The Future of African Bandwidth: African International Bandwidth Economics, Bottlenecks and Business Models

After years of outright despair at the crippling effect of expensive international bandwidth on the African continent, our research suggests that the market is inching ever closer to a tipping point. As submarine cables find their way along Africa’s coastlines, the continent is slowly, but inevitably emerging from what we have long referred to as the Dark Ages of African bandwidth, an era of bandwidth bondage of sorts, characterized by excessively high prices, near-zero broadband penetration rates and self-defeating regulatory models. How things change, and nowhere are they changing as fast as in the African wholesale bandwidth market.

Our analysis yielded the following points, as it pertains to the upside for and business models of international bandwidth in Africa:

Harbingers of a bandwidth boom abound. Broadband connectivity uptake and traffic is on the rise, following on a path trodden by mobile voice services. Over the next five years -and based on a variety of supply and demand assumptions- connectivity numbers should rise to around 30m from only around 6.5m in 2010, primarily thanks to the proliferation of mobile broadband. Internet user numbers are higher, with more than 120m users projected for sub-Saharan Africa by 2015.

Once overlooked, the domestic backhaul segment of the bandwidth infrastructure value chain is becoming the last major bottleneck to full scale bandwidth adoption in the African market. We are cautiously positive on this segment. Domestic backbone availability is increasingly less of an issue, though not uniformly.

Overall, however, the absence of competition in this segment is likely to hamper growth as domestic backhaul prices remain high - and indeed higher than international bandwidth prices. Markets with high competitive intensity in this segment are bound to see higher demand for international bandwidth, while we are more conservative on the others.

Our bandwidth utilization forecasts point to a remarkable increase in bandwidth requirements across sub-Saharan Africa. At the end of 2008, around […] of bandwidth was active in sub-Saharan Africa across fibre and satellite networks. Following the launch of the Seacom submarine cable in 2009 and Eassy in 2010, that number more than tripled to around […] at the end of 2010, with some markets (e.g. Kenya) seeing activated international bandwidth rise by more than 1000%. There’s a supply-demand gap, to be sure. But is there an international bandwidth supply glut? We believe the picture is a little more mixed.

The above hardly means there is no risk to bandwidth provider returns. The risk is both isolated and structural. Isolated risk pertains to individual markets, where the oversupply of bandwidth available dwarfs projected demand. In markets such as Benin, Gabon or Angola, for example, only about 30% of available lit bandwidth should be used over the long term.

We see three main implications from our analysis of the African international bandwidth oversupply risk for investors. First, there will be winners and losers: the dynamics of supply cannot be changed so dramatically in a competitive environment without negative impact on some industry players.

Our review suggests that the short term impact of wet fibre on satellite is unquestionably negative. Perhaps counter-intuitively, we still see some long term upside to satellite.

The decline in the cost of bandwidth has contributed to making submarine cable deployments more attractive from an investment standpoint - not that it ever wasn’t.

Such dramatic decline in CapEx impact carries considerable implications for African cable business models. For one, it potentially improves the business case in a context of falling wholesale prices by lowering the investment per unit of bandwidth. Another, perhaps more fundamental -if insidious- consequence is the impact on the nature of bandwidth as a product.

We note that African international bandwidth is selling at between 1.5x to 4x unit cost on an IRU basis, a rate that has been fairly stable over the past 10 years

We see some structural pricing risk in this market.