Uganda: Where is the Space for Competition in Uganda's Mobile Market?
Wednesday, 22 September 2010
MTN, the strongest brand in Ugandan telecoms, has consolidated a hefty 60% market share. Is the Ugandan market big enough to accommodate new competitors, or is the established structure already too entrenched?

Licensing and the Established Order
In 2006, the Government of Uganda passed licensing reforms avowedly designed to lay the foundation for a fully competitive telecommunications sector, and there was a scramble for telecoms operator licenses. However, beyond the three companies that held licenses before 2006 – Celtel (now Zain, soon to be rebranded Bharti Airtel), MTN, and Uganda Telecom Ltd (UTL) –, only two companies have managed to eke out any sort of place for themselves in the mobile market.

At first glance, the market looks busy: A slightly confounding list of licensed operators, published by the Uganda Communications Commission (UCC), states that there as many as 36 current players in the telecoms market. Isaac Kalembe, spokesperson for the UCC, offers the list as evidence of the 2006 attempts to increase competition in the sector.

However, the licensing regime does not distinguish between different telecom services like mobile, payphones and data. All companies offering any telecom service are issued a Public Service Provider (PSP) license, and any company holding any sort of infrastructure for this purpose requires a Public Infrastructure Provider (PIP) license. Mobile companies Zain, Orange, and Warid hold both PSP and PIP licenses, as do internet providers Africaonline and Infocom, and IT firm Datanet.

The Uganda Electricity Transmission Company (UECTL) also makes the list as holder of a PIP license: Not as a competitor in the telecoms market, but according to Kalembe because it has a short frequency radio network used for internal operations.

Rather inconsistently, MTN and UTL are exceptions and hold only National Telecommunications Operator (NTO) licenses, although Aussie Mutala, Makerere ICT lecturer and veteran of the Ugandan mobile sector, anticipates that when the NTO licenses expire, MTN and UTL will be given PSP and PIP status instead.

A significant number among the 36 PSP and PIP licensees, some of which are purportedly mobile companies, are not at all active in Uganda. In fact there are only five real mobile competitors. Based on revenue from airtime sales, the market share figures are as follows:

  •     MTN Uganda is the established leader with over 60% of the market
  •     Zain occupies something under 20%
  •     The balance is picked up by Warid, UTL and Orange in that order.

What this is means is that there have only been two successful entrants onto the market since 2006. MTN and UTL formed the pre-2006 NTO ‘duopoly’, and Celtel (now Zain) was the first mobile company in Uganda, operating under a Cellular Telecommunications Operator (CTO) license since 1993. But Uganda continues to attract interest, and the rising figures of consumption indicate that there might indeed be more space in the market.

A Growing Market
Over 4m new mobile phone-lines came into use between March 2008 and March 2009 alone, raising the total to 9.86m. Though growth has slowed down recently, the total number of mobile phone lines in Uganda in March 2010 stood at 10.3m, confirms UCC’s Kalembe. By contrast, the uptake of fixed landlines has been slow: Over the same period, March 2008 to March 2009, only 44,103 new land lines were installed, bringing the total to a comparably lowly 210,655.

Of course 10.3m phone-lines do not equal 10.3m mobile users: many individuals own and use more than one SIM card. This means that not even one-third of Uganda’s young population are using mobile services at this point. And while Mutala warns that the number of active mobile phone lines is likely to be inflated since companies often fail to cancel disused phone lines, the figures do show that Uganda is rapidly opening up to the consumption of mobile services. A study by Pyramid Research projects that by 2014, 70% of Ugandans will have a mobile phone. So to date, the mobile market is growing quickly and still under-saturated. What, then, is barring new companies from making their entry?

Marketing Challenges
One answer is that the companies that have tried so far have simply gotten it wrong, and the mistakes are most obvious in the marketing department: Scott Mackenzie, CEO of Simba Telecom, a leading airtime retailer across Kenya, Uganda, and Tanzania, holds up Orange’s bumpy beginnings as an example. Orange misread the Ugandan market upon entering it, he says: Their stores, with clean-cut European lines, failed to attract Ugandans comfortable with the purchase of airtime from familiar ramshackle cornershops. But their initial failure then aided their recovery: The low number of customers on their network allowed them to offer the fastest internet service, and they offered it at the lowest prices. And Orange have eventually also given their marketing a more local flavour, e.g. calling one of their offers ‘Gyekiri’, to match Warid’s ‘Pakalast.’

But it is not only the new kids who are getting it wrong. Mutala argues that Zain’s services are consistently of a higher quality than competitor MTN’s, and says that, originally, being a Celtel/Zain customer had a certain status: when the company first entered the market, it focused on high-income earners, and initially continued to charge more than its new rival MTN. “Zain is the company which is always almost getting there” he says. Mutala blames what he considers an inexplicable pricing structure and lacklustre advertising presence.

UTL, on the other hand, may be the cheapest, but their marketing strategy has been a flop: At this point, their presence in the mobile sphere is so weak that Mutala sees them as being almost totally propped up by the government’s commitment to use their landline and internet services (as UTL is partly government-owned). Should the competition heat up, UTL would be the first to go. So far, MTN may be the only company getting it right. The question is: Are they getting it so right that they’ll secure a Safaricom-style quasi-monopoly in Uganda?

Fighting the Network Effect
MTN’s brand strength and presence is indeed a formidable force in the market. Having taken away Celtel’s lead not long after their arrival in Uganda, MTN seemed to have attained an almost unassailable position. Mutala says, “It’s almost as if there is a market for MTN and a market for others.” Mackenzie asserts: “It’s a foregone conclusion that if an MTN product is comparable, [the company’s] brand strength will see them take over.” This, he says, is a risk that Orange is currently facing: the solid position the company has built for itself in the data service sphere might be imperilled by MTN’s newly lowered prices.

Few prominent business people lack an MTN line, and the company’s impressive distribution network crucially ensures that it has the lion’s share of the non-urban customer base. Considering that in the period of January to March 2009, fewer than 20% of all text messages sent were off-net, their sizable share of the market will be difficult to whittle down due to the network effect. It is unsurprising, then, that Orange and Warid have been forced to offer deal after deal, giving away free minutes, in order to break into the MTN-dominated mobile sector. And with such deals, mobile companies make lower revenues. New subscribers are more price conscious and have lower incomes.

Unsurprisingly, the boom in mobile consumption has been the impact of competition on prices. In early 2009, for example, overall consumer prices rose by 6.8%, whereas the communication and transport sector were affected by a price increase of only 1.3% as a result of intensifying competition. Furthermore, dropping prices has led to a reduction in the average revenue per user (ARPU), which has encouraged telecommunications companies, including mobile companies, to spread their marketing campaigns outward towards untapped markets.

Indian Invasion?
But near-unassailable does not mean completely impervious. Mutala considers that there are not only virgin territories open for new entrants to explore, but also that there are means to break, or at least loosen MTN’s grip on its 60% of the existing market. Indeed, he thinks that one company is already in the process of doing so.

Warid, under Indian company Essar’s ownership since late 2009, is slowly beginning to nibble into MTN’s customer base, says Mutala. Since the UCC regulated that promotional deals could only last three months, and could not be run back-to-back, Warid’s popular Pakalast has been available to customers as a profile on their phones: Pakalast offers the user unlimited free on-net calls for a full day after loading UGX1,000 in airtime – not ideal, perhaps, for day-to-day usage, but certainly a useful resource to have at one’s disposal.

This plays to the growing number of individuals who have more than one phone, or at least more than one SIM card: Subscribers might use their MTN SIM card, on either per-second or per-minute billing, for normal usage, but switch to their Pakalast-enabled Warid SIM cards for longer conversations. Encouraging this trend, Warid was the first company in Uganda to sell dual-SIM phones, with Orange following this move. By taking on a secondary status to begin with, Mutala says, Warid are hoping to build up a loyal customer base of their own.

The invasion from the subcontinent does not end there: Earlier this year, Indian market leaders Bharti Airtel bought the Africa operations of Middle Eastern Zain, and Mutala is currently working with Indian telecoms giant Reliance on their planned entry into the Ugandan market, scheduled for mid-2011. This should have happened much earlier, but had been delayed by the impact of the global financial crisis that cut down the company’s market value, and running two networks in India, a CDMA network and a GSM one, meant that the company had spread itself thinly.

In India, the telecoms market is driven by low prices and large subscriber numbers, with no one company holding such an outright majority of the market as MTN does in Uganda, or Safaricom in Kenya. “None of the companies in India even have a 20% market share” explains Mutala, and yet, within five years of launching, Reliance had 100m subscribers in its home country. Mutala predicts a race to lower prices similar to the one currently being run in Kenya.

The Indian companies are able to lower prices drastically as a result of their use of Chinese rather than European technology, which comes at a tenth of the cost. Bharti, already dealing with Chinese technology companies in India, are currently using Ericsson technology in Uganda, but have reportedly demanded that the Swedish firm offer them equipment at Chinese prices. MTN, on the other hand, use European equipment, and Mutula anticipates that they will find it more difficult to compete on prices.

Perspectives
Of course, Uganda’s population, even if growing by around 3% a year, is estimated at 31m, dwarfed by India’s nearly 1.2bn, so a market share of less than 20% of any potential Ugandan market is hardly comparable to the experiences of these companies in their home country. But Mutala argues that even a 10% share of the potential Ugandan market amounts to 3m subscribers, a good deal more than is currently held by any company but MTN, and enough to make a worthwhile profit.

Undercutting competition is one thing, but theorising about the potential market means tapping the unreached customer base. The Indian experience suggests that going rural is a worthwhile undertaking. As much as MTN has been more successful in reaching out to non-urban areas than its competitors and boasts successes in rural areas with its Village Phone – a phone equipped with a car battery and an endless antenna –, they have not taken the obvious step of installing mobile infrastructure in Uganda’s hinterland. Here the Indian companies have the advantage of vast capital and a willingness to deploy it. The Ugandan mobile market has hardly been turned on its head since the UCC invited full competition in 2006, but the combined forces of Essar, Bharti and Reliance could shake the establishment up quite a bit.

Essar, both in Kenya and Uganda, have avoided taking on the well entrenched market leader directly, which has prevented the ruinous kind of battle that Zain has tried to fight. At least in Kenya, this has enabled Essar’s Yu to overtake Telkom Orange in mobile subscriber numbers. New Zain owners Bharti have competed very aggressively on prices in Kenya, a do-or-die strategy to wrest market share from Safaricom, market leader with around 80% of the subscribers (see News Analysis: Telecoms Price Wars Gone Dirty?).

Jamie Anderson, a telecoms strategy advisor and business school lecturer, argued that most mobile companies in Africa had been lazy in that they focused on the urban consumers, and ignored the rural subscriber potential – a clientele that the new competitors from the subcontinent will certainly take into consideration, even if the Indian experience cannot necessarily be transferred directly: Finding the right technology and outsourcing partners is one challenge – India is known globally for its dynamic outsourcing industry (Will Bharti Airtel’s Business Model Translate to Sub-Saharan Africa? ). The other one is how to build a distribution network in sub-Saharan Africa’s much lower population density.



Read more:
Uganda’s Mobile Money Market: Copycats, Competition and Innovation



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