4G network plans reduce data profits

Saturday January 12 2013

IT infrastructure costs are likely to cancel out growing profits from the data market.

IT infrastructure costs are likely to cancel out growing profits from the data market.  

By JOINT REPORT The EastAfrican

Telecom companies in East Africa will record a near flat growth in profits from their data business as rising infrastructure costs cancel out all benefits accruing from increased data uptake.

According to a report by Gartner, a global research company, weakening regional currencies have pushed up the cost of IT infrastructure as majority are bought in foreign currency — a factor that is likely to cancel out the growing profits from the data market.

The report shows that global telecom service providers will spend $1.7 trillion in 2013, up from $1.66 trillion in 2012 on information and technology infrastructure, a 2.4 per cent surge.

“The huge investments in the sector, most of which are carried out in foreign currencies, leaves a huge gap between actual investments and earned revenues. This cuts into the profit margins of these companies,” said Francis Mwangi, an analyst at Standard Investment Bank.

Dropping voice revenues have forced mobile operators to battle it out for the fast developing data markets in Africa.

In the process, most operators, together with other Internet service providers, have lined up projects aimed at improving their services to keep off stiff competition.

In Kenya, market leader Safaricom is set to commence a $164 million five-year project this month to lay a terrestrial fibre network across the country.

Airtel Kenya has lined up investments worth $94 million towards improving its network, while yuMobile and Telkom Kenya are also involved in high-cost network expansion projects this year as the fight to dominate the data market intensifies.

The roll-out of the 4G long-term evolution network in Kenya will also demand a significant investment from each of the members in the public-private consortium, further broadening the companies’ expenditure.

A similar scenario is shaping up in Uganda. After spending over $80 million last year, MTN Uganda plans to invest $70 million this year alone in the roll out of its 4G network across the country. 

“The continuous capital expenditure (Capex) investment by MTN is aimed at providing our customers with the best possible user experience across the country. We would like to ensure consistent, reliable network quality for all our existing customers and to also enable new subscribers enjoy the mobile technology,” said MTN Uganda in a statement.

With most of the investments being funded using foreign currency, the telcos will be hoping that the regional currencies stage a strong performance against global currencies.

Weak currencies also mean that the firms may not be able to fully implement their projects as expected or may be forced to invest more to compensate for the lost value.

The Kenya shilling started the year on a wrong footing, decelerating towards a seven-month low last week as traders speculated on the Central Bank of Kenya lowering its benchmark lending rate.

The shilling weakened to trade at an average Ksh86.50 against the dollar as analysts predicted a further decline in coming months.

The Bank of Uganda recently announced that it would sell hard currency after the shilling weakened against the dollar to a five-week low to trade at an average of Ush2,705 against the dollar, a level last reached last November.

Analysts project a weaker performance owing to pressure from low interest rates and the suspension of foreign aid coupled with rising dollar demand from manufacturers, oil companies and commercial banks. 

By Scola Kamau and Charles Wokabi