MTN Nigeria: A victim of its own success

Johannesburg, 12 Mar 2003

MTN has found that it is tough to do business in Nigeria. However, like many companies before it, mostly those exploiting the country`s oil reserves, it has also found that doing so can be very profitable.

In fact, MTN was so pleased with progress in Nigeria that it came close to acquiring MSI Cellular, a private holding company for cellular licences in 14 countries ranging from Egypt to Malawi. It walked away from the deal only because, in the words of one insider, there were "some gems but also some rocks" among the operations. However, neither company has ever disclosed that negotiations ever took place and neither will confirm or deny the discussions.

Nigeria`s lack of infrastructure has forced MTN to build more than telecommunications infrastructure in the country.

"By far the biggest burden is the lack of reliable power," complains MTN Nigeria CEO Adrian Wood. "I don`t think MTN has that problem anywhere else."

The erratic electricity systems means generators are widely used by businesses, even in the most metropolitan areas. "Everyone in Lagos has a generator," says one businessman over his shoulder as he scampers off to fire up his.

In MTN`s case, however, powering the business means powering hundreds of different sites. Every cellphone mast has two generators and a 5 000 litre diesel tank, more than doubling the price of base stations.

"We are not only building a telecommunications network, we are also building a power grid," says Wood. He is not kidding. The company estimates that it generates between 12 and 14 megawatts of power per day, more than is available to many Nigerian cities. In February, MTN bought more than a million litres of diesel for its distributed power plant. When its network is at full strength it will be using more than 10 million.

Yellow microwave road

Once powered, base stations also need to be connected to the core of the network, and there the company faced a more unexpected problem: Nitel, the national telephone company, could not provide it with transmission infrastructure reliable enough for its purposes.

So it built its own.

The first phase of its microwave backbone - named the Y`helloBahn thanks to the combination of some fancy branding footwork and a promise to "paint Nigeria yellow" with its logos - was completed in January. Cutting the country neatly in half as it snakes from the coast to close to the northern border and covering much of the affluent south, the backbone covers 3 400km. The second and third phases will stretch the backbone across another 4 500km, making it by far the biggest of its kind on the continent.

MTN has already declared the network a success because it is cheaper than using point-to-point satellite and also eliminates the annoying latency that makes satellite second choice for voice traffic.

But the Y`helloBahn also came with the usual Nigerian price markup. Thanks to high humidity in the south and the harmattan winds, which can blow in enough dust from the Sahara to cover the capital city Abuja with a haze that clouds the sun, the atmosphere is fairly opaque to microwaves. As a result, towers on the Y`helloBahn have to be closer to each other than would be the case elsewhere, driving the cost of phase one above $100 million.

However, the extra cost may be more than recuperated, as may the costs of upgrading the network towards the end of the year when it is expected to run out of capacity. Late last year, Nigerian regulators gave MTN the go-ahead to resell excess capacity on its backbone. The company is clearly excited about the revenue potential such a side-business could hold, especially as Nigeria`s telecommunications system expands and competing operators start looking for transmission capacity, but is reluctant to talk about specific plans.

Over-eager subscribers

Probably the biggest problems MTN Nigeria faces are a result of its own success. Its massive branding campaign has been an unqualified success and it is difficult to travel more than a few blocks in either Lagos or Abuja without someone trying to sell you an MTN airtime card.

Even the company`s rapid growth - to more than a million subscribers in one-and-a-half years - and its greater than 50% cellular market share, does not account for the prominence it has. Recent studies have shown that it has overtaken even the mighty Coca-Cola to become Nigeria`s most recognised brand.

"I think MTN has become emblematic of new things happening in Nigeria," explains chief marketing officer Afam Edozie. "People connect us with that."

Either that or the very ambitious MTN ads have helped it far outstrip competitors Econet and the cellular arm of Nitel. Perhaps too far as MTN is currently not providing prepaid SIM cards to distributors or selling them directly. Its network has become so over-subscribed in densely populated areas that it is often impossible to initiate a call. It doesn`t have near the interconnection capacity it requires to hand calls to other networks in the country and its own switches and prepaid platform are also taking strain.

When quality finally became unacceptable, the company stopped accepting new clients, perhaps the first time a cellular network has ever done so.

Now a crash-programme is to see it increase its number of base stations by more than half within months, which requires two to three to be erected per day. Even then it is estimated the network will only be able to carry 750 000 more customers.

While the company postpones plans to cover more of the country while building extra capacity, winning the hearts of Nigerians has also led to another, potentially more serious problem. People everywhere are resentful, angry even, at what they say are the excessively high tariffs MTN is charging.

"People have impressed on us to appeal to MTN to reduce tariffs," says communications minister Haruna Elewi, while regulators also admit to being under pressure to somehow producing lower prices. Even a customs official snagged an MTN executive to discuss high rates.

MTN believes its prices, which translate to around R3 per minute, are easily justifiable given the massive investment it must recoup and the level of service it offers. But with competitors undercutting it by 10% or more, people want both its service and cheaper phone calls.

The issue has refused to die, and with national and state elections due next month, politicians have been making the most of it. Several pieces of proposed legislation could affect MTN, and one politician last year received ample media coverage by forming a committee and loudly demanding prices be reduced.

The committee, however, represents only posturing, and the communications minister says he can appeal for lower prices but not demand them. The Nigerian Communications Commission, the telecommunications regulator, boasts a level of independence from the government unknown in SA, and it is not budging on tariffs.

"We are not planning to start regulating tariffs [other than with the current] price caps," says head Ernest Ndukwe. "We are not going to change licence conditions."

MTN hopes that stays the case and that the tariff outcry will remain nothing but a public relations headache. However, it also says Nigeria`s telecommunications legislation is hopelessly outdated and the position of the new parliament and executive after this year`s elections remains an unknown.

High prepaid revenue

Despite many challenges, MTN Nigeria has maintained average revenue per user steadily above $50, even while the local currency devalued against the dollar. This is more than twice what it earns from subscribers in SA and also far outstrips its other four operations north of the Limpopo.

The high revenue is in spite of 98% of its Nigerian subscribers using prepaid airtime; traditionally pay-as-you-go users spend less than those on long-term contracts. In Nigeria, however, MTN says it has prepaid clients that have been known to spend more than R100 000 per month on a single cellphone.

The company also earns back its customer acquisition costs on signup thanks to large initial payments.

While executives believe average revenue numbers will eventually decline, as in any cellphone market, that day may not come soon. MTN estimates the available Nigerian market at 13 million, about the size of the current South African market. Unlike SA, that 13 million represents the 10% at the top of the economic spectrum. The market also still holds corporate accounts and a considerable appetite for international calls.

It seems almost certain that Nigeria will become MTN`s top performing territory. Already the country provides it with more business than Cameroon, Uganda, Rwanda and Swaziland combined, and its subscriber base is a fifth that of MTN South Africa.

Those kind of numbers, and the fact that Nigeria says it will stay EBITDA (earnings before interest, tax, depreciation and amortisation) positive for the foreseeable future, have renewed MTN`s interest in expanding across the rest of the continent and was part of the reason it went after MSI Cellular.

Africa, it seems, has not seen the end of MTN`s expansion yet.