Changing faces of telco revenue
In the past, telecommunications companies in Nigeria, Africa’s most populous nation, have benefited from high-margin products like voice and Short Messaging Service (SMS). But with new services such as mobile broadband, cloud and IT (Information Technology) services, social media, currently been chased for growth, there is the risk of tighter margins, writes BEN UZOR JR.
Expectations are that Nigeria’s highly competitive telecommunications industry will witness a fundamental shift in revenue mix and margins by the end of this year, as voice service pricing continue on a downward trajectory due to regulatory and competitive pressures.
Data services are expected to account for between 70 to 80 percent of operators’ total revenue mix by year end, according to Srinivasa KV, chief executive officer, Visafone Communications Limited.
Voice-based services, contributed 100 percent to telcos’ income a decade ago. As at the first quarter (Q1) of 2013, data was responsible for 15 percent of service revenue in the country’s telecoms market, according to Thecla Mbongue, senior research analyst at Informa Telecoms & Media.
The industry shift toward data has resulted in current cash cows like voice and messaging declining sharply in significance, with analysts pointing to services such as mobile broadband, cloud and IT services, social media, m-advertising, as new growth areas. This changing market dynamics is throwing up fresh challenges for telcos from a revenue standpoint.
As operators experience massive changes in product and revenue mix, their overall margin (EBITDA) mix will also evolve. Telcos have also benefited from high-margin products in the past like voice (40 percent) and SMS (70 percent), but with the new services currently being chased for growth, there is the risk of tighter margins, according to Andreas von Maltzahn, principal partner at DeltaGroup.
“New services will experience high revenue growth, they typically have significantly lower margins (although since they are markets in formation, long-term margins may still improve),” he said in a recent report. “We envisage that by the end of 2014, the share of data would be as high as 70-80 percent of total revenue mix. The rest may come from voice. The situation may not be different from other mobile operators.
“This is because voice tariffs have been on the decline. It is so cheap now and in most cases its free, if you subscribe to a data service,” said Srinivasa, in an interview with BusinessDay. According to the Visafone CEO, telecoms subscribers are becoming sophisticated and increasing demanding quality and efficient data services.
Voice service pricing, according to analysts, has been on a downward path in the country during the last five years due to the continued decline in mobile termination rates released by the Nigerian Communications Commission (NCC).
Telecoms companies have been overtly exuberant in the market over the past four year, lowering mobile call tariffs and giving away lots of free minutes in a conscious attempt to lure new subscribers and retain existing ones.
This move, analysts say, has not only contributed significantly to steady decline in voice service revenues but has also taken a lot of value out of Nigeria’s telecoms industry. Africa’s mobile Average Revenue Per User (ARPU) has continued to decline by 14 percent year-on-year since 2004.
Mobile voice, according to industry analysts at Analysys Mason, has long been the largest source of revenue for telcos in sub-Saharan Africa (SSA), representing 82 percent of all mobile retail revenue in 2011. The explosive demand for internet services is shaking up the industry.
“The market is becoming more sophisticated and data-intensive. Customers want data and they want it now. So, in terms of being able to access data, there is a great need to leapfrog on infrastructure development,” said Wale Goodluck, corporate services executive, MTN.
Given the lack of a fixed-line network to build upon, he said, “there are physical difficulties in building infrastructure that is required, as well as bureaucratic obstacles, and this will take time.”
Efforts geared towards improving Internet infrastructure across the length and breadth of the country are underway. Industry analysts say they expect the licensing of 30MEG spectrum in 2.3GHz frequency band by the federal government to be “explosive” for broadband growth.
As part of the telecoms regulator’s new broadband market structure, the Nigerian Communications Commission (NCC) has also disclosed plans to license seven regionally based Infrastructure Companies (InfraCos) by December 2014.
These InfraCos will roll out national fibre optic network for broadband delivery under plans by the Presidency to boost high speed Internet services across the country. In view of this, data service revenue is expected to continue growing in coming years.
Also, about 30 million smartphones are expected to be sold in Nigeria, Africa’s most populous nation, between now and 2015. These smartphone owners will however require mobile data to surf the Internet, send and receive emails, download music and videos and chat on instant messaging platforms as well. Nigeria has the highest online population with 46 million people.
“The telecoms industry of the future will look very different from what it is today and operators are at a strategic crossroad, needing to decide what strategic models to adopt to best address fundamental shifts in revenue mix and margins. Sitting on the fence is not an option as ‘wait-and-see’ operators will see costs explode and revenues start to stagnate,” said Von Maltzahn.