The Guardian has a good piece on telcos and their revenue challenges, capturing everything with this line: “ARPU, which was around $22 in 2005, has dropped by 81 per cent to $4.14 as at April, 2018. ARPU is a measure used primarily by consumer communications, digital media, and networking companies, defined as the total revenue divided by the number of subscribers.” This explains the sector and why WhatsApp and other OTT services are real problems to the telco operators. In short, if you look at the financials of most African telcos, they do not look encouraging. The asset utilization efficiency is very poor and bigger investments are not necessarily growing revenue, at parity. They have to deal with those issues immediately even as the problems mutate: you do not know what would come after Skye and WhatsApp with blockchain on the horizon.
A study carried out by Tekedia, with focus on operators, showed that though competition has been much in the sector, the OTT services have seriously reduced operators’ revenue, not only in Nigeria, but across the globe. […]
Already, Ovum, an independent analyst and consultancy had revealed that the growing adoption of OTT services by customers instead of traditional telecoms services will occasion global revenue loss of $386 billion over a period of six years (2012 – 2018) for the traditional telecom operators, thus endangering network development. […]
“Telecom Operators (Telcos) incur the costs to invest a lot on network infrastructure in order to provide basic and innovative services to customers, yet OTT players make the money,” Association of Licensed Telecommunication Operators of Nigeria (ALTON) said.
The Most Important Job in Telecoms
To deal with these myriad of issues, the telcos need a game plan. That brings me to the most important job in telecommunication today. That job must drive a smart business model that will handle growth, not just in subscriber number but Naira and US dollars. I will call that job title – Chief Anti-Disintermediation Officer [CAO].
Disintermediation is the reduction in the use of intermediaries between producers and consumers, for example by investing directly in the securities market rather than through a bank.(Wikipedia)
A good example is the voice to data transition and the emergence of messaging platforms – like WhatsApp – that disintermediate SMS and voice calls.(link)
There are several trends that suggest that in the long run the OTTs will get major market equity, eventually taking over the market and pushing out regular telecom providers; just by simply constantly evolving their service, mostly in terms of accessibility, availability and quality. (link)
Nigeria has been using the subscriber base as a sign of progress in the industry; it is good for the government and the citizens but for the telecoms, the ARPU is where the pain points are right now. For the telcos, today, you need at least 5 people to make the same relative revenue in 2005 from one subscriber (ignoring inflation), in US dollars. So, you have to invest to support 5 people and at the end, the revenue is not even up to what one person contributed in 2005. There is no business that can survive under that framework. Let me expand that thought below…
In my analysis, the telcos have increased services they offer to those 5 users by 400% [data, video and OTT with the last two kids of data] even as the stress on telecom infrastructure has jumped in excess of 700%, compared with 2005 numbers. In other words, the telcos are supporting 5 users with 400% more services and those users are using more 700% resources when benchmarked with 2005 numbers. Yet, the revenues from the 2018 five users are not cumulatively up to what a single subscriber paid in 2005. Using MTN Nigeria numbers, in Q1 2018, they got only $4.14 from each subscriber for a total of $20.70 for five subscribers. In 2005, one subscriber generated $22 when the operator offered nothing but voice and SMS.
You inject more cash but the outcome is lesser revenue even as the subscriber base is growing. In Nigeria, specifically, the path today will lead to more erosion of value as it has been evident that telcos have been UNABLE to change the trajectory if you look at the ARPU of the leading brands since 2005: As noted, MTN’s ARPU has dropped from the high of $22 in 2005 to $4.14 today. I have also checked Airtel Africa (it does not report numbers for Airtel Nigeria), it is the same outcome. A course correction is urgently needed in the sector.
To help me understand the impact of WhatsApp and other OTT solutions, I pulled MTN Group financial report in 2006. In 2005 (yes 2005), MTN Nigeria was recording ARPU of $22. Today, it is $4.14. Sure, competition has a huge role there but I do think the OTT services are largely to be blamed. When the ARPU dropped to $18 in 2006, we already had Glo and Airtel (you take the name, Econet, Zain, Celtet etc). So, the reduction of ARPU is not just on direct industry competition, the OTT is having a real effect.
The Way Forward
Telcos should invest in business model research and find ways to move from PAYG to subscription-based billing. That way, they would care less on what people do with their phones on their networks as the subscription must have covered those expenses. Regulating technology would be extremely dangerous. If we allow Telcos to succeed, the newspapers can ask for the same consideration since Facebook and Google are decimating their business models also. When you are dealing with aggregators, you rarely win because aggregators operate with near-zero marginal cost. Yes, their products are extremely valuable to the users even when they pay absolutely nothing [sure, I get it – privacy of data]. If you hit them hard, you would lose the soul of your business.
They need someone with vision as a CAO with focus on fixing this paralysis. Otherwise, the night is near because the OTT services continue to evolve. You need contract subscription billing so that you become ambivalent to whatever the customer is using. That way, you preserve ARPU. Yet, an entrepreneur can help build the subscription ecosystem for the telcos. That would be a huge business in the land.
A good example is the voice to data transition and the emergence of messaging platforms – like WhatsApp – that disintermediate SMS and voice calls. To counter this threat the telcos move from a per minute / megabyte voice-based plan to a tiered data plan e.g., 5GB for $30, 10GB for $50 …where voice and SMS are free. The simplistic strategy is to preserve customer ARPU and then you are ambivalent about messenger applications because you have preserved the revenue.
---Will you join me at Tekedia Business Webinar? $15 (or N5,000). Click and register here.
---Visit our Store for my books, cases, notes, etc. Now, enjoy our consolidated subscription for all contents (past, present and future).
-- We offer Advisory Services (tech, strategy & Africa).