Sleeping giant

The telecom sector in Madagascar has experienced tremendous growth over the past few years, but recent political turmoil threatens to disrupt the trend.

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By  George Bevir Published  September 8, 2009

The telecom sector in Madagascar has experienced tremendous growth over the past few years, but recent political turmoil threatens to disrupt the trend.

For thirty years the former French colony of Madagascar, which sits off the east coast of Africa, has recorded the fifth-lowest rate of GDP growth in the world, according to the World Bank, at only 0.5% per annum. This has improved in recent years, thanks in part to economic liberalisation, leading to GDP growth of 7% during 2008. But this rate of growth is not expected to be repeated in 2009, following the coup that took place at the start of this year.

Guy Zibi, principal, Africa Next Investment Research, says one of the main challenges facing the expanding telecom sector in Madagascar is uncertainty.

 "The market has faced substantial socio-political challenges over the past six months, with events that culminated in the resignation of President Ravalomana last March. Negotiations are underway between political parties to find a way out of the ongoing crisis, but political uncertainty remains high, economic activity has slowed and consumer spending has declined. As a result the mobile sector is in something of a wait-and-see mode, and overall growth has slowed."

Matthieu Mace, the chief commercial officer of Telma, Madagascar's third largest mobile operator and the country's only fixed line operator, agrees that the political crisis that occured at the beginning of the year is a big challenge for the country.

"It has slowed down the whole economy of Madagascar, because the country is surviving a lot on international aid. A lot of money comes in from international funds, from European aid and so on to help to country, and this was totally stopped at the beginning of the year because the government was not recognised by the international community."

Amazing growth

As the world's fourth largest island, Madagascar - affectionately known by locals as ‘the big island' - covers an area slightly smaller than France, from which it regained independence in 1960.

The country is served by three mobile operators; Zain Madagascar, which began life as Madacom before rebranding as Celtel, was the first GSM operator to launch in 1997. It claims 1.2 million customers, according to the operator's 2008 annual report, with average revenue per user (ARPU) of US$7.

Market leader Orange Madagascar launched as Antaris one year after Zain, in 1998. It was rebranded Orange Madagascar in 2003, and according to the firm's 2008 figures it has just over 2 million subscribers, which equates to a 58% share of the market.

Telecom Malagasy, known as Telma, is the only fixed line service provider in Madagascar. According to ZTE's chief representative in Madagascar, Li Jingchi, in 2004, Telma had approximately 58,000 fixed-line subscribers, a figure that increased to 160,000 by 2008.

Telma was privatised in July 2004 and was not allowed to start as a mobile operator until Madacom (which became Zain) launched.

Telma's chief commercial officer, Matthieu Macé, says there were 1 million mobile subscribers in Madagascar at end of 2006, and that this figure grew to four million by 2008. "In only two years, the market multiplied by four and we went from penetration of 5% to now more than 20%," he says.

Enda Hardiman, managing partner of consultancy firm Hardiman Telecommunications, says the telecom market in Madagascar has experienced "substantial" growth over the past year. "The year-on-year growth in subscribers for Orange was 55%, for Zain it was 117%, and for the incumbent it was a colossal 300%, so it has been growing very, very strongly," he says.

A fourth mobile operator is set to enter the market at some point this year. Madamobil, which will offer services under the "Life" brand, will be owned and operated by Life Telecom Holdings, in partnership with Tecom Investments, a subsidiary of Dubai Holdings, one of the larger institutional investors in the region.

Low GDP, low penetration

Li Jingchi, says that two of the main challenges facing the mobile sector in Madagascar at the moment are the low penetration rates and low gross domestic product per capita.

"The penetration rates in both fixed-line and mobile telecommunication market are still well below African averages," he says, pointing out that such figures point to "excellent growth potential".

 Pent-up demand for internet access and broadband capabilities, resulting from the traditionally underdeveloped fixed network, will continue driving both market sectors. But with one of the lowest GDPs per capita in the world, there will be limits to the growth of Madagascar's telecoms market, and the ARPU of the operators is expected to stay at a relative low level.

The challenge for operators in Madagascar, as in all low ARPU markets, is to keep opex at a low level in order to achieve reasonable EBITDA margins.

Stopping ARPU from dipping even lower than it already is seems like a tough challenge, particularly with the entry of a fourth operator and  the likely downward effect on prices it will have.

Hardiman says that Zain's forecast of an ARPU of approximately US$7 "may be slightly exaggerated" and that $3 to $5 that Madamobil has pinpointed for expansion and penetration over 20% is more realistic.

Africa Next Investment Research's Zibi says that close to 70% of the population of Madagascar lives below the poverty line, and consequently ARPUs that are now $4 to $5 per month will continue to decline. As ARPU declines, operators will need to introduce more services in order to boost revenue. 2.75G internet access, Blackberry-based services, roaming-oriented services such as Zain's One Network have already been offered by a few operators, but others are likely to follow suit, he says.

 "This market is highly voice-centric and the service focus is on developing packages and promotions that stimulate voice usage, such as flat rate deals, zone-based pricing, and friends and family rates."

 Much of the customer base of the mobile operators is comprised of residents of the larger cities, such as Antananarivo, Toamasina and Mahajanga. Operators are expanding network coverage to include other towns, but with more than 70% of the population living in rural areas, Zibi describes coverage as "merely adequate", and he says that expanding services to groups in rural locations is critical to future market growth.

Undersea cables

At the moment, Madagascar is connected to the rest of the world by satellite, but this will change when the island is connected to two submarine cables. Telma is the sole Madagascar operator involved in the Eastern Africa Submarine Cable System (EASSy) project, which will link Toliary on the south west of Madagascar to South Africa, and more countries along the east coast through to Port Sudan.

Orange Madagascar's submarine cable project, LION, landed in Madagascar in June. Funded by Orange Madagascar, France Telecom and Mauritius Telecom, the 1,800km broadband cable links the existing SAT3/WASC and SAFE cable and has a capacity of 1.3Tbps.

ZTE's chief representative in Madagascar, Li Jingchi, says the improved submarine cable capacity will "remarkably reduce the international telecommunication cost compared with the current satellite access".

 Figures from Telma show that at the end of 2008, internet penetration stood at only 2.1%, while fixed line penetration was only 0.8%. Telma launched its ADSL service in 2006, and has one competitor, Gulfsat, which offers WiMAX services, but broadband penetration remains low.

 "The big difference between Telma and Gulfsat," Telma's Mace says, "is that they are still very expensive in the terminal, because they only have a data service they are still quite expensive. With ADSL we are able to provide more speed."

In preparation for the arrival of the submarine cables, a national backbone project has been undertaken by Telma to link all the cities. While broadband penetration sits at a measly 1.5%, Telma expects it to be multiplied by ten within two or three years.

 Hardiman says WiMAX could be an option for increasing broadband penetration, as it makes little sense to replicate the wireline structure. "I'd be surprised if you could not make a business case (for WiMAX) for the central business district (CBD) of Antananarivo. We looked in some detail at Khartoum, Kampalla, Antibes and Mombassa and we found that in each of those we could make quite a reasonable case for WiMAX in downtown business districts.

"Where there is a dense concentration of demand, you can make businesses case for WiMAX. The more dense the demand, the better the business case. As a full blown competitor for 3G. I don't think that will work. But for concentrated demand, I can see it," he says.

With a national backbone connecting the island and two sea cables linking it to the rest of the world, there are increased opportunities for commerce on the island. Mace says that 50% of the population is under the age of 15, many of whom will not only consume the services on offer, but will also need jobs. And he points that Malagasy people speak very good French without an accent, which he says is different to Morocco or Mauritius.

"There is a future in call centre work in Madagascar. We are looking at Madagascar for data treatment and software development. There will be employment opportunities; we are trying to change the economic model, which is very rural. We want a new dimension, and that will be the technology dimension."

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