Last Mile Fibre Dynamics, Economics and Outlook in African Markets

THE AFRICAN FTTH BOOM

A XALAM ANALYTICS INVESTOR REPORT

December 2016

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Copyright 2016 by Xalam Analytics, LLC. All rights reserved. Please see important disclosures at the end of this document. We welcome all feedback on our research. Please email feedback to: [email protected]

EXECUTIVE SUMMARY

1. AFRICAN FTTH: JUST THE NUMBERS, PLEASE

African FTTH – The 1m Homes/Premises Passed Rubicon Has Been Crossed Five Markets are Driving 85% of African FTTH Deployments The Half a Million FTTH Connection Mark Has Been Crossed Country View: Mauritius is Africa’s Largest FTTH Market – but SA is About to Take Over Africa’s FTTH Take-Up Rates – Building Where the Demand Is Africa’s Largest Broadband Markets are Not Necessarily its Largest FTTH/P Markets FTTH Penetration – A Mauritius Outlier, and Few Markets are Above the 1% Household Penetration Mark Early Days: FTTH has Touched Only 2% of the African FBB Addressable Market Early Days: There is a Material Penetration Gap Between FBB and FTTH Sharp Contrasts – A Few Markets Go all FTTH, While Some of the Largest FBB Markets Have Virtually None How African FTTH Compares to Other Regions’ – Still Smallish, but Rising Fast

2. AFRICAN FTTH MARKET DRIVERS, MARKET STRUCTURE & THE IMPACT OF REGULATION

What Is Driving Recent African FTTH Growth? “ADSL Doesn’t Cut It” – Wholesale Fibre, Netflix Effect and the Rising Middle Class Other FTTH Drivers – Key Player Strategies and Government Broadband Push African Regulation is a Significant Obstacle to the Rollout of Ultra fast Broadband Infrastructure In Many Markets, Regulatory Action Seems Designed to Prevent Competition in the Broadband Space With a few Exceptions, African Market Structure is not Optimized for Ultra Fast Broadband Growth Breaking Down Optimal FTTH Market Structures What Works Best for FTTH? NBN Models vs. Last Mile Unbundling What Works Best for FTTH? Open Access Wholesale FTTH vs. Closed Access Network Build

3. BREAKING DOWN AFRICAN FTTH DEMAND, FROM PARKHURST TO YOPOUGON

African FTTH Demand: From a Population of 1.2bn to an FTTH Addressable Market of ~10m Understanding African FTTH Demand – Households and Businesses, from Parkhurst to Yopougon African FTTH Outlook: In the Short Run, Two Main Phases of Deployments

4. EXPLORING SOME BURNING FTTH QUESTIONS

Which African Markets are Ripe for FTTH? -The Best FTTH Opportunities are where Broadband is and Fibre Isn’t (Quite Yet) -Mature African Broadband Markets Offer the Best Opportunities for FTTH – Others Will Leapfrog How do ADSL, MBB, FWA Impact FTTH - & Vice-Versa? FTTH vs. ADSL - The Self Cannibalization Case FTTH vs. ADSL - The Competitive Cannibalization Case FTTH vs. ADSL – When (and Where) ADSL Keeps Up with FTTH The Last Stalwarts – ADSL Will do Just Fine, Thank You Does MBB Help or Hurt the Fibre Case? FBB Is more of a Precursor of FTTH Potential than MBB is… …But MBB Helps Build the Economic Case for FTTH

5. AFRICAN FTTH CAPEX, PRICING AND CHALLENGING ECONOMICS

At a Macro Level, a ~$9bn African Retail Broadband Opportunity African CapEx/Home Passed – Mostly Within Expected Range Africa Needs ~$1bn in Annual CapEx to Hit Our FTTH Roll-Out Projections – High, but Hardly Excessive FTTH Economic Levers – The CapEx/Home Passed Problem FTTH Economic Levers – ARPUs and FTTH Take-Up Rates FTTH Economics – Manageable in Phases 1 & 2, Rather Complicated Thereafter

6. AFRICAN FTTH: PRICING, COMPETITIVE DYNAMICS & MAPPING OUT FUTURE GROWTH FTTH Pricing – No Fibre Premium Here How FTTH Pricing and Speeds Compare to ADSL, Mobile Competitive Dynamics: Top Tier Telcos Can No Longer Ignore FTTH Mapping Out the Outlook for FTTH: East and Southern Africa Mapping Out the Outlook for FTTH: West & North Africa Sample FTTH Deployment Plans

7. AFRICAN FTTH: JUST THE FORECAST, PLEASE African FTTH Homes Passed – Towards the 5m Mark – Perhaps even 10m Africa FTTH – A ~2m FTTH Connection Target for 2020 Where is the FTTH Growth? Africa FTTH 2020 – At Least 6 Markets Above the 1% Household Penetration Mark

8. SAMPLE AFRICAN MARKETS FTTH SNAPSHOTS Mauritius FTTH: On Path to Become Africa’s First Gigabit Economy South Africa: Africa’s Deepest Combination of FTTH Demand and Supply Fundamentals Kenya FTTH: Has Done Very Well, but there’s Room for More Tanzania FTTH: Fibre Wholesale Economics Hold Up Potential Zimbabwe FTTH: Somehow Thriving Despite Terrible Macro-Economic Environment Nigeria: An African FTTH Tragedy

FTTH Homes Passed in Africa by Region – 2010 - 2016 FTTH Homes Passed in Africa by Key Market – 2010 - 2016 FTTH Connections in Africa by Region – 2010 - 2016 FTTH Connections in Africa by Region – 2010 - 2016 FTTH Take-Up in Sample African Markets (FTTH Connections / Homes Passed) - 2016E Africa’s Top 10 Fixed Broadband (FBB) and FTTH Markets – Number of Connections - 2016E FTTH Penetration of Households in African Markets - 2016E FTTH Penetration of Broadband Addressable Market in Sample Countries - 2016E FBB and FTTH Penetration of Broadband Addressable Market in Sample African Regions - 2016E FTTH as % of FBB Connections in African Markets - 2016E FTTH/B/P Connections Around the World – 2015-16E Sample FTTH Demand/Supply Dynamics Breakdown of Africa Broadband and FTTH Addressable Market - 2016E FTTH as % of FBB Connections in African Markets - 2016E ADSL vs. FTTH Connections – Mauritius ADSL vs. FTTH Net New Connections - Mauritius ADSL vs. FTTH Connections – South Africa ADSL vs. FTTH Net New Connections – South Africa ADSL vs. FTTH Connections - Zimbabwe ADSL vs. FTTH Net New Connections - Zimbabwe ADSL vs. FTTH Connections – Cote-d’Ivoire ADSL vs. FTTH Net New Connections – Cote-d’Ivoire MBB Penetration vs. FTTH Penetration and FBB Penetration in 15 African Markets – 2010-2016 FTTH CapEx/Home Passed in Sample African and International Projects Cumulative Africa FTTH CapEx Requirements – 2017-2020 Africa FTTH CapEx Requirements in Context Up or Down? Evolution of FTTH CapEx/Home Passed

FTTH Business Case 1 Free Cash Flows – Narrow Addressable Market (Phase 1 & Phase 2 Only) Tanzania Key Broadband Indicators - Past 3 Years FTTH Business Case 2 Free Cash Flows – Broader Addressable Market (Phase 2 and Beyond) Tanzania FTTH Penetration of Households vs. Peer Markets – 2016E Monthly Subscription Prices in Sample Markets: FTTH vs. ADSL vs. 3G/4G* Tanzania FTTH Outlook (Homes Passed vs. Connections) Fastest Access Speed Plans Available to Consumers – Fiber vs. Other Broadband Access Tanzania FTTH Context Options Where Tanzania Fits in the African FTTH Opportunity Mapping Monthly Price per GB – Fiber vs. Other Broadband Access Options (Consumer Plans) Zimbabwe Key Broadband Indicators - Past 3 Years Top 3 MNOs Combined Share of FTTH Market in Sample Countries* – 2016E Zimbabwe FTTH Penetration of Households vs. Peer Markets – 2016E Sample FTTH Deployment Plans Zimbabwe FTTH Outlook (Homes Passed vs. Connections) FTTH Homes Passed in Africa – 2016E-2020F Zimbabwe FTTH Context FTTH Connections in Africa by Country – 2016F – 2020F Where Zimbabwe Fits in the African FTTH Opportunity Mapping Africa’s Top 10 FTTH Markets – Number of Connections - 2016E vs. 2020F Nigeria Key Broadband Indicators - Past 3 Years FTTH Penetration of Households in African Markets - 2020E Nigeria FTTH Penetration of Households vs. Peer Markets – 2016E Mauritius Key Broadband Indicators - Past 3 Years Nigeria FTTH Outlook (Homes Passed vs. Connections) Mauritius FTTH Penetration of Households vs. Peer Markets – 2016E Nigeria FTTH Context Mauritius FTTH Outlook (Homes Passed vs. Connections) Where Nigeria Fits in the African FTTH Opportunity Mapping Mauritius FTTH Context Where Mauritius Fits in the African FTTH Opportunity Mapping Appendix 1 – Africa FTTH Homes Passed Table South Africa Key Broadband Indicators - Past 3 Years Appendix 2 – Africa FTTH Connections Table South Africa FTTH Penetration of Households vs. Peer Markets – 2016E South Africa FTTH Outlook (Homes Passed vs. Connections) South Africa FTTH Context Where South Africa Fits in the African FTTH Opportunity Mapping Kenya Key Broadband Indicators - Past 3 Years Kenya FTTH Penetration of Households vs. Peer Markets – 2016E Kenya FTTH Outlook (Homes Passed vs. Connections) Kenya FTTH Context Where Kenya Fits in the African FTTH Opportunity Mapping

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AM Addressable Market ARPU Average Revenue per User BB Broadband CapEx Capital Expenditure CSP Communications Service Provider FBB Fixed Broadband FBU Formal Business Unit FTTH Fibre to the Home FTTH/P Fibre to the Home/Premise FWB Fixed Wireless Broadband HH Household ISP Internet Service Provider MBB Mobile Broadband MNO Mobile Network Operator NBN National Broadband Network SA South Africa SSA Sub-Saharan Africa

This report uses FTTH definitions as outlined by the FTTH council – ““Fiber to the Home” is defined as an access network architecture in which the final connection to the subscriber’s premises is Optical Fiber.” [http://www.ftthcouncil.eu/documents/Publications/FTTH_Definition_of_Terms-Revision_2015-Final.pdf}. We often use the terms FTTH and FTTP (“Fibre to the premise”) interchangeably, with the latter designed to emphasize fibre connections to business premises.

While our focus is on FTTH, operator reporting may include FTTB, in which the final connection within the building may be through copper. We make note of this where such distinction is well established.

"In God we trust. All others must bring data." - W. Edwards Deming

This report, like much of our content, uses a lot of data. Xalam Analytics is highly data-driven: data is a foundational pillar of our analysis and insights. This is tough to achieve in Africa, markets that are compelling, but where data quality is notoriously terrible. But that, indeed, is why we are here. So how do we do it?

DATA SOURCES & COLLECTION

Xalam Analytics was formed specifically to provide in-depth, data-driven, economics-focused research on digital infrastructure markets in Africa and the Middle East. Our principals have been collecting and analyzing data on AME ICT markets for the past two decades.

We have strong experience in financial research and ICT service provider financial due diligence work in the emerging market context. Our experience on those types of projects has deeply influenced our belief in the need for good, strong data to drive long-term business, value-accretive decisions.

We have developed and maintain what we believe is one of the most extensive forecasting models available on African digital infrastructure and services markets.

We have no visibility on, nor can we control how others collect and define their data; therefore, we do not rely on third parties. We collect data and build our datasets ourselves, through operator reports, extensive country travel and a network of country-based contributors collecting information based on our own specifications.

Our data points primarily come from service providers themselves, along with regulators, infrastructure providers and other parties directly involved in establishing, delivering or overseeing services.

Our approach includes a mix of formal and informal operator interviews, operator reports, regulatory reports and any relevant press information cross-checked against other data sources.

Even with this, maintaining good data quality in Africa is continuous, arduous work, so we keep improving our processes every day.

We use the quality scale below to assess the reliability of our data. As a general research policy, we do not release a report if weak data accounts for more than 25% of the data points gathered. FTTH is a relatively new and under-reported marketplace in Africa, which creates material differences between countries and individual data points. Those are noted below.

DATA QUALITY DATA RELIABILITY ASSESSMENT FOR THIS REPORT – SAMPLE

The ratios below are estimates and represent a broad view. South Africa and Mauritius, Data Scale Definition for example, have stronger data points than Cameroon; Nigeria’s wireline data is Very Strong This is hard data reported under some form of regulatory requirement; to a regulator, notoriously weak. Likewise, the solidity of home passed data is fickle. Connection data government or other entity (with some implicit, or explicit threat of sanction if the is good, and pricing data is excellent. data is misleading). Included here is data from financial reports, some regulatory data (where the regulator has a strong history of data reliability). Data Point Weak Strong Very Strong Strong Data This is data reported by the provider, publicly or through formal and informal interviews, discussions with our research team or other sources. While the data point Homes Passed 20% 50% 30% is considered solid, it is nonetheless subject to exaggeration, definitions; this type of data is typically cross-checked against other sources (other reports, competitor assessment, etc.), and if applicable, “normalized” for benchmarking with others. FTTH Connections 10% 30% 60%

Weak Data This is data for which there is no formal, reliable source point. In this case, our research team generates its estimates based on conversations with market players, FTTH CapEx 0% 30% 70% regulators and other market observers. While this type of data point provides a general feel for order of magnitude, its reliability, by its very nature, is weak. FTTH Prices 0% 0% 100%

As a general research policy, we do not release a report if weak data accounts for more than 25% of the data points gathered – which explains why our Africa research often leaves out markets such as the Central African Republic, or to some extent, the Democratic Republic of Congo.

Anonymous African operator, 2016

Africa is witnessing an FTTH boom – between 2014 and 2016, the number of homes and premises passed by fibre has more than tripled. By our estimates, the cumulative number of African homes/premises passed by fibre crossed the 1m mark in 2016. We expect it to hit the 2m mark in 2017.

We estimate that the total number of FTTH connections in Africa passed the 500k mark in the third quarter of 2016. Recent growth has been strong: around 75% of Africa’s FTTH connection growth since 2010 has occurred over the past two years. About 800 new FTTH connections go active every day across Africa – a pace that is ~2x 2015 levels and continues to accelerate. The African FTTH Boom Five markets account for 85% of Africa’s FTTH/P homes passed – South Africa, Kenya, Nigeria, Morocco and Mauritius. But this boom is about more than the top 5 – FTTH/P roll-outs have been initiated in at least 15 markets outside of the top 5 above – from Cameroon to Gabon and Congo-Brazzaville, at various levels of scale. Still, we continue to despair at Nigeria’s inability to live up to its significant potential.

Supply and demand fundamentals are coming together to push African FTTH . Only around 45% of Africa’s Fixed broadband addressable demand has been reached by fixed broadband access solutions – and only 2% is currently reached by FTTH.

Africa is a predominantly mobile broadband market. But we find that the notion of an almost mobile-only African connectivity marketplace is largely fallacious. Urban professionals demand the same user experience at home that they are getting at work, or that they have seen in their travels. In South Africa, rich communities frustrated by existing broadband services took matters in their own hands and got providers to bid to offer them fibre services. Other drivers are the increased availability and consumption of bandwidth-hungry content, from video streaming services (Netflix, iRoko), to cloud-based enterprise applications, along with a realization that 3G/4G, ADSL (in its typical African form at least) just aren’t cutting it for some use cases.

African FTTH Growth Catalysts On the supply side - increased capacity supply and declining international capacity prices are easing up the pressure on independent ISPs’ business models. Substantial metro and interurban fibre capacity buildout and the rise of open access pricing models have improved wholesale capacity supply.

Regulatory conditions remain uneven, boosting growth in some cases, holding it up in others. For the most part, African market structures are not optimized for FTTH roll-outs – About two thirds of the markets we have examined have a closed access FTTH network build structure – there is scant to no infrastructure sharing and individual players seek and have full control of the established network value chain.

That African FTTH is picking up as much as it has been is really more a testimony to the bottled-up potential of demand for ultra high speed connectivity.

The rise of FTTH is transforming Africa’s broadband retail market dynamics – from bandwidth speeds to user experience, pricing models and market share upheavals, it’s a whole new game.

FTTH was the third fixed broadband technology option in 2016 (~20% of all fixed broadband connections); we now expect it to overtake ADSL and become the primary terrestrial alternative to mobile broadband in sub-Saharan Africa by 2020.

The interplay between various last mile access technologies is somewhat inconsistent. For example, we find that strong FBB penetration can be a catalyst for FTTH growth but it can also, rather paradoxically hold it up. Further, we see low to non-existent correlation between MBB uptake and FTTH uptake – but it’s early. MBB is nonetheless a precursor to FTTH – markets with low MBB penetration typically have low FTTH FTTH Impact & Market Dynamics penetration as well. More critically perhaps, we find that MBB helps build the economic case for FTTH.

Africa’s mobile operators have traditionally ignored FTTH. As a result, they have lost ground - In some of the continent’s largest FTTH markets (South Africa, Kenya, Nigeria), the top three mobile operators control less than 20% of active FTTH connections (Mauritius is a notable exception).

Strategically, we do not believe top tier operators can afford to lose too much ground on FTTH as their traditional mobile models are getting squeezed. They would be losing control on what will become the primary conduit for enterprise and home digital life – not for all, but for some of the market’s most critical segments. In turn, we expect that many will seek to catch up – either through greenfield build-outs, or preferably through acquisitions of FTTH players.

Our assessment of a number of FTTH rollout projects puts CapEx per home passed in the $600 to $2500 range . CapEx would typically be higher than the above range in the early phases of deployment; in addition, some markets require substantially more trenching and civil works, while in others governments charge excessively high rights of way fees.

On the basis of our CapEx/home passed estimates, we extrapolate that African markets will need between $2.3bn and $4bn over the 2016- 2020 period to hit our FTTH homes passed (and connections) projections. This means a potential CapEx of about $600m to $1bn per year over that period.

This is high, but hardly excessive, especially when considering the broader impact of increased FTTH penetration. For some perspective, the higher-end of our estimates is only around 15% of Sub-Saharan Africa’s 2015 mobile CapEx.

Our analysis suggests that there are three critical levers to African FTTH economics (assuming optimal regulatory and wholesale market African FTTH Economics conditions) – CapEx/Home, ARPU, and FTTH Take-Up Rates.

The CapEx per home passed is even more critical in Africa due to the potentially narrow size of the upper-end market. As for take-up rates, the potential for high take-up rates early on is good, given the strong demand and ability to pay in the premium target segments (and subject to the intensity of competition). The more operators will move beyond upper-end demand segments, the more take-up rates will likely turn problematic.

ARPU is a challenge as well - Beyond the premium target segment, a high price can constrain take-up rate and complicate the business model. The provider has to find the right balance, an effort complicated by competition and regulation.

Along with regulation, these economics are the biggest risk to all the projections we have made throughout this report. Our analysis also reinforces the fact that FTTH at scale is a long, long term game. Investors looking for quick returns and payback periods will not find them here. But providers that stick to it over the long run will hold a nearly unassailable position in Africa’s digital infrastructure market.

Africa’s FTTH growth runway is substantial – As noted, FTTH only touches ~2% of Africa’s fixed broadband addressable target market. Increasing penetration of this addressable demand by a mere five percentage points in sub-Saharan Africa alone would equate to adding half a million new FTTH connections over the next five years.

Africa FTTH Outlook We expect the total number of FTTH connections to hit the 2m mark by 2020. That’s ~1.3m new connections added between 2016 and 2020 – a run rate of ~330k new connections a year. The numbers could be higher subject to what happens in Nigeria, Egypt, Algeria, where we have highly conservative projections.

We expect Southern and East Africa (Kenya and South Africa, principally) to account for ~80% of Africa’s FTTH/P connections. The regional gap will get worse – West Africa’s FTTH lag will be substantial, absent urgent regulatory action (which we do not expect). In effect, African FTTH growth will be driven by a core group of 10-12 markets, with ultimate impact depending on how supply fundamentals evolve.

2. AFRICAN FTTH MARKET 3. BREAKING DOWN AFRICAN 1. AFRICAN FTTH: JUST THE DRIVERS, MARKET STRUCTURE 4. EXPLORING SOME FTTH DEMAND, FROM NUMBERS, PLEASE & THE IMPACT OF BURNING FTTH QUESTIONS PARKHURST TO YOPOUGON REGULATION

5. AFRICAN FTTH CAPEX, 6. AFRICAN FTTH: PRICING, 7. AFRICAN FTTH: JUST THE 8. SAMPLE AFRICAN PRICING AND CHALLENGING COMPETITIVE DYNAMICS & FORECAST, PLEASE MARKETS FTTH SNAPSHOTS ECONOMICS MAPPING OUT FUTURE GROWTH

FTTH Homes Passed in Africa by Region – 2010 - 2016 1.80 The 1m Homes/Premises 1.60 Passed mark was crossed in 2016 1.40

1.20 More Premises Passed added over the past two years (to YE 2016) 1.00 than over the previous 10 years combined

0.80

0.60

0.40 FTTH/P Homes/Premises Passed

0.20

0.00 2010E 2011E 2012E 2013E 2014E 2015E 2016F

East Africa West Africa Southern Africa North Africa

There is no obvious scientific approach to estimate fiber homes passed in a precise manner (other than using a GIS model and quite literally counting them) – even more so at an African level. Estimates here are based on operator reports; while these estimates are net of coverage duplication, some degree of duplication may remain. All numbers are provided for indicative purposes – and because they are key assumptions in our FTTH forecasts. Source: Xalam Analytics Estimates

We project the number of FTTH homes and premises passed in Africa to reach around 1.6m in 2016 – up ~60% from 2015 levels. The deployment boom is recent - ~1m homes passed added since the end of 2014 Deployments especially active in East and Southern Africa West and Central Africa largely lag the rest of the continent in FTTH/P deployment, for reasons ranging from good ADSL networks to regulatory and competitive inflexibility on FTTH rollouts.

FTTH Homes Passed in Africa by Key Market – 2010 - 2016

1.80

1.60

1.40 Five markets account for 85% of Africa’s FTTH/P homes passed – million

- South Africa, Kenya, Nigeria, Morocco and Mauritius. 1.20 South Africa, Kenya, Nigeria, Morocco and Mauritius account for 1.00 85% of Africa’s Homes Passed.

0.80

0.60

0.40 FTTH/P Homes Passed 0.20

0.00 2010E 2011E 2012E 2013E 2014E 2015E 2016F

Rwanda Nigeria Tanzania South Africa Kenya Côte d'Ivoire Ghana Senegal Egypt Algeria Tunisia Morocco Uganda Zimbabwe Mauritius Zambia Other

Five markets account for 85% of Africa’s FTTH/P homes passed – South Africa, Kenya, Nigeria, Morocco and Mauritius. South Africa has surpassed Kenya and Mauritius as the largest FTTH/P market, in terms of homes/premises passed The South African boom – ~35% of premises passed added over the past two years have been in South Africa But it’s about more than the top 5 – FTTH/P roll-outs have been initiated in at least 15 markets outside of the top 5 above – from Cameroon to Congo-Brazzaville, at various levels of scale.

FTTH Connections in Africa by Region – 2010 - 2016

The 500k FTTH connections 0.70 mark was crossed in 2016

0.60 ~800 new FTTH connections go active every day across Africa 0.50 (2016E) million

0.40 Southern and East Africa 0.30 account for more than three quarters of Africa’s FTTH/P 0.20 connections FTTH/P ConnectionsFTTH/P - 0.10

0.00 2010E 2011E 2012E 2013E 2014E 2015E 2016F

East Africa West Africa Southern Africa North Africa

Source: Xalam Analytics Estimates based on operator data, various

We estimate that the total number of FTTH connections passed the 500k mark in the third quarter of 2016 ~75% of Africa’s FTTH connection growth since 2010 has occurred over the past two years About 800 new FTTH connections go active every day across Africa – a pace that is ~2x 2015 levels and continues to accelerate Southern and East Africa (Mauritius, Kenya and South Africa, principally) account for 80% of Africa’s FTTH/P connections Southern Africa in particular is Africa’s FTTH hot spot – It accounts for ~55% of all connections – but ~70% of incremental growth over the past two years has come from there North Africa’s moderate FTTH impact belies its broader weight on African broadband

FTTH Connections in Africa by Key Market – 2010 - 2016

0.70

0.60 Mauritius is Africa’s largest market in terms of connections 0.50 –the island has accounted for about a third of Africa’s FTTH MAURITIUS million growth over the past two years 0.40

0.30 KENYA

0.20

FTTH/P ConnectionsFTTH/P - SOUTH 0.10 AFRICA

0.00 2010E 2011E 2012E 2013E 2014E 2015E 2016F

Rwanda Nigeria Tanzania South Africa Kenya Côte d'Ivoire Ghana Senegal Egypt Algeria Tunisia Morocco Uganda Zimbabwe Mauritius Zambia Other

Source: Xalam Analytics Estimates based on operator data, various

Mauritius, somewhat surprisingly, is Africa’s largest FTTH market (in terms of connections) – the island has accounted for about a third of Africa’s FTTH growth over the past two years South Africa is coming on strong – matched Mauritius’s growth in 2016, and by our estimates, will become Africa’s largest FTTH market in 2018 (or 2017 if Telkom SA’s actual deployments match its ambitions). Other notables are Africa’s third largest FTTH market, Kenya, where growth has slowed, but adoption remains strong, and Zimbabwe (surprisingly solid in the face of economic doldrums). Cameroon, Congo-Brazzaville are notable newcomers on the FTTH scene, in an otherwise barren Central African region We continue to despair at Nigeria’s inability to live up to its significant potential – and remain pessimistic on that front in the short term; at a broader level, the combination of antiquated regulation, highly concentrated fixed broadband market structures and marginally acceptable ADSL is making West Africa lose ground on FTTH.

FTTH Take-Up in Sample African Markets (FTTH Connections / Homes Passed) - 2016E

60%

50%

40% African markets still a bit higher than 30% other regions - LATAM take-up 20% estimated at 18%*, Europe’s at 28%, the 10% US at ~50%**

0% Mauritius USA Tanzania Nigeria Kenya South Africa Zimbabwe Morocco Europe Tunisia Zambia Latin America Rwanda

*LATAM (2015) from Bicsi.org; **Europe and US from FTTH Councils Sources: Xalam Analytics Estimates based on operator data as of Q3 2016, stakeholder estimations, various

Estimated take-up rates largely reflect the stage of development of the African FTTH market FTTH providers are prioritizing build-outs where the unquestionable demand is – CBDs, etc. (see our analysis on deployment phases in page 44) We expect these ratios to deteriorate over time as (and if) operators move beyond core addressable demand, into suburbs – the fundamental question will be what is the optimal take up rate to pursue deployments beyond the identified Phase 1 Over time, realistic take-up rates may be closer to ~20%-30% outside of CBDs and gated communities.

Africa’s Top 10 Fixed Broadband (FBB) and FTTH Markets – Number of Connections - 2016E

FBB (thousands) FTTH (thousands) Africa’s largest markets have been late to the FTTH game – Egypt and Algeria have yet to roll out in scale, and Morocco’s first scale launch only took 1 Egypt 4,390 1 Mauritius 170 place in the second half of 2016.

2 Algeria 1,842 2 Kenya 136 The underlying implication is that while strong FBB penetration can be a catalyst for FTTH growth, it 3 Morocco 1,338 3 South Africa 131 can also, rather paradoxically hold it up. The impact of FBB on FTTH is hardly automatic, and 4 South Africa 1,274 4 Nigeria 72 largely driven by other factors – (see our analysis on the interplay between FTTHJ and ADSL in Africa). 5 Tunisia 510 5 Morocco 50 Only 6 markets in the FBB top 10 are also in the 6 Mauritius 217 6 Zimbabwe 26 FTTH/P Top 10 – conversely, 4 of Africa’s Top 10 FTTH/P markets do not rank among its largest Fixed 7 Ghana 196 7 Tanzania 14 Broadband markets; they are, for the most part, “leapfroggers” – jumping directly into FTTH without having a strong established FBB base. 8 Angola 160 8 Uganda 9

9 Zimbabwe 160 9 Tunisia 8

10 Kenya 157 10 Zambia 5

Angola based on 2015 data; Nigeria is a Xalam Analytics estimate Source: Xalam Analytics Estimates based on operator data as of Q3 2016, stakeholder estimations, various

FTTH Penetration of Households in African Markets - 2016E (Mauritius displayed separately as it is off-scale)

140% 3.5%

120% 3.0%

100% 2.5%

80% 2.0%

60% 1.5%

40% 1.0%

20% 0.5%

0% 0.0% Mauritius Kenya Zimbabwe South Africa Morocco Tunisia Nigeria Zambia Tanzania Uganda

Penetration of all HH Penetration of Urban HH Penetration of all HH Penetration of Urban HH

Source: Xalam Analytics Estimates based on operator data as of Q3 2016, stakeholder estimations and country census data.

Only 2 markets are above the 1% FTTH household penetration mark – Mauritius and Kenya Mauritius is an African outlier in terms of FTTH penetration – already belongs in global rankings and will likely be in the global Top 10 by YE 2017 While expedient for global benchmarking, FTTH household penetration is not a very useful indicator in the African context Around half of African households are in rural areas – where FTTH rollout is highly improbable (and likely inappropriate) for economic reasons – FTTH is an urban solution All the same – even urban household penetration remains low – less than 5% outside of Mauritius We’re in only stages – the most important is not yet the penetration – but the actual number of FTTH rollouts, which is accelerating

FTTH Penetration of Broadband Addressable Market in Sample Countries - 2016E

60%

51% 50% Africa has a total FBB addressable base of ~22m households and ~2m formal business units with a staff of 5 or more – 40% Fixed Broadband reaches ~45% of that target market – FTTH reaches only 2% 30%

20% 13% 11% 10% 4% 3% 3% 2% 2% 2% 1% 1% 0% Mauritius Zimbabwe Kenya South Africa Morocco Nigeria Tanzania Uganda Zambia Tunisia Rwanda

Addressable Households are households able to afford $20/month connection, based on income levels; addressable business demand includes formal businesses only (i.e. excl. informal sector establishments); all data is 2016 estimate; Source: Xalam Analytics Estimates based on operator data as of Q3 2016, stakeholder estimations and country census data.

The estimated addressable for fixed broadband (based on income levels, readiness and propensity to adopt) is in a wide range - between 10% and 60% of households depending on the market With the formal business market (~2m units), addressable demand is estimated at around 24m – ~7m demand units outside of North Africa and South Africa. Only around 45% of this addressable demand has been reached by fixed broadband access solutions – and only 2% by FTTH The growth runway is substantial – increasing penetration of this addressable demand by a mere five percentage points in sub-Saharan Africa alone would equate to adding half a million new FTTH connections over the next five years.

FBB and FTTH Penetration of Broadband Addressable Market in Sample African Regions - 2016E

SSA (incl. SA)

Africa Excluding NAF and SA

Africa Average

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

FTTH FBB

SSA = Sub-Saharan Africa; SA = South Africa; NAF = North Africa; FBB = Fixed Broadband Addressable Households are households able to afford $20/month connection, based on income levels; addressable business demand includes formal businesses only (i.e. excl. informal sector establishments); all data is 2016 estimate; Source: Xalam Analytics Estimates based on operator data as of Q3 2016, stakeholder estimations and country census data.

At some level, FBB penetration provides a glimpse into the potential of FTTH In that sense, the potential of FTTH is important – there is a ~40 percentage point difference (on average) between FBB penetration and FTTH penetration That gap is widest in North Africa and South Africa – markets with relatively strong FBB penetration, but low (for now) FTTH reach – this suggests underexploited potential The gap is generally smaller in other African markets – suggesting that a predominantly FTTH-based FBB market is highly achievable; indeed, this is already the case in markets such as Kenya

FTTH as % of FBB Connections in African Markets - 2016E

100% > 90% of new FBB connections in Kenya and Nigeria over the past two years have been 90% FTTH/P-based FTTH has barely picked up in a few markets that account for >60% of Africa’s FBB 80% base 70%

60%

50%

40%

30%

20%

10%

0% Kenya Nigeria Mauritius Tanzania Rwanda Zimbabwe Zambia South Africa Uganda Morocco Ghana Tunisia Côte d'Ivoire Senegal Egypt Algeria

FBB = Fixed Broadband; Fixed Broadband includes discrete connections through ADSL, Fixed Wireless Access (Wi-Fi, WiMAX, CDMA), FTTH, leased lines and VSAT satellite; Nomadic LTE connections (TDD and FDD, including migrations from WiMAX) are counted as “mobile broadband” and excluded from these estimates Source: Xalam Analytics Estimates

There is substantial diversity in the pace and nature of FTTH adoption in Africa In some markets, FTTH is at the heart of incremental FBB growth In others, FTTH barely registers – despite the otherwise important level of FBB adoption We explore these differences in depth (along with the interaction between FTTH, other FBB access technologies and MBB in Section 4).

FTTH/B/P Connections Around the World – 2015-16E

EUR - ~36m NA - ~12.3m

ME - ~2m APAC - ~110m

AFR - ~0.6m

LATAM - ~3.7m

Sources: North America (2015) and Europe (2015) from FTTH Council; AP (2015) from Press Reports; LATAM (2015) from Bicsi.org; Middle East and Africa are Xalam Analytics Estimates (Q2 and Q4 2016).

Sample FTTH Demand/Supply Dynamics

Retail price points are Average Data Traffic Rising by High-income user density in key extremely competitive with Market structures do not ~100% a year in key African areas – Gated Communities, Central Declining FTTH Average CapEx – generally lower than- encourage co-investment, Markets Business Districts ADSL, LTE infrastructure-sharing

Acceleration of Demand for bandwidth-hungry applications Metro Fibre More Available in Lack of equal-capability, Very narrow addressable market Alternative FTTH rollout Business Districts – If not Necessarily cost-effective, alternatives during the first phases of deployment techniques that have cut CapEx – Cloud, Data Center Interconnect, Cheap to Fibre blown fibre, aerial fibre, street 4k Video, Virtual Reality Apps, etc. poles, etc.

Old incumbent fixed operators see fibre as a Often unpredictable, haphazard User push for alternative wireline possible path to More difficult economic context – regulation on rights of way, last mile options – something better redemption – Camtel, Competitive broadband retail markets slower growth, FX constraints, availability of passive than wireless, better than ADSL Congo-Telecom, TTCL, etc. tighter availability of capital infrastructure – ducts, poles, etc.

Market Structure/ Regulation/ Supply Technology Demand

*, © Xalam Analytics LLC - 2016 34 “ADSL Doesn’t Cut It” – Wholesale Fibre, Netflix Effect and the Rising Middle Class

Increased capacity supply and declining international capacity prices – Available international capacity has exploded over the past few years, and more subsea cable deployments are planned Decline in wholesale capacity prices (~75%+ from 2010 levels) has eased up the pressure on independent ISPs’ business models. Substantial metro and interurban fibre capacity buildout – extends reach of the Internet beyond capital cities, increased supply puts pressure on wholesale prices INFRASTRUCTURE The rise of open access pricing models – the increasingly favored pricing model for African capacity Shortcomings of established FBB infrastructure – consumer ADSL in most cases around 2-4mbps, reaching 20Mbps in the best of cases

Rising class of urban professionals – in attractive volumes: urban professionals demand the same user experience at home that they are getting at work, or that they have seen in their travels. South Africa in particular has experienced a demand-side revolt - rich communities frustrated by existing broadband services took matters in their own hands and got providers to bid to offer them fibre services The Netflix effect – the increased availability and consumption of bandwidth-hungry content, from video streaming services (Netflix, iRoko), to cloud-based enterprise applications. DEMAND A realization that 3G, ADSL (in its typical African form at least) just aren’t cutting it – is contributing to making the case for fibre in the last mile.

*, © Xalam Analytics LLC - 2016 35 Other FTTH Drivers – Key Player Strategies and Government Broadband Push

An opportunity to fill a gap – Larger African tier-1 (mostly mobile) telcos have –until recently- largely ignored FTTH, creating an opportunity for upstart ISPs A remarkable feature of African FTTH is that it is NOT driven by first tier mobile telcos Wholesale fibercos extending their reach into the business and home – and offering FTTH-based consumer and business broadband as a hedge against pressures in their wholesale business MARKET PLAYERS Old incumbents looking at FTTH as an opportunity to regenerate their lagging businesses – Camtel, TTCL, Congo- Telecom

Regulatory conditions are highly uneven across African markets Governments rolling out domestic backbones In some markets, governments facilitating rollouts, through rights of way, etc. Ease of licensing for last mile infrastructure rollouts REGULATION & GOVERNMENT PUSH

*, © Xalam Analytics LLC - 2016 36 African Regulation is a Significant Obstacle to the Rollout of Ultra fast Broadband Infrastructure

A review of FTTH growth around the world suggest that two primary regulatory/policy approaches have been used to accelerate FTTH adoption – often working in some form of tandem

Allows to build some of the foundational fibre infrastructure private telecoms operators are often loath to build on their own. In this scenario, the government builds some of the infrastructure, and makes it available to market players at attractive, open access prices. In Africa, such models have been used in the long distance backbone market, with good (Kenya) or more mixed (Tanzania) A Government, or Public- effectiveness. Extending the approach to the last mile (as has been done in Singapore or in Australia) is probably a bridge too far given costs sector Led Approach considerations A variant of this model could be for governments to drive this approach through state-owned telcos; many, such as Camtel Cameroon, TTCL Tanzania, Congo Telecom and others are already building out FTTH But in typical fashion, reselling that capacity to retail broadband providers – an approach that would stimulate the retail market- is not even a consideration.

Typically happens through open and flexible licensing of infrastructure providers Stimulation of Private Why impede a company that has credible plans to build up a fibre network? Sector Buildout through Regulators can develop rules to ensure open competition in the wholesale segment; by forcing pricing down on wholesale, they can increase competition in retail and in turn stimulate broadband penetration. Effective Regulation of Traditional setup (with variances) of Western European LLU-based ADSL broadband models – but has discouraged aggressive Wholesale and Retail investment in FTTH Markets This flexible regulatory approach is in use (in various flavors) in most of East and Southern Africa – it is one of the most significant factors behind those regions’ advances in FTTH deployments.

In Mauritius (otherwise an example for broadband best practices), FTTH player Bharat Telecom has waited for at least three years to receive a broadcasting licence to offer IPTV services – essentially neutering its offer while incumbents raced along with triple play services.

In Benin, French company Bollore Telecom’s FTTH deployments have been blocked presumably because it didn’t obtain the right infrastructure licence. Leaving aside the French group’s sulfurous reputation in West Africa, the sight of a government actively working to block FTTH deployments (in a bid to protect competitors) is mindboggling. The argument here isn’t that Bollore Telecom can operate in Benin without the right license; it is evident they must abide by the law. What is surprising is that they have not been given the right licence with the blessing to go ahead – so long as other players have access to similar commercial conditions that have been made available to Bollore.

In Cameroon, state-owned Camtel has an anachronistic exclusivity on operating a national backbone (though newcomer Viettel can apparently deploy a backbone) – ostensibly as part of a government strategy to keep it afloat. Any other provider seeking to roll out fibre between two Truncated Competition, cities gets handed a hefty fine, along with stern police intervention. Camtel survives (for now) – but the consumer and the broader market suffers Rights of Way Issues – though in fairness, Cameroon may not have had an FTTH initiative if Camtel hadn’t launched it.

In other markets (mostly in French-speaking West and Central Africa), de facto monopolies and government action (or inaction) combine to tamp down alternative FTTH rollout initiatives.

Factors such as the above help explain why French-speaking West Africa accounts for less than 5% of Africa’s FTTH connections, a contribution we expect to decline over the next five years as growth in other regions picks up.

In Nigeria, where the regulatory regime is relatively liberalized, the problem is different – a befuddling shortsightedness from local governments that seek excessive payments for fibre rights of way, and have essentially brought fibre rollouts to a standstill – with some help from economic recession. The regulator has been powerless to curb RoW and multiple taxation issues, and Nigeria’s Federal government hasn’t shown much leadership on that front either – all despite outwardly ambitious national broadband policy objectives.

SAMPLE AFRICA BEST SAMPLE AFRICA WORST WHAT AN OPTIMAL APPROACH MAY LOOK LIKE PRACTICE OFFENDERS

Any provider with the capability to build last mile fibre is largely free to do so LAST MILE South Africa Most of French-Speaking FTTH operators allowed to resell last-mile FTTH capacity on an open access basis; some regulation MARKET Kenya Africa: Cameroon, Senegal, encouraging infrastructure sharing STRUCTURE Zimbabwe Benin, etc. Regulator focused on working with municipalities facilitate deployments, rights-of-way, etc.

DOMESTIC/ Encourages/Fosters transmission, international market competition South Africa Most of French-Speaking INTL BACKBONE Government or private sector built domestic backbone, with capacity sold on open access basis Kenya Africa: Cameroon, Senegal, MARKET Competition in this segment is critical Zimbabwe, Zambia, etc. Benin, etc.

Relative ease of obtaining infrastructure licenses (subject to reasonable conditions) South Africa Most of French-Speaking FLEXIBILITY IN Unified licensing –rather than technology-focused Kenya Africa: Cameroon, Senegal, LICENSING Service/application agnostic licensing – focus is on infrastructure, rather than services Zimbabwe, Tanzania, etc. Benin, etc.

Market structure (whether through regulatory action or the interaction of market forces) is another critical contributing factor in the pace of FTTH rollout in a given market;

For the most part, African market structures are not optimized for FTTH roll-outs – About two thirds of the markets we have examined have a closed access FTTH network build structure – there is scant to no infrastructure sharing, individual players seek and have full control of the established network value chain.

That African FTTH is picking up as much as it has been is a testimony to the bottled-up potential of demand for ultra high speed connectivity.

1 2 3 4

LAYER 1 – INDEPENDENT, PASSIVE EXTENSIVE LIGHTLY-REGULATED INFR. WHOLESALE & GOVERNMENT- WHOLESALE MARKET UNBUNDLING DRIVEN LAST MILE ( LAYER 1 AND LAYER REGULATIONS TO NATIONAL 2) – COMPEL BROADBAND INTEGRATED PLAYER INFRASTRUCTURE NO EXPLICIT NETWORK (NBN)* FTTH BUILD-OUT – SHARING AT LAYER 2 UNBUNDLING LAYER 2 - THE ISP BUILDS AN AND 3 REGULATIONS ON ACTIVE FTTH FTTH INFR. INFRASTRUCTURE TO DRIVE ITS OWN RETAIL GROWTH

LAYER 3 RETAIL BROADBAND RETAIL BROADBAND RETAIL BROADBAND - ISPs ISPs ISPs SERVICES

The Government- The Integrated The Last Mile The Market-Driven, The African Way driven NBN Approach Unbundling Approach Last Mile Wholesale Network Value Chain (for the most part) Build Build

The government builds (or Wholesale regulation is used to Infrastructure players build and Everybody builds last mile drives the initiative) and compel infrastructure sharing resell last mile access – on a infrastructure for their own resells commercial, open access purposes – No, or extremely purposes limited sharing *In this case, the NBN is not a mere national backbone for backhaul purposes; it goes all the way to the premise/home. Sources: Xalam Analytics Research

Observations Examples

Government-built (or highly-subsidized) passive fiber infrastructure in the last mile - Broadband retail providers acquire passive or active last mile fiber on open access basis and resell broadband services to the customer This model is highly effective in driving service-level competition; it accelerates the commoditization of connectivity, Government- 1 forcing retail market participants to compete primarily at the service layer; driven Open Access National The government bears the brunt of the initial CapEx investment; another option is a co-investment structure under a Broadband public-private-partnership Network (NBN)* The NBN-driven model has been implemented in Singapore, Australia, New Zealand – there is no real African equivalent African Governments have built transmission backbones, but doing the same on last mile is not a realistic proposition – nor arguably the best use of government resources

Regulations are introduced at wholesale level to compel incumbent networks to resell capacity to retail providers at regulated prices, using a variety of schemes – LLU, VULA, Bitstream, etc. 2 This has been the primary model behind European broadband growth in the past 10 years – but more complicated to Highly-regulated implement for FTTH, as incumbents are loath to invest in fiber only to be forced to resell to competitors Unbundled Last Mile Model No real application of unbundled local loop in the African context – outside of a loose version in South Africa; there’s limited ADSL to begin with; The existing ADSL infrastructure is typically not compelling enough, and even if it is, regulators have not considered LLU a priority

Observations Examples

Layer 2 Fiber companies build last mile active/passive infrastructure – access is sold to retail players at open access prices Some fiber companies sell services directly to the end-user – but most are focused on wholesale 3 The Competitive, The primary impetus is the private assessment of a market opportunity – not regulatory action; addressable demand Open Access Last has to be high enough to support a variety of wholesale and retail FTTH providers Mile Wholesale Market Strong “land grab” and “cherry-picking” effects – wholesale players go after the most attractive demand hotspots, at the expense of others . The approach may require regulatory intervention to ensure wholesale price competition Primarily applied in South Africa, Zambia - Nigeria potential for this model would be strong, viability elsewhere would be questionable

This has long been the traditional African approach – the CSP builds out FTTH infrastructure from scratch for its own, exclusive retail use; the provider has full control on active and passive last mile network elements 4 Competition and differentiation remain largely focused on infrastructure

Closed Access Highly capital intensive – and wasteful. Substantial risk of infrastructure duplication in some sought after demand Network Build neighborhoods Relatively narrow FTTH addressable markets mean that this approach is used opportunistically and selectively CSPs is South Africa are moving away from this model, and more towards some degree of cooperation in coordinating deployments, along with infrastructure swaps and cross-leasing.

Breakdown of Africa Broadband and FTTH Addressable Market - 2016E

120 Africa Population - ~1.2bn

100 Urban Population - ~500m 100 Urban Households - ~100m

80 Households Broadband Addressable* - ~23m

Formal Business Unit Broadband 60 Addressable - ~2m million

Total HH + FBU Broadband Addressable - 40 ~25m

23 25 FTTH Phase 1 and Phase 2 Target Market - ~9m 20 8 9 FTTH Phase 1 and Phase 2 Target Market, 2 excluding South Africa and North Africa - 0 ~1m Urban Households Household Broadband Formal Business Units FBU BB Addressable HH+FBU Addressable Phase 1 & Phase 2 FTTH Addressable

HH: Households; FBU: Formal Business Units. Population data from statistics offices and World Bank; Addressable Households are households able to afford $20/month connection, based on income levels; addressable business demand includes formal businesses only (i.e. excl. informal sector establishments); using companies with staff >5 only; FTTH addressable demand target market in Phase 1 and Phase 2 rollouts only (Central Business Districts, Office Parks, Gated communities and upscale residential neighborhoods). See next pages for detailed definitions of Phase 1 and Phase II FTTH target market. Source: Xalam Analytics Estimates

Second priority of FTTH providers once CBDs have been covered Focus of current FTTH deployment efforts – 2015-2017 2 FTTH penetration still low - <50% - there’s some runway for growth

Office Parks/Central Urban Residential Urban Institutions, Popular Rural Business Urban SMEs, Urban Households & Rural Estates/Gated Education, Residential Businesses/ Districts/Foreign Branch Offices SOHOs Residential Communities Government Neighborhoods Remote Offices Institutions, Embassies

Corporate customers Small businesses Residential Lower Income Residential Government offices, SMEs and small Residential and/or mid-sized and corporate households in non- Households in households in Academic Institutions branch offices in Households Description companies located in the branch offices in gated communities; densely gated estates or located in populated semi-urban or in semi-urban midst of urban areas, or urban/suburban typically middle populated urban communities urban areas rural areas or rural areas in gated office parks neighborhoods, income areas Bryanston, Abobo, Examples – South Sandton, Victoria Island, Bryanston, Parkhurst, Banana Arcadia, Centurion, Alexandra, Africa, Nigeria, Kenya, Nairobi CBD, Westlands, Westlands, Ikeja, Island, Ikoyi, Marcory, Ikeja Soweto, Kibera, Upper Hill Ikoyi, Plateau Yopougon Cocody, Muthaiga, Cote-d’Ivoire Dolphin Estate Loresho

Third target segment – FTTH rollout here will largely hinge on Typically the priority target market for FTTH providers performance, competition and returns in the initial phases, demand FTTH/P Penetration of this segment inching closer to 100% in 3 pressures 1 Johannesburg, Cape Town, Dar es Salam, Nairobi and pockets Largest FTTH volume uptake would be here – but the economics are of Lagos/Abuja. tougher Still limited in Francophone West Africa - ~ <50% penetration ~2017-2019 rollout phase

Sources: Xalam Analytics Research © Xalam Analytics LLC - 2016 45 African FTTH Outlook: In the Short Run, Two Main Phases of Deployments

As noted in our broadband demand analysis overall household and formal business unit demand for broadband stands at around 25m in Africa. Office Parks/Central Business Districts/Foreign Institutions, Embassies Due to practical deployment and cost considerations, however, the actual FTTH Very small, niche base in most markets, typically concentrated in urban areas FTTH PHASE 1 addressable base is substantially smaller – ~ 70% of the addressable base in South Typically less than 2% of the estimated broadband addressable market Africa and North Africa, but only around 15%-20% of the addressable broadband In most markets, the base may not be large enough to sustain scale deployments base in other markets. Most African markets are in phase 1 of deployments, with a small few (South Africa, Kenya, Mauritius) now entering phase 2.

Urban SMEs, Branch Offices, Urban Residential Estates/Gated Communities; Urban Institutions, Education, Government Urban Households and Addressable FTTH Demand in Sample Markets – 2015E In some markets, FTTH planning would have to integrate this segment as part of the first phase of deployment, due to strong proximity in geographic, usage The addressable BB base is characteristics only a small fraction of all FTTH PHASE 2 12,000 ~10%-20% of estimated broadband addressable base (or ~2%-5% of urban households… households) 10,000 This is typically the existing fixed broadband base – the FTTH provider can achieve good volumes, but outside of a few markets, the overall scale is limited 8,000 …and the FTTH addressable is The bulk of our medium term FTTH projections fall within this group only a small fraction of 6,000 broadband demand million 4,000 Urban Households & SOHOs; Residential households in non-gated communities; typically middle income 2,000 ~50% of the broadband addressable base – good volumes, but FTTH economics FTTH PHASE 3 become more acute in this segment 0 Outside of South Africa, we generally do not expect this segment to be SA KEN CIV connected by FTTH within the next five years – whether it does within the next 10 years will depend on status of competition, returns from Phase II Urban HH+FBU Addressable BB HH+FBU Phase II FTTH Demand Phase I FFTH Demand

HH-Households; FBU-Formal Business Units Sources: Xalam Analytics estimates

Fixed Broadband FTTH as % of FBB Connections in African Markets - 2016E Penetration of Addressable HH and Business Demand*

140%

The Best The Next Best – Low 120% Opportunities – High BB penetration, but Mauritius BB penetration, strong FBB presence moderate to high 100% FBB Penetration Morocco

Zimbabwe 80%

Egypt 60% South Africa

Algeria Tunisia Broadband 40% Penetration of Population* -10% 0% 10% 20% 30% Senegal 40% 50% 60% 70% 80% 90% 100% Ghana Cote-d’Ivoire Kenya 20% Zambia The Case for Leapfrogging – Low Tanzania but growing BB, low Rwanda Nigeria 0% to non-existent FBB

-20% *Broadband including Fixed Broadband + 3G and 4G connections; ”Fixed Broadband includes discrete connections through ADSL, Fixed Wireless Access (Wi-Fi, WiMAX, CDMA), FTTH, leased lines and VSAT satellite; LTE (TDD and FDD) are counted as “mobile” and excluded from these estimates; Addressable Households are households able to afford $20/month connection, based on income levels; addressable business demand includes formal businesses only (i.e. excl. informal sector establishments); all data is 2016 estimate; Bubble size indicates annual USD connectivity market size (2016E) Source: Xalam Analytics Estimates

Two Types of FTTH Opportunities – The Mature and the Leapfrogging

These markets have high overall broadband penetration, higher than the ~35%-40% average (of the South Africa, population) Mauritius In addition, they have a moderate to high wireline penetration of the broadband addressable market Morocco In those cases, broadband usage levels are already strong – users are primarily focused on the quality of the Tunisia MATURE BB MARKETS - THE connectivity they receive – which in most cases will be up to 20Mbps ADSL or costly LTE Zimbabwe CLEAR-CUT FTTH Demand for broadband is already demonstrated - FTTH merely feeds into a yearning –and desire to pay- for OPPORTUNITIES better service capabilities While the potential is excellent, the pace of rollout can actually be slow if existing providers are comfortable with their offering – also known as the “people don’t need 100Mbps” syndrome.

Fixed broadband penetration is low enough that a compelling FTTH offering would essentially leapfrog other Ghana technologies. Kenya The scope of the leapfrogging depends on the depth of existing infrastructure. Zambia In about a quarter of the markets at least, FTTH either is, or can become the primary last mile access Nigeria THE LEAPFROGGING technology within 2-3 years from launch. Rwanda, OPPORTUNITIES Some markets are a midpoint between leapfrogging and maturity – broadband penetration is relatively low, Uganda, etc. but FBB penetration is higher than average – Cote-d’Ivoire, Senegal Such markets are likely to lag the rest of the region on FTTH as operators focus on preserving their ADSL assets.

ADSL vs. FTTH Connections – Mauritius ADSL vs. FTTH Net New Connections - Mauritius

180 150 160 140 100 120 Full Cannibalization – Subscribers Move 50 100 to Fibre as soon as 80 it’s Available 0

Thousands Other technologies 2010 2011 2012 2013 2014 2015 2016

60 Thousands are flat or declining (50) 40 primarily back-ups – 20 used where FTTH (100) can’t go 0 2010 2011 2012 2013 2014 2015 2016 (150)

ADSL FTTH ADSL FTTH CDMA/FWA/VSAT

Sources: Mauritius Telecom; CSO; Xalam Analytics Estimates

ADSL customers are migrated to FTTH connections Typically occurs in markets that are well penetrated by ADSL In this case, the ADSL operator accelerates the migration process, to preserve its broadband market share, increase ARPU The accelerated push to fibre generally is typically an anticipatory move under threat of competition; the operator migraters its customers before competitors have the opportunity to do so SELF-INDUCED CANNIBALIZATION Still relatively uncommon in the region as operators prefer to exhaust all possible upgrade options with (or fully amortize) ADSL Example: Mauritius, Morocco

ADSL vs. FTTH Connections – South Africa ADSL vs. FTTH Net New Connections – South Africa

1,200 150 1,000 100 800 50 600 The cannibalization phase is only starting – it will accelerate Thousands 400 0 2010 2011 2012 2013 2014 2015 2016

200 Thousands (50) 0 2010 2011 2012 2013 2014 2015 2016 (100)

ADSL FTTH (150)

ADSL FTTH CDMA/FWA/VSAT Sources: Operators; Xalam Analytics estimates

Typically occurs in markets that are well penetrated by ADSL In this case, alternative providers/ISPs drive FTTH growth The dominant ADSL operator is reluctant to move to ADSL – it seeks to exhaust all possible upgrade options with (or fully amortize) Competitive migration occurs – customers move to better quality offers – even for a slight premium COMPETITION-DRIVEN CANNIBALIZATION ADSL operators reluctantly kick off their own fibre rollouts so as not to be left behind, further accelerating the migration process, Example: South Africa, Zambia

ADSL vs. FTTH Connections - Zimbabwe ADSL vs. FTTH Net New Connections - Zimbabwe

80 30 70 FTTH is growing – but so is ADSL; 60 20 Other fixed broadband technologies 50 bear the brunt of FTTH growth 10 40 0

Thousands 30 2010 2011 2012 2013 2014 2015 2016 20 (10) Thousands 10 (20) 0 2010 2011 2012 2013 2014 2015 2016 (30) ADSL FTTH (40)

ADSL FTTH CDMA/FWA/VSAT Sources: Operators, POTRAZ, Xalam Analytics estimates

Typically occurs in markets with low to moderate broadband penetration FTTH is introduced, but ADSL continues to resist – ADSL connections take-up keep up with FTTH Occurs when FTTH is available, but has yet to offer superior proposition – speeds, pricing are similar to existing offers In some cases, FTTH cannibalizes ADSL in specific coverage areas – but ADSL continues to grow where FTTH is not available In such cases, other fixed broadband technologies bear the brunt of FTTH growth ADSL RESISTANCE Typically a transition phase towards competition-driven FTTH migration ; over time, FTTH cannibalization is largely inevitable Example: Zimbabwe

ADSL vs. FTTH Connections – Cote-d’Ivoire ADSL vs. FTTH Net New Connections – Cote-d’Ivoire

70 20 60 15 50 10 40 No credible FTTH competition + Incumbents 5 30 sweating their ADSL assets = ADSL dominates Thousands The question is whether this keeps up long 0 20 2010 2011 2012 2013 2014 2015 2016

term – we do not believe it does Thousands (5) 10 (10) 0 2010 2011 2012 2013 2014 2015 2016 (15)

ADSL FTTH (20) ADSL CDMA/FWA/VSAT FTTH Sources: Operators; Xalam Analytics estimates

Typically occurs in markets that have strong ADSL penetration, with limited competitive pressure The incumbent’s dominance of the last mile (along with regulatory protections) discourage alternative investments Incumbent ADSL providers show no inclination to cannibalize their ADSL offerings – and face no competitive pressure to do so No material FTTH plan – ADSL migration options are to be explored to the fullest before FTTH is rolled out NO REAL FTTH UPTAKE – FOR NOW Such markets will typically lag on FTTH – absent regulatory intervention Examples: Several top African broadband markets fall here - Cote-d’Ivoire, Senegal, Egypt, Tunisia The question in these cases is whether such markets can keep FTTH away for long – we do not believe they can As Internet usage expands, so will the limitations of ADSL – and demand-side pressure to move to FTTH

MBB Penetration vs. FTTH Penetration and FBB Penetration in 15 African Markets – 2010-2016

100% Positive FBB/MBB relationship: markets with strong MBB penetration are excellent grounds for FBB and vice versa – the same does not hold true for FTTH, at least for now. 80%

60%

MBB Penetration vs FTTH Penetration 40% MBB Penetration vs. FBB Penetration Linear (MBB Penetration vs FTTH Penetration) Linear (MBB Penetration vs. FBB Penetration)

20%

FBB/FTTH PenetrationAddressable of Market The correlation between MBB and FTTH penetration 0% has been low – while they both provide Internet 0% 10% 20% 30% 40% 50% 60% 70% 80% connectivity, the two technologies have fundamentally different supply and demand drivers; they’re complementary, rather than substitute -20% MBB Penetration of Population

Dots indicate penetration data in 15 African markets over 2010-2016 period; *MBB = Mobile Broadband (3G and 4G connections); FBB = Fixed Broadband - discrete connections through ADSL, Fixed Wireless Access (Wi-Fi, WiMAX, CDMA), FTTH, leased lines and VSAT satellite; Broadband addressable market includes households able to afford $20/month connection, based on income levels + addressable business demand (formal businesses only). Source: Xalam Analytics Estimates

African broadband connectivity is (and will be) predominantly built around mobile broadband. How does this impact FTTH?

MBB has been known to cannibalize FBB last mile solutions in African markets – largely because MBB was better in most respects We see low to non-existent (speeds, quality, pricing model, etc.). The relationship with FTTH is more positive (though not yet clearly established); correlation between MBB 1 uptake and FTTH uptake – but There’s low to non-existent correlation between MBB uptake and FTTH uptake – for now. While they both provide Internet it’s early connectivity, the two technologies have fundamentally different supply and demand drivers; they’re complementary, rather than substitutive.

But it’s early – while the empirical evidence doesn’t yet support this, our theory is that MBB lays the ground for FTTH penetration. It But MBB is nonetheless a allows initial, on-demand connectivity and creates the broader context for the broader connectivity ecosystem, including content, precursor to FTTH – markets regulation and supporting digital infrastructure (fibre backhaul, data centers, etc.). MBB usage also has limitations that make customers keenly aware of what they do not have. The more customers use MBB over time, the more they yearn for FTTH capabilities. 2 with low MBB penetration typically have low FTTH penetration as well In effect, MBB stimulates FTTH demand – whether FTTH picks up becomes primarily a supply issue. Conversely, a market with low MBB is unlikely to see solid FTTH uptake.

MBB helps build the economic 3 case for FTTH

African Retail Broadband Annual Revenue – 2015E-2020F Fixed Broadband Share of Retail Connectivity Revenue in Sample African Markets (2016E)

60% $12

50% $10

$8 40%

$6 30% US$ bn

$4 20%

$2 10%

$0 2015 2016 2017 2018 2019 2020 0% Mauritius Côte Egypt Zimbabwe Senegal Kenya Morocco Nigeria Ghana South FBB MBB d'Ivoire Africa

Sources: Xalam Analytics Estimates; Sources: Xalam Analytics Estimates;

At a macro level, we estimate Africa’s retail broadband connectivity market at around The potential fixed broadband opportunity largely dovetails the level of fixed $9bn (2016E) – a market growing at ~15%-20% in local currency terms (and ~5%-7% un broadband penetration. In some markets, FBB already accounts for at least 30% of USD terms). retail connectivity revenue, a potential pool for FTTH.

Around 70% of that revenue is generated in the mobility segment, a proportion that In others, the contribution of FBB is much smaller, perhaps leaving substantially varies significantly depending on the market; in effect, FTTH falls within a broader more growth upside. revenue opportunity of around $2.3bn annually, of which around a third is generated in North Africa.

FTTH CapEx/Home Passed in Sample African and International Projects

Capex CapEx/Home Homes Passed (USD million) Passed $2,500 Liquid Zambia $12 15,000 $800 $2,000 USD Liquid Rwanda $35 15,000 $2,333 - $150 350,000 $429 $1,500 Mauritius Tel One Zimbabwe $25 50,000 $500 $1,000 Telkom SA $149 144,500 $1,032

$500 Our assessment of a number of FTTH rollout projects puts CapEx per CapEx/Home Passed home passed in the $600 to $2500 range. Another ~$150 to $300 $0 would be added for each additional connection. CapEx would typically Liquid Rwanda Telkom SA Liquid Zambia Verizon Fios Tel One Mauritius be higher than the above range in the early phases of deployment; in Zimbabwe addition, some markets require substantially more trenching and civil works, while in others governments charge excessively high rights of way fees. Estimate in later phase Very early phase – early phase was ~2x Projected estimate after ~5 year of deployment, higher roll-out The CapEx range is broadly consistent with patterns observed relatively small Significant scale - ~20m Small island context elsewhere, notably in the US market rollout. In addition, the above scale homes passed range is consistent with an estimated range of ~$800 to $1200 suggested by broadband equipment vendor Adtran Inc to our research Estimate after 18 Estimate based on top partner Light Reading.* months of deployment, line target of ~50k ~150k homes passed homes passed African CapEx per home connected are still fairly high due to the early phase of deployment, and in our view not yet representative of the ultimate baseline CapEx/connection. Top level estimates based on operator reports; Liquid Rwanda based on estimates for 15k homes passed; Telkom based on cumulative fibre capex and homes passed as of September 2016; Mauritius based on five year FTTH CapEx and rollout projections Sources: Operator data, Xalam Analytics Estimates *http://www.lightreading.com/gigabit/fttx/altice-ftth-bill-could-hit-almost-$96b-in-us/d/d-id/728701

Cumulative Africa FTTH CapEx Requirements – 2017-2020 Africa FTTH CapEx Requirements in Context

$4.50 $7.00

$4.00 $6.00 $3.50 $5.00 $3.00 $4.00 billion

billion $2.50 - - $2.00 $3.00 CapEx CapEx $1.50 $2.00 $1.00 $1.00 $0.50 $0.00 $0.00 Low-End FTTH CapEx Requirement High End FTTH CapEx Requirement SSA Annual FTTH CapEx Vodacom SA Maroc Telecom MTN Nigeria Mobile CapEx Requirement 2016 CapEx 2015 CapEx 2016 CapEx (Annualized) Sources: Operator data, Xalam Analytics Estimates; CapEx is last mile fibre rollout only, excluding backbone expenses; estimates are based on FTTH/GPON model. Sources: Operator data, Xalam Analytics Estimates; Vodacom CapEx annualized based on 6m Capex to Sept 2016; MTN Nigeria CapEx annualized based on H1 2016.

On the basis of our CapEx/home passed estimates, we extrapolate that African Likewise, the lower-end of our FTTH CapEx estimates is lower than Vodacom South markets will need between $2.3bn and $4bn over the 2016-2020 period to hit our Africa’s annual CapEx, and only marginally higher than Maroc Telecom’s. FTTH homes passed projections. [These estimates exclude Egypt and Algeria, two markets where our rollout projections are highly conservative at this stage]. In essence, and for illustrative purposes, African mobile operators can effectively finance FTTH deployments by allocating ~15% of their annual CapEx to FTTH – On an annual basis, this means a potential CapEx of about $600m to $1bn. alternatively by increasing their CapEx by 15%-20%.

Seen in context, Africa’s FTTH CapEx requirements are hardly excessive, especially when considering the broader impact of increased FTTH penetration. The higher-end of our estimates is only around 15% of Sub-Saharan Africa’s 2015 mobile CapEx.

Our analysis suggests that there are three critical levers to African FTTH economics (assuming optimal regulatory and wholesale market conditions) – CapEx/Home, ARPU, and FTTH Take-Up Rates

The CapEx per home passed, which determines how much the provider spends for each home passed, on a cumulative and incremental basis. This factor is even more critical in Africa due to the potentially narrow size of the upper-end market.

There is some disagreement (ands limited empirical evidence) on what happens to incremental CapEx/home passed once a provider moves beyond central business districts, office parks and gated communities. In some cases, scale effects continue to bring down CapEx; in others, the difficult CAPEX PER HOME PASSED rollout environment may actually contribute to increasing marginal CapEx. But this is a critical determinant of whether FTTH ultimately works out beyond CBDs.

And incidentally, it illustrates the damaging impact of Nigerian local governments in seeking to maximize revenues through rights-of-way charges. Unless this is resolved, there’ll be no viable Nigerian FTTH business at scale.

Up or Down? Evolution of FTTH CapEx/Home Passed

Cumulative CapEx/Home Passed - CapEx Goes Back Up Outside the CBD Cumulative CapEx/Home Passed - CapEx Declines Outside the CBD

$1,600 $1,400 $1,200 $1,000 $800 Does marginal CapEx go Up or Down once the operator moves outside of the African CBD? Our research was inconclusive – $600 but the answer to this will determine whether African FTTH $400 ever reaches scale $200 $0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Our analysis suggests that there are three critical levers to African FTTH economics (assuming optimal regulatory and wholesale market conditions) – CapEx/Home, ARPU, and FTTH Take-Up Rates

The take-up rates indicate what proportion of homes passed actually pick up connectivity services. The higher the rate, the higher the revenue base and the overall economics of the business.

Rates above 40%-50% are optimal over the long term – whether they’re realistic will largely depends on the context. AFRICAN FTTH TAKE-UP RATES The potential for high take-up rates early on is good, given the strong demand and ability to pay in the premium target segments (and subject to the intensity of competition). The more operators will move beyond this core, the more take-up rates will likely turn problematic.

ARPU is another fundamental driver of the model. It is intricately tied to take up rates and phases of deployment.

In phase 1, ARPU can be high, given the high need and capability to pay of the target market. Beyond that segment, however, a high price can constrain take-up rates and complicate the business model. The provider has to find the right balance, an effort complicated by competition and AFRICAN FTTH ARPU regulation.

FTTH Business Case 1 – Narrow Addressable Market (Phase 1 & Phase 2 Only)

0 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 -5 US$ millions -10

-15

-20

Free Cash Flows EBITDA

Assuming ~50k homes passed after 5 years, take-up rising to 50%, ARPU at ~$75, CapEx/new homes passed stabilizing after Year 5, and EBITDA margin positive from year 2, rising to 40%. Sources: Xalam Analytics Research

African FTTH economics will be either workable, or quite tough, depending on the market context and the operator’s strategic approach.

We illustrate below, two indicative business cases. In the first, the provider focuses on a relatively narrow target market – “Phase 1 & Phase 2”, as per our definitions in our demand analysis ( Office Parks/Central Business Districts/Foreign Institutions, Embassies, etc.). In the second, the provider moves beyond these upper-end demand groups to offer FTTH to the mid and upper middle class market. We assumed similar timing for the business turning EBITDA-positive.

In the first case, the CapEx per new homes passed declines over time, reducing the CapEx pressure on the provider. As a result (and also thanks to higher ARPUs and higher take-up rates), the business turns cash flow-positive much faster (Year 6 in our example), though competition and other factors could delay that timing.

FTTH Business Case 2 – Broader Addressable Market (Phase 2 and Beyond)

0 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 -5 US$ millions -10

-15

-20

Free Cash Flows EBITDA

Assuming ~150k homes passed after 5 years, take-up rising to 30%, ARPU at ~$75, CapEx/new homes passed potentially increasing after Year 5, and EBITDA margin positive from year 2, rising to 40%. Sources: Xalam Analytics Research

The second business case is more complicated. As the provider moves beyond the first two phases of deployment, the CapEx risk can increase, average revenue per user declines, and so may take-up rates. Depending on the model, cash flows are tighter over a longer period of time, but CapEx can be controlled through infrastructure sharing, lower rights of way, etc.

Along with regulation, these economics are the biggest risk to all the projections we have made throughout this report. The business case turns positive, but only after 8+ years. This also reinforces the fact that FTTH at scale is a long, long term game. Investors looking for quick returns and payback periods will not find them here. But providers that stick to it over the long run will hold a nearly unassailable position in Africa’s digital infrastructure market.

This also means that operators have to tweak the model, become smarter and more flexible to bring down CapEx. This means some degree of cooperation in capital investment, or at a minimum, some form of infrastructure sharing. There has to be a pathway to bringing down CapEx or this will not work beyond Phase 1 in our opinion.

Monthly Subscription Prices in Sample Markets: FTTH vs. ADSL vs. 3G/4G*

$600

$500 Most FTTH packages are offered at a discount or very slight premium to ADSL

$400

$300

$200 Monthly Subscription Monthly

$100

$0 Nigeria Kenya South Africa Zimbabwe Zambia Cameroon Mauritius Morocco Gabon

Fibre ADSL/FWB/LTE MNOs/3G-4G

Comparisons based on packages of at least 15Mbps and 150Gbps or above, except for the following: Zimbabwe ADSL – 4Mbps; Cameroon FTTH is 4Mbps, ADSL is 256Kbps; Mauritius ADSL is 512Kbps; Gabon ADSL is 10Mbps; data as of Q3 2016; mobile packages based on prepaid Sources: Operator data, Xalam Analytics Estimates;

It is notable that FTTH is generally priced at par, discount or very slight premium to The FTTH price points are still relatively high. Only in a third of the markets are the ADSL, with substantially better speeds (and in many cases, double or triple play). The subscriptions available under $50 (for upper 100 GB usage), though more flexibility is pricing is built to get users to migrate. being introduced to drive adoption.

Mobile 3G/4G remains the predominant access technology – But for relatively high usage volume, it is not a competitive option.

As would be expected, fibre access solutions offer the best download (and upload) African FTTH benefits from highly competitive pricing; across all the markets we have speeds available in African markets – by a factor of 2x to 10x for the same level of spend. examined, FTTH is priced at par with (in the case of ADSL), or at a material discount to existing alternatives. The contrast is even starker for business customers – competitive packages are available for ~100Mbps speeds; in South Africa, gigabit business connections are increasingly On a per GB basis, FTTH is ~5x to 15x cheaper than the typical non-ADSL alternatives. For available – and increasingly available to households too. an average African household consuming at least 100GB a month, it is easily the best value for the money – and it’s not particularly close. FTTH is raising download speed averages – in Nigeria and South Africa, the lowest plans start at ~10Mbps or 20 Mbps. As more users shift to fibre packages, so does their user This means that at this stage, the primary obstacle to accelerated FTTH adoption within experience. the identified target markets is availability/supply – a gap many providers are rushing to fill.

Fastest Access Speed Plans Available to Consumers – Fiber vs. Other Broadband Access Monthly Price per GB – Fiber vs. Other Broadband Access Options (Consumer Plans) Options

120 $4.00 The monthly spend range for 150GB is ~$45- On a location-neutral basis, the fastest $85 on FTTH, and ADSL, $330 to $500 on 100 available consumer speeds on fiber are 2x to $3.50 3G/4G 10x higher than the alternatives $3.00 80 $2.50 60 $2.00 Mbps $1.50 40 $1.00

20 GB per Price Monthly $0.50 0 $0.00 Nigeria Kenya South Africa Nigeria Kenya South Africa

Fiber ADSL/3G/LTE Fiber FWB/LTE MNOs/3G-4G Estimates are indicative only; South Africa comparison against ADSL; Nigeria and Kenya against LTE average actual Comparison based on minimum monthly usage of 150GB and a fixed connection of 15Mbps-20Mbps; Kenya peak download speeds as collated from Opensignal.com; variations are likely based on user location, other factors and Nigeria fiber are triple play options, including TV and basic voice in addition to Internet Broadband. Sources: Xalam Analytics Research; Operators, Opensignla.com data Sources: Xalam Analytics Estimates, Operator Pricing Data

Top 3 MNOs Combined Share of FTTH Market in Sample Countries* – 2016E

120% 98% 100% Africa’s top mobile operators are lagging in the FTTH race – for now 80%

60%

40% 20% 20% 15%

Share Connections of FTTH Share 20% 10%

0% Zimbabwe South Africa Nigeria Kenya Zambia

*Share of FTTH connections held by the market’s top 3 mobile operators Source: Xalam Analytics Estimates

Africa’s mobile operators have traditionally ignored FTTH – not critical to value proposition, high CapEx, narrow addressable market (compared to mobile), regulatory complexity, and a potentially difficult business case at a time they had plenty other things to worry about.

As a result, they have lost ground - In some of the continent’s largest FTTH markets (South Africa, Kenya, Nigeria), the top three mobile operators control less than 20% of active FTTH connections (Mauritius is a notable exception). Their position in the fast-growing metro segment is relatively marginal, with metro players such as Liquid Telecom, EOH, or Broadbased Communications dominating that segment. Of course, this is a shortcoming that can be fixed through acquisitions but that path is bound to be pricey.

Strategically, we do not believe top tier operators can afford to lose ground on FTTH as their traditional mobile models are getting squeezed. They would be losing what will become the primary conduit for enterprise and home digital life – not for all, but for some of the market’s most critical segments – mid to upper-income digital homes, office parks, SMEs in central business districts, data center gigabit connectivity - ~80%+ of Africa’s last mile fiber revenue opportunity.

In turn, we expect that many will seek to catch up – either through greenfield build-outs, or preferably through acquisitions of FTTH players.

Excellent. Mauritius the most penetrated fibre market in Africa, household penetration will likely be in the Mauritius global top 10 by YE 2017.

Excellent. SA has arguably Africa’s best fundamentals South Africa for FTTH growth; core question is how far beyond initial phases of deployment rollout will go.

Very good. Good underlying fundamentals, with a few Kenya moderate limitations - depth of the household market and moderate backbone fibre competition.

Tanzania Moderate. Good potential, some deployments, but critical underlying limitations in key areas – e.g. flexibility of the backhaul metro market

Rwanda Good. Excellent supply fundamentals, government support; backhaul costs are a significant challenge, depth of demand is questionable.

Zimbabwe Good. Market is driven by competition, regulatory flexibility. Broader macro-economic context could hold back uptake.

Good. Market is driven by competition, regulatory Zambia flexibility. Broader macro-economic context could hold back uptake.

(1) Beyond Words: Government Impetus & Backing – refers to active government support and action, including on rights of way, etc; also refers to government ability to get out of the way; (2) Wholesale & Retail Regulation and Market Structure: assesses whether regulation and structure have driven or hampered FTTH rollout; (3) Availability of Fibre Backhaul at Competitive Prices- level of competitiveness, flexibility of the wholesale capacity market; (4) Depth/Size of FBB Addressable Market – potential size of addressable fixed broadband demand;(5) FTTH is a Critical Component of Key Telco Strategy: based on explicit plans, actions; indicates that item is a critical obstacle to FTTH

Beyond Words: Wholesale & Retail Availability of Fibre Depth/Size of FBB FTTH is a Critical Component Summary Outlook Government Regulation and Backhaul at Addressable of Key Telco Strategy Impetus & Backing Market Structure Competitive Prices Market Low. The demand depth is unquestionable, but the supply fundamentals are mostly woeful; deployments Nigeria will remain small scale, with potential for strong acceleration. Low to Moderate. The biggest wildcard of our Africa Egypt FTTH forecasts; CapEx impact means little appetite for FTTH, but a change would materially impact projections. . Very good. Good underlying fundamentals, with a few Morocco moderate limitations – FTTH growth has started to pick up.

Very good. Good underlying fundamentals, with a few Tunisia moderate limitations – FTTH growth has started to pick up. Low to Moderate. Good demand fundamentals, but Cote-d’Ivoire impetus to roll out FTTH is limited; will remain ADSL market over our forecast period

Low to Moderate. Good demand fundamentals, but Senegal impetus to roll out FTTH is limited; will remain ADSL market over our forecast period

Cameroon Low. Supply fundamentals are not good, but FTTH push by Camtel; deployments will remain small scale.

Country Primary FTTH Market Structure FTTH Deployment Plans

Telkom SA - Target ~300k-400k by 2017, 1m by 2018 Competitive Wholesale FTTH Vumatel - Targets ~200k homes passed by 2018 South Africa Market Frogfoot Networks/Vox - ~100k homes passed by 2018-19 Vodacom SA – Aims to reach ~250k by 2017, ~1m “Fibre end points” by 2020 – through mix of own+other FTTH provider infrastructure

Zimbabwe Tel One – Targets ~100k homes passed by 2018 Closed Access Network Build Liquid Telecom – Had passed around 50k premises in mid 2016, coverage projected to at least double within 2-3 years

Zambia Closed Access Network Build (1) CEC Liquid - ~15k homes at Q3 2016;

Wananchi – Initial target (from 2010) was ~1m homes by 2015; actual closer to ~25% of that target Kenya Closed Access Network Build Safaricom – Initial deal with Kenya Power for ~12k homes Liquid Telecom – Targeted approach, with focus on areas not already covered by other FTTH providers - ~10k homes passed by YE 2016

Tanzania Simbanet, Raha Closed Access Network Build NA – estimated under 50k homes passed

Rwanda Closed Access Network Build Liquid Telecom - ~15k homes targeted in Kigali

Mauritius Closed Access Network Build Mauritius Telecom – aims for 50% of the island’s households passed by fibre by YE 2016, and all households passed by 2020 (~350k households).

Nigeria Closed Access Network Build IPNX – An initial ~50k homes passed; pre-recession target was 500k to 2m homes long term – substantial pullback since

Cameroon Closed Access Network Build Camtel looking for financing to expand FTTH network to 1m households across the country

(1)CEC Liquid makes FTTH available for resale by retail broadband providers; we still classify the Zambia market structure as “closed”, as the Liquid approach is driven by company strategy (rather than a regulatory requirements), and the company retains full control on its FTTH wholesale prices. Sources – Operators, press reports, various.

FTTH Homes Passed in Africa – 2016E-2020F

Four big FTTH wildcards: Nigeria, Algeria, Egypt, Tunisia

6.00 Under a conservative reading of fiber deployment plans, between 5m and 6m homes and premises 5.00 passed in SSA by 2020 South Africa - More than 1m new homes/premised million - 4.00 passed over the next 4 years; close to 35% of Africa’s homes passed in 2020

3.00

2.00

FTTH/P Homes Passed 1.00

0.00 2016F 2017F 2018F 2019F 2020F

Rwanda Nigeria Tanzania South Africa Kenya Côte d'Ivoire Ghana Senegal Egypt Algeria Tunisia Morocco Uganda Zimbabwe Mauritius Zambia Other

There is no obvious scientific approach to estimate fibre homes passed in a precise manner (other than using a GIS model and quite literally counting them) – even more so at an African level. Estimates here are based on operator reports; while these estimates are net of coverage duplication, some degree of duplication may remain. All numbers are provided for indicative purposes – and because they are key assumptions in our FTTH forecasts. Source: Xalam Analytics Estimates

We project the number of FTTH/P homes and premises passed in Africa to reach around 5.6m by 2020 – up ~3x from 2015 levels. Half of the projected deployments are in Southern Africa (mostly South Africa) – only 20% in West Africa; North Africa uncertain, with strong upside High degree of volatility – our estimates are based on a conservative reading of dynamics in a number of critical volume markets – Nigeria, Algeria, Egypt, Tunisia; those four markets could double our homes passed projections to ~10m

FTTH Connections in Africa by Country – 2016F – 2020F

2.50 Africa to hit ~2m FTTH connection mark in 2020

SA Rising – South Africa to account for 2.00 50% of Africa’s FTTH Base

+~1.3m new FTTH connections million 1.50 between 2016 and 2020

1.00 FTTH Connections - Connections FTTH 0.50

0.00 2016F 2017F 2018F 2019F 2020F

Rwanda Nigeria Tanzania South Africa Kenya Côte d'Ivoire Ghana Senegal Egypt Algeria Tunisia Morocco Uganda Zimbabwe Mauritius Zambia Other

Source: Xalam Analytics Estimates based on operator data, various

We expect the total number of FTTH connections to hit the 2m mark by 2020 That’s ~1.3m new connections added between 2016 and 2020 – a run rate of ~325k new connections a year The numbers could be higher subject to what happens in Nigeria, Egypt, Algeria, where we have highly conservative projections Southern and East Africa (Kenya and South Africa, principally) to account for ~80% of Africa’s FTTH/P connections The regional gap will get worse – West Africa’s FTTH lag will be substantial, absent urgent regulatory action (which we do not expect).

Africa’s Top 10 FTTH Markets – Number of Connections - 2016E vs. 2020F

Our ranking of African FTTH markets highlights the FTTH 2016 FTTH 2020 (thousands) volatility (and perhaps, futility) of any long term (thousands) FTTH projections at this stage.

1 Mauritius 170 1 South Africa 746 On the basis of our base case projections, the top 10 of African FTTH markets should remain largely 2 Kenya 136 2 Mauritius 275 unchanged over the next four years.

3 South Africa 131 3 Morocco 250 The reality is more nuanced – we see our projections for Nigeria, Egypt, Tunisia and Algeria 4 Nigeria 72 4 Kenya 240 as extremely conservative, and a reflection of market conditions as of 2016-2017. 5 Morocco 50 5 Tanzania 131 Any material changes in supply factors (regulation, a 6 Zimbabwe 26 6 Zimbabwe 92 key player deciding to push FTTH, etc.) would push those markets near the top of this ranking. Likewise, 7 Tanzania 14 7 Nigeria 82 markets such as Angola could enter this top 10. Conversely, our projections for Tanzania or Uganda may turn out on the aggressive side. 8 Uganda 9 8 Tunisia 48 Perhaps more than inherently volatile rankings, the 9 Tunisia 8 9 Ghana 25 larger point is that core FTTH growth will be driven by a group of 10-12 markets, with ultimate impact 10 Zambia 5 10 Uganda 24 depending on how supply fundamentals evolve.

Each market has to be assessed individually – and on Angola based on 2015 data; Nigeria is a Xalam Analytics estimate its own intrinsic merits. Source: Xalam Analytics Estimates based on operator data as of Q3 2016, stakeholder estimations, various

FTTH Penetration of Households in African Markets - 2020E (Mauritius displayed separately as it is off-scale)

5.0% 80% 4.5% 70% 4.0% 60% 3.5%

50% 3.0% 2.5% 40% 2.0% 30% 1.5% 20% 1.0% 10% 0.5% 0% 0.0% Mauritius Kenya Zimbabwe South Africa Morocco Tunisia Nigeria Zambia Tanzania Uganda

2016E 2020E 2016E 2020E

Source: Xalam Analytics Estimates; For indicative purposes, penetration of households in above chart is based on all FTTH connections (rather than residential connections only).

At least 6 markets will be above the 1% penetration mark – and likely more, depending on the pace of rollouts Mauritius FTTH penetration projected to ~75%, a remarkable level even by global standards African FTTH to remain a primarily urban, Phase 1/Phase 2 Target Market play

Mauritius Key Broadband Indicators - Past 3 Years

2014 2015 2016

Population Household + FBU Addressable (k) 323 327 331 ~1.27m Fixed Broadband Connections (k) 190 210 217

FTTH Mobile Broadband Connections (k) 550 640 780 Connections (2016E) FTTH Connections (k) 18 72 170 ~170k

Mauritius FTTH Penetration of Households vs. Peer Markets – 2016E Mauritius FTTH Outlook (Homes Passed vs. Connections)

0.45 Mauritius 0.40 Kenya 0.35 0.30 Zimbabwe 0.25 0.20 South Africa million 0.15 Morocco 0.10 0.05 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 0.00 FTTH Penetration of Households 2015E 2016E 2017F 2018F 2019F 2020F

Sources: Mauritius Telecom, CSO, Xalam Analytics Research; For indicative purposes, penetration of households in Homes Passed Connections above chart is based on all FTTH connections (rather than residential connections only).

Mauritius FTTH Context Broadband Market Overview Beyond Wholesale & Availability of Depth/Size of Words: Retail Fibre FTTH is a Critical FBB Government Regulation and Backhaul at Component of Key Mauritius has the highest broadband penetration in African markets - ~80% of the Addressable Impetus & Market Competitive Telco Strategy Market population Backing Structure Prices Underlying connectivity infrastructure is excellent – if not quite competitive or using open access principles

A connectivity market worth ~$80m a year (2016E), growing at ~15%-20% annually;

Where Mauritius Fits in the African FTTH Opportunity Mapping FBB matters: fixed broadband generates slightly more than half of the country’s connectivity revenue Fixed Broadband Penetration of Addressable HH and Business Demand*

140% FTTH Outlook and Risk Factors

120% Mauritius falls in the “Best FTTH Opportunity” country bracket - High BB penetration, Mauritius moderate to high FBB Penetration: the market is ripe for FTTH 100%

80% FTTH rollout has been extensive – Mauritius Telecom aims to cover entire island with fibre by 2017 60% Broadband At least two other players (Emtel and Bharat) are rolling out fibre – but their efforts are 40% Penetration largely overwhelmed by MT + regulation somewhat slanted towards the incumbent -20% 0% 20% 40% 60% 80% 100% of 20% Population* The most penetrated fibre market in Africa, household penetration will likely be in the 0% global top 10 by YE 2017.

-20%

South Africa Key Broadband Indicators - Past 3 Years

2014 2015 2016

Population Household + FBU Addressable (m) 2.75 2.85 2.95 ~56m Fixed Broadband Connections (m) 1.20 1.29 1.28

FTTH Mobile Broadband Connections (m) 21.5 26.5 31.7 Connections (2016E) FTTH Connections (m) .007 .04 .130 ~130k

South Africa FTTH Penetration of Households vs. Peer Markets – 2016E South Africa FTTH Outlook (Homes Passed vs. Connections)

2.50 Kenya

Zimbabwe 2.00

South Africa 1.50 Morocco

million 1.00 Tunisia 0.50 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% FTTH Penetration of Households 0.00 2015E 2016E 2017F 2018F 2019F 2020F

Sources: Operators, Xalam Analytics Research; For indicative purposes, penetration of households in above chart is Homes Passed Connections based on all FTTH connections (rather than residential connections only).

South Africa FTTH Context Broadband Market Overview Beyond Wholesale & Availability of Depth/Size of Words: Retail Fibre FTTH is a Critical FBB Government Regulation and Backhaul at Component of Key South Africa is Africa’s fourth largest fixed broadband market in terms of connections, (behind Addressable Impetus & Market Competitive Telco Strategy Market Egypt, Algeria and Morocco), and its largest mobile broadband market. Backing Structure Prices Depth of demand is arguably the most attractive across African markets – but still somewhat underserved – FBB penetration of the broadband addressable market (households + formal business units) is only around 45%.

Underlying broadband supply fundamentals are excellent – competitive wholesale markets, Where South Africa Fits in the African FTTH Opportunity Mapping strong content base, relatively relaxed regulation on fixed broadband retail and wholesale markets Fixed Broadband Penetration of Addressable HH and Business Demand* A connectivity market worth ~$3bn a year (2016E), growing at ~15%-20% annually; only around 20% of that from FBB, suggesting very good upside 140%

120% FTTH Outlook and Risk Factors

100% Arguably the best combination of demand and supply fundamentals for FTTH growth among 80% African markets

60% The FTTH outlook is excellent, thanks to strong retail competition, larger telcos accelerating South Africa Broadband 40% Penetration their rollouts – this is the most significant African FTTH opportunity over the next five years -20% 0% 20% 40% 60% 80% 100% of 20% Population* Competitive infrastructure and retail broadband segments suggests that consolidation is likely over the forecast period – without material impact over our projections – the main questions 0% in SA are whether rollouts can get beyond CBDs and gated communities + how the -20% economics ultimately work out

Kenya Key Broadband Indicators - Past 3 Years

2014 2015 2016

Population Household + FBU Addressable (k) 940 970 1000 ~44m Fixed Broadband Connections (k) 120 138 156 Mobile Broadband Connections 4.3 7.2 13.7 FTTH (million) Connections (2016E) FTTH Connections (k) 83 110 136 ~136k

Kenya FTTH Penetration of Households vs. Peer Markets – 2016E Kenya FTTH Outlook (Homes Passed vs. Connections)

0.80 Kenya 0.70 Zimbabwe 0.60 South Africa 0.50 0.40 Morocco million 0.30 Tunisia 0.20

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 0.10 FTTH Penetration of Households 0.00 2015E 2016E 2017F 2018F 2019F 2020F

Homes Passed Connections Sources: Operators, CA Kenya, Xalam Analytics Research; For indicative purposes, penetration of households in above chart is based on all FTTH connections (rather than residential connections only).

Kenya FTTH Context Broadband Market Overview Beyond Wholesale & Availability of Depth/Size of Words: Retail Fibre FTTH is a Critical FBB Government Regulation and Backhaul at Component of Key Addressable Kenya is one of the most dynamic connectivity markets in Africa; the market is Impetus & Market Competitive Telco Strategy Market predominantly mobile-based, but increased adoption of capacity-hungry applications has Backing Structure Prices boosted demand for fibre last mile solutions.

Underlying broadband supply fundamentals are strong – competition in the retail market is strong; the wholesale fibre infrastructure is above-average, though pricing on some domestic interurban routes remains high. State-owned NOFBI backbone has helped support uptake.

Where Kenya Fits in the African FTTH Opportunity Mapping Recent broadband growth has been solid, but there is room for more – but still somewhat underserved – FBB penetration of the broadband addressable market (households + formal Fixed Broadband Penetration of Addressable business units) is only around 15% and should rise to double these levels. HH and Business Demand* A connectivity market worth ~$460m a year (2016E), growing at ~20% annually; only around 140% 30% of that from FBB. 120%

100% FTTH Outlook and Risk Factors 80%

60% The combination of strong demand for broadband and extremely limited availability of fixed Broadband broadband solutions made Kenya ripe for FTTH – a quintessential case of leapfrogging other 40% Penetration FBB options -20% 0% 20% 40% 60% 80% 100% of 20% Population* Kenya The FTTH outlook is excellent, mostly thanks to strong retail competition, and increased The usage – more than 90% of new FBB connections are FTTH-based, and FTTH is already the Leapfrogging 0% Cases primary alternative to mobile broadband solutions. -20%

Tanzania Key Broadband Indicators - Past 3 Years

2014 2015 2016

Population Household + FBU Addressable (k) 650 660 690 ~49m Fixed Broadband Connections (k) 39 50 43 Mobile Broadband Connections 4.5 6.3 9.4 FTTH (million) Connections (2016E) FTTH Connections (k) 5 8.5 13 ~13k

Tanzania FTTH Penetration of Households vs. Peer Markets – 2016E Tanzania FTTH Outlook (Homes Passed vs. Connections)

0.14 Kenya 0.12 Zimbabwe 0.10 Zambia 0.08

Nigeria million 0.06 0.04 Tanzania 0.02 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 0.00 FTTH Penetration of Households 2015E 2016E 2017F 2018F 2019F 2020F

Homes Passed Connections Sources: Operators, TCRA, Xalam Analytics Research; For indicative purposes, penetration of households in above chart is based on all FTTH connections (rather than residential connections only).

Tanzania FTTH Context Broadband Market Overview Beyond Wholesale & Availability of Depth/Size of Words: Retail Fibre FTTH is a Critical FBB Government Regulation and Backhaul at Component of Key Addressable Relative to its potential, Tanzania’s broadband performance has been mixed – and Impetus & Market Competitive Telco Strategy Market somewhat of a paradox. Mobile broadband growth has been excellent; around 25% of SIM Backing Structure Prices cards used mobile broadband, and MBB penetration of the population is around 20%.

But fixed broadband penetration has lagged, even as users yearn for better broadband speeds. Retail broadband competition is intense, but largely focused on a relatively small pool of customers.

Where Tanzania Fits in the African FTTH Opportunity Mapping The broadband market is held back by a relatively shallow addressable market – (much of the estimated ~700k addressable base is served by mobile solutions) – and inadequate Fixed Broadband wholesale fibre economics. While international capacity is largely affordable, ISPs and other Penetration of Addressable HH and Business Demand* Internet players find metro and interurban capacity to be overpriced, a factor that has hampered aggressive country-wide rollouts. 140%

120% A connectivity market worth ~$200m a year (2016E), growing at ~20%-25% annually; only around 18% of that from FBB. 100% FTTH Outlook and Risk Factors 80%

60% The FTTH outlook is mixed – growth could be sizeable, but rollouts are unlikely to move Broadband beyond central business districts and a few gated communities until there is more flexibility 40% Penetration on wholesale capacity options available to service providers. -20% 0% 20% 40% 60% 80% 100% of 20% Population* Mobile operators could drive FTTH growth, but have limited incentive to do so, as they get The squeezed by all manners of government measures designed to generate additional tax Leapfrogging Tanzania 0% Cases revenue from the sector. In turn, our FTTH outlook for Tanzania remains fairly conservative. -20%

Zimbabwe Key Broadband Indicators - Past 3 Years

2014 2015 2016

Population Household + FBU Addressable (k) 230 235 240 ~14m Fixed Broadband Connections (k) 151 166 159 Mobile Broadband Connections 5.7 7.7 9.2 FTTH (million) Connections (2016E) FTTH Connections (k) 2 13 26 ~26k

Zimbabwe FTTH Penetration of Households vs. Peer Markets – 2016E Zimbabwe FTTH Outlook (Homes Passed vs. Connections)

0.35 Kenya 0.30 Zimbabwe 0.25 Zambia 0.20

million 0.15 Nigeria 0.10 Tanzania 0.05 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 0.00 FTTH Penetration of Households 2015E 2016E 2017F 2018F 2019F 2020F

Homes Passed Connections Sources: Operators, POTRAZ, Xalam Analytics Research; For indicative purposes, penetration of households in above chart is based on all FTTH connections (rather than residential connections only).

Zimbabwe FTTH Context Broadband Market Overview Beyond Wholesale & Availability of Depth/Size of Words: Retail Fibre FTTH is a Critical FBB Government Regulation and Backhaul at Component of Key Addressable Zimbabwe’s broadband market position is oddly strong, in light of an otherwise challenging operating Impetus & Market Competitive Telco Strategy Market environment. For all those challenges, Zimbabwe has a fairly solid legacy fixed network (270k lines), a Backing Structure Prices young, Internet-savvy population and the benefit of stiff competition in the broadband space.

Broadband supply fundamentals are good – competition in the retail market is strong, with at least six providers leveraging a variety of technologies (from mobile broadband to WiMAX and FTTH) for credible offers. Despite the fact that the country is landlocked, the wholesale fibre infrastructure is above-average, with at least a few providers selling links through South Africa or Namibia.

Where Zimbabwe Fits in the African FTTH Opportunity Mapping FBB penetration of the broadband addressable market (households + formal business units) is around 15% (only behind Mauritius in the sample of 15 markets we analyzed) , a strong base for FTTH growth. Fixed Broadband Penetration of Addressable The connectivity market is worth ~$300m a year (2016E), ~40% of which is generated in the FBB space. HH and Business Demand* FBB growing at ~15%-20% annually until 2016, when growth has been trending flat. 140% The Best 120% Combinations for FTTH FTTH Outlook and Risk Factors 100%

Zimbabwe 80% Zimbabwe offers excellent ground for FTTH growth – the retail space is competitive, and the existing broadband fixed line infrastructure is relatively extensive. The catalyst here is TelOne, the state 60% incumbent that had lost ground on mobile, and (with Chinese funding) appears determined to be Broadband competitive on fixed broadband. 40% Penetration -20% 0% 20% 40% 60% 80% 100% of TelOne Zimbabwe and Zimbabwe Online (a Liquid Telecom 20% Population* The FTTH outlook is mixed, but positive – unit) had been building aggressively in Harare and should bring the number of homes passed to around 0% 70k – the core risk here is whether they can keep it up in an economic context that continues to deteriorate – that is unlikely. -20%

Nigeria Key Broadband Indicators - Past 3 Years

2014 2015 2016

Population Household + FBU Addressable (m) 2.11 2.17 2.17 ~190m Fixed Broadband Connections (m)* .07 .08 .08 Mobile Broadband Connections 27 46 53 FTTH (million) Connections (2016E) FTTH Connections (m) .05 .06 .07 ~70k

Nigeria FTTH Penetration of Households vs. Peer Markets – 2016E Nigeria FTTH Outlook (Homes Passed vs. Connections)

0.25 Kenya 0.20 Zimbabwe

Zambia 0.15

Nigeria million 0.10 Tanzania 0.05 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% FTTH Penetration of Households 0.00 2015E 2016E 2017F 2018F 2019F 2020F Sources: Operators, NCC, Xalam Analytics Research; For indicative purposes, penetration of households in above chart is based on all FTTH connections (rather than residential connections only). Nomadic LTE connections (TDD and FDD, Homes Passed Connections including migrations from WiMAX) are counted as “mobile broadband” and excluded from these estimates.

Nigeria FTTH Context FTTH Market Overview Beyond Wholesale & Availability of Depth/Size of Words: Retail Fibre FTTH is a Critical FBB Government Regulation and Backhaul at Component of Key Addressable Nigeria is one of the most volatile FTTH projections we have had to make. Owing to a variety Impetus & Market Competitive Telco Strategy Market of supply factors, FTTH rollout has essentially been stalled for the past two years – were such Backing Structure Prices issues to be resolved, FTTH uptake would be substantial.

The demand fundamentals –as often- are extremely strong, even with an economic downturn. Nigeria’s FBB addressable is around 2m units, the second largest in sub-Saharan Africa. Even if operators merely stuck to traditional Phase 1 target markets (CBDs, office parks, gated communities, etc.), they’d still have a potential for around 500k connections. Where Nigeria Fits in the African FTTH Opportunity Mapping The supply side, tragically, is a mess – Nigeria’s broadband plans are ambitious, with the aim Fixed Broadband Penetration of Addressable of hitting 30% penetration of the population by 2018, along with targets to have fibre rings HH and Business Demand* across key regional centres. In practice, multiple taxation, state and local government racketeering on fibre rights of way and a variety of other factors have combined to effectively 140% stall growth in what could easily become Africa’s largest FTTH market. 120% The potential is undeniable – only South Africa is larger, in sub-Saharan Africa. Nigeria has a 100% connectivity market worth ~$800m a year (2016E), which has been contracting due to the country’s recession, but can grow at a 15%-20% pace in normal times. Only around 20% o 80% Nigeria’s connectivity revenue is generated from FBB. 60% Broadband 40% Penetration -20% 0% 20% 40% 60% 80% 100% of 20% Population* The Leapfrogging Nigeria 0% Cases -20%

FTTH Homes Passed in Africa – Sample Key Market – 2015E – 2020F – Data in thousands

2015E 2016F 2017F 2018F 2019F 2020F

Rwanda 20 20 20 20 20 20 Nigeria 110 110 110 140 175 210 Tanzania 30 30 35 50 65 80 South Africa 185 405 675 965 1450 1935 Kenya 252 364 457 557 657 757 Côte d'Ivoire 11 11 11 11 21 31 Ghana 0 0 100 200 300 400 Egypt 0 0 30 60 90 120 Algeria 30 30 60 90 120 150 Tunisia 30 30 60 90 120 150 Morocco 70 170 270 370 470 570 Uganda 10 10 20 30 40 50 Zimbabwe 40 85 120 200 250 300 Mauritius 186 298 400 400 400 400 Zambia 8 20 30 30 30 30

Estimates based on operator reports; while these estimates are net of coverage duplication, some degree of duplication may remain. All numbers are provided for indicative purposes – and because they are key assumptions in our FTTH forecasts. Source: Xalam Analytics Estimates

FTTH Connections in Africa – Sample Key Market – 2015E – 2020F – Data in thousands

2015E 2016F 2017F 2018F 2019F 2020F

Rwanda 0 0 2 3 4 5 Nigeria 59 72 74 77 80 82 Tanzania 9 19 25 30 36 131 South Africa 43 131 198 321 552 746 Kenya 110 136 162 188 214 240 Côte d'Ivoire 1 1 2 3 4 5 Ghana 2 4 7 13 19 25 Egypt 4 8 14 20 34 48 Algeria 20 50 100 150 200 250 Tunisia 5 9 12 16 20 24 Morocco 14 26 39 54 76 92 Uganda 73 170 260 265 270 275 Zimbabwe 1 5 9 13 17 21 Mauritius 0 0 2 3 4 5 Zambia 59 72 74 77 80 82

Source: Xalam Analytics Estimates based on operator data, various

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