I have recently been 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 that allows you to make phone calls over the Internet instead of through traditional phone lines.
I present my simple and direct observations.
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 as making calls over the Internet requires a VERY RELIABLE Internet and therefore this is the starting point for anyone looking to invest in this sector. However, it is not uncommon for an ISP to charge $ 1,400 per month for 64 kbps. That’s not a lot of bandwidth, as a typical phone call requires about 8 kbps at any one time, and therefore 64 kbps only supports about 8 simultaneous conversations or less, depending on internet conditions. The good news, of course, is that this is changing with fiber optic cable laying all the time and therefore internet costs are going down. My best advice, use ADSL and shared bandwidth. UTL does a good job here, with a great value product and generally reliable if you can get the phone line.
2. Competition
VOIP prides itself on being cheaper than traditional phone companies and many VOIP providers will offer you much cheaper rates than networks. That was until recently. Many telecom providers in Uganda, for example Orange, have excellent international calling packages that give the VOIP provider a run for their money. Therefore, the VOIP provider has to compete with the telecommunications companies to offer its customers international calling services. So you need to be prepared to watch your finances closely and constantly so that you don’t fall into losses, so do yourself a favor – get yourself 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 exchange rate was 1,700 shillings to the dollar. As of 2011, at the time of writing this article, it is Shs 2800. For VOIP, this is critical as the primary purchase is “digital airtime” from international VOIP providers. This is purchased in dollars and, as such, the prices charged to customers must take into account the exchange rate, in addition to ensuring competitiveness against the BIG BAD WOLVES (I mean telecommunications companies).
4. Technological knowledge
VOIP is a niche industry 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 entrepreneurs to worry about this.
5. Initial capital
By my rough estimates, a typical VOIP business (say, a phone store to support 6 phone booths) can ideally start a business from as low as UGX 8.7 million. This should cover; rent at 500k per month (including a 2-month deposit that brings you to 1.5m), internet installation and subscription; 700k, purchase of VOIP and computer equipment; 1,975 m, furniture / accessories; 1 million year investor; 2 million, legal and related costs; 700k and signage (to advertise); 500k.
According to my analysis, a VOIP business alone is not profitable and therefore it is ESSENTIAL to also have a cyber cafe in parallel. The costs for the cyber cafe side plus the VOIP side that eliminates shared startup costs, such as rent and investor, will be 20,383,275. I have written about the costs of setting up an Internet Cafe separately in the Internet Cafe article. The total start-up cost is therefore around 20 million
AND NOW THE PROS
1. Profitability and rapid return on capital
Like the rest of Africa, Uganda has enormous growth opportunities in the ICT / communications sector, and according to the Uganda Investment Authority, this is one of its key sectors for investment. Call traffic is continually increasing as Ugandans enjoy higher incomes. Despite the scathing inflation, there is a continued increase in call traffic. VOIP is not lagging behind and to assume that ICT sector growth averages 25% per annum of turnover with an average of Shs 53m would not be an exaggeration. Based on my knowledge of this sector, I established a summary picture of profitability as well as return on equity (this includes a diversified model that includes an internet cafe). All estimates are in UGX. The exchange rate for the USD is approximately 1 USD = Shs 2700.
Large profits
Income – calls: 65,520,000. Assuming 7 days a week at 180k per day.
2. Internet revenue: 13,884,000. Assuming Shs 290k per week from 4 computers and multipurpose machining.
3. Cost of sales: -49,140,000. Assuming it’s 75% of call revenue based on exchange rate and reseller margin.
Credit transfer cost: -1,228,500. Assuming 2.5% of cost of sales
Franchise fee: – 655,200. 1% of revenue-calls.
Gross profit: 28,380,300
General expenses
Rent: 4,800,000 Shs
Internet: Shs 3,840,000
Personnel expenses: 6,000,000 shs
Other general expenses: Shs. 1,800,000
Total General Expenses: 16,440,000
Net profit: 11,940,300
Capital investment: 20,383,275
Return on investment: 1.71 years.
2. Return on capital
Therefore, based on the earnings picture above, this company should be able to have a 1.71-year return on equity. One caveat here. The above model assumes total capacity growth and therefore does not necessarily reflect the creation of a company in, say, its first few months. Furthermore, the model assumes that the cyber cafe and the call shop will operate side by side and at the same time. I have done a separate analysis of the VOIP model on its own and from 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 the telephone helpline and VOIP services.
3. Diversified services
Despite fierce competition, a VOIP business can survive being diverse. Many VOIP providers don’t just offer low-cost international calls. They also provide other related services such as cheap calls on your phone with internet access, a foreign number (e.g. USA) even while in Uganda and the use of VOIP in homes / offices. Some like http://www.telebm.com offer a special rate for Uganda. In addition, many integrate an internet café within their models, in addition to selling telephones and accessories. Diversified services spread overhead costs and enable continued profitability. From the profitability analysis above, I assume this business is diverse and offers VOIP and cyber cafe services.
4. Franchise model.
The beauty of a VOIP business is that it is very scalable, which means that it can continue to expand to other cities, other urban centers, and other countries. The typical VOIP provider will provide you with 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 internet based too). This provides a key remote monitoring advantage 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 occur. Therefore, the model can be replicated by having you, the business owner, configure agents who also have access to your system. I think this is the model being promoted by http://www.mafudian.co.uk, a Ugandan VOIP company.
SUMMARY AND FINAL WORD
Numbers first
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 equity (years to recover equity) (A / B) is 1.71 years
Now, the basics must be correct 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 the sale of cell phones and related accessories.
* Location, location, location. This business thrives best in an urban environment with high traffic, especially from commercial users.
* Get an IT person, VOIP can be tricky to continually set up.
FINAL WORD, YES OR NO?
This is not an easy sector to invest in with the stability of the internet as well as fierce competition with local telcos now offering some good international calling packages. Also, exchange rates change continuously due to the falling shilling, so they can affect earnings. I know of many VOIP companies that have failed and therefore investing in them requires not only being tech savvy, but also looking at the financial figures, as margins can be very tight! However, a business that has taken off can enjoy a significant amount of turnover, and diversification and expansion through franchises appears to be the key to success.