The Future of African Broadband: Economics, Business Models and the Rise of 3G

After years of slow growth and outright despair at whether broadband would ever take off 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. The African bandwidth revolution is nearly here, with all its implications for subscriber growth, social transformation business models and investment opportunities.

Our analysis yielded the following points, as it pertains to market upside, economic model issues, and the investment case for broadband in Africa:

• There is strong demand for broadband in Africa, if the price is right.
• Longstanding supply bottlenecks are being slowly, but surely removed; last mile competition is an increasing reality, wholesale segments are being liberalized, wireless technology has improved enough to provide alternatives to wireline broadband.
• We estimate the number of broadband subscriptions in Africa at about 7.6m at the end of 2009, up nearly 60% from 2008 levels. Subscriber growth has been remarkable in many respects; over the past three years to 2009, African broadband has grown at a compound rate of 80%, faster than even mobile subscriber growth (though from a smaller base).
• It is indisputable that Africa’s broadband growth is still primarily driven by North Africa and South Africa. Outside of this NA-SA group, the other areas of growth are in countries we refer to as “Volume” markets. Their contribution to overall broadband subscriber growth has increased steadily, from only about 10% in 2007 to 20% by the end of 2009.
• Broadband usage by speed has been evolving as well; only about a third of African broadband subscriptions were 1Mbps and above in 2008; by the end of 2009, that number had risen to 55%, most of which were mobility-based.
• We expect the African broadband subscriber market to treble in size between 2009 and 2015 to about 25m, buoyed by the mix of demand and supply catalysts described above.
• In revenue terms, we estimate Africa’s Internet retail revenue at about $4bn in 2009.
• We see a direct, unmistakable correlation between bandwidth wholesale and retail prices.
• The challenges created by the dramatic increase of mobile data traffic will be a reality in Africa too.
• We see the potential for network issues and the subsequent deterioration of customer experience as the biggest risks to our mobile broadband subscriber and revenue projections. Nonetheless, we argue that African broadband will succeed because it will be prepaid and metered.
• The broadband revenue case is solid, in our view; our research points to substantial prop-up potential on the revenue side. Current monthly broadband average revenue per data user is up to 10x higher than voice average revenue.
• The CapEx case is challenging for mobile operators; to manage the substantial increase in traffic, operators will have to increase their backhaul investments, to bulk up transmission capacity around base stations.
• The OpEx impact largely depends on the network provisioning structure of the operator.
• We like the WiMAX/FWB business case a lot better than we did only eighteen months ago. Specifically, we prefer WiMAX/FWB assets that display a combination of specific, identified attributes.

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