance of these cables cannot be underestimated, it is very important to emphasise the greater importance of ensuring that there is sufficient terrestrial infrastructure in place. This is the only way to realise the full potential of the additional bandwidth capacity brought to bear by the undersea cables. At present this is lacking in most of the African continent and there are various reasons for this. One of the most important is the fact that governments are faced with other resourcing priorities, such as education, sanitation and healthcare (although there is growing recognition that effective telecommunications would be of significant help to these sectors). This leaves the telecommunications industry a little way behind in attracting government investment. The current high cost of project finance is another obstacle, as is a lack of project management expertise necessary for the successful completion of these projects.

Whilst there is greater momentum towards completing these projects, they are definitely still a work in progress and additional emphasis is required to ensure their completion. Innovative partnerships between the public and private sector are only one example of how African companies and countries are addressing this challenge.

Partnerships, strategic alliances and merger and acquisition activity have been making headlines this year. The most notable event in this regard was the unbundling of Vodacom shares by Telkom and the listing of this company on the Johannesburg Stock Exchange as Vodafone increased its shareholding in the African operator to 65%. Vodacom’s listing was a great success and despite some operational hiccups in the form of the decision to pull out of the DRC and an inability to reach CAPEX goals, the company looks in fine form.

MTN is another Pan-African operator which continues to capture news headlines. The talk of a possible merger between the operator and India’s Bharti Airtel was a global news story for many months. Although the deal failed to materialise, this type of negotiation serves to demonstrate the increased international interest in the African continent and the synergies that exist between emerging market operators.

Other examples of international interest in the telecommunications market in Africa include the increased investment by France Telecom. It has a direct stake in a national operator and is also present in more than ten African countries through its Orange subsidiary. Frost & Sullivan expects this level of interest to continue to grow.  Vodafone is likely to expand its presence on the continent with direct investment and Vodacom’s footprint expansion will be worth watching.

The market looks set to continue its development well into 2010 as the FIFA World Cup comes to South Africa. The tournament is expected to have an incredible impact on the continent and this is just the first of many landmark developments that are expected to touch the continent in the next five years. While the past five years have provided unprecedented levels of exciting developments, Frost & Sullivan expects this is only the beginning, as the market will truly take off in the next five years.

Connecting the next two billion

Analyst forecasts indicate that around two billion more mobile subscribers will be added to the global market by 2013, with rural customers in emerging markets accounting for a majority of this growth.

As mobile operators in these regions struggle to profitably expand their networks into remote areas, there is evidence of a trend towards the use of satellite networks to cost-effectively backhaul voice and data traffic, as well as a shift toward an all-IP network infrastructure to achieve greater operational efficiencies.

Industry analyst Informa, which published a research paper commissioned by satellite-based IP technology firm iDirect, found that operators are realising the advantages of Time Division Multiple Access (TDMA) satellite networks as an alternative to microwave towers, Single Channel Per Carrier (SCPC) satellite connectivity and other conventional forms of mobile backhaul.

The research reveals that TDMA networks enable operators to reduce operating costs by allocating shared satellite capacity across multiple remote sites, with operators implementing IP-based backhaul networks realising bandwidth savings of up to 40 per cent.

According to Informa estimates around 58 per cent of operators worldwide currently deploy satellite backhaul technology, and 80 per cent plan to expand their basestation sites further into remote areas in the next five years, with TDMA-based infrastructure accounting for the majority of growth.

Moreover, 83 per cent of carriers have begun implementing IP technology, with major benefits listed including offering internet access, supporting a broad variety of mobile data services and creating a single unified network to lower operating costs, minimize technical complexity and increase network efficiency. “Both remote and rural areas present a huge opportunity for mobile operators. TDMA backhaul is giving mobile operators a tool to cost effectively reach new subscribers, expand coverage and maintain organic growth beyond urban areas,” Informa said.

Gateway moves in on Kenya

Pan-African network services firm Gateway Communications has scored three new licenses in Kenya, allowing it to build infrastructure in the country.

This week the Communications Commission of Kenya awarded the firm a Network Facilities Provider (NFP) Tier 2 Licence, an Application Services Provider (ASP) licence and a Business Process Outsourcing (BPO) licence.

In a nutshell this means that the firm can build infrastructure in Kenya and deliver telecommunications services to end users.

Gateway will now install its own satellite teleports in Kenya as well as two terrestrial teleports in Nairobi.

“Kenya has always been considered the hub of East Africa, which means a lot of multinationals are headquartered in Nairobi, but require reliable communications up and down the East Coast,” said Silvio do Carmo, managing director for Gateway East Africa. “Gateway can now provide direct connectivity for businesses from Kenya to South Africa, Mozambique, Tanzania, as well as Europe and the US, with our MPLS network.”

Harnessing the power of the sun

As African operators push out into rural areas, solar power is capturing the attention of many of the region’s players.

Whilst it can’t comment on specifics, Indian solar powered infrastructure firm VNL, told the Show Daily that it is building many pilot sites throughout Africa, after overwhelming interest from local operators.

Craig Hall, senior vice president for global initiatives at VNL, said that the company’s WorldGSM basestation has been specifically designed to enable mobile operators to reach remote rural areas where ARPUs are less than $2 a month. The target audience is the 1.6 billion people who have no electricity and another one billion, who live in areas with unreliable access to power.

Hall said the key to successful deployment of these sites is low power electronics. Unlike traditional GSM base stations, the kit deployed by VNL at village sites need no shelter, air conditioning, mains power, generator or diesel fuel. The system integrates with existing GSM macro networks and extends them into previously unreachable rural areas with the benefits of zero opex, made possible by major reductions in power consumption; allowing for the use of solar power as the single energy source. The equipment needs only 50 – 150 watts per base station compared to the 3000 watts required for traditional GSM. Each site can be powered by a 2-8m² solar panel.

But most importantly, said Hall, is the opportunity for operators to build customer loyalty by giving them their first phone call.

Recent research published by industry body the GSMA found that there is significant interest in off grid power solutions with 60 per cent of mobile operators interviewed by the association revealed to already have or be in the process of exploring off grid charging initiatives for handsets. However, there is thought to be only limited understanding about the full scope of options and the associated social and business benefits.

Today, a panel session on Stream A of the conference will look at using solar power to provide affordable mobile services to rural areas, featuring VNL and Paul Naastepad, CEO of Intivation, a firm which develops solar charging technologies for mobile handsets, seen as one of the last hurdles to bringing mobile services to the emerging markets.

Delivering data by air and sea

During the keynotes and panel sessions on the morning of the first day of the Africa Com event in Cape Town, it became clear that non voice services hold much potential not just as a revenue generator, but also as a customer retention tool in Africa.

Figures from Informa Telecoms & Media show that data revenues in Africa increased 13 per cent in the second quarter of 2009 to reach over $1bn. But we’re not talking about mobile broadband or YouTube here, it was also clear that data services have to provide timely and relevant content and information to the region’s subscribers.

A good example of this is Safaricom’s m-pesa initiative in Kenya, which analysts agree has shown the way in mobile banking, as a revenue generator as well as a customer retention tool.

And it is the dynamism of the market that will see more exciting and interesting data services rolled out as more bandwidth becomes available. Speaking at the opening keynote session of the event, Themba Khumalo, CEO of MTN Uganda, said that there is increased access to bandwidth in the country because of the landing of submarine cables such as EASSy on the continent. “Prices will come down so we will have to look at our own business model and price ourselves correctly. Data is a key area of concentration, we need to deliver value and great experience,” said Khumalo. “While we still need to maintain expensive connections from satellite for some time, customers will eventually see reduction in tariffs, as attractive pricing from other developed markets is coming in.”

But on the same panel Nagi Abboud, CEO of Atlantique Telecom, based in Cote d’Ivoire, said that most of his business is still based on voice. “The cost of data is still very high, and customers are not willing to pay,” he said. “But as more cables land prices will come down.”

This is a market being targeted by Google-backed satellite operator O3b Networks, which stands for “the Other 3 billion” and has attracted the interests of HSBC Principal Investments and Liberty Global as well.

Rash Jhanjee, VP MEA & Central Asia for O3b, said the firm offers fibre performance over satellite links, at prices comparable to fibre in developed regions, as well as plugging directly into core networks and 3G cellular and WiMAX towers to change the economics of the telecommunications game in the world’s fastest growing markets.

African incumbents are under threat

The prospect of consolidation among African and Middle Eastern operators has provided much fuel for the industry rumour mill in 2009, but the apparent collapse of talks involving Zain Africa as well as those between Bharti and MTN has not diminished the appetite for expansion.

Singaporean carrier SingTel, owner of Optus, is the latest major player to express an interest in the African region. As the Africa Com 2009 event kicked off in Cape Town on Wednesday SingTel’s chief executive Chua Sock Koong said that she was eyeing up Africa as a potential target for expansion. “Africa is a market that is definitely worth our interest,” Chua said.

The announcement came as SingTel reported quarterly financials for the three months to the end of September. Net profit at the group was up 10 per cent year on year to S$956m, compared to S$868m in 2008, while revenues climbed 5.4 per cent year on year to S$4.1bn.

Singapore has a mobile penetration of    and SingTel is looking further afield for growth opportunities. Given its 32 per cent holding in Indian operator Bharti Airtel, SingTel was one of the supporters of Bharti’s move to acquire a stake in African carrier MTN.

The talks between Bharti and MTN collapsed however, amid concerns on the part of the South African government that its national champion could fall into foreign hands.

At the same time, tongues were also wagging about the potential sale of Zain Africa, or at least a stake in the firm. Yet in his opening keynote speech at the Africa Com event on Wednesday, Chris Gabriel, CEO of Zain Africa repeated a number of times that “Zain Africa is not for sale. We are focused on our objective to become a top ten player by 2011 and we still have an appetite for expansion,” he said. Yet Gabriel expects further consolidation within the region, led by a handful of major players.

But this expected wave of consolidation could catch the incumbent carriers on the back foot. Nick Jotischky, regional research manager for Africa at Informa Telecoms & Media, warned that Africa was a land of challenges due to its harsh operating environment, but it also has strong growth opportunities. “It is survival of the fittest,” Jotischky said during the opening keynote. “Those operators who best adapt to their environment will succeed, they need new business models,” he said.

Despite the little M&A activity so far, it seems the industry is agreed that there is a huge potential in Africa for canny investors and innovative companies. But there is also the potential for incumbents and other market heavyweights to lose their footing.

“The operating environment is a threat to incumbents,” said Jotischky. “There is much more competition, new players, alternative players such as MVNOs,” acknowledging the success of Oman’s first MVNOs Friendi and Renna, the former of which notched up 100,000 subscribers in the first three months.

“These MVNOs have ambitions to become regional players,” said Jotischky. “They show that there are opportunities for players big and small to enter new markets as long as the business model is good. And the MVNO business model is of interest in Africa. There are huge opportunities as many regulators would like to see MVNOs in their market. So incumbents have to ask whether they are an opportunity or a threat, but if they are an opportunity then the carriers need to make sure they have a strong brand, a focus on an underserved market, good market reach and distribution and relevant content to make it a success.”

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Spirit of innovation driving growth in Africa

African telecoms operators have faced several challenges in 2009. The global economic downturn, a fiercely competitive landscape, and pressure to expand networks into rural areas have tested the mettle of the region’s carriers both big and small.

And yet, forecasts from Informa Telecoms & Media show that mobile subscription growth is still set to increase by 26.6 per cent year on year in 2009, with the total number of active subscriptions to exceed 473 million by the end of the year.

This figure is projected to increase to approximately 800 million by 2014, by which time SIM penetration across the region should reach 70 per cent, the analyst predicts.

“African operators have always recognised the need for innovation in meeting the demands of a low-income population, but the need to stand out from the crowd and differentiate from one’s competitors is taking this requirement to a new level,” said Nick Jotischky, Informa’s principal analyst covering the Middle East & Africa.

Chris Gabriel, chief executive officer of Zain Africa is delivering the opening keynote on day one of the Africa Com event, “Reassuring Operator Strategies in Challenging Times,” which focuses on Africa’s innovative spirit in the telecoms market.

“There is still plenty of growth potential in Africa,” said Gabriel. “The rules of the game have changed with a paradigm shift from customer numbers to customer value (share of wallet) and business models must adapt to optimising asset utilisation through right sizing, outsourcing and infrastructure sharing.”

Gabriel believes that collaboration between regulators, industry players, carriers and vendors is key to success in creating new products, services, ventures and partnerships, and the potential for future growth remains.

Indeed, a sign of the harsh operating environment facing African telecoms firms is the need for operators to manage their costs and maintain margins. Informa’s Jotischky notes that offsetting the ongoing fall in voice revenues is becoming central to operator strategies across the world. Not only are data services important as an income generator, but they are also useful as a customer retention tool. Investing in infrastructure to provide reliable data services to corporate and consumers will also be a focus of discussions.

“Those operators that adapt to the increased intensity of competition and the evolving role of communications will be best suited to surviving a dynamic but harsh operating environment,” said Jotischky.

In fact, there is a great deal that the African communications sector can teach the rest of the world’s telecoms markets. “There is great potential and value in emerging markets – relevant, affordable and localised products and services together with a lean optimised business model are key to creating value in low ARPU markets,” said Gabriel.

But there is also likely to be more consolidation ahead. Despite the failure of a number of big potential mergers in the region, Gabriel expects that in the medium term just three to four major players will emerge in the market and few medium scale operators will remain. “Scale is king,” Gabriel added.