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In February 2008, the Financial Times reported Orascom's chairman Naguib Sawiris's light-hearted reaction to his company's decision to invest in North Korea: "This is my proof to the world that there is nothing else out there. If you need to go all the way to North Korea to make sure there is a requirement, the world is done, finished."

There is certainly some truth in the fact that few countries in the world offer virgin territory for new investment in mobile telecoms. Africa, having recently been the focus of a number of major new telecoms investments, now boasts a considerable number of major mobile networks, in spite of the fact that it still has a relatively small number of mobile users. This situation points to the growing challenges for the investors in these mobile networks to ensure these investments pay off.

Too much supply, not enough demand (yet)

In the last three years alone, Africa has seen the launch of 27 new telecoms operators. Figure 1 shows that this figure remains some way below the peaks reached in 1998-2001, but it is clear that a significant number of new mobile networks continue to be deployed, fuelled in part by the advent of third-generation mobile technology.

Despite this proliferation of mobile networks, it is often acknowledged that Africa represents the largest reservoir of untapped mobile subscribers. By global standards, the penetration rate across the continent is low, with the number of subscriptions equating to 28% of the population at the end of 2007, compared with 65% in Latin America, 51% in the Middle East and 35% in the Asia-Pacific region (as shown in Figure 2).

In Europe, the figure now exceeds 110%, highlighting the fact that some individuals hold subscriptions to more than one network simultaneously. This phenomenon of multiple subscriptions per user is not restricted to Europe; indeed, it is very prevalent in many African countries. The proportion of the African population holding a mobile subscription may therefore be markedly lower than 28%.

Africa's vast untapped demand has provided a compelling rationale for international mobile operators to invest in and deploy new networks or to extend and upgrade existing operations. Between 2005 and 2007, no less than eighty new mobile licences were awarded across Africa, and the continent has been the focus of intense interest from emerging markets investors, in particular from the Middle East and South Africa. This intense activity has resulted in some of the most competitive telecoms markets in the world. Figure 3 below provides regional benchmarks of the ratio of operators to subscribers and population. It shows that there are now more operators per subscriber in Africa than any other region of the world. Mr Sawiris's comment is therefore shown to be very relevant indeed.

The news for investors in African telecoms is not all bad though: the number of operators may be high when viewed in terms of the current subscriber base, but is still relatively low in the context of the population as a whole. Indeed the ratio of operators to population is comparable to that seen in the Middle East and Western Europe.

This points to two dynamics for the future of African telecoms: the expansion of the base of users and a consolidation between operators. The future of the markets will be determined to a large extent by the balance between these two dimensions.

It's the economy, stupid

The key to increasing demand for mobile services in many African markets lies primarily in lowering barriers to entry for potential new subscribers. In many parts of Africa, the takeup of mobile telephony is currently limited by a combination of factors including geographical coverage of networks, the availability and price of SIM cards and airtime recharges, handset prices and the reliable availability of electricity. In markets where average revenue per user (ARPU) is already low in absolute terms, operators are thinking hard about which barriers to lower, and how much they are willing to pay in order to do so. The more evident barriers are on the demand side: buying a handset and a SIM starter pack can be expensive, and airtime prices must be affordable enough to provide incentives for people to join the network.

Operators have so far limited their financial risk on these issues: handset subsidies are a rarity in emerging markets, because of the predominance of prepaid schemes. Similarly, the cash price of starter packs often remains quite high to discourage very low users: operators offer better value for money by increasing the airtime that is bundled with the pack, rather than by reducing the price of the same airtime.

The markets themselves have been remarkably effective at providing solutions to these issues. Highly developed second-hand markets have made handset prices more affordable: a new handset can be picked up in Dakar for USD30, and a second-hand one for less than USD10.

Network 'externalities', which represent the benefit derived by existing users of a new subscriber joining a network, are also internalised much more than in developed markets: for instance a person making a good living in a city or abroad may be willing to pay the subscription costs of their less affluent relatives in small towns or rural areas.

Expanding geographical coverage, by contrast, has a direct impact on an operator's costs: deploying a new base station for coverage purposes in an area where there is no commercial power can cost up to USD 300 000. In a country where ARPU is about USD 10 per month, the payback period for such an investment can be dangerously close to the lifetime of the asset. When factoring in operating costs - which can be very high when there is no commercial power and diesel generators must be deployed - the business case for new geographical coverage can be very risky.

Competition is already pushing the boundaries of the return on investment that operators are willing to accept. In Tanzania, where the population is relatively uniformly distributed across a wide area, rural network coverage is an important marketing issue. Consequently all the major Tanzanian operators are investing heavily in the roll-out of new sites.

In the long run, however, more extensive coverage will only be justified if ARPU levels stop falling as penetration increases. This is by no means an impossible prospect: there is evidence of a strong potential demand for mobile services in emerging markets. A marginal increase in disposable income would therefore translate into higher demand at current prices.

The gamble that investors and operators are making is that the economy of Africa will grow, and that this growth will translate in greater consumption, some of it directed to telecoms services. If this fails to materialise, some investors may be forced to pull out, which would accelerate a consolidation process that may well already be inevitable in some countries.

Consolidation across and within borders

Consolidation can take be international (across borders) or domestic (within a given country). To date, mergers between companies operating in the same country have been few and far between in Africa. By contrast, consolidation of operators across borders, within multi-national groups, has been happening at a frenetic pace over the past three years.

This has given rise to large multi-national groups with presences in many countries across Africa and the Middle East, such as MTC/Celtel, Etisalat (with Atlantique Telecom, Canar and Zantel) and MTN (including Investcom). Smaller groups, with a more regional focus, include Vodacom in Southern Africa, Orascom in North Africa and Millicom along the equator.

The phenomenon of cross-border consolidation has been happening more quickly in Africa than in more developed markets: multi-national groups have realised the advantage that purchasing and marketing synergies can provide especially when addressing lower-income segments.

Innovative initiatives are already in train to exploit the benefits of multi-national presence. For example, Celtel's OneNetwork allows a roaming user to benefit from his home tariff in any of the 12 countries covered. This initiative is being replicated, in particular by MTN Uganda, Vodacom Tanzania and Safaricom Kenya to allow seamless and free roaming between the three countries.

When it comes to assessing the opportunity for consolidation within a country's borders, numerous parameters come into play. In growing markets, every operator holds the belief that it can succeed: consequently no serious domestic consolidation has yet taken place in African mobile markets. As markets mature, however, it may become clear that there is no longer room for everyone. Figure 6 shows a distribution of African countries according to the population per operator as of December 2007.

From this chart, it appears that some countries have more operators than is sustainable given the population, which may lead to consolidation. In some cases, there may be specific characteristics that explain this state of affairs: some countries (Comoros, Seychelles, Sao Tome) are small, island countries; some (Djibouti, Equatorial Guinea) have only one mobile operator. Botswana is another exception, given its very concentrated population around Gaborone, its high GDP per capita and high mobile penetration. For other countries in the lower end of this scale, however, (and indeed for those where mobile penetration does not increase as expected) some investors may decide to sell out, whether the gamble has paid off or not.

From subscriber growth to profit growth

The focus of operators in emerging markets around the world is now shifting from establishing a presence, to making this presence pay. Operators across the continent are developing innovative tariff plans to improve affordability as well as margins, and are experimenting with new ways to bring mobile telephony to more people across the continent.

In many ways this second phase is even more exciting than the first; its success will have a marked impact on the future economic growth of countries across Africa, by enabling more and more people to benefit from reliable, affordable voice and data services.