West Africa's Major National Markets: Overview of Nigeria and Ghana

Nigeria: West Africa's jewel...but a moveable feast

The Nigerian mobile market is definitely a feast - currently reported as now being larger than South Africa's. But, in Africa, wherever there is food there will be scavengers looking for a share of it. How these fierce competitions play out illustrates classic risk factors in a highly idiosyncratic business environment.

Readers will be entirely familiar with why Nigeria is a focal point among the developing markets in Africa. It is the continent's most heavily populated nation (some 150 million and latest estimates are in the region of 170 million) and population density is high by global standards, around 185 people per square kilometre. In Africa, that puts Nigeria ahead of all but much smaller countries such as Rwanda and Mauritius.

It is a booming economy in terms of GDP, thanks to oil and gas exports. Even during the current recession, it has achieved better than five percent growth and is capable of even ten percent in a more robust global economic climate.

On the mobile side, it was a late entrant, basically only rolling out services from about 2001 onwards. The market is still expanding and maturing and not in the consolidation phase that usually applies to saturated markets.

Balanced against the above positive aspects are some negative variables that have impact on the equation.

Politically, Nigeria is still in the process of establishing a democratic, civilian government after many years as a military dictatorship. The political process is often unstable, with election results questioned both locally and by outside observers, and occasional, violent protest by citizens.

Socially, there is ongoing unrest between rival groups, including the tension between the mainly Muslim north and the predominantly Christian south as well as historical friction between the three main language groups. Then there is the Niger Delta region where local rulers hold more power than the politicians in Abuja or the businesspeople in Lagos - and there is sporadic rebel activity as well.

This all forms a backdrop to the nation's somewhat exaggerated but still real reputation for crime, corruption and lawlessness. While it is absurd to suggest that crime and corruption are endemic and ubiquitous, Nigeria ranks very far down on foreign surveys of corruption perception and questionable governance - typically in the bottom ten countries in the world.

In business and politics, there are frequent allegations of inside deals. On the streets, the divide between rich and poor supports a tendency to petty crime that ranges from fake pharmaceuticals to blatant theft of equipment, telecoms cables and generators being high on the list. In remote areas, piracy and hostage taking risks mean that international oil and mining operations run heavily armed security services to protect their staff and facilities.

The Nigerian mobile market has dodged some of the risks inherent in all the above and learnt to live with those that cannot be avoided. But the business and regulatory environments are a matter that cannot be circumvented. In recent negotiations with the national regulator (NCC), the leading MNOs appealed for a review of established KPIs to allow for 'the peculiarity of the Nigerian business environment'. The market leader is MTN of South Africa, followed by local MNO Globacom and then Bharti Airtel. All three have been fined by the NCC for poor service delivery.

What really highlights the risk factors in this practically unique market is a history of dispute that mainly involves Airtel. For the Indian giant, Nigeria represents almost ten percent of global profits, not just revenue. As it tries to leverage its USD 11 billion acquisition of former Zain assets across the continent, Nigeria plays a crucial role in two ways: it is not only the most promising market but exploiting it consumes company resources, slowing down (according to some commentators) expansion in other areas such as the Great Lakes nations.

Airtel is number three in Nigeria and has a serious challenge ahead of it to alter that list. MTN is entrenched with about half the market in its camp and Globacom has roughly a third. Airtel trails with about a fifth and, despite its broadside, cost-cutting marketing approach, it still has to worry about Etisalat snapping at its heels. Across Africa, analysts describe Airtel's performance over the last two years as 'disappointing'. In Nigeria, it has inherited a dispute of ownership that goes back to the former government's days and involves Econet (Nigeria's original MNO) whose operation was sequentially involved with Vodacom and then Zain.

Recent Nigerian court rulings have reversed agreements made in a chain of business deals. Currently, Airtel has the matter on appeal before the Nigerian Appeals Court. What is at stake is not just who owns what of which company: there is a potential damages claim of over USD 3 billion and the rulings made thus far would support Econet's position.

The immediate consequences of Airtel losing Nigeria are serious indeed. As mentioned, it is a sizeable slice of global company profits. It is also a major investment in its own right, apart from Airtel's other activities in Africa. While MTN and Globacom have both announced hefty infrastructure investments in response to the NCC fines, Airtel is on the back foot. Figures released by the company in December 2011 show a 50 percent drop in overall capex in Africa. While MTN is looking at spending about USD 1 billion in Nigeria, Airtel probably is nowhere near able to match that.

The dispute concerning a minor five percent shareholding potentially affects all subsequent deals, especially the sale of assets to Zain and then Bharti Airtel's later purchase. Beyond that, it skews Airtel's focus to a profitable investment with an uncertain future while the company is seriously behind target for growth in Kenya and Uganda and equally behind schedule for 3G rollouts in that region.

This is exactly the point. Whatever risk factors Airtel faces in Nigeria can hardly be ring-fenced. Present drain on its reduced resources, coupled with potentially onerous damages payments at some later point, have commentators and stakeholders concerned for Airtel's entire African venture.

As for Nigeria, the risk factors and business fundamentals that resulted in Zain and Vodacom pulling out of the market are still there, whatever the outcome of present legal disputes.

Airtel is the world's fifth-largest MNO and has massive capital resources. But whether it makes sense to continue its Nigerian investment - and maybe also the rest of its African operations - is questionable in very basic business terms.

In a best-case scenario, it could continue to derive profits and escape fines but not have realistic hope of dominating Nigeria's market. The worst-case scenario is to have fines imposed that negate years of profit and turn its focus to less attractive markets elsewhere, or simply accept that, as a late entrant, it has little hope of playing a major role in African markets, despite the prevalent optimism of just two years ago.

One certainty, however, is that the winners will be MTN and Globacom, no matter what direction Airtel takes.

Vodfaone Ghana: a missing piece of the puzzle...

Vodafone is not the first operator to discover that the telecoms market in Ghana is more complicated than it looks at first sight. The story illustrates exactly what can go wrong, and right, in African markets.

Ghana is a puzzle in itself. It was one of the first nations in Africa to adopt a positive approach to all aspects of ICT, pushing deregulation and increased free-market competition even in the mid-1990s. It was the first sub-Saharan country to launch mobile telecoms in 1992, just ahead of South Africa.

As a market, Ghana has always appeared to be ripe for expansion and to offer great potential. The actual history of its development has not followed on these expectations closely, although the story is far from over.

Vodafone entered the market in Ghana as part of the privatisation process. Ghana Telecom was the incumbent national operator and Vodafone acquired a 70 percent stake (the remainder still held by the government) in 2008. The operation was rebranded in 2009 as Vodafone Ghana.

This certainly looked like a good deal. Other companies had competed unsuccessfully for the purchase, the main contender being France Telecom, and commentaries at the time focused on the 'bargain' price of around USD900 million that was agreed. It was also noted that the intention of the government, as signalled by the regulator (Ghana's NCA), was to improve service delivery for customers.

This was a key issue. Despite an early launch of mobile services, there was an established and probably valid perception that service delivery was unacceptably poor.

As is typically the case in Africa, the mobile market in Ghana also vastly outnumbers the provision of fixed-line services, by a ratio of some 10:1. Beyond that, the available figures on mobile penetration still indicated considerable room for expansion on voice services alone, with only about 75 percent being the typical figure at the time.

Today, the Ghana mobile market is probably at a real figure of about 85 percent and there are six mobile operators running. Figures here (subscriber numbers in brackets) are based on those issued by the NCA. These include regional heavyweights such as MTN (over 10 million), Vodafone (over 4 million), Tigo (first to market, as Millicom, and still holding just under 4 million) and Airtel (having taken over Zain's operations with some 2.5 million). Expresso (Sudatel from Sudan) holds about 200,000 subscribers on its CDMA network, all the other operators are GSM, and now, as of May 2012, Glo (Globacom of Nigeria) has finally launched, already subject to a fine from the NCA for a late start to operations.

These figures must be seen in the context of a country that has a population of about 25 million but, notably, a per-capita GDP of only just over USD 3,300. Ghana is often compared to its near-neighbour Nigeria because of a similar cultural heritage and shared history of British rule but this tends to gloss over the obvious differences: Ghana is smaller, less affluent and not a major oil exporter.

On the positive side, Ghana has hopes of becoming a player in international oil markets with offshore licences having been granted and a number of fields having been identified and tapped. The country is also a landing point for the massive (5TB) WACS cable that runs from the UK to South Africa and involves joint investments from some 14 telcos, though none from Ghana. The cable has only about 500GB lit thus far and there is obviously plenty of additional capacity.

Behind the hype, it has to be said that Ghana will not achieve the same levels of oil output as Nigeria or Angola. The oil discoveries have resulted in a local boom for the nearby port of Takoradi and optimistic government forecasts of 12 percent GDP growth. This is compared to the roughly 5 percent growth seen previously, which is pretty much in step with the average for the Southern Africa region. Even the landing of WACS has a question mark attached, as the main operators controlling that cable are either from the EU or South Africa, which raises the question of just how much Ghanaian operators will pay (except possibly for MTN, which is a major partner in the WACS project).

The other area where Ghana's performance has fallen short of expectations is in the critical matter of privatisation, deregulation and the role played by the NCA. As has been seen elsewhere, decisions can be reversed or revised and the criteria are often opaque.

Vodafone also inherits the baggage of Ghana Telecom, specifically an unpopular fixed-line network that is not yielding strong returns and mobile subscribers who are not eagerly migrating from voice to data services, despite the need to do so because of limited ADSL access.

The challenge for all MNOs in Ghana is to meet the need for mobile data services at a price point that works in the market. With typical ARPU figures of around USD 5 it is difficult to make money from services, especially when they depend on the costly switchgear needed for 3G (which all the country's major operators now offer).

The unique challenge for Vodafone is to do all that and play catch-up with the dominant operator (MTN) while hindered by legacy fixed-line burdens and a watchful but somewhat unpredictable national regulator.

Nevertheless, Ghana remains an important focus because it still has potential. With GDP growth of better than average sub-Saharan levels, a significant number of consumers still not using mobile and a national economy that is looking to modernise and globalise, there is very real opportunity for MNOs.

Vodafone has demonstrated its awareness. Its local marketing covers every channel, including the whole range of social media that local users are only just beginning to explore. Of course, it is younger users doing this, which is why it plays a crucial role in long-term market development. Vodafone has also won awards for its social responsibility initiatives, specifically the Healthline project that allows consumers to check that medication is valid by text messaging.

There is much that Vodafone has done right in Ghana. Whether it will be victorious in competition with MTN is another question. And the real issue remains what the cost of such victory would be, given the relatively low revenue expectations in the Ghanaian market.