I noted many days ago that Airtel Nigeria has successfully re-engineered its business for profitability through a smart leasing /asset financing strategy where it has moved many assets out of its books. And provided it could find solid partners to handle these heavy infrastructure operations, its balance sheet would continue to look promising. Also, it would have more free cash to plow into customer service and experience. Largely, Airtel customers will experience better service.
Many quarters ago, Airtel was seen as a company that would abandon Nigeria. In the depth of the recession, the company struggled: it had so many underperforming assets. As the nation exited recession, Airtel upgraded its business model. Today, Airtel is leaving the infrastructure business, outsourcing all to partners across Nigeria. Typically, such enables companies to conserve cash. The impact is now visible in the subscriber numbers. Provided Airtel continues to find partners, it would continue to grow at a faster rate than its peers.
Many months ago, many were predicting that Airtel would depart Africa [I did not believe that because Airtel’s home country (India) is the most competitive telecom market in the world with Jio through which Mukesh Ambani, the world’s 19th richest person, has unleashed mayhem on telecom operators with pricing anyone in Africa could only pray for]. So, Airtel Africa is the main hope for Airtel as the Indian operation would likely succumb to Reliance Industries, the owner of Jio.
Yes, Airtel Africa will be here. And the business leaders came with a game plan – sell off those masts, equipments etc and lease them back. Today, that strategy is working: Airtel Africa made a full year profit.
The Declining ARPU
Yet, even though Airtel Africa made a full year profit, challenges lie ahead. Just as I have noted on MTN Nigeria which had seen its ARPU (average revenue per user) dropped from $22 (in 2005) to $4.14 in Q1 2018, Airtel Africa is even doing worse: $3 in 2017. Airtel does not break its African operation by countries; so we do not have Airtel specific Nigerian number. (9Mobile and Glo are private companies; you do not expect to know anything about their financials.)
Overall Africa average revenue per user (ARPU), a key performance metric, fell by 1.8% to $3 on-year, while sequentially it fell by 5.6%.
So, MTN Nigeria is operating at ARPU of $4.14 while Airtel Africa is at $3. These companies are using scale to improve revenue [they have more users], but the challenge on profitability remains strong since the revenue is coming by selling and supporting more services and products which increases cost.
The present model in telecom operation in Nigeria may not be sustainable. I have suggested that moving towards subscription may be an option to make the telecom operators to become ambivalent to what the subscribers use their solutions for. Yes, once they pay the monthly fee, no one would care what they do provided they remain within the service tier they have paid.
How low can this go before we see mergers? Typically, 4 (big) telecom operators are too much in an emerging country!---
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