UAE. A new Oliver Wyman study forecasts average revenue per user (ARPU) in sub-Saharan Africa and South Asia to drop by half by 2013.

Yet these regions are where future growth in mobile market lies, as they’re expected to contribute 44% of mobile subscriber net additions through 2012.

To capture this growth profitably, operators must streamline costs and improve offerings for low-income customers. 
 
For Middle East mobile telecom firms such as Zain, Qtel, STC and Etisalat, most of their recent growth has come from emerging markets with high population and relatively low rates of penetration, such as sub-Saharan Africa and South Asia.

But these operators are now challenged to boost profitability, as average revenue per user (ARPU) levels in such markets have been dramatically decreasing, because of increasing competition, price reductions, and a second wave of customers who are predominantly lower-income.

Oliver Wyman, the international management consulting firm, forecasts that ARPU will drop from US$12 today to US$6 in Sub-Saharan Africa by 2013, and from US$6 to US$3 in India and elsewhere in South Asia. And that poses major challenges for operators.

"Obviously, adding more subscribers will generate further economies of scale. But scale alone will not be sufficient to sustain profitability and master the low-ARPU challenge," said Joerg Hildebrandt, a Dubai-based partner of Oliver Wyman who led the low-ARPU study.

Indian operators are relatively well suited to meet the US$4 challenge because of high affordability of services (around US$0.014 per minute at the end of 2008), favourable wealth distribution, large economies of scale, good GDP growth, and extensive outsourcing and managed services. But the challenges for sub-Saharan Africa are considerable, as outlined by Hildebrandt:

Per-minute prices are relatively high. In most sub-Saharan markets, per-minute prices are still high relative to the purchasing power of the population. “A customer with a budget of US$1 to US$2 per month for telecom services will only be able to make 6-12 minutes of outbound calls per month,” said Hildebrandt.

“Such low usage levels will not provide incentives for poor segments in Africa to invest in a handset and SIM card.” African countries have seen a spree of new licensees over the past two years, which will intensify competition and drive down prices in most major markets.

Yet lowering prices will cannibalise current voice revenues in the short term. African operators are bound to lose a significant portion of voice revenues generated by the high-income segment. These customers represent typically 40% of their revenue today, and are not budget-constrained; hence price elasticity is likely to be too low to prevent ARPU erosion for this segment.

High rates of illiteracy restrict SMS as an alternative to voice. While SMS is definitely worth investigating, it is likely attractive only for specific segments, such as students.

Fragmented African markets have low economies of scale. African markets are marked by small populations, political issues, language barriers, and lack of affordable cross-border connectivity. This has made it difficult so far to leverage shared platforms between local operations.

To grow revenues without forsaking profits, Hildebrandt advised African operators to focus on four changes to their business:

1. Make network sharing a reality. Despite large potential cost savings, network sharing remains limited – fewer than 2% of towers are shared. Two factors will push African operators towards implementing network sharing. First, the global financial crisis increases the cost of financing network expansion. Second, African regulators are increasingly favorable to network sharing.

2. Build scale for back-office operations. Nearly half of all sub-Saharan African operators belong to only six international operators, namely MTN (17 operations), Zain (16), France Télécom (14), Etisalat (10), Vodafone (9) and Millicom (7). These pan-African groups can move beyond the low-hanging fruit of centralised purchasing to implement intra-group shared services in the fields of IT, billing, customer care, network operating centers, or HR.

The lack of reliable and affordable international connectivity between African countries remains a major impediment, so telecom companies need to take actions to develop direct interconnection between their African operations, and to support efforts to develop undersea cables and terrestrial fibre-optic connections.

3. Master customer segmentation. African operators will need to capture low-income customers while also protecting their profits with upper- and middle-income customers. To do that will require further differentiating their offerings and their service levels. For instance, some operators are testing offerings where airtime is priced as a function of the call quality.

4. Streamline costs across the board. Cost efficiency can best be achieved by combining small gains in many areas. Examples include: further automation such as electronic vouchers to replace physical prepaid vouchers; simplifying by eliminating complex offerings; and tightly managing power costs.

Ultimately, Hildebrandt points out, operators in sub-Saharan Africa need to look beyond the low-income segment for growth and start to plant the seeds of new revenue streams for high- and mid-income customers.

"Just as few executives believed a decade ago that the penetration of 2G mobile voice would ever go above 2% or 3% of the population in emerging markets, it may be hard to envision a large market for mobile Internet," he said.

"But it will eventually become affordable for more customers in sub-Saharan Africa as large subscriber bases in richer countries dramatically drive down the cost of network equipment and smartphones."

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