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Tuesday, October 31, 2017

Consolidating Digital Dividends: Elixirs for indisposed communications sector

There have been some momentous events in the telecommunications industry very lately. The visit of Google CEO, Sundar Pichai (following on the heels of earlier visits by Facebook’s Mark Zuckerberg and Microsoft’s Satya Nadella) readily comes to mind.

Equally significant are the recent approvals of an ICT Roadmap (2017 -2020) which adopts the spirit of the National Broadband Plan of 2013 and is supposed to stimulate the creation of around 2.5 million jobs, boost broadband penetration to 30 per cent and increase ICT contribution to GDP to 20 per cent by 2020, as well as the establishment of a multi-campus ICT University, by the Federal Executive Council.

Also, the internationally renowned mobile operator, Etisalat, pulled out of the Nigerian market and pursuant to this, the local replacement brand, 9mobile, emerged. These events are noteworthy from two perspectives: they revalidate the three key stakeholder segments in the Nigerian broadband ecosystem – the content providers, government and network operators, and also serve as a reflection of the enthusiasm levels of each of the said segments for the industry and the attainment of the broadband goals.

It is unanimously agreed among all stakeholders that the opportunities offered by broadband are virtually boundless. Content providers are excited at the prospect of eager subscriptions and patronage in a massive national market of over 180 million people, over half of whom are under thirty years old. Government, naturally, is bullish about the socio-economic developmental benefits that will accrue from extensive broadband uptake. But while the operators are expected to make extensive investments in building and managing the networks upon which broadband traffic will be carried, every indicator points to the fact that they have strong reservations about the continued viability of their businesses in the face of base-level average revenues per user (ARPU), earnings before interest, tax, depreciation and amortization (EBITDA) and non-existent profit margins.

The two major local industry associations – the Association of Licensed Telecommunications Operators of Nigeria (ALTON) and the Association of Telecommunications Companies of Nigeria (ATCON) – as well as the worldwide body for mobile communications service providers, the GSMA, have consistently offered guidance, for some time now, on this state of affairs which effectively threatens the continued growth of the communications industry and has been reaffirmed somewhat dramatically by the Etisalat incident.

The causes of profit value erosion in the industry have been well-highlighted:  rampant multiple taxation, steady dip in tariffs since industry inception in 2001 as against all other sectors which have since been enjoying tariff increases, heavy import dependencies for network components (most of which have a life cycle of between two to four years), wide foreign exchange variations among others.

Engagements are ongoing within the industry ecosystem and with government to address a good number of these issues, and the aim of this piece is not to focus on same.  Rather, the purpose is to project that in the face of these unrelentingly constricting market conditions, after having voluntarily implemented various cost-saving practices like outsourcing, infrastructure sharing and staff-streamlining in recent years which have not ipso facto translated to profitability, in line with trends in more established markets, the next logical step for the network operators will be to go into “market self-correction” mode, to effect a reduction in the number of market players in order to remedy certain structural in-balances therein and re-energize market growth and, consequently, the attainment of the broadband aspirations.

Typically, this will be effected through mergers and consolidations as the market landscape presently displays the trappings of a consolidation-ready environment  seen from the presence of multi-operators who are mostly in negative financial health and having disparate subscriber numbers as well as random frequency spectrum holdings.  

The benefits of this option would include ensuring that  existing investments are fully protected, the network and operating assets of the consolidating parties fully optimized/deployed to deliver more robust services to subscribers, and the emergent consolidated entity will have more subscribers as well as a larger market share than the component entities. The bottom line from these will be that the consolidated entity will be a much more profitable enterprise than its progenitors and therefore be attractive to additional investments for further expansion to facilitate the provision of truly world-class broadband services.

it is axiomatic that frequency spectrum is the oxygen which gives life to 4G LTE mobile broadband networks and so there must be assurances to investors who seek to consolidate incumbent networks that this resource will be available for the use of the re-engineered emergent entity. This is even more so in a situation where one of the consolidation targets owns  slots of spectrum which are the points of attraction for the transaction. Assurance of availability will be in the form of prompt regulatory confirmation by the Nigerian Communications Commission (NCC) of the right of the emergent entity to use the frequency spectrum that had been assigned to each of the component consolidating networks without let or hindrance, upon due diligence inquiry. Such assurance will also be offered by the instant withdrawal of the “digital dividend” spectrum of 700/800mhz from the broadcasting industry by the National Frequency Management Council (NFMC) and allocation of same to the communications sector, followed by the publication of a transparent process for its assignment to the operators for the provision of 4GLTE services within a definite time frame as has been advised by the International Telecommunication Union (ITU) which had prescribed two  separate cut-over dates that Nigeria has been unable to meet.  Such institution of certainty and predictability should also arrest the incidence of indiscriminate acquisition of slots of the said frequency spectrum by eager operators, as has been witnessed in recent times.

The importance of frequency spectrum availability as a success factor in the  merger of mobile companies has been underscored in various jurisdictions in Europe, North America, Asia and Africa where changing market conditions such as are currently being witnessed in Nigeria have driven such consolidations. Our summation is that this internationally recognized trend will also play out here and so urgent steps need to be taken by the relevant government offices to address the issues around frequency spectrum availability as outlined above. To this end, pursuant to the commendable work it is doing in the area of spectrum use reform via the ongoing spectrum trading and active infrastructure sharing consultations, the NCC will be required to publish rules around frequency spectrum administration in a consolidated market while the NFMC, working with the Ministries of Communications and Information (which have responsibility for telecommunications and broadcasting respectively) effects the devolution of the “digital dividend” frequency spectrum to the NCC (and retrieval of irregularly held slots of same) for transparent assignment to operators.

The implementation of these measures will certainly infuse the promoters of the incumbent network operators and prospective fresh investors with the confidence to commence definite discussions around the merger and consolidation of the operating companies. The result of successful consolidations will be beneficial to not just the investors who will enjoy enhanced returns but also to the content providers and other sub sectors in the service delivery value chain in the form of greater business volumes, the subscribers by way of modern and world class service offerings as obtainable in other more developed markets. Equally and more importantly, government stands to gain specially – directly and indirectly - as its broadband target and other relevant goals which are set out in the National Broadband Plan  and the ICT Roadmap will be attained. This will therefore be a win-win for all stakeholders in the ecosystem.

The operators and investment community are expectant of the implementation of the  afore-highlighted frequency spectrum availability proposals by government as a green light for the commencement of discussions on consolidation.

*Courtesy: Osondu C. Nwokoro who is Director External Affairs, ntel.

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