Sustaining telecoms sector growth, quality of service through new reforms, by Ololade Bamigbola

Over the past few years, the telecoms sector has experienced rapid growth and, in June 2016, constituted 9.8 per cent of Nigeria’s GDP, but this growth has now stalled, with the sector at a strategic crossroad. Several factors have converged simultaneously, which could materially impact the industry and undermine its potential to drive economic growth and stimulate the Nigerian economy as a whole.

There is no doubt that the telecommunications sector has transformed Nigeria’s economic landscape and has impacted the lives of Nigerians immensely as well as the way we engage on a day-to-day basis. Over the years, mobile phone usage has advanced from basic mobile telephony to accommodate new cutting edge services – such as Uber and Twitter – which has enhanced all of our lives. Moreover, the industry enables the country to constantly innovate and has helped embed new technology within various sectors in the country. It effectively offers a means of transforming banking services, creates access to e-learning platforms and provides healthcare facilities to all citizens. More importantly, it has contributed enormously to economic growth and is capable of getting the Nigerian economy back on its feet as it gradually gets out of the recession.
Over the past few years, the telecoms sector has experienced rapid growth and, in June 2016, constituted 9.8 per cent of Nigeria’s GDP, but this growth has now stalled, with the sector at a strategic crossroad. Several factors have converged simultaneously, which could materially impact the industry and undermine its potential to drive economic growth and stimulate the Nigerian economy as a whole.
From a structural perspective, the current weakness in the local economy has resulted in relatively low consumer purchasing power and continues to place pressure on the industry and its operators. The weak Naira has made the importation of much-needed telecom equipment into the country difficult, and the upgrading of towers and service capacity expansion too expensive to conduct on a large scale. Operators are now either deferring or delaying upgrades or the expansion of their networks and customers are starting to feel the impact. Signal quality has been affected, incidences of dropped calls have increased, and overall customer service quality has declined. Nigerian consumers have every right to demand more and should never have to settle for poor network quality or services.
To compound matters, consumers continue to move away from traditional voice (cellular) services and are switching to data bundle packs, which allow them use over the top service providers such as WhatsApp, Skype and Facebook to make phone calls inexpensively over broadband connectivity. This switch requires massive investments in telecoms tower network densification, as new 3G and 4G technologies are rolled out. These network upgrades can only be done if there is adequate financing and a suitable business case.
There is, now, an ongoing data bundle “price war” between incumbent telecom operators and internet service providers; with a frantic race to deliver cheap gigabytes of data, for rock bottom prices. On the surface, these prices appear good for the consumer in the short term, but in the long run, this price war will put many operators out of business, as the current bundled offerings are priced well below their actual costs to network operators. According to Research ICT Africa, the price of data has decreased by over 65% over the past two years, squeezing margins and pushing smaller mobile network operators to the brink of collapse.
Industry implications
Artificially low data prices are designed to drive out competition. This type of practice is called “predatory pricing” in respect of which there are restrictions in many parts of the world. These pricing wars never work out well for consumers in the long term, as they typically result in initial temporary low service prices, just long enough to force out the competition.
Then, without warning, the few remaining players increase their market share and suddenly double, or even quadruple prices, as they are the only remaining game in town. It’s easy to identify anticompetitive pricing, as we know what it costs the telecoms industry to secure internet bandwidth.
A good example of healthy competition which has led to improved quality and product service offerings is mobile phones. The competition between Apple and Samsung and others has forced all parties to constantly launch new and improved products. Competition leads to fair market pricing which has enabled mobile phones to be purchased by the masses. The current problem in the telecoms sector is that we do not have fair market pricing – the price of data bundles in Nigeria is presently amongst the lowest in Sub-Saharan Africa.
While market forces drive the industry, governments and regulators must shape the mobile economy by setting the policies and regulations that will deliver a healthy, competitive and sustainable mobile sector alongside consumer protection for all citizens.
The outlook
Given the tremendous potential that telecommunications has to jump start and stimulate the Nigerian economy at all levels, we need the help of government and regulators to play the role of referee and establish a level playing field.
Engineer Gbenga Adebayo, the Chairman, Association of Licensed Telecommunications Operators of Nigeria, explained: “Data floor price determination is meant for small operators, not for big operators who will still survive in the present situation. We are trying to avoid a situation where Code Division Multiple Access (CDMA) operators die because of a price war. If a data price is determined, it will encourage small operators within the sector. We need to look at it beyond public sentiment, and emotions around the issue, and revisit the topic to ensure growth within the industry.”
Nobody doubts the importance of the free market principles of business and competition. However, artificially-induced low prices are having a negative effect on investment and growth within the sector. Both large and small mobile network operators are currently working to try and mitigate the current challenges related to squeezed margins, and in other cases generating losses, and lack of direct access to foreign currencies, with the smaller firms struggling the most to compete. Reduced competition will be a lose-lose situation for all operators, and the public as a whole.
The recent default status of Etisalat Nigeria, is a prime example of how it can all go wrong. Etisalat is the fourth largest telecom operator in Nigeria, but as a direct result of the company’s razor thin margins on its current service offerings, and against the backdrop of the devaluation of our currency, the company has failed to meet its obligations to its lenders. The result is the current crisis that has seen the appointment of a new Chairman and a board reshuffle.
Regulatory efforts need to be made to ensure that all sides survive and the quality of service levels continue to be enhanced, by having the regulatory bodies insist the mobile network operators focus on additional customer metrics such as, measuring their signal reach, network uptime and improved quality of data services.
A regulated minimum price level will help stop the downward spiral of the telecoms industry and allow all telecom players, big and small, to compete on network service and customer service quality. The Nigerian Communications Commission can issue more spectrum licenses and make up revenues when additional spectrum is auctioned and mobile network operators roll out into new rural areas.
We also need to consider the telecom sector as critical to our nation’s economic development and, as such, place the sector on the critical national infrastructure list. This important designation will give operators priority access to much needed foreign exchange and the procurement and purchase of telecom upgrade equipment for the networks.
Finally, mobile network operators serve millions of SMEs and multinationals that are dependent on internet access – a half day service disruption results in large revenue losses for various businesses throughout the country.
In order for Nigeria to consolidate its status as an African business hub and to boost investors’ confidence, the federal government, and other stakeholders in the telecommunications sector, must work to find strategies to boost growth and ensure the long-term sustainability of the telecommunications sector.