It is not clear whether Africell will maintain Orange Uganda’s niche as an Internet Service Provider or it will try to battle to get more voice customers, although Elias Arwadi, the chief operations officer of the Africell Group sounded optimistic.
“We are confident in achieving a quick turnaround of the operation in Uganda; our operating model has proven that we would be able to offer an attractive proposition to the Ugandan consumer allowing us to quickly climb the market share ladder and bring the operation into profitability,” he said.
In May 2014, Africell signed a reputed US$12 million agreement with Orange Group to acquire its majority stake in Orange Uganda. Orange first launched operations in Uganda in 2008, around the same time Warid Telecom, another operator, and had only managed to amass around 620,000 clients.
In contrast, Warid attained an enviable 2.8 million subscribers thanks, in part, to its strategy of offering almost free calls.
Yet, despite the encouraging numbers, analysts say that Warid deliberately dug its own financial grave by stoking an unprecedented price war that rocked the telecom sector in 2011.
These price wars marked the start of Warid’s eventual takeover as the company only succeeded in diluting the Average Revenue Per User (ARPU) across the sector by increasing the number of multiple SIM card holders.
In the words of an economic pundit, “It only managed to attract ‘part-time’ subscribers onto its network and this did not reflect in the company’s bottom lines. In the end these low prices were not sustainable and the company could not stay afloat.”
So, what is Africell’s strategy after acquisition of Orange Uganda’s operating licence?
Launched in the Democratic Republic of Congo in late 2012, Africell went in with a similarly unorthodox approach: offering free calls in a bid to attract customers from other operators. Did the strategy pay off? The answer is no.
If this is the strategy Africell plans to use in the Ugandan telecom market, the operator should spend more time and effort connecting with its current and potential customers. Their best bet is investment in network quality.
Firstly, more than ever before, mobile subscribers in Uganda are now more sensitive about the services and are now focused beyond price. Any such move therefore would backfire on Africell as an operator, because subscribers today have become more discerning about how they are treated.
During a Consumer Parliament convened earlier this year, consensus amongst participants was that they would rather pay more for better service. Therefore, Ugandans are not looking mainly for the cheapest operator when making a decision for preferred network; they’re going for quality in the clearest network.
This is not to infer that Africell’s network will be poor. But telecom business requires constant investment in infrastructure – most of it long term.
If an operation’s costs keep on escalating each year, the company has difficulty assuring the public that it can invest into upgrading of network.
Secondly, to recoup the investments made by telecoms industry, players take time and therefore shareholders with a long-term view will seek to use conventional marketing models, unlike Africell.
In fact, Anthony Katamba, the general manager, corporate services and chief legal counsel at MTN Uganda, while responding to consumers’ queries at the Consumer Parliament said telecoms firms need to make substantial investment before getting any return.
“We have to bear in mind that call costs have dropped over 70% in three years to almost unbearable levels. That is why there was consolidation in the sector last year,” Katamba said.
Dennis Kakonge, Airtel Uganda’s legal director agreed. “There’s a high level of taxation in the telecom sector; 10% on Mobile Money transactions; 18% VAT; 12% excise duty on importation of handsets; 25% on scratch cards and taxes on international calls and so on. All these taxes have an impact on the final tariff that is charged,” he said.
In May this year Ziad Dalloul, chairman and CEO of the Africell Group said, “Uganda with a population of over 37 million and a penetration rate of 50% was well within the criteria we had set to further expand in Africa targeting high potential and high growth markets.”
The telecom sector is among the highest taxed sectors in Uganda and yet the operators have to continuously invest to meet the standards set by the industry regulator, Uganda Communications Commission.
“We are ranked highly in the East African region and instead of pushing that money into investment, we are busy channeling it into taxation,” Eng. Godfrey Mutabazi, the executive director of UCC said during the Consumer Parliament.
Finally, telecoms in Uganda can ill afford the sort of turmoil that Africell has visited upon markets such as the Democratic Republic of Congo (DRC). The operator was involved in ugly and public battles pitting itself against other players.
Africell kicked off a tariff battle – typically characterised by unsustainable promotions and bonuses – meaning that most players could not focus on fixing poor quality of service with the falling-out also leading to lower operators’ revenues.
A sharp reduction of telecoms sector contribution to the Treasury soon followed hitting the DRC’s budget plans.
This is serious in a country where three main operators account for 40% of the taxes collected by the government.
The result was an estimated $222 million revenue loss in 2013 because of Africell’s market behaviour.
After a string of court cases and deliberations involving government, telecoms players and even the Supreme Court, the line Ministry determined that all players must comply with the floor price set by an international company hired by Autorite de Regulation de la Poste et des Telecommunications du Congo (ARPTC) the telecoms regulator.
DRC’s tax body also indicated that the floor price will be the basis for taxation and as result, Africell has to pay taxes and fees based on the floor price.
With this new acquisition, Africell will be operating in four different African countries with a combined market potential of over 120 million people.
Despite having a 69% market share in The Gambia totalling to 1.3 million subscribers out of 2 million, Africell still doesn’t seem to have had any experience with Mobile Money or 4G which appear to be the money makers in Uganda’s telecom landscape.
But telecom market observers say Uganda needs concerted efforts from industry players, not disparate strategies aimed at quick wins.
According to Business Monitor International (BMI), huge opportunities and limits to growth in Uganda’s mobile market are both related to its low penetration rate, estimated around 49 per cent in 2013. This is vital for the sector that BMI forecasts a return to stronger growth of 11%, in 2014.
BMI thinks although the low penetration rate means that there remains considerable opportunities for organic growth in Uganda’s mobile market, these are limited by poor network coverage in rural areas, where most Ugandans live.
In the meantime, telecom customers in Uganda will be asking themselves whether Africell wants a repeat of its disastrous business model in DRC.
Culkled from East Africa Business Weekly
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