In a piece, I noted that Nigerian techies and firms are using American hosting companies even for the top level .ng and .com.ng domains. Besides the ease of using the U.S. hosting services, another main factor was cost: the foreign hosting firms are largely cheaper compared to the local alternatives.

Nigerian techies really love America. According to Hub8, 72% of our hosted sites are domiciled in U.S. Those sites include the .ng and .com.ng. It is really unfortunate that we cannot keep anything in Nigeria.  Government has been campaigning, promoting  .ng and .com.ng domains. But as soon as the users acquire them, they put them in hosting providers in U.S. Honestly, I do not see how that will change in coming years because even most of the local hosting firms are resellers of American hosting companies: it is tough to run a 24/7 business when there is no electricity.

In the LinkedIn community, some commenters noted that power may not necessarily be the main factor. The reasoning was that power is a factor local hosting companies can adjust for and price into their products. They explained that our telecom companies like MTN, Airtel, and Glo are independently generating power for their businesses, and are doing just fine. In other words, if MTN uses generators to run its business, hosting companies can simply do that, since that has not severely hurt MTN.

Unfortunately, that thinking is flawed. It is flawed because the products sold by MTN and other telcos are not internet products; they are digital non-internet products. Yes, they are bounded and constrained by national geography. If you are in Nigeria, you cannot buy your cell phone number from U.S.-based Verizon or AT&T. The implication is that MTN and Glo are never in direct competition with Verizon and AT&T because Nigerians cannot have the opportunity to shop for phone numbers across the national boundaries. That means, even if MTN and Glo should include the cost of independent power generation in their pricing, you have no alternative than to pay for it [the telcos have made it clear that Nigerians could save if they have reliable grid supply across Nigeria].

Contrast that localized positioning to web hosting. Web hosting product is an Internet product which means the competition is global and unbounded by geography. A Nigerian user can buy hosting from a U.S. company unrestricted. So, if someone begins a web hosting business in Nigeria with 24/7 generator and adds the power cost to the hosting pricing, that person will struggle because if the price is higher compared to what American competitors offer, Nigerians can easily shop across the border. This is one of the biggest challenges of Internet products: they are unbounded by geography and that makes competition global.

Pricing Dangote Web Services

I will explain this pricing relationship with Dangote Cement (which exists) and Dangote Web Services (which does not). The core thing here is geography. Dangote Cement is sold in Nigeria and it is a dominant brand. Even though the relative price of a bag of Dangote Cement may be higher than one sold in German, it is irrelevant as no one is going to shop for a bag of cement in Germany while in Nigeria. Dangote Cement generates its own power to make its cement, and that pushes its price higher [I assume if the power comes from the grid, the product may be cheaper]. We all buy the cement at the price Dangote Group sells because there are few alternatives. The German cement may have been cheaper but that is irrelevant because of distribution cost. This Dangote Cement is like MTN which also generates its own power and have the capacity to increase price to cover the extra expenses.

But consider a scenario where we have Dangote Web Services (DWS), and Dangote Group wants to use the same 24/7 independent power station to run the servers which are located in Nigeria. It can do that, but it will struggle if it wants to add the extra power expenses in its pricing. Unlike cement which is not an internet product, the DWS is an internet product and can be bought across national boundaries with practically limited friction. So, DWS will struggle on pricing when compared with foreign competitors because the electricity expenses have increased its cost. In that case, Nigerians will go for the U.S. hosting competitors since the pricing is better. This scenario is what is happening between the local hosting firms and their counterparts in U.S., and the very reason Nigerians choose overwhelmingly foreign hosting services.

All Together

The Dangote Cement vs. Dangote Web Services scenario as explained is what is happening in the market. MTN and Glo are not offering internet services and that limits the scope of the global competition against them. The mobile numbers they assign to customers are localized and no one outside Nigerian can challenge them competitively. That gives them the leverage to recoup all expenses including power. But for local web hosting companies, the boundary advantage collapses, providing an opportunity for Nigerians to shop globally. In that case, they look for places with better pricing, i.e. not suffering from “expensive electricity”.

So, Dangote Cement will thrive in Nigeria but Dangote Web Services under global competition will struggle because Nigerians can easily find alternatives on the web unbounded by geography. Indeed, internet products compete globally; a challenge for local entrepreneurs creating and selling them. That explains while .ng and .com.ng are bought from (government approved) local domain sellers but hosted outside the country.

Cisco lived on a hangover for years. It wanted to sustain its highly lucrative hardware selling model into a world where “software is eating” everything. Under John Chambers, its former long-tenured CEO, the company kept the high-margin hardware party going for extended period even when the world had moved on. Mr. Chambers had a big challenge which caused the stasis: cannibalize a lucrative hardware business to participate in an emerging, and largely low-margin software one. He chose the hardware business and Cisco, over time, lost its bearing, running six quarters of declining sales.

Amazon had helped to unleash a double whammy through cloud computing for typical Cisco customers and commoditization of most server hardware. As that happened, the race trajectory was to the gross margin bottom: many companies like Facebook and Google were using off-the-shelf components to build their datacenters. Generic network equipment manufacturers like Taiwanese Quanta and Winstron brutally wounded Cisco business model with cheaper alternatives that did the work. Usually, after the generic builders have delivered, most of the companies use in-house networking software to put them to use. Over time, Cisco was totally cut-off with its premium (expensive) solutions.

Just like that, most datacenters do not rely on premium networking gears. From HP to IBM to Cisco, that transition affected many things: the cash-cow collapsed. Specifically for Cisco, it went into lost quarters where revenue declined. Mr. Chambers started to react, restructuring the business, but he was slow. Then Mr Chambers left.

Under a new leadership, a new strategy is evolving in Cisco. It is a total redesign for the pioneering networking gear company. Today, instead of focusing on the hardware element of the datacenter equipment for handling corporate networks, Cisco has gone into software. That was what it has resisted for years. It was a hangover just the same way Microsoft was slow to mobile to protect Windows. A transition from desktop to mobile was a threat to Windows and Microsoft wanted that not to happen or be delayed. Unfortunately to Microsoft, Apple and Google (through Android) did not get the memo: mobile happened without Microsoft. Cisco had the same issue: managing network was moving to software and it stood there protecting the margins on hardware.

The tech giant debuted software on … designed to make it easier for corporate customers to manage and monitor their networks. In addition to the new software, the company also introduced new data center switches with custom-made chips that are intended to make operating the software more efficient.

Customers that buy the new equipment must pay a subscription to access many of the new software features, marking a big departure for Cisco from its longtime business strategy. In the past, Cisco sold hardware that came with most services pre-installed and that customers had to pay for whether they wanted that software or not.

The new software by subscription underscores Cisco’s efforts to deal with declines in its legacy business of selling equipment for managing Internet and telecommunications networks. Businesses are increasingly buying computing resources on-demand from companies like Amazon and Microsoft instead of buying traditional data center hardware, which has hurt Cisco because of its dependence on selling data center gear.

Jumia, the Nigeria-based gigantic ecommerce company, has since consolidated most of its services. The new Jumia is now a leaner company and effectively more structured to grow in Africa compared to few years ago when it (i.e. the old African Internet Holding) had Kaymu and other businesses operating as separate entities. As Jumia grows and expands in Africa, it will take over new markets and territories.

I predict that by 2030, Jumia could become the largest retail bank in Africa, by total loan amount made to merchants. (It does not need to be a bank to make that happen.) I expect the 2020s to be the year of the ecommerce where many merchants will move online to sell their products. As they do that, companies like Jumia will hold more of their data. Holding the data will give Jumia better insights on what is happening in those businesses. And using the data, Jumia will make smarter loans to merchants at efficiency levels no traditional bank can match.

Yes, Jumia will be in a better position than most banks because it is seeing not just the transactions at the side of the merchants, but also at the side of the customers to those merchants. There is no data that will be greater than that.

The turning point for ecommerce will happen in 2022 in most parts of Africa because most of the challenges we face today would be dealt with.

In today’s videocast, I make a case that Africa will enter the era of affordable broadband internet in 2022. That will be the year we will begin a new dawn of immersive connectivity where you can eat and surf all you can. Industry players will take off the Internet meter and then focus on service, experience and quality. From satellite broadband vendors to the MNCs with balloons and drones, the sector will become very competitive and service will drive growth. This has happened in the past – every decade, Africa experiences a major industrial transformation. We saw that in banking and voice telephony. 2020s, starting at 2022, will be the decade of immersive connectivity.

Jumia Data Advantage

One of the key advantages for Jumia is that it is collecting massive data on customers and merchants as the industry develops. I do believe that the data it has and as ecommerce takes shape in Africa will give it a huge advantage over banks on merchant lending. I do believe that merchant online lending will be huge because of the potential usage-convenience over comparable products from traditional banks. Companies with data will win. Today, in most parts of sub-Saharan Africa, Jumia is ahead on merchant data, at granular level, not necessarily on the data volume. Banks have merchant customers but they see largely cash-anchored without necessarily knowing the customers. Jumia in its ecosystem sees those customers who are buying from the merchants. That gives it an advantage to structure loans more optimally.

Ecommerce is the future because at the end commerce will move online. These merchants will need capital to grow, and ecommerce entities like Jumia have the customers where merchants could sell. Banks like GTBank understand this trajectory and are building marketplaces. Yet, the scale pales to what Jumia and Yudala could offer. At the moment, no bank in Nigeria is better positioned than Jumia for this market of the future. We are talking of small business lending where alternative data is scarce. Jumia has built a brand. And as the ecommerce business picks up, I expect the merchant lending business to grow. Applying for this loan may simply be hitting a button on the merchant dashboard, and may not technically require completing any form, unlike a traditional bank lender, because Jumia has all the data it needs to make decisions.

All Together

A bank may be blind to the needs of merchants but ecommerce platforms understand the needs and challenges of their portal-partners.  Jumia will not need to ask the merchants to fill paper forms on revenue because they have that data. It may not also ask the merchants to list their customers because it knows all of them. And because Jumia understands the trajectory of the transactions, e.g. seasonal demand of the products, it would be best positioned to make smarter loans. With that deep understanding and capabilities, it could lead the merchant online lending by 2030 in Africa. It may not have to do this lending directly; it can package the data for banks to do the lending while it takes a cut. That way, it pushes the risks to others.

Yes, Jumia could take advantage of its great industry positioning in the continent to run a possible aggregation construct merchant lending. That will bring additional revenue from multiple bank partners as it take its commissions. To further reduce risk, Jumia could warehouse the products and ship directly to final customers.  The merchants will benefit and the customers could see lower prices due to economies of scale, made possible with funding.

The banking industry has since changed: companies like Jumia will play key roles in the future. Any bank that looks at lending competition purely from institutions with “banking licenses” will struggle. Amazon loaned $1 billion to its merchants last year, signifying that within a decade it may topple most U.S. banks in that category while recording near-zero default rate.

Merry Christmas and Happy New Year ahead!

Today, I discuss how Nollywood (the eponymous Nigeria’s movie industry) can improve revenue.  I do not really watch the movies because of time, but in my family, there are fans: the TV seems perpetually connected to YouTube for Nollywood. I used to follow in the days of Living in Bondage, Circle of Doom, and Glamour Girls before I lost track of the amalgam of new productions which are released daily. With new actors and actresses, Nigeria has got a great sector there. The people that pioneered this industry, creating new sources of employment, deserve our commendation.

Nollywood is an enigma. I had expected they would run out of money because of piracy. Yes, I am always astonished how the producers make money with so much piracy happening on YouTube, illegal shops and elsewhere. On music, Facebook is not far, hosting “personal contents” with clear instructions not to distribute. Yes, users distribute copyrighted movies and music with little consequences. But to blame Facebook and Google will miss the mark: the law is on their side. All they need to do is to remove the contents, after alerting them, if you think the hosted contents are copyrighted. The problem is that policing ecosystems with billions of users is a lost cause. You have no chance.

This is my suggestion for Nollywood producers: do not bother asking YouTube and Facebook to be removing the copyrighted movies and music. It is a waste of time especially when the producers do not have resources to hire people to police the piracy within these platforms. Rather, the Nollywood association should approach Facebook and Google with a proposal. That proposal should be for Google and Facebook to pay their producers for the rights to movies and songs uploaded by their users. In other words, as soon as the users upload the contents, the rights go to Facebook and Google thereby making the process non-illegal.

This arrangement has two benefits: the producers would not have to bother asking Facebook and YouTube to remove the contents and the tech companies will not have to deal with legal challenges that may result for hosting digital wares they do not have rights to use. Of course, the more money for Nollywood is not bad.

While Facebook and Google may not initially like this plan, I am very sure if the association explains their challenges, the technology companies will listen. The key is making it clear to Facebook and Google that Nollywood can provide great contents in their ecosystems in the right way. That will be a win-win as the tech firms would improve user experiences even as the producers have more resources to make better movies.

For Nollywood to move to Nollywood 2.0 with better funded movies, they will have to deal with the revenue side of the business. Having a clear roadmap on how to deal with Facebook and YouTube will be fundamental to that future. Despite nearly 27 years of making movies, the improvement on movie quality has been largely incremental. Nollywood has to change that and advance faster.