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FTTH and FTTB in Africa

Fibre broadband connectivity has been much talked about in many markets in Africa over the past few years. It is touted as required infrastructure for the next generation of services both in the business and residential markets – from operating out of the cloud by small and medium sized businesses (SMEs) to eGovernment services to future household entertainment (streaming content).

Factors limiting fibre growth

Yet, with the exception of a few countries, the growth of fibre access networks has been very limited in across most of the African continent. This can be ascribed to a number of factors, including:

  • Cost of fibre infrastructure deployment – This remains quite high in many markets and makes for a difficult business case, given the service adoption rates (although aerial fibre deployment is less expensive). It is less expensive to build wireless networks.
  • Cost of infrastructure maintenance – Once a fibre network has been built, the cost of maintenance and repairs can also be quite high if the fibre cable keeps being damaged due to other infrastructure development in the same area.
  • Small target market – Socio-economic development is often still slow, with slow middle class growth, and correspondingly low affordability levels. This is coupled with comparatively high prices of fibre connectivity, paying a premium for a superior service. In the business market, and in particular small businesses, the level of maturity (and often also affordability) limits the adoption of fibre broadband.

Fibre Access Infrastructure Market

The fibre access infrastructure provider environment tends to be quite fragmented in many markets, with a number of smaller fibre network operators (FNOs) operational. It is difficult for small operators to maintain a sustainable operation with a small footprint. Hence, in most markets in Africa, operators follow a multi-technology strategy, where possible, for the provision of connectivity services. Fibre is one of the technologies used but most of the connections may be provided wirelessly. Only in a limited number of cases have we seen the evolution of a pure fibre access infrastructure provider. This is most pronounced in South Africa, where around 50 FNOs are operational. Many of them very small and unsustainable. This leads to growing consolidation in this market.

As at mid-2018, there were 136 commercial FTTH / FTTB networks operational in Africa in 40 countries (including territories) and another ten networks either planned or in deployment. The presence of fibre broadband infrastructure on the African continent and growth over the past few years are presented below. The year-on-year growth of connected premises from mid-2017 to mid-2018 was 75%.

Concentrated Market

Fibre broadband uptake is concentrated in a handful of country markets, with almost 97% of total fibre connections on the continent (top five account for 85% of total). Even at that, household penetration is very low in these countries. The notable exceptions are Mauritius (where fibre deployment is being pursued as a national strategy) and La Réunion – both small islands with small populations in the Indian Ocean. This concentration of fibre broadband in several market on the continent is illustrated in the following graphic.

Some of the key market trends observed in the fibre broadband market are:

  • Access infrastructure has been expanding and improving, underpinned by improving national long-haul and metro backhaul infrastructure.
  • Pricing of fibre-based products has seen some reduction, making the products more affordable. This is combined with increasing disposable income levels (at least in growing economies).
  • Economic improvements (not in all markets) have led to improved business climate and demand for fibre-based services.
  • Government policy direction moving towards national fibre roll-out, digital agenda, etc.
  • Access to relevant content has been improving.

Market Opportunities

The present FTTH / FTTB market landscape in Africa provides for a number of opportunities going forward. These include:

  • Lack of legacy fixed infrastructure in many markets presents an opportunity to address this shortage with fibre. However, this can also be a challenge due to, for instance, lack of duct infrastructure which could be reused to lower the cost of deployment or lack of fixed line product / service culture and understanding of such products / services within the target user base.
  • Middle class migration to gated communities / complexes and increasing concentration of businesses in office parks means that the potential users can be reached more easily at a lower cost. New residential and business developments also provide an opportunity for greenfields fibre infrastructure deployment in such premises.
  • Once the first wave of FTTH deployment and uptake is past its peak (this may take a number of years in most markets in Africa), the cost of deployment and provision of services may be suitable for a second wave to address the lower socio-economic segments.
  • The fragmented fibre infrastructure provider environment presents M&A opportunities for (typically) larger operators or non-telecoms investors.
    Future evolution of the FTTH / FTTB markets in Africa will be driven by a combination of socio-economic development and government policies.

Market Outlook

However, given the diversity of markets in Africa in terms of ICT and socio-economic development, the pace of fibre broadband deployment and adoption will also differ significantly from country to country over the next five years. The expected market evolution trends are highlighted below.

Home Market

  • Greater focus on back selling of fibre services to achieve higher connectivity rate of homes passed.
  • Geographic expansion of the FTTH footprint (although limited to main cities in most countries).
  • Introduction of new products (including smaller bundled offers) to address households with lower disposable income levels (than the top end).
  • Introduction of converged products combining fixed and mobile services.
  • Increase in relevant content (requiring fast and reliable internet access) will drive uptake.
  • Continued downward trend in retail prices of fibre products, resulting in greater affordability.

Business Market

  • Geographic expansion of the FTTB footprint (although limited to main cities).
  • Introduction of converged products combining fixed and mobile services.
  • Move towards IoT (and IoE) over time, requiring greater good quality connectivity.
  • Government policy direction aimed at expansion of broadband (including fibre) infrastructure and services to drive socio-economic development.
  • Growth in maturity of the business community, realising the benefits of IP and cloud services. Fibre will be used for delivery of these services.

2018 Broadband Trends in Africa

Broadband is being increasingly considered as a necessity for future socio-economic development, with some parties viewing it as a basic human right. Essentially, without broadband connectivity, the digital divide in the social and business spheres (between businesses / households / individuals who have access to broadband vs. those that do not) will continue to widen to the point where the have nots will be left out of mainstream development altogether.

This presents a significant problem in many countries in Africa which have limited financial resources for telecommunications infrastructure builds on the one hand and continue to experience relatively low levels of socio-economic development on the other hand. Private sector telecoms infrastructure operators tend to build where they can generate a reasonable return on their investment (ROI) while large segments of the population and many small / micro businesses struggle cannot afford proper broadband connectivity or sufficient quantity of broadband services.

Implementation of Polices and Programmes

To remedy this situation, a number of national governments have been developing and implementing policies and programmes to build out broadband infrastructure as widely as possible and to decrease the prices of broadband services to a point where ultimately can afford them in sufficient quantity. To achieve this, they need to involve private sector operators while remaining mindful of the fact that private entities need to remain profitable to maintain sustainable operations.

While most countries in Africa now have access to good quality and adequate bandwidth on international, national long-haul and metro infrastructure (albeit in some markets still expensive), the constraint is now focused on broadband access infrastructure. In some regions of the continent inland backbone networks also need to be improved, although a number of projects are underway to address this.

Although broadband penetration has shown steady growth over the past several years, penetration levels of fixed broadband remain very low at approximately 7% of households on the continent, while mobile broadband has demonstrated a notable decline in growth and plateauing of the penetration rate. These trends are illustrated below.

Note: For the purposes of this analysis mobile 3G is considered a broadband service, although in many instances speeds achieved on a 3G connection would not be reflective of a good quality broadband service.

The Challenge

The challenge to higher fixed broadband penetration is the speed of deployment of fixed broadband infrastructure, to a large degree dictated by sales opportunities. A barrier to entry into the mobile broadband market is often still the price of a 3G or 4G phone. Mobile operators typically pursue a strategy of making lower cost handsets available as much as possible to lower this barrier.

Additionally, mobile broadband coverage (even 3G) is still not available across parts of the continent, particularly in rural / remote areas. Build-out of 4G infrastructure in sub-1GHz spectrum holds promise of providing coverage in such areas but in many markets 4G is still at an early stage of deployment, focusing on the larger urban environment.

Broadband Access Technologies

A range of broadband access technologies is used by operators in Africa to provide services, although the vast majority of connections is wireless and most of the connections are mobile.

The map provides an indication of key broadband technologies deployed. Most of the markets have seen implementation of multiple technologies, with various fixed wireless access (FWA) present in all markets. However, the geographic footprint of these technologies, in particular fixed technologies, remains very limited in most of the markets.

The mix of technologies used for the delivery of broadband services is changing. Older FWA technologies such as pre-WiMAX and WiMAX are being replaced with fixed LTE / LTE-A, while historical copper lines (where they exist) are gradually giving way to fibre (FTTH and FTTB), although on a very limited scale at present, with the exception of a few countries.

In the mobile space, the focus will be on 4G infrastructure footprint build-out far more extensive than currently, with 5G hovering on the distant horizon.

Only South Africa has begun to pilot 5G technology, with first commercial services expected to be offered in the second half of 2019. However, wider 5G implementation is also a couple / few years away in that market.

Broadband Adoption will grow

As the use cases for true broadband connectivity grow, so will adoption of broadband across the consumer and business markets in Africa. This will be aided by decreasing prices of broadband connectivity (in time, all of the connectivity will become commoditised) and government-led initiatives aimed at wider broadband availability.

Broader socio-economic development, supported by good GDP growth in many countries in Africa, will also contribute to making broadband services more affordable and increasingly indispensable to sustain this development.
The opportunity for expansion of broadband penetration is there, as evidenced, for instance by the total mobile penetration rate (80% in mid-2018 for Africa) vs. mobile broadband penetration of 53% at the same time.

There is room for growth

Fixed broadband adoption will need to compete with mobile broadband, certainly in the consumer / residential market and in the micro / small company market.

However, certain drivers such as migration to cloud services and accessing online content in large quantities will create a demand for fixed broadband services.

It would also be sensible for operators in Africa to consider moving to a more open access network environment in the fixed wireline space, where wholesale infrastructure operators would host a number of retail service providers on their networks to stimulate service-based competition.

2017 FTTH Africa Council Conference Review

This year’s 2017 FTTH Africa Council Conference highlighted some interesting developments that were presented and discussed among the delegates. These are our key take-outs from the conference:

Besides looking at the fibre developments in the various markets, with current focus on the importance of rolling out quality infrastructure in the Africa, LATAM, MENA, Europe and the Americas, the key messages at conference also centred around the recent topical issues, mainly the road to 5G, and the need to build next generation mobile networks to support fibre. The telecoms sector players seem to be actively tracking developments around 5G, not only because it is expected to complement fibre solutions, but also because 5G is no longer regarded as a spectrum-based network, but rather a platform that is scalable, segmentable and designed for the Internet of things.

The influence of the regulatory authorities in shaping and growing economies around the globe also came under scrutiny. As discussions gained momentum around the subject, it became clear that the market does not favour heavily regulated environments, as previous studies indicate that there is little economic growth achieved in such markets. Regulators were also urged to be agile to ensure that policies and legislations that being introduced, move at the same speed as the technological developments themselves. Locally, the government was urged to entrench investment-friendly policy and market certainty before infrastructure investment take place on a scale needed by SA.

The developments in the IOT market also received attention at the conference, as well growing interest in Big Data analytics. This despite growing concerns that Big Data is susceptible to hacking, and can also be used for spying. Privacy as well as discrimination challenges were also highlighted as possible danger areas as far as Big Data is concerned, as everything can be tracked and analysed through Big Data.

In the fibre market, opportunities in the highly urbanised areas are increasingly becoming small, this has prompted operators to now target small towns in their endeavours to build smart cities. The operators however conceded that the high cost of extending fibre internet services beyond urban areas does not make expansion to smaller towns viable, especially combined with the lower number of potential subscribers, although expenses associated with equipment and electronics of fibre networks have come down. Notably, operators are currently considering various models that they can adopt in order to bring fibre to these towns in a sustainable way, and have also urged governments to put incentives on the table, that will encourage them to roll out fibre in the small towns and cities, as well to stimulate uptake of services.

In terms of monetising fibre, operators were urged to embrace infrastructure sharing models, as these would allow them to reduce costs. It must nonetheless be emphasised that each market is different, meaning this preferred model might not be ideal for some markets. In terms of rolling out fibre networks, the general view is that Africa continues to be challenged by shortage of funding, shortage of skills, lack of proper planning as well as policy uncertainty, although the continent is at least getting the fibre footprint right.

Overall, an intervention to deal with the issues highlighted above will require operators to undertake careful studies to understand the problem, before possible solutions are implemented. This as we are moving to a fragmented world, that will be characterised by cloud services, integrated services, simplicity, and single identity.

Moreover, the increasing adoption of fibre solutions in various markets around the world is expected to have a positive impact on our journey to the 4th Industrial Revolution and the global digital economy. This is because the industrial Internet, Internet of Things (IoT) and Big Data are also driven by optics, and so is the foundation of platform economics. However, telcos of today will continue to be challenged by the disruptive players such as OTTs and MVNOs, as well as growing competition facilitated by open access networks, more innovative solutions entering the market, and competitors that are quick to embrace newer technologies.

For further details, please contact Ofentse Mopedi.

Vumatel/Fibrehoods deal underlines the FTTH Economics of Scale Factor

Summary

Economics of scale is a critical success factor for open access fibre networks. Achieving scale gives open access network providers a strong competitive advantage. Mergers and acquisitions (M&A) is a critical tool used by fibre network operators in achieving scale. The Vumatel acquisition of Fibrehoods represents the latest M&A deal in the open access fibre market. This deal continues the fibre M&A trend seen in 2016.

Vumatel buys Fibrehoods

In 2014, Vumatel entered the Fibre To The Home (FTTH) market. While there were existing fibre network operators, the entry of Vumatel kick started the entry of many new operators to the market. This in turn triggered a rapid fibre land grab. By March 2016, we estimate there were 196 thousand houses passed. Note this number excludes VDSL subscribers, as in some markets VDSL, who use FTTC, are included in the reported FTTH numbers. The figure below shows the rapid growth in FTTH houses passed over the last two years.

FFTH Market Oct 2016

Scale is critical for an open access fibre network operator

Fibre network scale is a critical success factor for an open access network provider, with scale being measured by the size of its FTTH network. The network operator’s expanding network footprint drives sales momentum among retail service providers using its network. In effect, the open access network operator offers more opportunities for the retail service providers to sell retail services.
The key benefit is that FTTH scale also translates into economic scale in that the operators balance sheet grows stronger. Economic scale means that the operator can access cheaper capital with better terms than smaller operators. This is a strategic competitive advantage as building out FTTH networks is a capital-intensive business.

Open access operators can gain scale through a combination of a build and/or buy strategy:

  • Build strategy: In terms of building out FTTH networks, we foresee a total of R12 billion being invested in open access FTTH networks over the next three to four years. This estimate is based on market announcements and our assessment of capital required to deploy the announced fibre networks. This strategy works well when an operator deploys fibre in areas where there is no existing fibre network to compete against.
  • Buy strategy: We have seen the buy strategy exercised over the past two years, with a significant ramp-up in 2016 MA activity.

M&A is part of the fibre network strategy

“M&A is a key tool used by fibre network operators to expand their networks”

Fibre network operators typically start out as niche operators, who focus on a specific high-income geographical residential area. As the operator gains market traction, it seeks new areas to deploy fibre thus driving the scale of its business.
In doing so, it faces two challenges: (1) funding the network expansion, and/or (2) deploying fibre in an area where there is an existing competing network.

  • Funding: Network operators either sell equity or take on long term debt to fund network expansion. We have seen both options exercised in South Africa. For example, Investec acquired an equity stake in Vumatel and Rainbow Capital acquired an equity stake in Metrofibre Networx.
  • Competitive: The operator can choose to (1) buy the existing network operator, (2) reach a network sharing agreement, or (3) decide to not enter that geographical market. Typically, we see options (1) and (3) being taken. Network sharing and co-build strategies are seen on long-haul fibre routes.

In SA, we have yet to see a new FTTH entrant build FTTH infrastructure in areas where another new entrant has already built out their FTTH network. We have seen new entrants build-out in competition to Telkom’s DSL network. Part of the reason is that there are enough attractive geographic areas for new entrants to choose from. This has led to an explosion in new FTTH players over the last two years that in turn has resulted in a fibre land grab.

There are a limited number of early win attractive areas wherein to deploy fibre. To gain scale and to enter these attractive markets means that the SA fibre operators must move into the M&A phase, and the market has done just that.

The following table (as at 25 Oct 2016) lists the M&A activity in the FTTH market. As can be seen, we have moved aggressively into an M&A phase. Note that the table excludes the establishment of fibre network operators and only focuses on M&A.

FTTH M&A Deals

Source: Company press releases 2015 to 2016, the Date column represents the year in which the deal was completed. It is not the deal announcement date. The Not Complete comment implies that the deal is still awaiting final regulatory/competition approval.

Here are noteworthy fibre deals that were terminated:

  • Vodacom offered to buy Neotel, the deal was terminated in Q1 2016 given the regulatory hurdles that the deal encountered.

The table shows that the year 2016 will be remembered as the year that FTTH M&A commenced.

The FTTH M&A activity seen in SA is reflective of global trends. Global market observations show that consolidation is a natural part of the FTTH market. Examples of such country markets are the UK and USA.

Fibre Network M&A Outlook

Long term sustainability in the open access FTTH network market is defined by one key word “scale”. Scale is generated through network expansion. Operators drive scale through a combination of a build/buy strategy. To date, we see little evidence of operators building competitive fibre networks in the same geographical area.

Furthermore, the South African National Integrated ICT Policy White paper (Oct 2016) promotes open access networks with the objective of limiting duplicate infrastructure build. We therefore expect that M&A will continue to be an important tool to grow network scale. In addition, we expect that more private capital will be attracted to the fibre market.

In 2017 and 2018, we expect further consolidation in the FTTH market. Small open access network operators, who cannot generate enough scale, will ultimately close or be acquired.

The M&A fibre market theme for network operators will be: buy or be bought.