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The final frontier
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March 26, 1998: 6:14 p.m. ET
The African Communications Group is venturing into the world's last untouched communications markets
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SAN FRANCISCO (The Red Herring) - Ask any ordinary communications industry executive about opportunities in Africa, and the answer you'll get is a blank stare. Or the question, Is there a market in Africa? Monique Maddy, founder, president, and CEO of the African Communications Group of Cambridge, Massachusetts, has a different response. In 1993 she and Côme Laguë, ACG's chief operating officer, concluded that Africa was the last remaining place a telecom network could be started on a small scale without extremely high levels of investment. This realization evolved into a business plan for providing wireless communications services to the developing countries in Africa, where basic telephone service is nearly impossible to get.
In the four and a half years since ACG's founding, Ms. Maddy and Mr. Laguë have used their understanding of market conditions in African countries and their ties to the U.S. technology business community to build a startup that is able to stick with a long-term strategy in the face of significant technical, political, and financial challenges. In November 1996 ACG commenced operations in Tanzania through a subsidiary called ACG Telesystems. A month later ACG won a "second national operator" license in Ghana, which allows it to provide all types of telecommunications services within the country through a consortium that also includes Ghana National Petroleum and U.S.-based Western Wireless International.
Into Africa
From the research Ms. Maddy conducted as a student at Harvard Business School and her previous experience working for the telecommunications group of the United Nations Development Program, she knew that African economies suffer from enormous pent-up demand for basic telephony services - infrastructure in these countries is sorely inadequate, and cellular service, where available, is prohibitively expensive. In Tanzania in the early '90s, for example, there were only 78,000 phone lines for a population of 27 million, according to an Arthur Andersen report. In Tanzania's seat of government, Dar es Salaam, phone penetration was a mere one line per 100 residents; in rural areas, the figure declined to one line per 2,000 residents.
With these market conditions in mind, ACG set out to devise a wireless communications service that could be set up quickly and for a lower cost than cellular networks. The method Ms. Maddy and Mr. Laguë adopted uses public telephones and pagers to produce the effect of a virtual phone. Each subscriber is issued a voice-mailbox number and a pager. Every time a caller leaves a message for the subscriber, the pager beeps. The subscriber can then retrieve the message at the nearest pay phone.
The savings are achieved in part by clever implementation of wireless local-loop technology provided by DSC Communications. Eric Stonestrom, vice president of DSC's Airspan products division, says ACG is using a technology designed for specialty networks that allows customers to build networks quickly at low capital costs. While most customers use the technology to set up data networks for businesses that need immediate service in developing countries, ACG is using it to provide basic telephony to a much less saturated market segment: low-income consumers. Mr. Stonestrom thinks highly of ACG's creative approach: "They are the strongest group we've dealt with in this market. They can put a base station in the middle of a town and provide services for people within a 15-kilometer radius. Nobody else is using our technology the way ACG is." In January ACG had installed 250 pay phones for 500 paging subscribers in Tanzania, and Ms. Maddy expected to reach 400 phones by the end of March.
Recipe for success
Tanzania offers many of the ingredients that ACG needed for a successful market debut: a relatively underdeveloped communications infrastructure, a good-size population, and, perhaps most importantly, political stability and a favorable regulatory environment for foreign investments. Ms. Maddy cautions that the difficulty of negotiating with African governments should not be underestimated. Often, she says, "the will is there at the political level because governments want this kind of competition, but at the business level you still have to interact with the entrenched national phone companies." The result: licenses take a long time to secure, and in some cases there are no regulations set up to handle ACG's license requests.
Although a wireless network is less expensive to build than a wire-line network, it still requires a substantial investment, which has provided another formidable challenge for ACG. As Ms. Maddy recalls, "Raising money was very difficult for us initially. In 1993 VCs were investing only in the U.S.; even Europe was far away for them." So ACG raised its first small round of capital from a Harvard classmate of Ms. Maddy's, and a second round soon followed from Landmark Communications.
By 1997 the flow of funding had increased. ACG completed a round of $7 million at the holding-company level from HarbourVest Partners; the Netherlands Development Finance Company, which is partly owned by the Dutch government; and Media Communications Investors, a partnership managed by two principals of the Boston venture capital firm Media/Communication Partners. Ms. Maddy says she expects to complete a follow-on round of $4 million. In addition, ACG has raised $20 million, mostly in debt financing, at the subsidiary level, and Ms. Maddy intends to increase that figure to $75 million this year.
For now, ACG is favorably positioned against both the entrenched postal, telegraph, and telephone agencies in Africa and large international carriers like AT&T. Ms. Maddy is confident that in Ghana, for example, where ACG has been given free rein to compete with the national phone company - the first license of its kind in Africa - ACG's understanding of wireless technology and its access to U.S. capital will give it an advantage. As for giants like AT&T, she believes African markets simply haven't grown large enough to appear on their radar screens yet. "AT&T just isn't going to put $7 million into telecom services in Ghana right now," she asserts. "The opportunity cost is far too great for them at this stage."
Sleeping lions
That is not to say, however, that global forces won't turn their attention to Africa eventually. Howard Stevenson, who was Ms. Maddy's faculty adviser in business school and is an investor in ACG, believes that "some of the big players are going to wake up and realize they're three years too late in Africa. But by then ACG could be an ideal acquisition target."
Mr. Stevenson worries that ACG's greatest challenge is figuring out how to market a service to people who've never used a telephone before: "There is no model for this." But Mr. Laguë contends that, given ample time and capital, the company can persuade any consumer of the value of its virtual phones. "You simply need patience to run a business in this environment," he says, rather convincingly.
African Communications Group at a glance:
CEO: Monique Maddy
Location: Cambridge, Massachusetts
Phone: 617/576-7396
Ownership: Private
Founded: 1993
Employees: 100
Product: Wireless communications services in developing African countries
Suppliers in Tanzania: Glenayre, DSC Communications, Intellicall
Partners in Ghana: Western Wireless International, Ghana National Petroleum
Competitors: AT&T, British Telecom, national telephone companies in African countries, International Wireless Communications in developing regions other than Africa
Revenues: FY97 $1.8 million
Revenues: FY98E $3.7 million
Financing: $7 million at the holding-company level, $20 million at the project/subsidiary level
Investors: HarbourVest Partners, Netherlands Development Finance Company, Landmark Communications, Media Communications Investors, private investors.
--by Nikki Goth Itoi
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