Despite facing many challenges in 2016, the Nigerian telecoms market continues to grow and offer significant potential for investment. With a population of nearly 189m, this substantial consumer base offers a variety of opportunities for mobile operators, broadband companies and content providers. Furthermore, the government’s intention to use telecoms and ICT not only for economic development, but also for financial inclusion, bodes well for the industry. Recent sector programmes have emphasised the importance of providing tax incentives for investors.
At the same time, Nigerian telecoms is constrained by high costs, general economic uncertainty and an uneven competitive environment. Going forward, the regulatory regime will need to address these challenges if the sector is to fulfil its potential.
Performance
The sector has established itself as a key driver of economic growth. While the National Bureau of Statistics (NBS) does not provide separate figures for the ICT and telecoms sectors, the industries grew by a combined 2.3% quarter-on-quarter in the April-to-June period of 2017, and accounted for 12.4% of real GDP. Even in the face of lower oil prices and the concomitant exchange rate volatility, the industry has continued to thrive and, according to the NBS, it regularly outperforms the economy as a whole. The fourth quarter of 2016 was particularly strong, posting 20% growth over the prior quarter.
Regulatory Framework
There are a range of public institutions and agencies overseeing the sector. Among the most prominent are the Federal Ministry of Communication Technology, which oversees top-level development and policy planning; the Nigerian Communications Commission (NCC), the federal telecoms regulator; the Nigeria Internet Registration Association, which manages the nation’s .ng domain; and the Nigerian IT Development Agency (NITDA), which handles research, policy standardisation and the coordination of IT-related development programmes. There are also various government-owned or affiliated entities that control satellite or fibre-optic infrastructure and assets.
Over the past year the NCC has made efforts to prevent predatory pricing by dominant operators against new entrants, introducing a floor price for data in November 2016. However, this was suspended a month later following public backlash against potential data price increases. The regulator has now embarked on a further review of wholesale costs and prices in a bid to introduce a new, more transparent data price regime. However, the NCC must tread a fine line between encouraging affordable services and ensuring fair competition among operators.
“There is a conflict in the way we are approaching broadband in the market. On the one hand, we are talking about affordability, but on the other hand we are trying to make operators profitable,” Olusola Teniola, president of the Association of Telecommunications Companies of Nigeria (ATCON), told OBG.
Market Size
The nation’s demographics alone bode well for the long-term growth and development of the industry. In 2016 the population growth rate in Nigeria stood at an estimated 2.6%, according to World Bank figures. Furthermore, over two-thirds of the population is under the age of 25. Given these demographics, and the fact that income levels are continuing to rise, the country is likely to see further ICT penetration and the rollout of a range of services and offerings.
In many ways, Nigeria is already ahead of the regional curve when it comes to ICT habits and usage. According to “The Mobile Economy Africa 2016” report published by the GSM Association, 46% of Africa’s population subscribed to mobile services at the end of 2015. Nigeria represented 15% of those 557m unique subscribers, resulting in a national penetration rate of 44%. While the country has a similar mobile penetration rate to the African average, internet penetration is much higher comparatively. Standing at 53% versus an average of just 18% for the continent as a whole, Nigeria has had significant success in promoting connectivity. This has largely been driven by the mobile segment. By the end of 2016 the fixed-wireless and fixed-wired markets had a combined customer base of 154,513 – less than 1% of the population – according to NCC data. As a result, the majority of users connect to the web using their phones, despite the high cost of data. Smartphone uptake has increased rapidly, expanding by 394% between 2014 and 2016, according to e-commerce firm and retailer Jumia. The falling price for such devices has enabled this impressive growth; the average price of a smartphone on Jumia’s site fell from $216 in 2014 to $117 in 2016.
Government Strategy
This is not only good news for operators and service providers in the sector, but also for a government that has placed the industry at the centre of plans for smart, diversified growth. Politicians continue to stress the need to use ICT as a tool for economic transformation in the country. For example, in May 2017 Abubakar Saraki, president of the Senate of Nigeria, told local press, “In an era where we are looking to diversify the foundation of our economy, in 2017 ICT can be a key source of potential revenue and livelihoods for millions of our enterprising youth.”
In early 2016 the NCC released its Eight-Point Agenda, covering the period 2015-20, the goal of which is to promote innovation and ICT as an economic pillar through increased investment, improved competition and more protections for consumers. The plan’s goal of service improvement is based on what it terms the three As: availability, accessibility and affordability. The eight points are: facilitating broadband penetration by means of affordable fixed and mobile broadband; improving service quality by investing in critical ICT infrastructure; optimising the usage and benefits of spectrum by maximising its availability, while preventing distorted market competition; promoting ICT innovation and investment opportunities, with a particular emphasis on youth and small firms; forming partnerships with stakeholders to use ICT for sustainable economic development; protecting consumers via the availability of information and education; promoting fair competition and inclusive growth; and ensuring efficiency through an effective regulatory framework with strict compliance and enforcement mechanisms.
The agenda is in line with the National Broadband Plan 2013-18, which seeks, among other things, to achieve 30% broadband penetration by 2018. The programme underlines the need to update Nigeria’s legislation to classify ICT networks and infrastructure as “critical infrastructure”, which would make it eligible for government protection and allow for more serious penalties in cases of vandalism (see analysis). The government also hopes to improve pricing transparency and reduce overall costs by encouraging operators to share infrastructure. Another key goal is to reach at least 80% 3G wireless coverage by 2018.
As these ambitions will require an influx of capital, the plan also emphasises the need to create an attractive investment climate through targeted concessions, tax incentives and grants where needed.
Main Players
Nigeria is already the largest telecoms market in Africa. In May 2017 the country had 145.4m mobile subscribers. According to the NCC, this equates to a penetration rate of nearly 104%; however, this is based on population statistics from 2006. As such, the real penetration rate, when counting multiple-SIM card ownership, is more likely around 77%. The four main mobile GSM operators are MTN Nigeria, Globacom, Airtel Nigeria and Etisalat Nigeria, now known as 9Mobile. There are also several operators offering mobile internet services: Starcomms, Multi-Links, Visafone, Smile, Spectranet, Swift Networks and ntel (formerly Mtel), a local operator that acquired the assets of the now-defunct state-owned Nigeria Telecommunications in 2015.
In May 2017 the largest GSM operator, MTN Nigeria, had a market share of 34.3%. The second-largest player, Globacom, is also the second-longest-serving operator, having entered the market in 2003. The Nigerian-owned company had a market share of 29.9% in May 2017. The last two operators, Airtel Nigeria – a subsidiary of India’s Bharti Airtel – and 9Mobile both entered the market in 2007. In May 2017 they had market shares of 21.7% and 14%, respectively. As the figures illustrate, despite strong and repeated regulatory intervention intended to increase competition, it has been difficult for the newer arrivals to significantly erode the market share of the more established players.
MTN
MTN Nigeria remains the largest revenue generator for its parent company, a firm based in South Africa. In 2016 Nigeria accounted for 32%, or R47.1bn ($3.4bn), of the group’s total revenue. According to MTN’s 2016 report, its Nigerian operator maintained a healthy earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 46.4%, although it was down 6.6 percentage points from the previous year. MTN added 717,000 subscribers in Nigeria during 2016 and has a goal to add a further 1m in 2017. At end-2016 the operator had 62m subscribers in the country, a 1.2% increase for the year.
The longest-serving operator in Nigeria, MTN remains the dominant player in the sector. Still, the firm has had to navigate some challenges, many of which are illustrative of problems facing the sector as a whole. The company had a difficult 2016. In the first quarter revenue fell by 6.3%, and although it rebounded to post a 4% year-on-year (y-o-y) increase in the last quarter, the company recorded a small drop of 1.4% for the whole of 2016. EBIDTA fell by 16.1% to R21.85bn ($1.6bn). This performance was partly due to the disconnection of 4.5m subscribers in the first quarter of 2016, in accordance with an NCC ruling on subscriber registration requirements. MTN had previously been fined $5.2bn for failing to disconnect 5.1m unregistered SIM cards on its network. The operator is also currently responding to a Senate investigation into its repatriation of funds over a 10-year period starting in 2006.
As part of the regulatory settlement, MTN was required to list on the Nigerian Stock Exchange (NSE). The operator had initially sought to launch an initial public offering in 2017, with the express goal of raising $1bn. However, given the economic conditions prevailing in the country – the NSE was the weakest performer among the markets tracked by Bloomberg in 2016 – MTN announced in January 2017 that it plans to delay the listing until 2018. Phuthuma Nhleko, executive chairman of MTN Group, told press at a World Economic Forum summit in January 2017, “It’s a work in progress, and hopefully within the 12- to 18-month period we will be able to do it. Regulatory issues need to be resolved, and the macro conditions need to have improved.”
9Mobile
In 2016 9Mobile launched 4G LTE service in Lagos and rolled out its EasyMobile app, which allows customers to more easily monitor data and airtime balances. According to the company’s 2016 report, Nigeria accounted for 5.1% of group revenue that year, at N228.6bn ($807.9m), and EBITDA for the Nigerian operator reached N33bn ($116.6m). The subscriber base was recorded at 20.7m in 2016, representing a 7% decline, which 9Mobile largely attributed to SIM cards that were disconnected in order to comply with the regulator’s registration process.
Headwinds
While the sector’s overall performance has been nominally positive, operators have had to grapple with broader challenges, such as currency fluctuations. Bharti Airtel, for example, noted in its third quarter 2016 results for Africa, “Consolidated revenue growth [was] muted by 3.3% on account of [the] full quarter impact of Nigeria currency devaluation.” 9Mobile also faces significant issues. The operator has struggled to service its dollar-denominated debt, with lenders threatening to seize 45% of its shares in mid-2017 as a means of retrieving their funds. In 2013 the telecoms firm secured a $1.2bn medium-term facility with 13 local banks to refinance its existing debt obligations, and upgrade and expand its network infrastructure. MTN suffered foreign exchange losses of R1.8bn ($128.5m) in 2016, which was in part a consequence of dollar-denominated loans held by the firm and its 51% of 2016. EBIDTA fell by 16.1% to R21.85bn ($1.6bn). This equity stake in Nigeria Tower InterCo, a tower-leasing company that also has dollar-denominated loans.
Voice Services
Although voice has long been the primary revenue generator in the sector, it is declining with more data use. ATCON’s Teniola estimated that data may now account for approximately 35% of operator revenues. “Voice services are at a mature level,” he told OBG. “But there is an issue of interconnection debt that has not been resolved.” Indeed, as operators have sought to bolster their subscriber numbers through reduced call tariffs and free minutes, there has been an accumulation of interconnection debt, the money owed to another operator to terminate a call to their network. At end-2016 this debt had reached N30bn ($106m) across the sector, according to local press.
With the voice penetration approaching 100%, operators are becoming increasingly aggressive with their pricing and offers. According to the NCC, the annualised average cost per minute for an in-network voice call fell from N34.20 ($0.12) in 2007 to N12.01 ($0.04) in 2016. Furthermore, as voice interconnection rates have become symmetrical, the price of off-network calls have almost reached parity with on-network calls. The annualised average cost per minute of off-network calls fell from N41.10 ($0.15) in 2007 to N12.64 ($0.04) in 2016.
The trend does pose challenges for operators. As the largest provider in terms of customers, MTN also has the largest share of money owed to it. In February 2016 the company said it was owed 40% of total outstanding debt. Oyeronke Oyetunde, general manager of regulatory affairs at MTN Nigeria, told local media in May 2016 that the issue needed to be resolved swiftly, or it might “pose questions around the sustainability of the industry”. Although some of this debt has subsequently been paid off, the issue remains, with the prospect of debt increasing once more in 2017.
In May 2017, 9Mobile called for the reintroduction of asymmetrical mobile termination rates to level the playing field, boost revenue among smaller players and help the operator address its debt. Symmetrical rates, under which all GSM operators pay the same amount to connect to rival networks, were introduced in 2013. An asymmetrical model would allow 9Mobile to generate additional revenue and mitigate the impact of interconnection debts on the sector.
Given these challenges, the market may not be able to move forward in its current form. Richard Edet, managing director of Nokia Nigeria, told OBG, “With the arrival of new international players the telecoms sector is becoming ever more competitive and will probably consolidate around a smaller number of operators.” This is not only the result of voice saturation and competition, but also the number of players in the data field. The country has nine broadband providers, and the ability to generate profit and compete on price and service with the dominant players are substantial challenges.
Data
While there is a high level of competition in data, growth for operators will ultimately be driven by a greater focus on dependable, affordable and quality data services. “The voice operators will only trend downward,” Teniola told OBG. According to him, average revenue per user (ARPU) across the mobile segment stands at $4.75. “The only way to ensure growth is to blend ARPU with improved data services,” he added.
In 2016 MTN Nigeria recorded data revenue of R9.9bn ($706.7m). While this represented a real term increase of 10.8%, it accounted for just 21% of revenue in the country, according to MTN’s annual report. This is below the group average, where data services account for 26.9% of revenue. While Bharti Airtel does not release country-specific information, the company is experiencing strong data growth across its African operations. In 2016 data revenues were up 91%, compared to voice growth of 10.1%. Consequently, data revenue accounted for 16.7% of African mobile revenues for Bharti Airtel in 2016. Globacom has also been aggressively targeting the data segment. In the first quarter of 2016 the firm accounted for 80% of new data subscribers in the market, adding 1.45m new internet users in the three-month period.
Demand appears to be trending upward. Smartphone accounts connected to MTN’s network, for example, increased by 36.1% to 20.4m in 2016. In the market as a whole, the smartphone penetration rate reached 30% in mid-2016. A 2016 report by MTN found that data ARPU for smartphones using LTE stood at N3927 ($13.88), compared to a figure of just N290 ($1.02) for 3G and N11 ($0.04) for data use on non-smartphone devices. There is plenty of room for further growth. The average amount of data downloaded in Nigeria is 200 MB per month per user, compared to a global average of 746 MB, according to figures from ntel. By 2020, 88% of Nigerians, or approximately 195m customers, are expected to have a mobile broadband subscription. Given the erosion of voice ARPU, high-speed mobile broadband services offer a valuable alternative revenue stream and a means of protecting margins. However, tough competition in this segment is also likely to lead to a decline in data ARPU. Globacom has already launched an aggressive pricing strategy for its 4G data services, offering bundles ranging from N500 ($1.77) for 1.6 GB to N5000 ($17.67) for 24 GB.
4G Rollout
The expansion of mobile broadband is largely contingent on the build out of 4G LTE networks. 4G LTE coverage has been present in Nigeria for over three years, following an effort by the NCC to grant smaller data providers the opportunity to establish a network presence in large urban areas before expanding licensing to larger established players. In April 2016 ntel launched high-speed mobile services on its 4G LTE network in Lagos, Abuja and Port Harcourt. This followed the 2014 launch of 4G LTE in Nigeria by South African firm Smile Communications. ntel and Smile have focused their efforts on providing high-speed mobile data services at a relatively low price point to appeal to the nation’s burgeoning middle class. Currently, ntel is using voice-over-LTE (VoLTE) technology and rolling out its services in large cities before moving on to smaller towns. The company is targeting speeds of 230 Mbps. Smile Communications also launched a VoLTE network in March 2016, using the 800-MHz spectrum. By May 2017 the company had established coverage in seven states and Abuja. Swift Networks and Spectranet were also pioneers of 4G services in the country, although their operations have largely been confined to Lagos and Abuja. Swift began testing its 4G services in September 2013, while Spectranet launched in the capital in November 2013.
In March 2016 the NCC re-opened a highly anticipated 2.6-GHz spectrum licence auction that had been suspended by the commission’s previous leadership. In June 2016 MTN announced that it had won the auction for the 10-year licence with a bid of N18.96bn ($67m), after being listed as the sole approved bidder for the spectrum block. In the last quarter of 2016 Globacom and 9Mobile joined the competition and launched 4G services. Globacom used 700-MHz frequency acquired from the National Broadcasting Commission, while 9Mobile repurposed its 1800-MHz band in certain regions. Airtel announced in 2017 that it will work alongside China’s ZTE Corporation to implement its own high-speed 4G network in Nigeria.
Investment Landscape
However, further penetration of data services will depend on the availability of capital and spectrum for network expansion. “In Nigeria there is the need for more powerful infrastructure as we enter the 5G era, and the country needs a friendlier licence regime,” Danjuma Abbas, managing director and Nigeria country manager for wireless services firm Ceragon, told OBG. Even with the rollout of 4G LTE networks, the sector has scaled back investment in the face of rising costs and a tough macroeconomic environment. In the last four years capital expenditure has fallen by approximately 20% on average, according to US-based IT research firm Xalam Analytics. In 2016 the investment levels of mobile operators were at about 40% of what they were in 2012, despite the move towards next-generation technologies.
The exception to this trend has been MTN, which, in its efforts to establish a strong presence in the 4G market, invested heavily in 2016. MTN’s capital expenditure for 2016 stood at R8.7bn ($621.2m), according to the company’s 2016 annual report. This was up from R4.99bn ($356.3m) in 2015, an increase of 130.6% in real terms. As a result of this investment, the operator was able to deploy 1799 new 3G sites and a further 1833 LTE sites. Meanwhile, in 2016, 9Mobile recorded N21.5bn ($76m) in capital expenditure. Although specific figures are not available, Bharti Airtel has invested over $1.5bn in its Nigerian network in the last five years.
Infrastructure Sharing
Building network capacity has become a significant challenge in the country, prompting operators to look more closely at sharing or leasing infrastructure. Base stations are imported, making network investment vulnerable to foreign currency shortages and local currency depreciation. There are other cost challenges around power, fuel, security and logistics. Setup costs for a base station in Nigeria are typically around $250,000, while operational costs for such infrastructure comprise as much as 30% of total operating expenditure for mobile providers, according to ATCON. The current number of base stations in Nigeria is not sufficient to meet service requirements. “We currently have black spots and dropped calls that require additional infrastructure,” Teniola told OBG.
The country needs as many as 80,000 base stations for a strong and comprehensive 4G network that would meet customers’ expectations. As with other markets on the continent and beyond, operators are addressing the challenges of network development by removing assets from their books and turning to tower leasing companies for infrastructure. Currently, there are approximately 25,000 towers in the country, and as many as 17,000 towers are leased, according to ATCON.
“Mobile operators will not want to roll out their own towers because of the expense and difficulties associated with it,” Teniola told OBG. “If you have to choose between operating expenditure and capital expenditure in Nigeria, most have chosen to go the operating expenditure route.” Tower companies such as IHS Towers and Eaton Towers have specialised expertise and the ability to maintain cost efficiencies. As such, it is often a better deal for operators to lease infrastructure rather than build it themselves, although dollar-denominated leases have led to increased expenditures for some operators given the weaker naira.
Gateways
Nigeria is one of the most connected countries in Africa in terms of international bandwidth. Five submarine fibre-optic cables come ashore in the country, delivering total capacity in excess of 17 Tbps. The nation’s oldest subsea fibre link to the global internet backbone is the South Atlantic 3-West Africa Submarine Cable, which was completed in 2001 and stretches from Portugal to South Africa, where it meets another cable that then runs on to Malaysia via India. Today the cable system – now owned by ntel, following its acquisition of the assets of Nigeria Telecommunications – is among Nigeria’s slowest international connections, despite a series of upgrades that have brought its total capacity to 800-920 Gbps. ntel has announced plans to upgrade it further.
In the mid-2000s a spate of submarine cable financing and construction kicked off in Nigeria. The first of these projects to come on-line was the 7000-km Main One Cable in 2010. Developed by the Main One Cable Company, a conglomerate financed by a handful of West African financial services firms, the cable was the region’s first privately owned subsea link, connecting Portugal to Nigeria and Ghana with a 4.96-Tbps line. In 2011 Globacom finished work on its 2.5-Tbps Glo-1 cable, which links Nigeria to the UK with various points in between. This was followed in 2012 by the launch of services on the West Africa Cable System (WACS), which stretches from the UK to South Africa and was financed by a consortium of primarily African telecoms operators. MTN is the largest shareholder in WACS. The link has a capacity of 5.12 Tbps. Additionally, in 2013 the African Coast to Europe (ACE) cable came on-line in Nigeria. Completed a year earlier by a consortium of operators led by the French telecoms firm Orange, the ACE system stretches from France to South Africa and has a capacity of some 5.12 Tbps.
Outlook
This is both an exciting and challenging time for Nigeria’s mobile market. Operators are reorienting towards higher-revenue data and next-generation services at a time when costs and uncertainty are elevated. Network expansion and quality assurance remain key concerns, given significant network operating costs and a reluctance to deploy capital. However, the long-term outlook for the market is positive. The country has a young, rapidly expanding population, providing a substantial pool of consumers. Smartphone use and data consumption are expected to increase rapidly over the next five years and beyond. Furthermore, the market is likely to rationalise in the coming years, with strong prospects for consolidation and healthy competition.
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