Africa: Expanding Data & Voice
By Jason Bates
The first deregulation efforts in Africa helped establish VSAT networks as one of the leading communications solutions across the continent. Companies such as Gilat and Hughes Network Systems established strong footholds in Africa by providing telephony services using VSAT networks. But industry efforts to increase the size of the VSAT market across the continent have been slowed by the price of the systems.
Making VSAT Affordable For Small and Medium Enterprises
One of the biggest uses of VSATs in Africa remains the provision of government-subsidized telephony networks. The buildout requirements of these systems, put in place in the early days of deregulation, helped drive the VSAT market and establish Gilat and Hughes Networks Systems (HNS) as dominate players, says Andrea Maleter of Futron Corp. "VSATs provide the tools that enable private competitive carriers to get into business in any market, and in particular Africa," Maleter says. "They are an enabler of competition, because it’s a relatively low-cost and incremental mechanism whereby a new operator can get into business and start providing service and have network and infrastructure installed rapidly and incrementally."
While VSATs are a big part of the African market, that market is a small percentage of revenue for the world’s largest VSAT providers, says Maleter. Africa accounts for just 10 percent of the world’s VSAT systems. Africa provides only 8 percent of Gilat’s VSAT revenues, and only 2 percent for HNS, according to data collected by Comsys. "VSATs are huge in relation to other telecoms in Africa but not in relation to VSATs in the world as a whole," says Maleter. "Africa is continuing to grow, but it’s been in fits and starts. Everybody thought it would grow really big 10 years ago, but then it slowed down. The deregulation, a key issue to all of this, now is starting to take hold."
Satellite in general and VSAT in particular provide solutions to many problems in Africa’s economic development, civil government establishment of responsible civil governments and educational development, which is also critically important for growth of the region. But VSATs today remain the domain of governments and large companies or organizations in Africa, as the industry continues to struggle to bring the cost of the networks down in order to make them affordable for small and medium enterprises.
Demand from small and medium enterprises in the financial services, and the retail sector, is growing, especially in regions where obtaining an operator’s license has become easier, says Janna Koretskaya, regional vice president of Africa for Gilat Satellite Networks. The companies also are working to bring the prices down. "Throughout the years, VSAT technology has become increasingly affordable to a wider range of end users. As this trend continues, we believe we will see operators using VSATs as part of hybrid networks, where VSAT is integrated into a broad networking solution that includes DSL, Wireless Local Loop, WiFi and even WiMAX. For example, VSAT can be used as an effective backup solution for banks, to provide 100 percent uptime for mission-critical networks. This provides an automatic failover in case a bank’s terrestrial network connectivity is lost. In addition, VSAT will continue to serve as an efficient last-mile solution for other technologies to bring communications service to all citizens in the region, regardless of their remote location."
VSATs remain the domain of the largest operators in Africa, but the definition of large operators can vary, says Dave Jupin, vice president of product development and marketing for the international group of HNS. "Most of the networks we consider large are greater than 100, but in some cases, greater than 50 is a pretty large number. In South Africa, there have been customers signed by telcoms that are in the multiple hundreds. They tend to be banking and retail. In Nigeria, 30 or 50 sites may be considered large for that country versus a small or medium enterprise that might be 15 sites or less."
The VSAT providers would like to find ways to bring VSATs to more users, but "we don’t have a lot of price elasticity on the volume of equipment unless it gets into the thousands," says Jupin. "The issue for small users is that you probably are not profitable until you cross 1,000 sites, and it’s not just the equipment, the space segment is expensive and you have to buy it in chunks. Until you get to be a service provider with a certain amount of volume, you probably can’t make ends meet and be profitable."
Many VSAT providers charge upfront for equipment and do not subsidize the cost, and HNS does not provide vendor financing, Jupin says.
Even with the cost impediments, HNS partners such as Nairobi, Kenya-based Afsat Communications Ltd. are trying to market to small entities across the continent, Jupin says. "Where we are seeing tractions is targeting pan-African service," he says. "Afsat has crossed about 2,500 sites and quite a bit of its service is to small entities, either individuals or small enterprise companies. Accelon, a similar company, is up around 1,000 sites that are more concentrated in Nigeria, with a lot of individuals or small business operators picking up on that service. They pick up small contracts – ones and twos at a time, and on average they are taking 100 to 150 sites per moth. They are starting to pick up steam by targeting individuals or single proprietors that need Internet access and good communications."
New Markets, Services Help Drive Demand
While the providers are looking to expand their services to smaller operators, the traditional markets still remain strong, analysts and company officials say. South Africa continues to be the largest VSAT market in Africa, by a wide margin, but the government still has not opened the market up to full competition. Other countries across the continent are improving as markets, but "to look at Africa, you have to look at two different markets," Benoit says. "The VSAT market has picked up in some countries but not in others. If you want to do a forecast, there are different ways of approaching the market in different countries. Some create a lot of impediment; some don’t. But everyone is excited about satellites and you have some pretty interesting things going on."
Nigeria, among the first countries to deregulate, already has about 4,500 terminals in operation due to industrial uses such as oil and gas and mining and continues to provide opportunities. Kenya is another country that looks promising for increased VSAT activity, spurred by efforts such as the installation of VSATs in the country’s post offices. "Within a few months, the revenues generated by the Internet exceeded the revenue from stamps and other services," Benoit says.
"Due to overall deregulation within the continent, the majority of markets have good potential for growth," Koretskaya says. "However, we consider the hottest markets to be educational institutions, health care agencies and banks. The use of VSAT for cellular backhaul applications is also growing rapidly. Business owners and professionals in the education and health care markets are clamoring for broadband satellite Internet service, in addition to distance learning and video conferencing. Financial services companies also understand the value of using VSAT for broadband Internet, in addition to automatic teller machines and a wide range of other corporate networking applications. Demand for VSAT networks for toll-quality telephony service continues to remain high, in both urban and rural areas. We are also seeing an increase in demand for Voice over IP (VoIP) applications in many areas."
Other procurements have been popping up in countries such as Madagascar, Egypt and Tanzania. Angola’s government also is looking at using VSAT to provide rural telephony, company officials say. "This is a positive, because for a long time, it seemed sales were primarily to government entities. The new systems are going to entrepreneurial service providers who see a market in starting up services," says Jupin.
Telephony services and government initiatives such as distance learning still remain a big driver of the VSAT market. "I think that government initiatives for distance education and rural telephony are going to become fairly prevalent for the next several years in Africa," Jupin says. "There is a big desire by many of these countries to promote education, and they see satellite as a good way to provide video programming as well as Internet access and voice into the schools. We delivered a system in Ethiopia a few years ago, and we are hearing of other governments that are considering possibly floating tenders for similar systems. I think government initiatives, either for distance education or just for better communications within their own governments generally, will happen throughout the next several years."
Gabon is among the nations on the leading edge of using VSAT networks to help provide cell phone service. Gabon started the service in the early 1990s using capacity leased from Intelsat to connect base stations, and that model is "becoming a very big business for satellites in general" in countries such as Ghana, Nigeria and Kenya, Maleter says. New communications lines such as Voice over Internet Protocol (VoIP) also are growing. "Even though VoIP is considered a competitor to traditional telecom companies, it’s going in and that’s an area where VSATs can play a role," she says.
Afsat’s Iway service is moving into the VoIP market, Jupin adds. While most of the company’s small customers use VSAT because they "want to be able to have Internet access, primary either for marketing products or finding out information about their markets," Jupin says. "VoIP is another area where they can save money.
Continued growth in the VSAT market depends on deregulation efforts in the various countries, analyst and industry officials stress. "There are still pockets of resistance," Jupin says. "It depends on the country. From just a broad sense, it seem the countries are opening up, but it’s certainly not uniform. It depends on the government I place but in general, governments are realizing that opening up the regulatory environment allows entrepreneurs to provide more communications and that helps the economy and growth of the country."
"Africa is getting into more competitive markets as opposed to the monopolies that dominated 10 years ago," Benoit says. Now there are only three or four countries that operate as monopolies for VSAT. In the telecom world, there are two ways for competitors to go against the incumbents. Either you go to the big markets such as capitals and big cities, or you go to the rural areas, and grow from there to medium cities."
Satellite Operators Preparing For Business
One sign that the space industry expects the African market to grow is that communication satellite operators are lining up additional capacity throughout the region. All of the largest satellite players have capacity over the continent, and some regional players are in the area as well. "No one will achieve strong market penetration in Africa anytime soon, not even within the next five years," says Benoit. "But we are forecasting more than 2 million main lines in southern Africa, which will more than double by 2010 to 4.2 million. From the point of view of the satellite operators, some have satellites that look at region in C-band that are not making any money at all. They will sell them for $1 million or even less in the region, as long as you have those birds up, they want to find markets for it. This is definitely a market where you can see a few extra transponders."
There is even a start up based in Africa ready to join the fray. Rascomstar-QAF expects to launch its satellite, with about 12 transponders, by 2008. "Rascom has been in process longer than deregulation," Benoit says. "It holds the promise of being a satellite system of Africa, for Africa, by Africa, but it’s not clear that it necessarily is going to improve the service or pricing or the business."
The VSAT market in Africa again looks poised for growth, according to industry officials and observers. Opportunities are popping up across the continent for VSAT providers, as users of all sizes are seeking to add VSAT communications to their operations. "Because of many factors, especially government initiatives, we think Africa is about ready to materialize and grow, and part of that is where we’ve seen problems in the past is the ability to pay," Jupin says. "Either their governments are willing to put in money or the World Bank or other groups are willing to finance, which has been an impediment to government initiatives in the past. This is being mitigated, so I think Africa is poised for some pretty good growth in the VSAT area."