Nigeria Telecommunications Market A Snap Shot View

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1 Nigeria Telecommunications Market A Snap Shot View White Paper Prepared by: Africa Analysis Andre Wills, Geoff Daniels Contact details: Andre Wills, andre@africaanalysis.co.za 1

2 Executive Summary The Nigerian telecoms market offers a clear and exciting opportunity for many telecom operators. This market is highly deregulated with the NCC licensing a wide variety of telecoms operators. This market has moved from zero to hero in just under three years and is now considered a leading opportunity for both telecom operators and equipment suppliers. By end 2002 the Nigerian services telecoms market was worth some USD1.1 billion and experienced annual growth of 37% driven predominantly by the explosion in mobile telephony. While this is a highly exciting market the key challenges do not lay in the market demand but rather in the physical and political environment. Introduction From Zero to Hero in just three years The Nigerian telecommunications market has undergone radical change over the past few years driven primarily by the introduction of mobile licences. In 2002 NCC embarked upon a process of licensing fixed wireless local loop operators. The Nigerian market has moved to a fully liberalized market where the law of jungle has been replaced by the law of competition. NCC has removed the barriers to market entry and are now relying upon natural market forces to ensure market sustainability. By end 2002 the Nigerian services telecoms market was worth some USD1.1 billion and experienced annual growth of 37% driven predominantly by the explosion in mobile telephony. Regulatory structure Bold but achievable? Nigeria has opted for an approach of extensive cost distribution to deregulate the telecoms market. This has led to the licensing of dozens of smaller operators as a tool to rapidly meet market demand. Although successful in meeting some of this demand, the end result is a highly fragmented market which is very complex to understand and difficult to regulate (even with the New Telecommunications Policy 2001 ). NCC s five year plan is a well though out plan but its application will require extensive regulatory resources that the NCC, in our view, has yet to acquire. As experience in developed markets has shown regulating such a diverse and competitive market will certainly tax NCC s abilities. Unless NCC plan to invest in resources we suspect that this plan will remain in many ways just that - a well defined plan. 2

3 The objectives set out to improve access and teledensity will place quite a burden on licensed telecom operators. The telecoms industry in Nigeria will however never be without political interference. Such interference can increase in the future as the money generated by specifically the cellular operators becomes more apparent. All existing policies and regulations are under review with the purpose of removing unnecessary constraints and barriers, but at the same time ensuring that Nigerian and regional development goals and objectives are not compromised. West African Telecommunications Regulatory Authority The first Annual general meeting of WATRA was held in Abuja Nigeria March ECOWAS reiterated its total support for WATRA and its endeavors to develop harmonised ICT policy and regulatory guidelines for use by the 16 ECOWAS countries. The ECOWAS vision for the telecommunications sector is "to have a single liberalised telecommunications market in the Community, following on the adoption of uniform legislative and regulatory frameworks, and the interconnection and integration of national networks" The aims of WATRA are therefore: encourage the creation of a viable, homogeneous telecommunications marketplace in West Africa establish conditions that will allow any operator to provide trans-national or global services, in line with the principle of non-discrimination ensure that commitments entered into in dealings with the WTO are not at variance with ECOWAS objectives establish a conducive framework within which Member States of ECOWAS can evolve a common stand regarding international telecommunications agreements, conventions and treaties allow joint management of certain scarce or limited telecommunications facilities and resources such as the radio frequency spectrum enable application of uniform rate and tariffs for ICT services Implement mutual recognition of equipment and terminal type approval processes provide ECOWAS with the legal instruments regulating network interconnection defining a framework of the functions and purposes of Member State regulatory bodies 3

4 Market structure General overview Infrastructure licensing is the dominant route taken by NCC in it s objective of increasing telephony penetration and access throughout Nigeria. The following figure shows the licences issued. SP s Service Provision Access National International Fixed Licences Mobile Nitel PTO s ISPs Nitel GSM Dealers Nitel PTO s FWA VSAT Nitel GSM Nitel LDO s VSAT Nitel GSM Nitel VSAT As shown the market is quite crowded with many operators being able to build networks for access, national and international. While the mobile operators ( and ) can build their own national backbone they do so as Nitel is unable to meet their network requirements. The liberalisation of the Nigerian telecoms market is providing new challenges to all the existing operators. specifically has raised the stakes considerably in the market, and is setting the pace with the other operators currently struggling to focus their operations and thus become fully operational. have embarked on a very strong branding strategy that has by all accounts proven to be successful. Unique challenges that exist in this market are the unstable and poor power supply and environmental conditions that directly have impacted upon exiting telecoms operator network deployment strategy. have reported that the unforeseen power and environment issues have resulted in a USD100 million additional spend in rolling out their network. Cellular operators Three cellular operators have launched their services since 2001, and Rose (Nitel). Rose is the rebranded Nitel GSM brand. is expected to launch as a fourth mobile operator during the course of the next 6 months with its brand Royal. 4

5 The current combined subscriber base is estimated at 1.9 million active subscribers, with the market leader with an estimated 54% subscriber market share. The following figure shows the market share by operator. 7% 39% 54% 5 Nitel GSM Nigeria GSM market share as at March 2003 The value of the cellular market is estimated to be US$1 billion by end By the end of 2002 had invested USD1.4 billion, had deployed more than 400 base stations across the country with 8 mobile switching centers located in Lagos, Port Harcourt, and Abuja respectively. Another 6 are planned over the next few months. plans to invest another USD60 million deploying a further 200 base stations to ease network congestion and expand the geographical coverage. The industry ARPU is around USD54 per month. A major challenge facing and is the settlement and collection of interconnect fees due to them from Nitel. In October 2002 Nitel was ordered by NCC to pay in excess of N1 billion to cover 80% of the interconnect fees due to and. (SNO) will be launching its cellular service in the next 3 months. An aggressive launch is expected, and it is known that 500,000 cellular handsets have been ordered. Alcatel has currently an estimated 120 engineers rolling out the network. Fixed line operators Nitel, the incumbent fixed line operator has currently an estimated installed base of 650,000 lines across 800 switches covering the whole of Nigeria. However, only half of these lines are typically operational due to various ongoing network issues. Most of the network consists of a mixture of old to obsolete equipment and poorly maintained more modern equipment. Nitel also suffers from a negative consumer reputation, and will have to change this perception before they will be able to become a successful player within the Nigerian telecoms market.

6 Pentascope has successfully won the management contract to manage Nitel for the next 3 years. Pentascope's remuneration is based on a base fee of four million dollars per annum, of which two million dollars are in respect of clearly variable expenses, but which could be higher if it meets the turnover and profitability targets in the business plan. Pentascope is expected to increase the GSM subscriber base seven fold from around 130,000 to 1 million and to increase the number of fixed lines from some 600,000 to 1.3 million in the three year period. Pentascope, a telecoms consultancy firm owned by Pentascope Group and its employees, was until last year wholly owned by KPN, the leading phone operator in the Netherlands. Pentascope has quite challenge ahead of it as the 250,000 digital lines installed by Alcatel some 5 months ago in Lagos have not been activated as there is a payment dispute between Alcatel and Nitel. To improve its resource base for the planned expansion of Nigeria's telephone system, the government has begun moves to secure a $1bn World Bank loan. If secured, the loan will be used to finance the proposed universal rural access programme to provide easier access to telephone and information services in the nation's six geopolitical zones., whose major shareholder is Conpetro Ltd., one of Nigeria's largest petrochemical companies is the future SNO. will be managed by Detecom Consulting GmbH, a wholly owned unit of Deutsche Telkom AG. The rollout plan initially involves one million lines for mobile phone service and landlines in 32 cities, starting with three major cities within 3-6 months. will also build a backbone infrastructure involving a network of 10,000 kilometres of fibre optic cable across the country and the first three phases, about 2,500 kilometres, is expected to be completed in early Long Distance Operators Two long distance operators have been licensed yet none are providing services. One licensed operator, Nepskom, is 51 percent held by Eskom Enterprises, part of South Africa's government-owned power utility Eskom with 49% held by Nigeria's power authority, which the government plans to restructure and privatise. Eskom Enterprises had already strung 1,300 kilometres of fibre optic cable along power lines for the power authority's private network in 2000 and PTO s & FWA Operators (the one and the same) The five main PTO s are Mobitel, Multilink, Starcomm, Reliance and Intercellular. The leading PTO s have and are migrated to CDMA networks. Already between them they have some 1 million subscribers. To ensure continued success in this new, more dynamic market, these PTO s will need to move either up the value chain, or into underserved market areas, or both. It is also expected that they will be looking at possible business partnerships with larger operators such as Nitel or the SNO. There has been much speculation about the licensed FWA operators forfeiting their licences. However there is no mechanism that the NCC can execute to 6

7 retract the issued licences. Should the NCC decide to do so this will set a dangerous precedent in the telecoms market and place at risk all issued licences. Another win for the PTO s is the NCC ruling that allows FWA s to offer limited mobility just what limited mobility will prove to be and how contentious this issue will become remains to be seen. Recently Starcomms rolled out a CDMA2001x network worth $60 million in Lagos. This network has a capacity of 500,000 lines but currently it is only enabled for 150,000 subscribers. Reliance Telecom placed an order with Ericsson worth $145 million for a CDMAS20001x mobile telecoms network. Multi-Links Telecommunications installed CDMA20001x Nortel kit and recently announced the commercial launch. The network will serve 500,000 customers in Lagos. Multi-Links plans to further extend it throughout the country. Odu'a Telecom placed an order with Harris Corporation for $17 million contract with to provide a broadband fixed wireless access network in Nigeria. The network, being rolled out across five states, is Harris s ClearBurst fixed wireless technology. Harris will also provide a radio backhaul and interconnection network and network management software as well as integration services. VSAT Currently there are in issue some 80 domestic VSAT licences and 12 International VSAT licences of which only 7 are operational. The domestic VSAT licences are mostly used by large corporate companies for internal ICT services. The 12 International VSAT licences granted were on condition that the holders would establish hubs in Nigeria, not all have however done so. Two new initiatives are in the process of deployment during the latter half of this year of whoch both plan to provide Internet access services via VSAT based on hubs to be built in Lagos (IP Direct and DCC). Currently the NCC has been instructed not to issue anymore licenses for VSAT services until the new policies and regulations are in place. VSAT Developments Under the auspices of ECOWAS, the Economic Community of West African States, the Gobal VSAT Forum (GVF), WATRA and the NCC a VSAT workshop that followed on immediately after the WATRA AGM in April. The GVF has undertaken to prepare a document for the NCC that could be used as a basis for the drafting of the new VSAT policies and regulations envisaged by the NCC. This task will be undertaken by the GVF's regulatory working group. VSAT Applications The IP Direct project proposes to provide Internet access services to a broad section of the marketplace. end-user access via a Star networks from a hub in Lagos. The hub will be provided with backbone access via the SAT 3 undersea optic fibre cable. SME and SOHO via a combined Star and Mesh network based on the hub in Lagos Corporate closed user group services 7

8 The 200 ISP's are in theory allowed to provide Internet Access via satellite gateways. Many are providing illegal voice connectivity through these gateways. Technology in Nigeria CDMA20001x Today's CDMA service is based on the IS-95-A. A refinement of this standard, IS- 95B, allows up to eight channels to be combined for packet-data rates as high as 64Kbps. Beyond IS-95B, CDMA evolves into 3G technology in a standard called CDMA CDMA 2000 includes numerous improvements over IS-95A, including more sophisticated power control, new modulation on the reverse channels, and improved data encoding methods. The result is significantly higher capacity for the same amount of spectrum, and data rates up to 2Mbps that meet the IMT-2000 requirements. DECT DECT has had some success but it is yet to be deployed on a wide scale. 3G in Nigeria - Pie in the Sky Much has been written about technology adoption rates in Africa and many people cite the ability for Africa to leap frog ahead and technology. While this is true in many areas it certainly is not true for Africa becoming the 3G continent of the world. Voice is the predominant mobile killer application. Many mobile operators are still chasing the elusive holy rail of national coverage and are incurring significant Capex investments to achieve this objective. The days of deploying technology on the belief that subscribers will arrive is assigned to the annuals of history along with many telecom operators. Today it is the market demands that sets that pace for technology deployment. End 8