Unit Economics, Population Collapse, Stranded Assets, and Econet’s Run-to-Failure Maintenance System
Few people dedicate the time needed to really understand something. Most people read the headlines and then pack up the comment section with uninformed and half-informed opinions. Some encounter one side of the story and then rush to conclude who is bad and who is good.
The resounding criticism of Econet’s poor network maintenance is one such issue. Recently, Elder Joshua Maponga was angry and had a rant at Econet but directed his concerns to Strive Masiyiwa.
Econet and other Mobile Network Operators look like they are neglecting their core customers. As we shall see things are not that black and white. There are a few issues to ponder here if one is to truly understand the whole picture.
- Changing Unit Economics
- Population Collapse
- The Issue of Stranded Assets
- Run-to-Failure Maintenance System
Changing Unit Economics
As the business world changes, so do the unit economics that businesses operate under. This is particularly true in the tech sector, where changes in technology and consumer behavior can have a profound effect on a company’s bottom line. That’s why it’s so important for businesses to keep a close eye on their unit economics and be prepared to change them when necessary.
Unit economics is the study of the costs and revenue associated with producing and selling a single unit of a good or service. It’s a key metric for businesses since it can tell them whether or not their product is profitable. If a business’s unit economics are not favorable, it may need to change its business model or pricing in order to become profitable.
There are a number of factors that can affect a business’s unit economics. For instance, the cost of goods sold (COGS) can increase if the company needs to purchase more expensive materials or labor in order to produce its product. Similarly, the price of the product may need to be increased in order to cover these higher costs.
Changes in the consumer behavior can also affect unit economics. For example, if people are buying less of a certain product, the company will need to sell more units in order to maintain the revenue level.
All of the above are affecting Econet right now.
Well, before we consider the current situation, let it be known that from Day 1 our unit economics have been sub-par. Compared with European and Asian countries, we had a relatively less dense population. Zimbabwe is twice the size of England in terms of land size. A service provider in England had to cover 130,279 km² of land whilst a provider in Zimbabwe had to cover 390,757 km². The provider in Zimbabwe needs more base stations, to cover expansive geography and has to fork out way more Capex in order to provide the minimum basic coverage compared with the provider in England. As such, the provider in Zimbabwe had to charge more per unit of consumption in order to recoup costs. A bar-talk comparison of charges levied in England vs in Zimbabwe does not typically take these things into consideration. The unit economics are different.
England currently has a population of 67m whilst Zimbabwe has a population of 15m. In terms of the population, England is 4.4 times larger than Zimbabwe. The provider in England can spread the costs across more people, thus lowering the per unit cost. Just taking these two factors into account (land size and population size), unit costs for a provider in England ought to be 6 times better than in Zimbabwe. If we consider the terrain of the land, supportive infrastructure, availability of electricity, et cetera unit economics would be fundamentally different.
The last point on the availability of electricity is worrisome for Econet. It has to invest in the generation of its own electricity (diesel generators and solar farms) to power base stations. That raises the Capex level, and the costs to be recouped. A population that is predominantly rural is more difficult to service than a population that is heavily urbanized in dense metros. For Zimbabwe, Harare, Bulawayo, Mutare, Gweru, and Masvingo are viable whilst the rest of the country outside these cities is commercially unattractive and economically unviable.
Over and above these differences in starting point, other factors have affected the unit economics.
- Declining revenues — service revenue per user.
- Rise of the OTP (Over-the-Top operators)
These two factors are interconnected. The rise of Over-The-Top (OTP) technologies killed old revenue lines for Mobile Network Operators but created new lines in the process. Merely providing service is not profitable anymore. Times have changed. MNOs used to charge $X for a 3-minute call, but now they can’t. The game changed.
They can only sell data that customers use for voice calls via OTT platforms, and that is a competitive landscape. Now the game is data. It replaced both text messages and normal voice calls. The landscape for data is competitive because other non-MNO providers are in there too. The market was blown wide open.
The revenues that MNOs are getting from selling data are decent and growing but they are nothing compared to what they used to rake in during the peak SMS +voice call era. Declining revenues affect unit economics. MNOs still have good cashflows, but it is no longer what they used to be. Something is gotta give.
A collapsing population is a population in which the number of individuals is decreasing at an accelerating rate. A collapsing population is not necessarily a dying population; it is possible for a collapsing population to rebound if the conditions that caused the decline are no longer present.
However, a collapsing population is at a greater risk of extinction than a population that is merely declining. There are several causes of a collapsing population. One cause is a sudden decrease in the birth rate. Another cause of a collapsing population is an increase in the death rate. This can be the result of a disease, such as a plague, or it can be the result of human activity, such as war or genocide. A collapsing population can also be the result of emigration, or the movement of individuals out of a population. This can happen when individuals move to escape a natural disaster, or when they move to escape the human conflict.
Zimbabwe has faced some of these factors:
- Migration outwards — emigration
- Decrease in the birth rate — due to increased urbanization, smaller families, the rising cost of childcare, the collapse of the extended family, et cetera
- Increase in the death rate — collapse in healthcare, reducing lifespans
Zimbabwe’s population is not yet collapsing right now. To claim so will be a little bit dramatic. It is still growing, albeit at a slower pace than previously expected. The last batch of babies was our very own baby boomer generation. That generation, when it enters maturity, is going to have fewer children than their parents.
The prospect of Zim’s population ever-increasing to a peak of 35 million is now very low. The population is now highly likely to peak around 20m and decline thereafter. These changes could happen in the next two decades.
The tweet above summarizes the changes and growth trajectory. In fact, in the next decade, it will be very hard for the country to gain another 2.5 million people. The population collapse could accelerate faster.
To service providers, the promise of reaping profits from an expanding population becomes elusive. As a provider you need growth. Growth in per capita spending and growth in the number of customers. If a company like Econet has already reached its maximum penetration, it looks to population growth for its bottom-line growth (mature industries).
The absence of such growth in users means future cashflows might not grow. In the absence of such growth, there is no basis to justify capital expenditures and maintenance expenditures toward improving and maintaining a good network.
This does not apply to Econet alone. It applies to a whole range of utility-like businesses that operate in Zimbabwe. They are facing the same scenario. They have to wait for per capita spending to increase before committing investments.
The world and Zimbabwe included quickly moved from requiring kilobytes to send messages, to megabytes and from megabytes to gigabytes. Now, for many households, gigabytes are no longer a unit of purchase. They want unlimited internet access to cater to their endless streaming requirements.
Fibre and 5G are the critical assets needed to serve these consumers. Unlimited wifi access is the standard. This cannot be effectively served via the old channels that were designed for mobile service provision (connectivity for SMS and voice calls).
The connectivity assets are becoming stranded, especially in metro areas where there is wifi coverage everywhere you go. Wifi at home, wifi at work, wifi at church, wifi at the pub, wifi at restaurants. The only time you need internet from a Mobile Network Operator is when you are traversing between these places (home, work, church, pub, school, restaurant). But then again, it's the only access you need, it's not like you will be watching movies whilst driving. There are people who spend three months before buying a bundle from a Mobile Network Operator. The assets related to older service provisions are thus stranded. They cannot generate decent revenues.
MNOs have had to ditch those assets and move in to provide unlimited internet access because the trends show that this is the ultimate desired consumption unit by consumers.
Two key points to note here:
- MNOs are repositioning themselves. They are re-inventing themselves. They have to deliberately leave some revenues behind because they are being generated in dying revenue lines.
- Service Provision is Dead — unless you are willing to pay an arm and a leg for it. This means customers in remote areas can complain all day long as much as they want but MNOs are not going to pump money into service provision.
The question to MNOs is what should they do with their stranded assets? They can actually choose to abandon them or they can repurpose them. They can provide Digital Identity Services, but this is also an area where other players can get in.
In the long run, the infrastructure needed for service provision has to be viewed as a public good. The government has to step in and subsidize the network infrastructure. Alternatively, public ownership of the infrastructure could ensure all areas have access, just like how we view the electricity grid as a necessary public infrastructure. The government could even use the electricity grid as a supportive infrastructure for mobile service connectivity.
Without government intervention, we will continue to see gradual and then sudden dis-investment in mobile networks. It's a perfect case of market failure. The market is failing to provide a service needed by the rest of the country because it is uneconomical to do so. Government intervention is needed up to the time that the market has been able to provide unlimited high-quality internet access to the rest of the country. Starlink holds such promises, accessing the internet via satellite as opposed to mobile networks.
In industrial and commercial facilities, run-to-failure maintenance (RTFM) is the decision to continue operating equipment until it fails and then replace it, rather than to perform preventive maintenance (PM) or condition-based maintenance (CBM).
The rationale behind this decision is that the cost of PM or CBM, in terms of both money and downtime, is greater than the cost of simply waiting for a failure to occur and then repairing or replacing the equipment.
There are a number of factors to consider when making the decision to adopt an RTFM strategy. One is the cost of the equipment itself; if it is relatively inexpensive, it may not be worth the effort to perform PM or CBM. Another is the cost of downtime; if an extended period of downtime would be more expensive than simply replacing the equipment, RTFM may be the better option.
Finally, the likelihood of a failure occurring must be considered; if the probability of a failure is low, the costs associated with RTFM may be lower than the costs of PM or CBM. There are a number of benefits to RTFM, as well. One is that it can simplify maintenance since there is no need to track and schedule PM or CBM.
It appears Econet has adopted an RTFM system for the bulk of its network system. Preventative maintenance is simply too costly. The RTFM system could be in place for the metros whilst a non-maintenance system (total abandonment) could be in place in remote areas.
The company cannot maintain all of its network nodes. Capital is to be used optimally and efficiently. Cross Asset Consolidations across the space could help. Maybe a merger between Econet and Netone could reduce maintenance costs as the country would only need to maintain one network as opposed to two.