Are Internet Providers in Zimbabwe Overcharging You?
What I found may surprise you.
Internet in Zimbabwe can be four to five times more expensive than elsewhere.
Are internet providers ripping people off?
I looked at Liquid's financial statements, the biggest internet provider, to try to understand what was going on.
Let's unpack!
My first thought was that if internet providers in Zimbabwe, and in this case, Liquid, are overcharging, then I should expect to see higher-than-normal profits.
I chose to use their financial statements for the years ending February 28, 2018, and 2017, as these were the available years that were the least affected by the distortions that arose when the Zimbabwean dollar was reintroduced in 2019.
In 2018, the Zimbabwe business's adjusted EBITDA divided by revenue (a measure of profitability) was the highest at 52%.
In 2017, it was second to the Rest of the Worlds segment at 40%.
On a two-year average basis, the Zimbabwe segment was at the top and had 19% higher operating profitability than South Africa.
Coming out on top could indicate that the Zimbabwe business had higher markups than other geographies like SA by about 20%.
Theoretically, the higher profitability could be because of a more efficient operation in Zimbabwe. However, since doing business in Zimbabwe is typically harder than somewhere like South Africa, I doubt that would be the case, so my baseline assumption is that the higher profitability has to do with higher markups.
But even if my assumption is correct, it only accounts for about 20% to 30% of why the internet is cheaper elsewhere, while the difference is closer to 80%. So, there must be factors besides Internet Service Providers charging a higher markup in Zimbabwe.
What also could be driving costs is the objectively higher cost of providing the internet infrastructure in Zimbabwe.
One simple factor that plays a part is geography. The backbone of the internet is fibre optic cables, which circle Africa, as shown in the image below.
Simplified, the closer a country is to a cable, the cheaper it is to provide internet access. Zimbabwe, unfortunately, as you can see, is not that close.
This also partly explains why South Africa has cheaper Internet. It has some of the best connections and access to the undersea cables.
Other costs are environmental such as the reliability of electricity, lower population density, inefficiencies and other general costs of operating in the country.
ISPs in Zimbabwe may also not be as efficient at operating their businesses as those in South Africa, increasing the cost. Who knows?
However, these costs also don’t seem enough to explain the full difference. If I had to guess, I wouldn't expect the factors to contribute more than 20% to the cost, so we would need to move on to other possibilities.
Which brings us to taxes.
According to Utande’s CEO (another ISP in Zimbabwe), for every dollar earned by an ISP, 35 cents go to taxes. Below is an extract from the story published by Newsday.
Now, part of those taxes include VAT at 15%, which is quite common in other countries, including South Africa, so that can't be factored in as a driver in the price differences.
Also, I think the estimate by the Utande CEO included the impact of corporate tax, which is also a commonly charged tax, and so must also be excluded from the comparison.
Ignoring those elements, we could say that the additional tax burden contributes around 10% -15% in higher costs. This sounds about right compared to the taxes we know are levied.
The last thing I can think of that drives up costs is the "Zim Premium," which companies add due to anticipated future costs or losses due to the volatility of the Zimbabwean environment.
An example was the premium companies charged in anticipation that the ZWL would depreciate before funds could be converted to USD and taken out of the country.
Even the Credit Rating Agency Fitch mentioned the inability to extract cash in its recent downgrade of Liquid’s business.
So, in theory, even if your margin is 30%, for example, you may only realise 20% due to currency depreciation and other challenges in moving profits outside of Zim.
So what do you do? Increase your markup to 40% so you still end up on 30%.
Now, based on this, we can do a direct comparison and reconciliation.
The cheapest unlimited fibre package with Liquid costs about $220 in Zimbabwe, and the cheapest package in South Africa with Afrihost (a big ISP) costs about $50 for the same 100Mbps package.
So, South Africa is about 78% cheaper.
Let’s try to tie that back to what we found.
Based on our "guestimations," the impact of the higher markup is about 25%, the higher tax burden is about 15%, and the environmental factors add about 20%, which would leave us at about 60%.
This would mean that the “Zim Premium” would be about 18% to come back to 78%, which represents how much fibre internet is cheaper in South Africa compared to Zimbabwe.
Now, I know the above makes a lot of big assumptions, so this is not meant to be definitive but just to provide some data points and reasoning for discussion purposes.
If there is more solid data, please comment and share.
Based on the breakdown above, the question is: Are internet service providers profiteering, or is it just the cost of doing business?
I think prices could be lower by quite a bit, but it's also hard to say it's just ISPs profiteering from high markups.
It seems that taxes, the cost of doing business, and the “Zim Premium” are also contributing factors.
What is debatable is how much each of the factors contributes to the total that makes internet 80% cheaper elsewhere.
What is certain is that the higher pricing presents an opportunity for other players like Starlink, who just got licenced in Zimbabwe.
This reminds me of Jeff Bezos’s famous quote:
"Your margin is my opportunity." - Jeff Bezos
With Starlink significantly lower in cost, ISPs will have to work hard to reduce the margin on their services sustainably. Otherwise, they could quickly find themselves struggling to retain customers.
PS: I am working from publicly available information, and in this case, I had to make significant assumptions, so there is an increased risk that I am missing something or just wrong in my analysis.
Let me know what you think! Thanks for reading.
PS: If you found this interesting, you may also want to check out the series on Econet Wireless, the largest telco in Zimbabwe. Here is the link to Part 1, The Business Of Telecoms and Econet's Struggles.