How MTN is profiting from Nigeria’s informal economy

Perhaps the most strikingly visible way in which formal businesses make use of System D is in the mobile phone industry. Along every road in many African and Asian countries – on median strips, on the side streets and main drags, in the middle of highways, at almost every intersection – you can find small plastic tables with umbrellas overhead.

They’re called umbrella stands and they are the phone booths of the developing world. In the sparse shade offered by those umbrellas, the formal economy meets System D in an extremely direct way.

Nigeria provides a perfect case study. It’s the largest country in Africa, with a mobile phone market that seems to have nothing but upside, and a variety of telecom firms are battling for market share.

MTN, a massive multinational based in South Africa and active in twenty one countries through Africa and the Middle East, had spent years looking for a way to gain a share of the Nigerian market. With a population of close to a hundred and sixty million, Nigeria is Africa’s most populous country, and one in six Africans is a Nigerian.

The Nigerian market was worth a lot of money. MTN made its first move on Nigeria in 2001. “We tried to replicate the car and phone market of the United Kingdom,” Akinwale Goodluck, the general manager of regulatory issues for the company’s Nigerian operations, told me.

“We wanted all dealers to be registered. They had to get a licence from the Nigeria Corporate Affairs Commission. They had to have a business name, to be a registered company.” MTN determined that it would sell airtime in three denominations: fifteen hundred naira, three thousand naira, and six thousand naira – $10, $20, and $40 – which would be sold only through stores that had the MTN brand.

The result: the plan crashed and burned. Goodluck put it in gentler terms: “It became very glaring that such a ‘Rolls-Royce’ type of distribution network would not be feasible.”

So MTN wrote off the loss and rethought its approach. It concluded that in Nigeria, where even scavengers at the garbage dump have mobile phones, the bulk of its income – perhaps as much as 90 per cent – would come from selling pay-as-you-go airtime rather than selling costly monthly plans. And that meant that service had to be cheap and readily available.

So MTN came back with a new plan based on umbrella stands. Almost all of its products would be sold by hawkers and street vendors. The cheapest airtime would be offered at a bargain basement price – a hundred naira, or less than $1 – and it would be available all over town. The company dropped its vision of selling phones with the MTN label. It dropped the price of SIM cards to less than $3. And it has ridden this low-priced model to a better than 40 per cent share of the Nigerian mobile phone market.

In 2007, MTN had revenues of 73.1 billion rand (approximately $8.78 billion) and earnings of 31.8 billion rand ($3.8 billion), and Nigeria was a big part of that, responsible for one-quarter of MTN’s one hundred million customers and 28 per cent of the company’s cash – or about $2.4 billion per year. And how does MTN earn that $2.4 billion? Almost all of it comes from System D.

Despite their importance to the bottom line, MTN keeps these System D vendors at arm’s length. “We don’t have a direct relationship with the gentleman or lady on the street,” Goodluck said. “We provide merchandise and support through the dealers.” What he means is that MTN sells its recharge cards to distributors, who in turn sell to subdealers, who sell to sub-subdealers, who sell to the folks on the street, who retail the cards to the people who use them.

Most umbrella stand operators also purchase heavily discounted contracts from MTN and other service providers.

If you want to call anywhere in Nigeria on the MTN network or any other network, for that matter – you can go to your local umbrella stand and make your call for twenty naira (thirteen cents) a minute. Most umbrella stand operators have several phones with SIM cards from different mobile services, so you can save money by making your call on the network the person you are calling uses. Many people who have their own mobiles nonetheless use the umbrella stands to make calls – because the cost per minute is cheaper.

“The umbrella market is a very, very important market now,” Goodluck told me. “No serious operator can afford to ignore the umbrella people.”