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Battling for Nigerias telecommunications

South African mobile giants Vodacom and MTN wrestle for control over adeveloping market

D

ean Hoffs article, South African cellular wars in Nigeria, examines one of the

fastest growing markets in wireless telecommunications in the world. At present,

Nigeria offers players in the mobile technology industry an impressive opportunity to

benefit from a developing infrastructure and socio-economic conditions that are

encouraging competition in the telecommunications market.

At this moment in time, the dominant player in Nigerias mobile telecommunications industry

is the South African company, MTN, with 43 percent market share, followed by Vee

Networks. This dominance was made possible by the withdrawal from Nigeria of MTNs main

South African competition, Vodacom. The purpose of Hoffs article is to examine the reasons

for, and wisdom of, Vodacoms decision to withdraw from Nigeria, by outlining the improving

conditions that exist for ambitious telecommunication companies willing to take the risk on

investment in an unstable economic and political environment.

South African competition

In the South African market, MTN plays second fiddle to Vodacom, who lead the market with

56 percent market share. Vodacom has international operations in Tanzania, the Democratic

Republic of Congo, Lesotho and Mozambique, all of which are proving successful ventures.

As Hoff states:

Vocacom sees its construction of cellular networks across Africa as a means of helping achieve

the African renaissance.

MTN has a similarly impressive international portfolio, with operations in Cameroon, Rwanda,

Swaziland, Uganda, and now in Nigeria. MTN is the leading operator in Nigeria, partly due to

Vodacoms withdrawal from this market. Both companies clearly targeted the whole of the

African continent as the main platform of competition, and initially, Vodacom includedNigeria as a primary target. In March 2004, Vodacoms head of treasury Debbie Millar

identified Nigeria as the biggest opportunity in Africa, and outlined the companys resolve

in obtaining a significant chunk of the market.

So what are the conditions that make Nigeria such an attractive proposition for the

telecommunications industry? How have MTN established themselves in this market, and,

more pertinently, why did Vodacom withdraw from the competition? These are questions that

Hoff addresses, with the following explanations.

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Nigerian infrastructure

At present, Nigeria has an inadequate telecommunications network, which is further

hindered by poor maintenance. The country has traditionally been characterized by political

instability, corruption and poor economic management, particularly under the rule of its

former military leaders who failed to diversify the national economy away from the oil sector.

In addition, the agricultural sector has failed to keep pace with the huge growth in

population. The current government, however, has initiated change in Nigerias economy by

implementing market reforms urged by the IMF. For example, during 2003, fuel prices were

deregulated, the oil refineries were privatized and the banking system was modernized. As aresult, by 2004 Nigerias GDP had strongly increased, a welcome change given the still-high

levels of corruption.

Despite the inherent problems which face investors, however, Nigeria is one of Africas

fastest developing telecommunication markets. Hoff quotes a massive increase in

telecommunication subscriptions in 2004 of 155 percent, while the number of telephone

lines is expected to double to 20 million according to the regulator. The number of mobile

subscribers in Nigeria is expected to reach 23 million by 2007, from the 8.6 million that exist

at present.

MTNs Nigerian venture

Telecommunications is a massive boom industry for Nigeria, therefore, and MTN, as the

leading provider, is reaping the rewards. MTN was launched in Nigeria in August 2001. Thegrowth in the number of subscribers has since been exponential, rising to over four million

customers by September 2005. MTNs market share in Nigeria is estimated at 43 percent,

and the company was awarded brand of the year by a major Nigerian media group. And

there is still plenty of room for further development. MTN still only has limited coverage of the

countrys potential area, accounting for some 65 local government areas from a total of 550:

in population terms this translates into only roughly 16 million people from a population of

129 million who can receive a signal from MTN.

The prognosis for further development is, therefore, very encouraging, and is boosted by the

comparatively weak competition from its nearest rivals, Econet Wireless Nigeria (EWN) and

Nigerian Mobile Telecommunications Limited (M-tel). EWN is Nigerias second largest

telecommunications company with three million subscribers, followed by M-tel with

approximately 1.3 million. And, of course, MTNs dominance was firmly established by the

withdrawal from the Nigerian market of Vodacom.

Vodacoms gamble

In March 2004, Vodacom announced its resolve to invest in the Nigeria as one of the main

targets in the African telecommunications market. An opportunity arose when EWN acquired

fresh capital: Vodaom began negotiating for a 51 percent stake in EWN for $250 million, and

although the offer was accepted by the shareholders, it was challenged and ultimately

thrown out by Econet Wireless International (EWI), who wanted control of the company.

Despite this defiance, EWN shareholders awarded Vodacom a five-year management

At present, Nigeria offers players in the mobile technologyindustry an impressive opportunity to benefit from adeveloping infrastructure and socio-economic conditions thatare encouraging competition in the telecommunicationsmarket.

VOL. 22 NO. 7 2006 jSTRATEGIC DIRECTIONj PAGE 9

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contract, which allowed the company to place its own managers in key positions, and to

rebrand the organization from Econet to Vee Networks. This led to protracted legal disputes

initiated by EWI, which went as high as the United Nations Commission on International

Trade in the Hague. In the end, Vodacom cancelled its management contract amid a

scandal involving irregular payments (although Hoff does not clarify precisely what parties

were involved or accused in this scandal).

The actual reasons behind Vodacoms decision to withdraw from the Nigerian market remain

unclear, but in a statement of May 2004 it officially announced the decision to the world. It

later claimed that the decision was made in order to protect its corporate governancestandards, but did not go so far as to name any wrongdoing or corruption of its former

executives.

Vodacoms complicated withdrawal from Nigeria has left open the way for MTN to

consolidate its dominance in this particular market. However, Vodacom is intending to return

with an improved offer to acquire a majority stake in Vee Networks, despite interest from

Virgin Mobile in the UK. MTN has benefited from being the first mover into this market, and

from taking a chance on an unstable economic and political climate. Although it may soon be

challenged once again by Vodacom, MTN will have established a certain level of dominance

through the bold management strategy of entering an untried arena.

Comment

This review is of South African cellular wars in Nigeria by Dean Hoff. This article is full of

up-to-date information on the present state of the Nigerian telecommunications industries

and infrastructure, and the histories of the main players competing for market shares. As this

is a case study, the article comes to no firm conclusions as such, but provides a clear outline

of the socio-economic conditions in this particular market for potential investors and the

problems faced by the major competitors.

Keywords:

Emerging markets,

Acquisitions and mergers,

Corporate governance,

Mobile communication systems,

Due diligence,

Nigeria

Reference

Hoff, D. (2006), South African cellular wars in Nigeria, International Journal of Emerging Markets, Vol. 1

No. 1, pp. 84-95.

PAGE 10 jSTRATEGIC DIRECTIONj VOL. 22 NO. 7 2006

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