Introduction
Right now, the telecom industry is in a state of flux. In the wake of the deregulation of the telecom sector in the US and Europe beginning in 1996, demand for internet and wireless services was matched by huge spending by telecom companies on both sides of the Atlantic. Telecom giants and upstarts spent huge amounts of money building networks that could carry voice, data and high-speed internet access. Demand for these services was expected to grow in double digits per year.
To crown this optimism, European telecom giants, like BT, France Telecom, Deutsche Telecom and KPN, took a bet on the future, borrowed heavily to pay for 3G licences to enable them provide high speed data transmission and video on demand among other services. The estimated roll out date for 3G services has now become as uncertain as which of the major licensees will retain its current structure going forward. The long and short of all these is that US and European telecom companies spent more money in the good old days than the opportunities that are now available.
Too many players are chasing too little business setting up crippling price competition that has eroded profits. The situation is better described by Business Week1 as follows "Now, what once looked like the land of promise, is quickly turning a wasteland, as profits vanish, revenues slump, stocks plummet, and companies begin going belly-up". Spates of debt defaults and credit downgrades have been competing with unimaginable bankruptcies. If things are this bad in the developed world, the question is, why should anybody invest in a developing economy?
Well, the surprising thing is that, any telecom company interested in growth cannot ignore developing countries. The reason is simple. Unlike in the developed economies, where there are too many players chasing too little business, in developing countries, because of the perceived risks, there are too few players exploring vast opportunities. The purpose of this paper is to examine the "rewards" and challenges of investing in telecom services in Nigeria. In this regard, we will examine the vast telecom business opportunities in Nigeria and the experience of current operators in the Nigerian telecom sector.
Telecom Regulations And Operators
Telecom is regulated in Nigeria by the Nigerian Communication Commission (NCC) which grants licences and manages available spectrum.2
In addition to the internet and data service providers, there are three broad categories of telecom operators in Nigeria, namely-
- the fixed wire/wireless services providers such as the Government owned Nigeria Telecommunications Limited (NITEL), the newly licensed Second National Operator (Globacom), a number of fixed wireless operators and those operating the Fixed Wireless Access technology.
- the cellular operators such as MTN Communications and Econet Wireless, the two dominant GSM operators. NITEL and Globacom also hold Digital Mobile Licences to provide cellular services based on the GSM technology.
- the Long Distance Operators such as NEPSKOM Communications Limited and Mobile Telecommunications Service Limited. Interestingly, NEPSKOM is a Joint Venture (JV) between ESKOM, a South African electricity company, and the Nigeria Electric Power Authority (NEPA). The JV is basically expected to utilize NEPA’s transmission infrastructure to provide transmission backbone to telecom companies that may require it.
The Rewards
There are immense opportunities in the telecom sector in Nigeria which in our view overshadow any perceived risk.
Huge and untapped opportunities
Nigeria is the most populous country in Sub-Sahara Africa, and one of the countries with the lowest tele-density ratio at four (4) telephone lines per 1000 people3. The World Bank’s World Development Indicator database stated that Nigeria’s population in year 2000 was 126.9 million growing at a rate of 2.4% per annum4. This implies conservatively an annual increase in population of 2m – 2.5m. There is therefore a lot of pent-up demand for telecommunication services.
- Pyramid Research estimated that from a market value of $800m in 2001, the Nigerian market will be worth $2.5 to $3.5 billion by the end of 2006.5
- With that growth potential, Nigeria market is ranked second in Africa after South Africa. However, with a Compound Annual Growth Rate (CAGR) of about 50% between 2001 and 2006, Nigeria ranked first among the top four markets in Africa.6
- Based on pent-up demand, resulting from a bad telecoms infrastructure, growth is expected from mobile services, internet, data communications and fixed voice services.
Further to the invitation of bids for the Second National Operator Licence, the NCC carried out a Fixed Market Demand data survey. According to the NCC, the primary objective of the Market Demand Analysis was to analyse the total fixed network voice, data and IP demand for Nigeria and construct a nationwide market demand model7. The NCC also stated that although the model is essentially a needs-driven analysis, it included a poverty index to influence the calculation of the addressable market. This is particularly because a large part of the perceived demand of telecomms services lies in rural areas, which are relatively very poor, and isolated.
The NCC believes the demand of this larger percentage of the population could be met though the provision of shared facilities, e.g. community tele-centres, public call offices and/or innovative services, including those on Fixed Wireless Access Technology. Below is an analysis of fixed line demand and voice traffic forecast by NCC for 2001-2009.
Fixed Line Demand - Voice Line
Million Lines |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
Fixed Lines Of which: |
4.03 |
4.93 |
6.04 |
7.07 |
7.77 |
8.85 |
9.43 |
9.83 |
10.25 |
Business |
0.65 |
1.06 |
1.42 |
1.53 |
1.61 |
1.69 |
1.74 |
1.80 |
1.85 |
Residential |
3.38 |
3.87 |
4.62 |
5.54 |
6.16 |
7.16 |
7.69 |
8.03 |
8.40 |
Teledensity (based on demand) |
3.4% |
4.1% |
4.9% |
5.5% |
5.9% |
6.5% |
6.8% |
6.9% |
7.0% |
Assessment of Voice Line Demand, 2001 – 2009 Source: NCC – Information Memorandum for SNO
Voice Traffic Forecast
Million minutes per month |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
Total fixed traffic |
2,461 |
2,704 |
3,242 |
3,599 |
4,089 |
5,489 |
6,671 |
7,723 |
8,590 |
Of which: |
|||||||||
Business voice |
419 |
669 |
849 |
879 |
884 |
887 |
871 |
898 |
927 |
Res. Voice |
2,030 |
2,010 |
2.311 |
2,492 |
2,618 |
3,043 |
3,266 |
3,413 |
3,569 |
Business dial-up |
9 |
19 |
54 |
136 |
263 |
624 |
760 |
1,023 |
1,023 |
Res. Dial-up |
2 |
6 |
29 |
91 |
322 |
936 |
1,774 |
2,388 |
3,070 |
%age of traffic residential |
82.6% |
74.6% |
72.2% |
71.8% |
71.9% |
72.5% |
75.5% |
75.1% |
77.3% |