It will be revenue windfall for operators
Subscribers already ripped off with marginal increase in depletion rate of data bundles
Recently, telecommunication companies under the aegis of the Association of Licensed Telecom Operators of Nigeria proposed a 40 percent increase in the cost of calls, SMS, and data services in the country. However, the Nigerian Communications Commission rejected the request by the telecom operators, noting that such a decision must be fair to the subscribers and engender healthy competition among service providers. Though it remains unclear whether the proposed hike in tariffs will be eventually implemented, BAMIDELE FAMOOFO, picking the minds of investment experts, examines the broad range of issues surrounding the development and the implications for mobile network operators and users of their services.
The details of ALTON’s proposal revealed that the price floor of voice calls would increase from N6.40 to N8.95 while the price cap of SMS would increase from N4.00 to N5.61. On data services, ALTON stated that the NCC should implement the recommendations from the August 2020 KPMG report on the determination of cost-based pricing for wholesale and retail broadband services. The proposal by ALTON must have been induced by the rapid increase in the cost of providing telecommunications services in the country.
It is pertinent to note that the prerogative to hike telecom tariffs resides with the NCC. Based on analysts’ interpretation of the body language of NCC, an upward review of telecom tariffs in the immediate future may not be on the cards. However financial analysts disclosed that users of telecom services, especially data bundles, have been forced to pay more without any announcement of price increase by network operators in recent times.
Gbolahan Ologunro, Investment Analyst with Cordros Securities hinted “We think mobile network operators have tactically passed on some portion of the cost burden to subscribers through a marginal increase in the depletion rate of data bundles.”
Ologunro revealed that a faster replenishment rate of data bundles has contributed to the rapid expansion in data revenue for network operators in the last three years. This, he said, does not put into consideration the impact of rising smartphone and broadband penetration in the country.
“In our view, this lends credence to healthy margins in the face of rising cost pressures. With data revenue not showing any signs of weakness, we do not see any threat to industry margins in the near term,” he argued.
Ologunro, who acknowledged the impact of naira devaluation on the operating cost of network providers, argued that rising revenue from data usage offsets the rising cost, delivering sumptuous profit to operators.
“For us, the most probable explanation for the healthy margins is the rapid explosion in data revenue which has been a significant driver for service revenue
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His words: “Industry margins have remained very defensive despite the substantial growth in network operating costs. For us, the most probable explanation for the healthy margins is the rapid explosion in data revenue which has been a significant driver for service revenue.”
Survey of subscribers’ experience carried out by Cordros Research, revealed that data bundles get exhausted slightly faster now compared to four years ago. Hence, we believe that the increase in the rate at which subscribers renew their data plans can be regarded as a tactical price increment.
Citing Nigeria’s leading network provider- MTN as a case study, Ologunro said, “MTN Nigeria data revenue expanded tremendously from N67.8 billion in 2016FY to N516.21 billion in 2021FY, implying a 5-year CAGR of 50.1 percent. Further analysis revealed that the growth in data revenue is 3.5x the increase in operating cost between 2016 and 2021. Hence, we believe this largely explains the improvement in MTNN’s EBITDA margin from 47.4 percent in 2016FY to 53.0 percent in 2021FY.”
Financial figures made available by Airtel Africa Plc, for last quarter ended March 2022, supported the claim that operators in the industry are making a killing from data service. Revenue grew by double-digits for the seventh successive quarter, rising by 17.7 percent y/y in Q4 22. The movement was primarily driven by growth in Data (+26.3% y/y) and Voice (+11.9% y/y).
According to Airtel, growth in data, which contributed 32.6 percent to revenue, was delivered through a combination of data customer base growth (+15.2% y/y) and Data Average Revenue Per User (ARPU) growth (+10.5% y/y). According to management, data customer base penetration (percentage of the total customer base) reached 36.4 percent, an increase of 2.1 percentage points, with 4G customers making up 42.6 percent of the total Data customer base.
Comparatively, Airtel Nigeria Q4 22 data revenue grew by 28.0 percent y/y, much slower than MTNN (+54.5% y/y). Airtel’s management says there were issues with the company’s fibre infrastructure in January and February 2022, which led to the slowdown in the data revenue growth trend.
Favourable country demographics underpinned by the large population with a median age of 19, rising adoption of social media platforms for communication, and increasing internet and smartphone penetration are key drivers of data revenue in Africa’s largest economy.
Ope Ani, Senior Investment Analyst at Coronation Capital Limited, said a conference call which he held with the management of Airtel Africa Plc, made it clear that the discretion on NCC to regulate price in the industry.
“We do not expect that a 40 percent hike in tariffs prices will be approved by NCC, given the negative spillovers on broadband penetration and the nation’s drive towards enhancing financial inclusion
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“Airtel does not have pricing power in Nigeria. The regulator sets tariffs. No movement on tariffs at the moment, but Airtel will follow any regulatory directives given,” he disclosed that was the response of the management of Airtel on tariffs increase.
“It is difficult to ascertain whether a hike in tariffs will be implemented in the short to medium term, given that the ultimate decision rests with the regulatory body, NCC. That said, our interpretation of the body language of the NCC suggests that an upward review of telecom tariffs may not be on the cards. Particularly as the industry is yet to move past issues related to the NIN-SIM linkage. In the interim, we expect that the NCC will engage with ALTON to determine whether an upward price adjustment is necessary at this time. In any case, we do not expect that a 40 percent hike in tariffs prices will be approved by NCC, given the negative spillovers on broadband penetration and the nation’s drive towards enhancing financial inclusion,” Ologunro added.
Cordros Research however is of the opinion that there is no basis for price hike at the moment, noting that a possible hike by about 5-10 percent, which is their baseline expectation; would be a windfall for revenue growth.
“Our view is further substantiated by the fact that the demand for telecommunication services is price inelastic. Thus, we envisage the price impact would more than offset any reduction in the consumption of telecommunication services.”
Another money spinner
Apart from data, the mobile money business is a potential huge revenue spinner for the telecoms industry as major players are set to take off. It would be recalled that the Central Bank of Nigeria has given final approval for both MTN Nigeria Plc and Airtel Africa Plc to take off.
Airtel disclosed that revenue from its mobile money elsewhere grew by 33.6 percent (y/y) as it continued to grow by double-digits, following the continued expansion of the Group’s distribution network, particularly the expansion of the exclusive channel of Airtel money branches and kiosks.
In Nigeria, Airtel disclosed that $30million out of about $750million capital expenditure planned for financial year 2023 has been earmarked for the rollout of the Nigeria Payment Service Bank.
“Nigeria PSB will primarily target two types of customers: (1) those who do not have any financial services (no account or wallet) will be offered services as a store of value for their cash, and (2) those who have bank accounts will be offered more sophisticated products with Airtel acting as an intermediary for insurance, loans, and investment products,” management revealed.
Recommendation
Experts at Cordros Research expect that sustained efforts in accelerating data revenue through investment in network capacity to accommodate growing data traffic will remain the overarching strategy for the industry players.
“Given that operating leverage in the telecommunications industry is high, we do not think incremental investment in the network will constitute a drag. If history is anything to go by, we believe margins will remain healthy provided the growth in data revenue remains well above the increase in costs. Lastly, we note that the final approval granted by the CBN to MTNN and AIRTEL AFRICA to commence payment service bank operations is another fulcrum for revenue growth in the medium term,” the experts noted.
