What does Elon Musk's Starlink mean for Nigeria's telcos?

It is no secret that the IT & Telecoms industry is one of the few darlings of the Nigerian economy. While there’s very little data on Nigeria’s labour market, Jobberman’s analysis of more than 30,000 job listings and 1,000,000 job applications shows that the IT & Telecoms industry is one of Nigeria’s largest job creators.

Between July 2020 and July 2021, the sector accounted for 14% of job listings and 12% of job applications. By comparison, the oil sector accounted for 5% of job listings and 6% of job applications over the same time period.
 

That’s not too surprising, though, and you could argue it’s even welcome. Given the digital age we live in, a vibrant IT & Telecoms industry can indicate a country’s ability to harness opportunities for the modern economy. For instance, internet access has been a key driver to the growth of Nigeria’s entertainment and media (another darling) industry.

Several segments boost the industry’s revenue, from out-of-home advertising, video games, VR, TV advertising, and Cinema to the internet. But internet revenue was growing and projected to grow at the fastest rate in coming years, according to PwC.

The internet has fundamentally changed the way we consume entertainment and as some have argued, has even created an entirely new form of it. Today, digital streaming platforms like Netflix make it even easier for Nigerians (home and abroad) to engage with popular Nollywood productions such as Blood Sisters. These services also reduce the losses of potential industry profit to piracy. 

For these reasons, it’s wise to make it our business whenever significant developments that might impact the IT & Telcoms industry occur. One key stakeholder in this industry includes telecommunication companies like MTN and Airtel. As of today, most Nigerians get their communication services—from internet access to text messages and voice calls—from one or more of these major telecom providers. But with Starlink in the picture, it's worth assessing if this is likely to change.
 

How has the telecom industry grown over time?

Since telcos launched in the country in 2001, mobile subscribers have grown so much, it’s almost equal to the total number of people living in the country. 

Of course, not everyone in Nigeria has a mobile phone or subscribes to telco carriers—Nigeria’s 200 million+ population includes 26% of the population with no phone access—say, children or people that can’t afford to get one. This data just underscores the fact that phone subscription rates are growing rapidly, and for context, they are growing faster than India’s but much slower than Ghana’s. 
 

Still, Nigeria’s telecom industry’s impressive growth statistics have happened despite sub-optimal infrastructure. 

The industry regulator, Nigerian Communications Commission (NCC), says only 12% of Nigerians have adopted a 4G connection—a technology 10x faster than 3G that better supports more intensive mobile connection activities like video calling and watching videos or listening to music online (streaming). 

Globally, Nigeria claims the top spot for the number of internet-poor people. Issues like internet price and quality need to be tackled to place the country in a favourable position that better serves other industries. 

It’s worth highlighting that issues with high internet costs have several dimensions. Internet poverty relates to cost and ability to pay. So even when the price in USD of a GB of data in Nigeria is around one of the lowest globally, looking at the exact cost as a percentage of average income (GNI), you’ll see Nigeria fall several places. This situation suggests that maybe it is not the cost but the low-income levels that make the internet unaffordable.

So, despite the IT & Telecoms industry growing, infrastructure to reduce internet poverty in Nigeria has been minimal. Recently, though, players like Facebook, Airtel, Google's Equiano and co have stepped in to solve this problem for us. And now, we have Starlink gearing to come in. They all have various motivations (Google and Facebook are looking for ad revenue, while Airtel and co are trying to boost data revenue).

That said, many states are unserved and still underserved. Because of how important communicative access has proven to be, people like Elon Musk, the World’s richest man, have invested heavily in it. So, it was exciting to see Musk’s recent announcement of Starlink’s, a satellite-enabled internet service, approval in Nigeria. No doubt, Musk can be unreliable. He was all over Twitter with his announcement of buying and taking over the social media platform not long ago, only for him to pause the deal. But with countries like Nigeria looking to improve communication access, such an investment seems like a no-brainer. 

Starlink, which space exploration firm SpaceX currently operates, allows people to connect to the internet via a satellite dish placed on or near their property. The internet is beamed down to the dish via Starlink satellites put into orbit by SpaceX. According to SpaceX, Starlink, based in Redmond, Washington, should provide the world with faster internet by improving internet access in parts of the world that broadband providers don’t currently serve.

It plans to do this by putting thousands of small telecom satellites into low-Earth orbit that can beam high-speed, low-latency internet to the ground—like how we connect to DSTV.

Growth opportunities in Nigeria’s telecom industry

Musk’s announcement also confirmed rural areas as Starlink’s target. But we know that even people in urban centres across several states in Nigeria struggle to make a decent phone conversation or complete hours of uninterrupted work when they need to use the internet. I work remotely and every morning before I resume work, one of my prayer points is, “Father Lord, let [insert Nigeria’s top telco’s name] not shame me today.” Worries about spotty internet connection or a full-on disruption are just one of the obstacles I face when I try to connect to the rest of my team across the world. 

The situation is worse for those who live in many parts of poorly connected states like Bayelsa or Jigawa state. Statistics from the NCC suggest that 46% of the 138 million internet subscriptions in April 2020 were from users whose internet speeds are not high enough to be classified as broadband. 

Going by the Cable UK’s worldwide broadband speed league for 2021, Nigeria falls short of the global average (29.79 Mbps) with a broadband speed of 8.68 Mbps. This means that downloading a 5GB HD movie in Nigeria will take approximately 1 hour, 18 minutes and 39 seconds. In Jersey, downloading the same movie will only take 2 minutes 29 seconds—31 times faster than Nigeria’s broadband speed. Whereas, speed tests by Starlink beta users in August found download speeds ranging from 11Mbps to 60Mbps and upload speeds of 5Mbps to 18Mbps.

So there appear to be opportunities for current and new telecom players in the country to improve the state of affairs. For instance, states like Jigawa, in the far north, have only 316 cell towers that aid mobile connectivity. Whether these towers are in good condition is an analysis for another day, but below is a chart that shows most of the infrastructure that aids connectivity is centred in—you guessed it—the country’s economic capital, Lagos. 

Having these towers is vital to providing quality service and further boosting telephone penetration. The situation is not that different for servers, another form of communication infrastructure. Kenya has about 61 million phone subscribers but nearly three times more internet servers than the whole of Nigeria. 
 

So considering Nigeria’s sparse communication infrastructure and the apparent demand for telecom services, as evidenced by the growth in the sector, Starlink’s appeal for providing ubiquitous internet access is understandable.

But, knowing Musk and how things work in Nigeria, there is still a long way to go before Nigeria can have super speed connections for communication everywhere. In a world where this solution works more quickly than we anticipate, how should we be thinking about the disruption it would cause in the telecom industry? Also, what would it mean for Nigerians and their current network providers?

Let’s look at three areas:

Will it solve the internet quality problem?

Before answering this, let’s think about a different question: “is there an internet quality problem in Nigeria?” 

The answer to this question is subjective. The lady that gets threatened to be beaten up by her uber driver after an 11 pm drop because her bank’s network was down will scream: “Yes! there is an internet quality problem”. But the man whose biggest internet need is to make a Whatsapp voice call to his girlfriend every night might not regard a few disconnected calls as a severe issue. 

It’s okay to assume Nigeria’s internet quality is terrible if your experience with internet service is poor. Or if we compare it to the kind of connections in the US or the UK where 4G and 5G networks are already common. But the question is, is the quality so bad that you decide you are better off without it?

GSMA, a leading intelligence agency for the mobile ecosystem, released a 2021 report on the state of mobile connectivity, and it shares some key insights. One is that it suggests only a small proportion of the people in most African countries cared too deeply about slow internet connection at least when compared to the price. 

To be clear, slow internet connection is still a problem for many Nigerians, it is not just as much a problem as price. The report explained that it surveyed adults aged 18+ who have not used mobile internet in the last three months. Participants were asked to identify “the most important reason stopping them” from using the internet. The replies ranged from price and no access to poor connection. They were also asked to state “which one of those factors would you say is the single most important reason stopping you from using the internet on a mobile phone?” To which most Nigerians who are aware of mobile internet replied “cost”. 

The report noted that it excluded mobile users who are not aware of mobile internet and that the number of respondents varied from 44 to 222. However, it did not justify that this sample size represented the countries surveyed well.

So, 3% (both urban and rural) of a population as huge as Nigeria’s can sound like an enticing market. But if you are an avid Stears reader, you will know that population size is not equal to market size. 

In fact, yesterday’s article gives you all the data points you need to know about building a product for African consumers and their wallet sizes. For example, we now know that daily per capita spending in Africa is $9.78. That makes Africa the only continent whose daily per capita spend falls below the $10 threshold that is informally used to define a proper consumer class. In fact, an often-quoted statistic here at Stears looks at how only 3.7 million people out of our 200 million  (estimated) population can afford to spend more than $10 a day. Meanwhile, Starlink plans to propose a monthly internet subscription fee of $110 for its services. 

So naturally, that brings us to our next question:

Will it make Nigeria’s internet less affordable?

Let’s use Starlink’s monthly subscription of $110, that’s ₦66,000, considering that $1 is now = ₦600 at the parallel market. This price is 66 times higher than one of Nigeria's cheapest mobile data plans currently available. With ₦1,000, which is less than $2, you can get data access from any mobile network. 

In fact, according to the World Development Indicators (WDI) by the World Bank, Nigeria ranks 19th among 72 countries when it comes to internet affordability. 
 

But even after accounting for Nigeria’s relatively cheap internet costs, affordability is still the highest barrier to internet access in the country. 43% of people in urban areas find it too expensive, according to the GSMA report referenced earlier. And almost half (48%) of Nigerians in rural areas find the internet unaffordable. GSMA acknowledged that affordability could be tricky to measure. There are different data plans, and their costs change over time, so the report noted that it used the lowest prices for 1GB and 5GB of data in the country.

But think of corporate (both private and public) organisations, banks, government institutions, and foreign offices based in Nigeria. They have huge incentives and pockets deep enough to demand the internet quality that Starlink can deliver. 

So what does this mean for telco providers?

First, why are we talking about telcos? Well, Starlink is offering a direct to consumer service, and they handle the entire value chain instead of outsourcing distribution to another company.

If Starlink were giving their infrastructure to internet service providers (ISPs) that service customers, then they could disrupt infrastructure players such as MainOne. 

But with this B2C approach, we’ve established that better internet services like Starlink won’t make the internet cheaper based on our current information. While it might solve internet quality problems, it will only do so for people who think there is a problem in the first place and can afford to change their network providers (remember, Starlink’s package is quite expensive). 

The challenge is that having individuals and institutions that can afford better internet service is vital for the current players in the telecom industry. 

For some players like MTN, with relatively better internet coverage and higher market share, it’s important to see what difference Starlink’s presence might make. 
 

Luckily, internet service revenue from telcos can provide some answers. The reasoning is that if the bulk of revenue comes from businesses and corporates, then it is possible to assume that with faster speeds, Starlink can really attract customers who care about getting better quality internet services. 

A look at MTN’s financial statements shows how the company views customers and shines a little light on what category or segment of customers might be most valuable. 

The chart below indicates that revenue from enterprise customers (corporate and small business customers) is significantly lower than revenue from the customer business unit, which represents the youth, high value and mass segments of the telco).
 

Enterprises make up a smaller chunk of MTN’s revenue. Also, servicing the CBU segment is not outrageous—the CBU has the highest cost, but incomes are high enough to provide the most significant gross margins. 

Although MTN does not further break down the CBU unit, it’s not hard to imagine that the “high value” customers in this segment who can afford better services and might not be happy with their current service provider could port. 

Also, this is a breakdown of total revenue and not revenue from data services. It is essential to mention this distinction. That’s because while CBU is larger than EBU, revenue from providing data services might take up a larger proportion of EBU than CBU.

The point is that a competitor like Starlink could offset the existing market share that telcos might be enjoying. More information, like the contribution of mass-market customers to CBU data revenue, will tell us more about how likely this could be. For instance, if mass-market consumers load, let’s say, 1.5 or 2 GB of mobile data monthly at costs of around ₦1,000 to ₦1,500 that make up the bulk of telcos revenues, then the disruption to telcos is unlikely. 

So even as we desire disruption in the telecom industry, we must look critically at the implications. Telcos are not only internet providers; they are also some of the biggest companies on the Nigerian exchange and contribute significant revenue to the government through taxes. In addition, these companies have invested heavily in financial services. Their activities have ranged from procuring licensing fees such as 5G to training mobile operators. Some of these investments have happened despite providing services in otherwise economically unviable areas and need the more viable areas to keep running till they can recoup their investment.

India’s stance on Starlink validates this line of reasoning. Like Nigeria, India has a large population, and its telecoms industry is vital to the economy’s stability—enabling about 35% of the country’s GDP during the Covid-19 lockdown. The Asian country’s government refused to give Starlink an operating licence, and it warned the public to shun it. 

The stakes are higher in India. Almost 12% of its 1.3 billion population are unsatisfied with their internet connection, and affordability is less of a problem than in Nigeria. 

Still looking at things from the Indian perspective, you might recall that local internet providers like Reliance recently invested billions of dollars in boosting services in the country. So when you think of how Starlink can jeopardise chances to recoup the investment that local telecom providers have already made or are making, you’d see why telco providers might worry about a competition like Starlink. 

In Nigeria, telcos battle with different state governments on Right of Way (RoW) charges to lay fibre optic cables or erect towers for better connectivity. If successful, 4G coverage across Nigeria will be greater than 90% by 2025, according to GSMA projections. The stakes to get connectivity right are much higher for local telco players in Nigeria. If we are being objective, they stand to lose high-quality customers with this new Starlink announcement. 

The next set of questions would then be what’s the way around this dilemma? Should the government suspend the license? Can our telcos leverage Starlink’s technology or just face the competition head-on with more investments in infrastructure for better service?

These are vital questions to unpack. As we have observed from telcos muscling to offer financial services and social media giants attempting to provide internet services, we live in an age of disruption. From all indications, the rules are changing for many industries. Ultimately, the winners would be shaped both by the ability to satisfy customers and the existing regulatory landscape.