US embassy cable - 05LAGOS1531

C O N F I D E N T I A L SECTION 01 OF 04 LAGOS 001531 
 
SIPDIS 
 
STATE PLEASE PASS TO FCC, EX-IM, AND OPIC 
 
E.O. 12958: DECL: 09/19/2015 
TAGS: ECPS, ECON, EINV, EIND, PGOV, NI, CH 
SUBJECT: TELECOM SECTOR GROWS, CHINESE FIRMS EXPAND 
OPERATIONS 
 
REF: LAGOS 0924 
 
Classified By: Consul General Brian L. Browne for reasons 1.4(b) 
and (d). 
 
1. (C) Summary.  Telecom operators believe the Nigerian 
Communications Commission's (NCC) unified licensing policy 
allowing existing fixed wireless and mobile licensees to 
provide both services for voice, data and multimedia will 
reinforce the current dominance enjoyed by the key players 
already in mobile telephony.  Analysts believe the policy 
will lead the four major Global System of Communication 
operators (GSM) to acquire or push most Fixed Wireless (FW) 
operators from the market.  While mobile telephone 
subscribers has climbed to over 13 million users, challenges 
such as inadequate power supply, customs clearance delays, 
multiple taxation, inadequate backbone infrastructure, diesel 
fuel theft, security and maintenance costs continued to 
plague the sector.  In the meantime, Chinese telecom 
equipment and service firms Huawei and Zhongxing Telecom 
(ZTE) are expanding their operations in Nigeria.  End Summary. 
 
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Background 
---------- 
 
2. (U) The NCC announced February 2005 its plans to introduce 
a unified licensing regime by February 2006.  Under this 
policy, existing GSM operators (MTN, Vmobile, Globacom, and 
Mtel) could offer fixed wireless and fixed line services, 
while FW operators (Starcomms, MTS, Multilinks, and 
Intercellular) could offer mobile services.  FW operators 
would no longer be confined to specific geographic areas, but 
could offer services nationwide, putting them in direct 
competition with the more popular GSM providers (reftel). 
Operators wanting a unified license would be required to meet 
conditions specified in the licensing framework which, in 
theory, was aimed at providing a level playing field for all 
operators while increasing service penetration. 
 
------------------------------- 
Unified Licensing Won't Remove 
GSM Operators Current Dominance 
------------------------------- 
 
3. (C) Economic officers met on September 16 with Vmobile 
Chief Regulatory Officer J.P Snijders who predicted unified 
licensing would not change GSM operator behavior.  To protect 
their market from competition, GSM operators would raise the 
entry barriers so high that potential competitors would be 
discouraged to invest.  According to him, unified licensing 
was nothing but "political capital" aimed at making the 
Government of Nigeria appear to be making progress in telecom 
deregulation.  Snijders asserted his company was "following 
along" simply to appease the NCC.  He believed the policy 
would bring some competition and foresaw the potential for a 
large South African telecom company or Vodafone vying to 
obtain a unified license.  However, he did not foresee 
licensing traffic in the opposite direction - relatively 
small-scale fixed operators entering the GSM market. 
 
4. (C) MTN Network Group and Financial Control Manager 
Olawole Obasunloye stated under the unified license regime, 
existing GSM operators would remain in the enviable position 
of shaping the rules of the game.  His company would 
discourage new entrants and would purchase or force out any 
FW operator posing a threat to MTN's operations in any 
geographic region.  He believed new and existing FW operators 
could earn profits in regions where GSM operators were not 
operating, but there was a high likelihood they would be 
acquired or pushed out by GSM operators.  Globacom Marketing 
and Strategy Director Subhra Das said his company "would not 
hesitate" to acquire profitable FW operators, and GSM 
operators "would do everything in their power" to prohibit 
new entrants from entering the GSM market. 
 
--------------------------------- 
13 Million Subscribers and Rising 
--------------------------------- 
 
5. (U) NCC Lagos Zonal Controller Dr. Henry Nkemadu told us 
the telecom sector continued to grow.  He estimated 13 
million active mobile telephone subscribers in Nigeria. 
Industry experts place the figure higher.  MTN claimed over 
six million subscribers, Vmobile and Globacom respectively 
claimed about three million each, and Mtel around one 
million.  Snijders, Obasunloye, and Das claimed the number of 
mobile subscribers increased monthly an average of two to 
three hundred thousand subscribers per company.  Vmobile 
launched its ROSE (Rolling Out Service Everywhere) initiative 
to invest USD two billion to expand the number of base 
stations (currently at 1,500) to 3,000 and increase network 
capacity to handle ten million active subscribers by 2007. 
 
----------------------------------- 
Fierce Competition, Reduced Revenue 
----------------------------------- 
 
6. (SBU) Revenue did not increase in proportion to the 
increase in the number of subscribers in 2004, operators 
said.  Protracted GSM price wars reduced charges for 
subscriber identification module (SIM) cards and airtime 
promotion packages, Obasunloye said.  According to him, their 
SIM card and free 500 minutes of airtime package valued at 
naira 2000 (USD 15) last year, has been reduced to naira 980 
(USD 7), helping to boost subscriber numbers.  The cost per 
minute of GSM airtime during peak hours was reduced from 
naira 50 (USD .38) to now naira 38 (USD .29), he said. 
Snijders said some Nigerian consumers had also switched to 
text messaging costing naira 10 to 15 per minute (USD .08 to 
.11) as a cheaper alternative to make phone calls.  Consumers 
had also begun "flashing" or developing codes to communicate 
by dialing and immediately hanging-up before being charged 
for the call, Snijders said.  The reduced cost for airtime, 
fierce promotion campaigns, and changing consumer behavior 
led to a diminished rate of return in 2005, operators said. 
They claimed the average revenue gained per GSM user had been 
reduced from between USD 30-40 last year to USD 10-23 now. 
According to Obasunloye, "subscribers are rising, but 
revenues are not rising as fast as before". 
 
-------------------- 
Plenty of Challenges 
-------------------- 
 
7. (C) Industry experts have complained that infrastructure 
costs prevented new operators from entering.  Unified 
licensing would not solve this challenge, the experts said. 
GSM operators rely on Nigeria's National Electric Power 
Authority (NEPA) for only 16% of their power, spending over 
naira six billion (USD 45 million) to use and maintain their 
own generators, including the purchase of 116 million liters 
of fuel, the NCC said.  Vmobile's Snijders said the cost for 
a base station in Nigeria was three times the cost in Europe; 
the company spends millions of dollars on maintenance costs 
for base stations including security, infrastructure, power 
supply, and logistics.  The 35% import duty on telecom 
equipment and the customs clearance delays also caused 
"headaches", Snijders said. 
 
----------------- 
Multiple Taxation 
----------------- 
 
8. (C) Lack of harmonized tax regime between state and 
federal governments had led to double taxation on building 
permits, industry experts said.  MTN's Obasunloye stated 
taxes on masts, towers, building permits, and various 
environmental tax charges paid to state, federal, and local 
governments added hundreds of millions of naira in additional 
costs to GSM operators.  Multiple taxation remains a 
challenge that Snijders felt could only be tackled by a 
comprehensive tax reform bill. 
 
---------------------------------- 
Inadequate Backbone Infrastructure 
---------------------------------- 
 
9. (C) Years of infrastructure neglect by the NCC has meant 
GSM operators must invest in National Microwave and fiber 
optic infrastructure in different parts of the country. 
Chinese firms have been actively bidding in this area. 
According to Snijders, Huawei Telecom provides GSM radio 
networks for Vmobile in northern Nigeria, and has been 
seeking contracts to provide backbone infrastructure for GSM 
operators across the country.  Motorola has been providing 
backbone infrastructure support mostly in central and 
southeastern Nigeria, and Ericsson in southwestern Nigeria, 
Snijders said.  The cost of building and operating a 600 km 
fiber optic backbone is over naira one billion (USD 7.5 
million).  Industry experts deemed existing backbone 
infrastructure as inadequate to support the pace of GSM 
network expansion. 
 
----------------- 
Diesel Fuel Theft 
----------------- 
 
10. (SBU) Diesel fuel theft from base stations throughout the 
country remains a challenge for GSM operators.  Obasunloye 
estimated MTN lost naira four billion (USD 30 million) in 
costs associated with diesel fuel theft.  (Note: This amount 
seems exaggerated for effect but it does go to show that the 
GSM operators see this as a serious problem.  End Note.) 
Snijders and Das said diesel fuel theft, and the associated 
costs, including hiring security guards, building security 
fences, and securing vehicles cost their companies' millions 
each year.  Vmobile and other companies have tightened 
security to prevent people from stealing base station 
equipment in addition to fuel and other supplies. 
 
--------------------------------- 
Chinese Firms Expanded Operations 
--------------------------------- 
 
11. (C) Chinese firms Huawei and ZTE have expanded their 
operations in Nigeria.  Obasunloye said Huawei had improved 
its technology rapidly in the past two years which has 
allowed MTN to intensify its business operations with Huawei. 
 Huawei now provided 30% of MTN's base stations in contrast 
to 20% last year, while Ericsson now provided 70%.  MTN 
employees also attended Huawei's USD 7 million training 
facility in Abuja and Huawei had invested more this year in 
research and development than 2004.  ZTE also had been 
bidding to provide base stations, Snijders said.  Obasunloye 
said MTN was currently reviewing ZTE's proposals.  ZTE had 
been trying actively to sell its 3G technology, and recently 
built an assembly-line factory in Abuja to produce and sell 
phone hand sets. 
 
--------------- 
No Turning Back 
--------------- 
 
12. (C) Comment.  Despite the costs of doing business in 
Nigeria, existing GSM operators are bullish, and so are 
Chinese firms Huawei and ZTE.  Industry experts predict 
active mobile telephone subscribers to exceed 20 million by 
2007, placing the potential subscriber base at between 30 and 
40 million people in the next five to eight years. 
Competition in the telecom sector will remain fierce.  None 
of the major GSM operators believe the NCC's unified 
licensing regime will significantly impact their operations. 
Even when the unified licensing regime is introduced in 
February 2006, most observers believe it will take another 
year before implementation.  Given this lag time, GSM 
operators will continue as they are to spend millions if not 
billions of naira to build infrastructure and maintain market 
dominance.  Opening the door via the unified licensing policy 
so companies can do both GSM and fixed wireless services 
sounds even-handed and competition-enhancing.  However, given 
their size and market share advantage over FW operators, GSM 
operators might see the new policy as a way to anneal their 
dominance and actually stifle competition.  End Comment. 
BROWNE