June 28, 2005

Booming Cell Phone Sector Rare Africa Success Story

JOHANNESBURG -- Ask the head of leading African mobile phone operator Vodacom why last year's profits were so huge, and he points to the long lines of South Africans snaking from the company's flagship store in Johannesburg.

"Just look at all these people signing up for phones," marvels Alan Knott-Craig. "They can't seem to get enough of them and these are ordinary folk, not white executives."

Vodacom and its main rivals MTN and Celtel -- now part of Kuwait's MTC -- are making a killing in Africa as millions often too poor for decent homes, healthcare and education, pour their last few pennies into airtime.

Cell phone companies have proven that even in a continent hobbled by patchy infrastructure, unskilled workforces and an impoverished population, there is still money to be made.

And as the world's most powerful leaders prepare to tackle African poverty at next month's Group of Eight (G8) summit, experts point to the continent's biggest boom since gold was discovered as a rare glimmer of hope.

"Telecoms are Africa's big success story -- perhaps the only one," Knott-Craig told Reuters.

But what is the secret of the industry's success and how can it be replicated by others hoping to make money or foster business in the world's poorest continent?

Simple, say experts: demand, and investor-friendly government policies.

New Gold Rush?

The number of Africans owning a mobile phone has leapt some 1,000 percent in the past five years to about 8 percent of the population. It is expected to more than double in the next five years and might even hit 25 percent, says research group BMI-TechKnowledge.

The explosion was particularly dramatic since vast and often inhospitable African terrain means fixed lines are scarce.

"When a technology came along that could meet Africa's fundamental need to communicate, it exploded at a rate that stunned the world," said Arthur Goldstuck, head of South African technology research group WorldWideWorx.

African governments, sometimes criticized for failing to tackle corruption and red tape, helped fuel the boom by luring telecom companies with investor-friendly legislation.

Many countries liberalized their telecom sectors in the mid-1990s, few charged the exorbitant license fees that crippled so many European operators, and Nigeria even exempted mobile firms from paying tax.

"Governments realized that because returns here are lower, the business model just doesn't stack up if they charge big license fees," said Jonathan Newman, a top executive at South Africa's third-biggest operator, Cell C.

Vodacom boosted net profit by 27 percent in its last financial year while rival MTN posted a 45 percent jump in annual adjusted headline earnings.

And the rest of the world is taking note. Kuwait's MTC paid a huge premium for Celtel this year, while Vodacom and Britain's Virgin Group have teamed up to bid for Nigeria's Vmobile, spurring hopes more deals are ahead.

Critics say cell phone companies rip off Africans with little disposable income -- a charge companies deny.

But experts also concede the technology does more than make a few shareholders rich.

Telephones make doing business easier. In the cities, plumbers and painters contact customers on their cell phones, and in rural areas, entrepreneurs are renting out mobiles to villagers otherwise unable to contact their families.

According to World Bank research, an increase of 10 mobile phones per 100 people could boost GDP growth by 0.6 percent in developing countries.

BMI telecoms analyst Richard Hurst was skeptical about boasts by mobile phone companies they are transforming the continent, but he reckoned the benefit to ordinary Africans still offset massive profits.

"Clearly these companies are making a lot of money, but it's not like they are selling cigarettes.