I was recently reviewing the business model of a company that deals with VOIP. For the uninitiated, VOIP stands for Voice Over Internet Protocol (VOIP). It is basically a technology or technologies that allow you to make phone calls over the Internet instead of traditional phone lines.
I stated my observations simple and direct.
First the cons (of course)
1. Internet stability.
Internet in Uganda can be very unreliable and where it is reliable it is very expensive. Now, this is very important since to make calls over the Internet you need VERY RELIABLE Internet, so this is the starting point for anyone looking to invest in this sector. However, it is not uncommon for an ISP to charge $1400 per month for 64kbps. That’s not a lot of bandwidth, since a typical phone call requires around 8kbps at any one time, and therefore 64kbps supports only around 8 concurrent conversations or less depending on internet conditions. The good news of course is that this is changing with fiber optic cables being installed all the time and therefore internet costs coming down. My best advice, use ADSL and shared bandwidth. UTL does a good job here, great value and a generally reliable product if you can get your hands on the phone line.
2.Competition
VOIP prides itself on being cheaper than traditional phone companies and many VOIP providers will give you rates that are much cheaper than the networks. That was until recently. Many telecom providers in Uganda eg Orange have great international calling packages which give the VOIP provider a run for its money. Therefore, the VOIP provider has to compete with the telecommunication companies to offer customers international calling services. Therefore, you must be prepared to watch your finances closely and constantly so as not to fall for losses, so do yourself a favor and get a good accountant!
3. The exchange rate
The Ugandan shilling is depreciating against the dollar and may continue to do so. In 2006, for example, the rate was 1,700 shs per dollar. In 2011 as of this writing it is Shs 2800. For VOIP this is critical as the main purchase is “digital airtime” from international VOIP providers. This is purchased in dollars, and as such, prices charged to customers need to factor in the exchange rate, as well as ensuring competitiveness against the BIG BAD WOLVES (I mean the telcos).
4. Technological knowledge
VOIP is a specialized sector and of course requires someone with an interest, but this is not such a big deal as hiring an IT person will help reduce the need for the business owner to worry about this.
5. Initial capital
Based on my rough estimates, a typical VOIP business (eg a phone shop to support 6 phone booths) can ideally start a business from as little as UGX 8.7 million. This should cover; rent at 500k per month (including 2 months deposit to bring it to 1.5m), internet installation and subscription; 700k, purchase of VOIP and computer equipment; 1,975m, furniture/fittings; 1m an inverter; 2m, legal and related costs; 700k and sign (to advertise); 500k.
However, based on my analysis, a VOIP business alone is not profitable and therefore it is ESSENTIAL to also have an internet cafe running at the same time. The costs for the internet cafe side plus the VOIP side, excluding shared start-up costs such as rent and inverter, will be 20,383,275. I have written about internet cafe setup costs separately in the article about the internet cafe. Therefore, the total start-up cost is around Shs 20 million.
AND NOW THE PROS
1. Profitability and rapid return on capital
Like the rest of Africa, there are huge growth opportunities in Uganda in the ICT/Communications sector and according to the Uganda Investment Authority, this is one of their key sectors for investment. Call traffic is continuously increasing as Ugandans enjoy higher income. Despite the biting inflation, there is a continued increase in call traffic. VOIP is not lagging behind and assuming an ICT sector growth of an average of 25% per year with an average turnover of Shs 53 million would not be an exaggeration. Based on my knowledge of this sector, I have established a summary profitability table, as well as the return on capital (this includes a diversified model that includes an internet cafe). All estimates are in UGX. The exchange rate to USD is approximately 1 USD = 2700 Shs.
great benefit
1. Income-calls: 65,520,000. Assuming 7 days a week at 180k per day.
2.Internet income: 13,884,000. Assuming Shs 290k per week from 4 computers and multipurpose machining.
3. Cost of sales: -49,140,000. Assuming 75% of call revenue based on exchange rate and reseller margin.
4. Credit transfer cost: -1,228,500. Assuming 2.5% of cost of sales
5. Franchise fee: – 655,200. 1% of income-calls.
Big win: 28,380,300
General expenses
Income: Shs 4,800,000
Internet: Shs 3,840,000
Staff costs: Shs 6,000,000
Other general expenses: Shs. 1,800,000
Total overhead: 16,440,000
Net Income: 11,940,300
Investment capital: 20,383,275
Return on Investment: 1.71 years.
2. Return on capital
So, based on the earnings picture above, this business should be able to have a return on equity of 1.71 years. A word of caution here. The above model assumes full capacity growth and therefore may not necessarily reflect a start-up of the business, for example, in its first few months. In addition, the model assumes that the cybercafé and the call shop will operate in parallel and at the same time. I have done a separate analysis of the VOIP model alone and based on my analysis it will take 90 years to get a return on your capital! In Uganda, therefore, there is no other alternative for a VOIP investor than to integrate call shop and VOIP services.
3. Diversified services
Despite the fierce competition, a VOIP business can survive by being diverse. Many VOIP providers don’t just provide low-cost international calls. They also provide other related services such as cheap calls on your internet enabled phone, a foreign number (eg USA) even while in Uganda and home/office VOIP usage. Some like http://www.telebm.com offer a special Ugandan rate. Additionally, many integrate an internet cafe into their models, as well as sell phones and accessories. Diversified services spread overhead costs and allow for continued profitability. In the profitability analysis above, I assume that this business is diverse and offers VOIP and internet cafe services.
4. Franchise model.
The beauty of a VOIP business is that it is very scalable, which means you can keep expanding to other cities, other urban centers, other countries. The typical VOIP provider will give you a software management system that can be accessed from anywhere on the Internet (after all, since calls are made over the Internet, call logs are also based on the Internet). This provides a key advantage of remote monitoring for the business owner. You don’t necessarily have to worry about revenue as you can remotely monitor sales (calls) in real time because call logs show calls (and costs) as they happen. Therefore, the model can be replicated if you, the business owner, set up agents that also gain access to your system. I believe this is the model that http://www.mafudian.co.uk a VOIP company from Uganda is promoting.
SUMMARY AND THE FINAL WORD
first the numbers
Based on my analysis:
* Capital investment (Internet and VOIP equipment) (A): Shs 20,383,275
* Income per year: Shs 79,404,000
* Profit per year (after all expenses (B) is Shs 11,940,300
* Return on capital (years to recover capital) (A/B) is 1.71 years
Now the basics that you must have well before investing.
* Internet stability and reliability. Get a good ISP that supports VOIP
* Diversification of services. Don’t just do VOIP services, consider an internet cafe, multipurpose machine, WIFI hotspots or even cell phone and related accessory sales.
* Rent, Rent, Rent. This business thrives best in an urban environment with heavy traffic, especially from business users.
* Get an IT person, VOIP can be tricky to set up all the time.
FINAL WORD, YES OR NO?
This is not an easy sector to invest in with the stability of the Internet, as well as the fierce competition with local telecommunication companies that now offer some good international calling packages. Also, exchange rates are continually changing due to the falling shilling, so potentially eating into gains. I know many VOIP companies that have failed and therefore to invest in them you need to not only be technologically savvy but also look at the financial numbers as the margins can be very tight! However, a business that has taken off can enjoy a significant amount of turnover and diversifying and expanding through franchising seems to be the key to success.