Monday, October 25, 2010

Perched at a Tipping Point: Let the Price Wars Begin

Over the last several weeks, technologists in Africa have begun to see an extraordinary phenomenon starting to take place across the continent. Price wars have begun. In Kenya, consumers have seen a 30% reduction in broadband prices, a 50% - 75% drop for calling, and a shockingly high 94% decrease for SMS. Similar trends have emerged in Ghana last months with the first real price war in calling and SMS and bandwidth prices plummeting by up to half. But this sudden new occurrence begs several questions: Why now? Who will benefit? And how does Google fit in?

First, why now? Really, it's been a long time coming. The mobile phone market in Africa is exploding, and for the first time we're seeing real competition among Internet providers.

Some staggering facts:
  1. In the last 10 years, the number of mobile phone subscribers in Kenya has ballooned by roughly 100,000%.
  2. Mobile penetration in Ghana in September was 67% and is expected to hit 80% by year end.
  3. Today, nearly 2 in 3 Kenyan households have mobile phones, twice as many as have running water.
These kind of statistics combined with the recent significant shake up in the African telecom industry has spelled good news for consumers. This burgeoning market has attracted a great deal of interest from foreign multinationals; just last month, Indian telco giant, Bharti Airtel, bought the African subsidiary of one of the top telecom providers on the continent, Zain. Bharti Airtel has had great success in India and has a reputation for its disruptive tactics. Clearly, the incumbents weren't going to take this sitting down.

This disruption has been further exacerbated by the introduction of significant, new physical infrastructure around Africa. When the Internet was first introduced to West Africa, for example, the only way to  connect was via satellite, a solution both inefficient and highly expensive. In 2001, the first underwater cable, SAT3, landed, and for the first time, provided the opportunity for fast, cheap web connectivity. But as economics would predict, the markets didn't play out exactly that way. With  satellite as the only competition, the owner of SAT3 only had to undercut the extremely expensive alternative. Things remained this way for quite some time. In fact, it wasn't until just this summer that a second underwater cable, Main One, launched, spurring fierce disruption to the market. By September, broadband prices in Ghana had been slashed in half. And with the upcoming entrance of a third submarine cable, Glo-1, the former SAT3 monopoly is all but history. Similar dynamics have been taking place in East Africa as well, with the launch of three submarine cables since just 2009.

What's more, telecom providers are starting to realize the power of lower prices. Vincent Wang’ombe, a marketing manager from Kenya Data Networks went on record saying, "From our experience, a reduction in internet prices increases usage, and this is why we will be lowering our prices before the end of October, so as to utilize both our international and local capacity. We have un-utilized capacity that we are paying for whether we use it or not." At last, people are beginning to talk sense.

Finally, how does Google fit into this? To put it lightly, my colleagues and I are very much encouraged by recent developments. Google's goal in Africa is to help spur a sustainable, thriving Internet ecosystem. And as I noted in my recent post on barriers to access, cost is still a huge obstacle. So we'll see how it goes from here. We at Google believe that if we can build compelling products and services, the more people there are on the Internet, the more people will be using them. It's an exciting time to watch this all play out.

Some links about these recent events:


Unknown said...

Capitalism and sanity prevail!

Deborah Tan said...

"Clearly, the incumbents weren't going to take this sitting down" - ha ha pun intended...?

Interesting post / stats.. miss you!

Unknown said...

Haha, not intended at all. Miss you too!

Randy said...

A comprehensive lesson in economics in one blog! Superb!

Anonymous said...

Finally, capitalism happening in Africa! For too long, big companies have been taking African consumers for granted with high prices and poor services. In Ghana here for example, Vodafone's broadband service is crap. If you think I'm lying, google it or checkout up in arms facebook groups highlighting Vodafone's deficiencies.
To the future of Africa.