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22 Jul 2010
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Nigeria's mobile telecommunications market has grown rapidly in recent years, filling a gap left by the small number of landlines. The government has announced it expects to see reductions in tariffs in the near future, prompting companies to consider cost-saving strategies.

Earlier this month, Nigeria's minister of information and communication, Dora Akunyili, called for a review of the 1999 national telecoms policy, arguing that high profits by telecoms companies warranted tariff reductions for clients.

Such a policy will likely meet a mixed reaction from operators, however. "Demand for telecoms services in Nigeria in 2008 continued at very high levels," Maher Qubain, the CEO of Starcomms, said as he unveiled quarterly results in April. "However, the second half of the year was characterised by worsening economic conditions, a declining exchange rate and falling ARPU across the industry."

As with many emerging economies, an estimated 95% of the GSM market is prepaid, meaning that the lock-in effects of bundled offers are not as pronounced.

The industry argues that high energy prices, which account for between 55% and 60% of operation costs, were the main factor behind pricing policy. Nigerian operators depend on generator electricity to power transmission towers, prompting Akunyili to argue that as in other countries alternative energy sources, such as solar panels and wind turbines, should be employed. Operators in certain countries, such as Kenya and Morocco, use such sources for up to 20% of their energy needs.

"It's a very capital-intensive business, so you have to get scale,” Steve Evans, the CEO of Etisalat Nigeria, told OBG. “In a case like Nigeria, you have to be driving well over 10m subscribers to get the economies of scale you need on a national network, covering probably 80% of the population."

Telecoms analysts agree that the current average revenue per user (ARPU) is between $11 and $12 per subscriber per month. However, given the uncertainty as to the number of lines per subscriber, it is difficult to estimate the true revenue per user. As penetration rates rise, analysts expect a slow decline of ARPU, with long-term projections leaning towards the $8 mark.

Nigeria is Africa's largest telecoms market. As of year-end 2008, Nigeria had 56.9m GSM lines and 6m CDMA lines active, according to the Nigerian Communications Commission (NCC), the telecoms regulator. Including 1.3m landlines, this translates to a total of 64.3m lines active, up from 57m lines at the end of the third quarter of 2008. A total of 22.59m new GSM and CDMA lines were connected in 2008.

With present penetration rates at 45%, according to figures from the NCC, industry insiders expect upcoming years of sustained growth. There is widespread expectation that the market will reach maturity at between 60% and 70% penetration within the next five years.

Although a small percentage of the total customer base, the four CDMA operators account for 6.05m lines as of year-end 2008. Visafone, financed by Zenith Bank, is the leading CDMA operator with 2.21m lines, leading Multilinks, owned by South Africa's Telkom, with 1.99m lines. Meanwhile, the two smaller CDMA operators, Starcomms (1.16m lines) and Reliance (700,000), have ensured healthy competition in this segment of the market.

On the GSM market, South Africa's MTN is the leader, with 3.08m SIM cards; Bahrain's Zain (formerly CelTel) comes in second, with 17.2m lines; Nigeria's local operator Globacom has been relegated to third place, with its 16m lines, having been second in 2008; and the new entrant, the UAE's Etisalat, has attracted 400,000 subscriptions in its first quarter of operations at the end of 2008.

The total market grew by 55.9% in 2008, according to the NCC, with GSM operators leading the growth. The top performer, Zain, saw growth of 55%, while MTN's turnover increased by 39.8% and Globacom's by 30.9%.

The industry is not necessarily united on how exactly the NCC should support the development of the market. "When you have a second phase of operators coming into the marketplace you need a second phase of regulation to insure a level playing field," Evans told OBG.

Certain steps have, however, been taken in reducing structural advantages of established operators.

In a bid to encourage open competition and further extension of coverage, the NCC plans to implement full number portability for both mobile and land lines. Due to be implemented by the last quarter of 2009, this will reduce the lock-in effect for established operators. For relatively new entrants to the market such as Etisalat Nigeria, the decision is a welcome one.

"For a second-wave operator it is critical that you put in place a policy on number portability," Evans told OBG.

Similarly, the sharing of the backbone infrastructure would allow operators, both new and established, to focus on new technologies rather than on laying out basic infrastructure, thereby reducing cost overheads. This would drive competition into services, which would ultimately benefit the end users.

Given the vast size of the Nigerian telecoms sector, the potential for further development is immense. The government has demonstrated its political will to see a reduction in telecoms tariffs. As profits remain high, discussions have shifted as to how to engineer a reduction in the cost base, particularly through cost-effective energy sources. This is likely to prove good news for consumers, encouraging market growth.

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