TELECOM SECTOR GROWS, CHINESE FIRMS EXPAND

C O N F I D E N T I A L SECTION 01 OF 04 LAGOS 001531

SIPDIS

STATE PLEASE PASS TO FCC, EX-IM, AND OPIC

E.O. 12958: DECL: 09/19/2015
TAGS: ECPS ECON EINV EIND PGOV NI CH
SUBJECT: TELECOM SECTOR GROWS, CHINESE FIRMS EXPAND
OPERATIONS

REF: LAGOS 0924

Classified By: Consul General Brian L. Browne for reasons 1.4(b)
and (d).


1. (C) Summary. Telecom operators believe the Nigerian
Communications Commission's (NCC) unified licensing policy
allowing existing fixed wireless and mobile licensees to
provide both services for voice, data and multimedia will
reinforce the current dominance enjoyed by the key players
already in mobile telephony. Analysts believe the policy
will lead the four major Global System of Communication
operators (GSM) to acquire or push most Fixed Wireless (FW)
operators from the market. While mobile telephone
subscribers has climbed to over 13 million users, challenges
such as inadequate power supply, customs clearance delays,
multiple taxation, inadequate backbone infrastructure, diesel
fuel theft, security and maintenance costs continued to
plague the sector. In the meantime, Chinese telecom
equipment and service firms Huawei and Zhongxing Telecom
(ZTE) are expanding their operations in Nigeria. End Summary.

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Background
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2. (U) The NCC announced February 2005 its plans to introduce
a unified licensing regime by February 2006. Under this
policy, existing GSM operators (MTN, Vmobile, Globacom, and
Mtel) could offer fixed wireless and fixed line services,
while FW operators (Starcomms, MTS, Multilinks, and
Intercellular) could offer mobile services. FW operators
would no longer be confined to specific geographic areas, but
could offer services nationwide, putting them in direct
competition with the more popular GSM providers (reftel).
Operators wanting a unified license would be required to meet
conditions specified in the licensing framework which, in
theory, was aimed at providing a level playing field for all
operators while increasing service penetration.

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Unified Licensing Won't Remove
GSM Operators Current Dominance
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3. (C) Economic officers met on September 16 with Vmobile
Chief Regulatory Officer J.P Snijders who predicted unified
licensing would not change GSM operator behavior. To protect
their market from competition, GSM operators would raise the
entry barriers so high that potential competitors would be
discouraged to invest. According to him, unified licensing
was nothing but "political capital" aimed at making the
Government of Nigeria appear to be making progress in telecom
deregulation. Snijders asserted his company was "following
along" simply to appease the NCC. He believed the policy
would bring some competition and foresaw the potential for a
large South African telecom company or Vodafone vying to
obtain a unified license. However, he did not foresee
licensing traffic in the opposite direction - relatively
small-scale fixed operators entering the GSM market.


4. (C) MTN Network Group and Financial Control Manager
Olawole Obasunloye stated under the unified license regime,
existing GSM operators would remain in the enviable position
of shaping the rules of the game. His company would
discourage new entrants and would purchase or force out any
FW operator posing a threat to MTN's operations in any
geographic region. He believed new and existing FW operators
could earn profits in regions where GSM operators were not
operating, but there was a high likelihood they would be
acquired or pushed out by GSM operators. Globacom Marketing
and Strategy Director Subhra Das said his company "would not
hesitate" to acquire profitable FW operators, and GSM
operators "would do everything in their power" to prohibit
new entrants from entering the GSM market.

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13 Million Subscribers and Rising
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5. (U) NCC Lagos Zonal Controller Dr. Henry Nkemadu told us
the telecom sector continued to grow. He estimated 13
million active mobile telephone subscribers in Nigeria.
Industry experts place the figure higher. MTN claimed over
six million subscribers, Vmobile and Globacom respectively
claimed about three million each, and Mtel around one
million. Snijders, Obasunloye, and Das claimed the number of
mobile subscribers increased monthly an average of two to
three hundred thousand subscribers per company. Vmobile
launched its ROSE (Rolling Out Service Everywhere) initiative
to invest USD two billion to expand the number of base
stations (currently at 1,500) to 3,000 and increase network
capacity to handle ten million active subscribers by 2007.

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Fierce Competition, Reduced Revenue
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6. (SBU) Revenue did not increase in proportion to the
increase in the number of subscribers in 2004, operators
said. Protracted GSM price wars reduced charges for
subscriber identification module (SIM) cards and airtime
promotion packages, Obasunloye said. According to him, their
SIM card and free 500 minutes of airtime package valued at
naira 2000 (USD 15) last year, has been reduced to naira 980
(USD 7),helping to boost subscriber numbers. The cost per
minute of GSM airtime during peak hours was reduced from
naira 50 (USD .38) to now naira 38 (USD .29),he said.
Snijders said some Nigerian consumers had also switched to
text messaging costing naira 10 to 15 per minute (USD .08 to
.11) as a cheaper alternative to make phone calls. Consumers
had also begun "flashing" or developing codes to communicate
by dialing and immediately hanging-up before being charged
for the call, Snijders said. The reduced cost for airtime,
fierce promotion campaigns, and changing consumer behavior
led to a diminished rate of return in 2005, operators said.
They claimed the average revenue gained per GSM user had been
reduced from between USD 30-40 last year to USD 10-23 now.
According to Obasunloye, "subscribers are rising, but
revenues are not rising as fast as before".

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Plenty of Challenges
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7. (C) Industry experts have complained that infrastructure
costs prevented new operators from entering. Unified
licensing would not solve this challenge, the experts said.
GSM operators rely on Nigeria's National Electric Power
Authority (NEPA) for only 16% of their power, spending over
naira six billion (USD 45 million) to use and maintain their
own generators, including the purchase of 116 million liters
of fuel, the NCC said. Vmobile's Snijders said the cost for
a base station in Nigeria was three times the cost in Europe;
the company spends millions of dollars on maintenance costs
for base stations including security, infrastructure, power
supply, and logistics. The 35% import duty on telecom
equipment and the customs clearance delays also caused
"headaches", Snijders said.

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Multiple Taxation
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8. (C) Lack of harmonized tax regime between state and
federal governments had led to double taxation on building
permits, industry experts said. MTN's Obasunloye stated
taxes on masts, towers, building permits, and various
environmental tax charges paid to state, federal, and local
governments added hundreds of millions of naira in additional
costs to GSM operators. Multiple taxation remains a
challenge that Snijders felt could only be tackled by a
comprehensive tax reform bill.

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Inadequate Backbone Infrastructure
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9. (C) Years of infrastructure neglect by the NCC has meant
GSM operators must invest in National Microwave and fiber
optic infrastructure in different parts of the country.
Chinese firms have been actively bidding in this area.
According to Snijders, Huawei Telecom provides GSM radio
networks for Vmobile in northern Nigeria, and has been
seeking contracts to provide backbone infrastructure for GSM
operators across the country. Motorola has been providing
backbone infrastructure support mostly in central and
southeastern Nigeria, and Ericsson in southwestern Nigeria,
Snijders said. The cost of building and operating a 600 km
fiber optic backbone is over naira one billion (USD 7.5
million). Industry experts deemed existing backbone
infrastructure as inadequate to support the pace of GSM
network expansion.

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Diesel Fuel Theft
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10. (SBU) Diesel fuel theft from base stations throughout the
country remains a challenge for GSM operators. Obasunloye
estimated MTN lost naira four billion (USD 30 million) in
costs associated with diesel fuel theft. (Note: This amount
seems exaggerated for effect but it does go to show that the
GSM operators see this as a serious problem. End Note.)
Snijders and Das said diesel fuel theft, and the associated
costs, including hiring security guards, building security
fences, and securing vehicles cost their companies' millions
each year. Vmobile and other companies have tightened
security to prevent people from stealing base station
equipment in addition to fuel and other supplies.

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Chinese Firms Expanded Operations
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11. (C) Chinese firms Huawei and ZTE have expanded their
operations in Nigeria. Obasunloye said Huawei had improved
its technology rapidly in the past two years which has
allowed MTN to intensify its business operations with Huawei.
Huawei now provided 30% of MTN's base stations in contrast
to 20% last year, while Ericsson now provided 70%. MTN
employees also attended Huawei's USD 7 million training
facility in Abuja and Huawei had invested more this year in
research and development than 2004. ZTE also had been
bidding to provide base stations, Snijders said. Obasunloye
said MTN was currently reviewing ZTE's proposals. ZTE had
been trying actively to sell its 3G technology, and recently
built an assembly-line factory in Abuja to produce and sell
phone hand sets.

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No Turning Back
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12. (C) Comment. Despite the costs of doing business in
Nigeria, existing GSM operators are bullish, and so are
Chinese firms Huawei and ZTE. Industry experts predict
active mobile telephone subscribers to exceed 20 million by
2007, placing the potential subscriber base at between 30 and
40 million people in the next five to eight years.
Competition in the telecom sector will remain fierce. None
of the major GSM operators believe the NCC's unified
licensing regime will significantly impact their operations.
Even when the unified licensing regime is introduced in
February 2006, most observers believe it will take another
year before implementation. Given this lag time, GSM
operators will continue as they are to spend millions if not
billions of naira to build infrastructure and maintain market
dominance. Opening the door via the unified licensing policy
so companies can do both GSM and fixed wireless services
sounds even-handed and competition-enhancing. However, given
their size and market share advantage over FW operators, GSM
operators might see the new policy as a way to anneal their
dominance and actually stifle competition. End Comment.
BROWNE