After years of slow growth and outright despair at whether broadband would ever take off on the African continent, our research suggests that the market is inching ever closer to a tipping point. Our latest report, “the Future of African Broadband: Economics, Business Models, and the Rise of 3G”, makes a number of key points with regards to supply and demand, some of which are summarized below:

There is strong demand for broadband in Africa, if the price is right. We estimate that the African addressable market for household retail connections is about 25m, based on 2007-2009 household income data. North Africa and South Africa account for about 70% of this estimated African household addressable market; outside of those countries, many markets have a household addressable market of 150,000 (e.g. Mozambique) to as many as 400,000 households (e.g. Kenya) depending on their individual structural and income characteristics. The business segment is similarly attractive. The enterprise installed base – defined as registered, tax-paying formal companies- is at about 3m; outside of North and South Africa, the corporate market base varies between 3,000 in low income economies to more than 100,000 units in larger intermediary African economies.

Longstanding supply bottlenecks are being slowly, but surely removed; last mile competition is an increasing reality, wholesale segments are being liberalized, wireless technology has improved enough to provide alternatives to wireline broadband; over the next five years, a combined 500 Gbps+ in initial, available international capacity will be brought into the market. The domestic backhaul segment remains a major supply bottleneck, and in our view, the weak link in the emerging African broadband infrastructure value chain. Even here, however, things are improving.

We see the best broadband opportunities in markets with strong household addressable demand in volume terms, yet one that is currently underpenetrated. The opportunity matrix screen we developed to identify such markets yielded Nigeria, Kenya, Cameroon, Angola, Madagascar and a small few others as markets with the highest upside in this respect.

At last, it was here. The SEACOM cable landed on East Africa’s Coast over the summer, and has now gone live in Kenya and Tanzania. We summarize some initial observations from our own recent trip to East Africa, press reports and other anecdotal evidence. Our verdict: promising on bandwidth utilization, wait and see on retail prices.

1. While no official estimates have been announced, we estimate that SEACOM has been able to pick up slightly more than a dozen customers since its launch, each purchasing anywhere from an STM-1 (155mbps) to 2.5Gbps.

2. Undeniable though the enthusiasm from ISPs and corporate customers for the new cable may be, it is coupled with some caution. The main ISPs are purchasing enough bandwidth to meet immediate demand and stay competitive, but are moving cautiously as they (1) seek to reduce the cost or get out of long term satellite contracts and (2) wait to see the impact of the arrival of two additional cables on wholesale bandwidth prices.

3. Service providers with stakes in other cable projects (namely the TEAMS and EASSY cables expected in 2010) are nonetheless picking up capacity on SEACOM, lest they be at a competitive disadvantage, a trend that highlights SEACOM’s first-mover advantage.

4. Taking capacity inland and reaching landlocked markets will remain significant challenges; cunningly, SEACOM has been buying up terrestrial cross-border capacity into landlocked markets (e.g. to Rwanda and Uganda) to expand its offering beyond seaport routes. Its main challenger in East Africa will be Kenya Data Networks.

5. The submarine cable impact on wholesale prices is unquestionable. By our estimates, SEACOM has slashed wholesale bandwidth costs by at least 60% in Tanzania (for a dedicated E1); in Kenya, a dedicated international E1 is already going for less than $1,500 (excl. VAT). Kenya Data Networks, one of the country’s largest wholesale players (and a major SEACOM client) announced that it would slash its wholesale rates by 90%. The retail price impact will be slower, though there is some movement here as well. The initial step will be for increased bandwidth for a similar amount of spend; we anticipate a six to nine month lag for a decline in retail prices.  

6. The impact on wholesale bandwidth requirements is already perceptible. In Kenya and Tanzania for example, estimates from the Broadband and Wholesale Forecasts released by the AfricaNext Data Unit project a 150% and near 200% increase in international bandwidth utilization respectively for 2009, and that’s with less than 6 months of submarine cable availability.