SAT-3 down and out (again)

Just heard from my mole in the Telecoms industry that NITEL is on strike (again) and SAT3 has been shut down by the Union. That will knock-out internet bandwidth for many businesses in Nigeria for the duration. Affordable broadband, something which is increasingly available elsewhere on the continent, from Senegal to Tanzania, from Morocco to South Africa, remains a distant mirage across the Sahelian sand....

There is light at the tunnel however - here is an update on the submarine cable projects with a Nigeria dimension from Balancing Act. The gist of it is that we are still waiting for Mr Adenuga to put us out of our bandwidth-starved misery:

West Africa: New international fibre entrants playing a dangerous game of poker
One’s a monopoly, two’s competition, three’s intense competition and four or five is suicide. This should be the mantra that the new international cable entrants repeat to themselves as they enter what will become one of the most difficult poker games over the next three years. Russell Southwood assesses how the new entrants are likely to fare as the continent enters more uncertain economic times.

When I spoke in the middle of last year to the country CTO of one of the continent’s largest mobile operators about an independent fibre operator asking him to invest in a project, he said that the company was fed up with being asked to put up all the money for new projects (through promising its traffic) and preferred the idea of building and controlling these all important fibre routes.

This was before the full extent of the credit crunch had become visible and so any discussion in this context of availability of capital and opportunity cost seemed to be largely irrelevant. Of course, things do not look quite the same now…

West Africa has only really got three international bandwidth markets of any size: Ghana, Nigeria and Senegal. Whoever wins significant share in at least two of these markets has perhaps the making of a business plan. With the arrival of Expresso in Senegal then perhaps Sonatel will lose 10-30% of its share. All the other West African country markets are relatively small and getting traffic from them is intricately entwined with attitudes to competition and geographic position.

In order of their likelihood and operational start date, the following players are in the game of poker:

1. Globacom: Nigeria’s SNO Globacom has a cable that it promises will land in Lagos this year and in Accra at a slightly later date. If it misses these dates, its credibility will sink even lower for the existence of the cable was part of its advertising campaign in 2008 and it just did not arrive. It appears that Globacom decided to hold off on the building of the cable (which got as far as Dakar) and lost its place in the queue with its contractor. Work has now resumed on the Dakar-Lagos stretch.

Globacom has captive traffic for its cable from its own operations in Nigeria, Benin and Ghana and has announced its intention to create more mobile operations along the route of the cable. But this traffic by itself will not justify building the cable so it has to persuade others to become its customers. Unfortunately its existing national fibre backbone in Nigeria is both expensive and not always of great quality so it has a second credibility hurdle to jump (See:
http://www.balancingact-africa.com/news/back/balancing-act_420.html )

2. Mainstreet Technologies: The second contender is the independently financed Nigerian project Mainstreet Technologies which has publicly announced that it will land in Accra and Lagos and would like to land in a number of other destinations including South Africa. Its planned completion date is May 2010 and it has gone from being a rank outsider to a more likely player. It has already signed a contract with its contractor Tyco and has publicly promised an E1 for US$4000 to large volume buyers. Will others be able to match that kind of lower end price?

But it somehow has to weave its way through the obstacles posed by the increase of potential cable players from four to five and more if you count projects that have not publicly announced. As most of the international traffic comes from voice operators, it has to attract the carriers whose names are currently unattached to any of the existing projects: Etisalat and Zain are the most obvious big players absent from all of the lists so far.

3. West African Cable System: It has all of the big beasts of the telecoms sector in South Africa involved (MTN, Neotel, Telkom and Vodacom/Vodafone) and the mixed blessing of the South African Government’s backing. Seacom made a partnership with Neotel to get into the market but now all of these players have their own cable they are unlikely to partner with another entrant like Mainstreet to allow it into the market. Furthermore, they represent the majority of the bandwidth in the market.

MTN now has operations all along the West African seaboard except in Togo. MTN and Telkom are a substantial part of the traffic in Nigeria. Vodacom/Vodafone has announced that it would like to buy Nigeria’s most celebrated “car crash” of a company, Nitel. However, their cable is only planned (so far) to land in Accra and Lagos because these are the only two places on the route that are sufficiently competitive to allow a second landing station. No final timetable has been set but it looks likely to miss being available for the World Cup in South Africa in 2010.

4. France Telecom/ACE: At the end of November, France Telecom/Orange put out a press release that went largely unnoticed announcing that it was going to build an international cable with 14 other operators. Those publicly announced are: France Telecom itself; Vivendi-owned Maroc Telecom (with operations in Burkina Faso, Gabon, Mauritania and Morocco); Benin Telecom, Togo Telecom, Gamtel and Cabo Verde Telecom. The identity of the remaining players can be deduced from looking at the list of proposed landing stations. France Telecom will only say that they include “mobile operators and new global players.”

This 12,000 km cable, called ACE (Africa Coast to Europe), will extend from Gabon to France, and from 2011 will connect Gabon, Cameroon, Nigeria, Benin, Togo, Ghana, Ivory Coast, Liberia, Sierra Leone, Guinea, Guinea Bissau, Senegal, Gambia, Cape Verde, Mauritania, Morocco, Spain, Portugal and France. An extension to South Africa is also being studied.

The cable is to be run as a shareholders’ consortium with France Telecom as the managing agent, a structure that more or less mirrors that of the existing controversial SAT3/SAFE cable. France Telecom are under an NDA so are rather tight-lipped about the details. On finance, understandably they say the budget will be similar to other cables and do want to name a figure as they go into negotiations with suppliers.

On the financial side, each party will buy according to their anticipated demand and it will be this that will determine the level of each party’s investment contribution. So for example how will Gamtel that is currently almost bankrupt and has not made a great success of its link to Senegal raise this money? There are also almost certainly other companies on the list who do not look terribly “bankable”.

But whether the landing stations built in countries like Gabon (where Maroc Telecom would operate both landing stations) and Sierra Leone are monopolies will depend as much on the regulation in the country as on the shareholders’ agreement. But it will potentially make competition more difficult in those countries with only one landing station or two that are controlled by the same company.

A study authored by Balancing Act late last year also highlighted the potential market dominance of France Telecom and Vivendi in international traffic over a large part of the region. So if you count country links with a single country link counting twice (once for each country it connects), then out of the 32 existing and planned inter-country links identified, ownership is as follows: Government-owned national telcos (10); France Telecom (10); Vivendi (5); and independent “carriers’ carriers” (2). And Vivendi (through Maroc Telecom) looks set to buy Mali’s Sotelma….(see below in Telecom News)

To be fair to France Telecom, it has been a “price-progressive” on SAT3 with amongst the lowest prices on the route in Senegal and Cote d’Ivoire and it has built competitive regional links to challenge Sotelma in Mali.

5. Infinity: It has to be the rank outsider in the game but is maintaining a confident stance that it will sign off on its financing before too long. However, like Mainstreet it will have to rely on attracting those not already on someone else’s team.

6. O3B: It is also in the market and concentrating heavily on international trunking. Its constellation of satellites will be launched in late 2010. It says that it has already sold 7 gbps of capacity, not large alongside the proposed capacities of the fibre operators (and likely demand at the right price) but a lot for something that won’t be available for over 18 months.

(Please do not point out that we have missed out NEPAD’s Uhurunet. It is a project without committed backers and only keeps being taken seriously because of Department of Communications backing. That may all change after the elections this year.)

But in terms of competition, things may not be so bleak because it is no longer so easy to protect less competitive markets. Nigeria’s Suburban Telecom already has a link to Benin that offers substantially cheaper and better-managed international bandwidth. It has well advanced plans to connect as far as Accra. Phase 3 also from Nigeria has plans to go from Lagos to Accra overland.

For the incumbents in Benin and Togo, the attractions of getting paid for unimagined volumes of traffic from their neighbours is too good to pass up. Regional arbitrage will ensure that prices converge downwards. But there will be countries that will still be unwilling to allow terrestrial cables of this kind to cross their borders. From a wider West African perspective, this is madness as it incentives telcos to use international cables or often satellite to transfer traffic between countries in the region. Cheaper international gateway licences for regional transit traffic would an effective incentive to get more links built.

To say that raising capital in today’s markets will not be easy as last year is an understatement. One operator who is just completing financing for an unrelated project told us that many of the more obvious funds have put a six month moratorium on investing just to get a grip on what their investment assets are worth in this strange new world. Some of these funds are the very people who might finance the more marginal operators in countries that have no landing stations.

Seacom has its cable on the east coast that will complete in Q2 this year but has made no move in terms of the west coast. If it joins the party at this late stage, it would make logical sense for it to look at Mainstreet (the only independent) or the West African Cable System which has its South African partner Neotel as an investor.

The key decision for all operators is whether it make sense to sink quite large sums of money into a capital project or should they simply buy from someone else who is prepared to invest on their behalf. There is a lurking suspicion that the operators would prefer to do the former in order to keep prices on the west coast from falling to the level promised on the east coast. However, in this particular poker game not everyone will have a winning hand.