While the Nation was still reeling from the effects of the outage of the dominant international fiber cable operator Main One, we were hit with the news of the financial/commercial crisis at one of the 4 dominant telecommunications operators Etisalat Nigeria. The crisis was so severe that it looked for a while that the company may go into receivership. This seems to have now been averted by the unprecedented intervention of the industry regulator- the Nigeria Communications Commission and the banking regulator Central Bank of Nigeria. For now, the banks have been allowed to take over the management and board of the company to keep it afloat while they work out a long term solution to the survival of the 4th largest telco in the country.
In an economy that has been more than 18 months in recession, this was just the latest blow from one of the hitherto lucrative industries that were considered the most bankable and cash rich sectors of the Nigerian economy. Since the successful liberalization of the telecommunications industry in the early 2000s, it rapidly became one of the fastest growing business segments in the world growing from less than 1 million customers in 1999 to more than 100 million customers as at 2015. This follows the distress we have seen in Aviation- where the 2 largest carriers Arik Airlines and Aero Contractors have been in receivership and various tales of distress we hear from the financial sector. It is fair to say that these are not the best of times for corporate Nigeria and something needs to be done urgently to stabilize the economy.
That said, what went wrong in the telecommunications sector and could the current distress have been avoided or minimized? I will say yes from my perspective. And much more efficiency and margin can be created with some innovative and forceful consolidation. The telecommunications landscape today is littered with massive inefficiencies that are very costly and have distorted the structure and increased costs. If these are eliminated or reduced, it will create a better playing field and reduce the chokehold on the operators.
Typically, the telecommunications industry comprises of upstream and downstream segments. The upstream segment comprises of wholesalers which include international cable operators, national cable operators, international voice and data gateways and national voice and data gateways. This also includes colocation and data center providers. The customers for these providers are other telcos, large corporates and government.
In the downstream segment, we have the retail services. The players here are the telcos (GSM and other telephony operators), Internet Service Providers (fiber to the premises, wimax and 4G) and application service providers (whatsapp, Facebook, skype, etc). There are of course ancillary providers who fall into the downstream such as recharge card distributors, installers and contractors. The customers for these providers are individual subscribers, homes, small and medium offices, etc.
Because of the way telecommunications have evolved, there are some integrated players who are basically shaped by their history more than any other factor. These integrated players are mostly the former incumbent national operators like AT&T in the US, BT in the UK, France Telecom in France, DT in Germany, NTT in Japan and so on. These integrated players built from the ground up because they had to create the facilities for their services to run on because in the days when the industry was tightly regulated, no other operator was allowed to compete with them. NITEL in Nigeria would have been in this category if it had survived.
Changes in 2 major factors have always and will continue to determine fortunes in the telecom business- they are changes in technology and changes in consumer behavior. The 2 factors don’t necessarily go hand in hand. A lot of the time, the technology runs ahead of consumer behavior while in some cases, technology has to catch up with consumer demand (when this happens, it is a jackpot). Some examples may be helpful here, When 3G services were launched in the late 2000s, equipment manufacturers and telcos were eager to show customers the wonder of video calling. Suddenly, you could see the called party on a video on your phone. It turns out that people were not ready for this yet, they didn’t want to see the people they were talking to for all sorts of reasons including the cost of the call. The manufacturers and telcos had to beat back a retreat and focus on the larger data capabilities of 3G networks and allow OTT (over the top) providers like Skype to fiddle with video calling until they found the right fit. Up till today the telcos are not able to find customers for video calling in the way that OTT providers are. On the other hand, per second billing of voice calls was one instance where the consumer demand was ahead of the technology and it took a while before the manufacturers and telcos were able to meet this. One of our local telcos who was first to provide this made it a game changer and reaped massive benefits back in the day.
So with rapidly evolving technology and consumer behavior, the operators are forced to continuously innovate and adapt in order to remain profitable. While they are making profits today, they are forced to envision where these 2 factors are going and how to respond to them. In most cases it involves tearing down the entire network and rebuilding it which may be cheaper but not feasible because services cannot be interrupted for so long. This makes the older operators who have to adapt to new technology have much higher switching costs than newer operators- legacy problem. This is probably the only industry where history is a liability.
So with such a situation, the odds are always in favor of the operator who is nimble, agile, ruthless and focused on the value proposition. It is always against the heavier, legacy laden and deeply entrenched player. This is one of the mistakes of the Nigerian telcos. While they are fairly new operators, less than 20 years old in most cases, they have been in a rush to acquire heavy assets including fiber optic lines across international and national boundaries, towers, switching and transmission equipment, land and buildings and so on. They have also developed these in parallel to each other thereby replicating costs across the industry and building huge operating costs. A classic example of this is in the building of towers. It is common to see 3-4 telco towers in a 100 sq.m area because according to the radio spectrum planning, that location is ideal for the towers but instead of one tower that everyone will share, every operator has erected their own. The set up cost and operating cost over time is accumulated and passed on to the customer eventually which leads to avoidable higher prices.
The inability to envision and adapt to new technology has also caught the telcos in severe slumber and led to avoidable problems. At Suburban we saw this clearly when we adopted Internet Protocol( IP) technology far ahead of the industry and made huge gains throughout the period we were a wholesale transmission provider. While other operators were still investing in soon to be obsolete circuit switching or SS7 technology, the smarter operators went for IP. Today the entire ICT architecture the world over runs on IP and those who adopted early had a stable foundation to build on. Today, the telcos are being taken to the cleaners by Over the Top(OTT) operators like WhatsApp, Skype, Facebook, Twitter, Netflix, Amazon, Google, etc. This is due to their inability to perceive that customer behavior will shift in that direction. Today the traditional voice and sms revenue that made the telcos extremely profitable has been totally eroded by these free services that actually run on their networks. Unfortunately they are relegated to just being internet/data services providers. Internet/data services are more complex to run and provide lower margins than voice and sms which has led to the current distress the telcos find themselves in.
While it will take individual efforts at each telco to change their approach and attitude towards perceiving and responding to customer demands, it is easier to take steps to reduce waste by some practical steps. If operators across the entire spectrum craft their value propositions by defining their markets and focusing on them, they can create room to maneuver. So there is no need for Main One to be a downstream ISP competing with its customers when it does not have redundancies and alternative routing to secure its main investment ie the international cable. Likewise Globacom does not need to be a national carrier building everything everywhere to provide facilities that it cannot monetize. The international and national cable operators need to to share and swap their cable capacities. They need to define and streamline their customers so that they don’t end up competing with and killing their customers. When they do this, they trigger a price war that they cannot sustain and hence a race to the grave. The proper industry structure needs to be agreed to protect operators investments and customers.
This may not be easy for players who have made careers out of antagonizing each other, so the regulator NCC may have to step in to get this done. The opportunity presented by the distress of Etisalat has presented the perfect excuse for the NCC to do just this. The template of banking consolidation by the Chukwuma Soludo Central Bank may provide the framework for this much needed intervention. Along with this consolidation, the regulator needs to establish strict corporate governance guidelines that will help ensure that the massive investments in the sector are properly secured. The Federal Government itself needs to be take this very seriously as it can be seen that the failure of such a huge institution like Etisalat can cause a financial crisis that will affect the banks and other financial institutions and derail foreign investment required for diversification of the national economy. Let this be a wake up call for all of us.