Movitel prioritizes rural markets in bold new approach to Africa

Investors treading untested waters overseas tend to be measured in their approach, especially in cases where incumbency is strong. But Viettel, the Vietnamese parent of Mozambique’s third national mobile operator, Movitel, has been bold in the scale of its ambition and the swiftness with which it has gone about executing its strategy.

Incumbent operators in Africa have been focused on urban areas, recently with mobile data and Internet services. Movitel, on the other hand, has placed its bets squarely on rural consumers.

Movitel’s approach required a large greenfield network to be rolled out, with a substantial capital investment, targeting a low-value customer base. Taken on face value, the idea might seem commercially unpalatable. But Movitel is betting not on high ARPUs but on the scale of the rural market and on the fact that Movitel will have an effective monopoly in large parts of that market, until the incumbents decide to pay attention.

By end-2012, Movitel had rolled out more than 16,000km of fiber-optic cable, touching every district in the country, accounting for 70% of the country’s fiber capacity. An inadequate nationwide terrestrial fiber-optic backbone network had been the bottleneck preventing a recent glut in international submarine bandwidth from translating into affordable Internet access in most sub-Saharan countries. This initiative from Movitel to wire-up all the districts in Mozambique was much needed.

The operator has achieved a similarly impressive tally when it comes to mobile base stations. As of end-2012, the company had deployed more than 1,850 of them, doubling the country’s total. In addition, for public benefit Movitel has connected 2,500 public schools across the country to the Internet, free of charge. And after six months in service, the operator, which launched in May, had more than 1 million active subscriptions on its network. At end-2012, it had 1.4 million, giving it a market share of nearly 15%.

Before issuing the third mobile license to Movitel, the regulator, INCM, had been concerned about the existence of large connectivity gaps in rural areas, which of course were caused by incumbents MCel and Vodacom’s focus on urban consumers. INCM took the view that the issuing of licenses and spectrum should be less of a revenue source for the public treasury and more of a tool to achieve higher rural telephony penetration. This thinking translated into stringent USO (universal service obligation) requirements attached to the third license. The conditions included mandatory coverage in non-economical areas. The regulator slipped in a per-region population-coverage requirement, targeting 70% per district over five years.

Even though a regionwide coverage obligation is taxing, Movitel is said to have surprisingly proposed 80% per-region population coverage. And on the ground, by end-2012, barely half a year after the commercial launch, Movitel had already claimed 60% population coverage.

These geographic-coverage requirements have also found their way into license-renewal terms for both MCel and Vodacom. But with a time frame of five years to hit the coverage targets, the incumbents may yet push their rural expansion a while longer. In the meantime, Movitel’s wider network reach is not just getting previously unconnected consumers to subscribe to Movitel’s service; it is also encouraging customers on MCel’s and Vodacom’s networks to make the switch to Movitel to take advantage of the better coverage. In other words, a wider network reach will pay off for Movitel not just in the rural sector but also in the highly competitive urban sector.

Further, in a double whammy to the incumbents, Movitel added in a steep cut to rates. Upon launch, the operator set its product prices 10% below the market average. Since then, market prices have been trending downward on average. The regulator reportedly has been actively managing the situation to keep the price war from getting out of hand – a development the incumbents could appreciate.

Despite Movitel’s undercutting of prices, as of September 2012 Vodacom was still reporting a strong performance. Revenue growth continued to be strong, and the operator was still adding subscribers at a stable rate. In a June investor call, Vodacom mentioned that it wasn’t really seeing competitive pressure from Movitel. MCel’s reading of the situation must have been similar. And that would have been a reasonable reading of market conditions in mid-2012. But by year-end, numbers and street talk pointed to increased competition.

Now, both MCel and Vodacom have to react to match Movitel’s aggressive network investments, whether to compete with Movitel or to simply comply with the regulator’s revised license terms. The upside for the incumbents is that they’ll finally arrive in rural Mozambique, where over 60% of the population lives.

Movitel’s approach in Mozambique, as bold and impressive as it might be, still leaves the question of its long-term profitability wide open. But, while we wait to find out more about that, we can appreciate its marketing success and its social impact.

This is a guest blog post by by Kalyan Medapati , Analyst at Informa Telecoms & Media

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