So You Want to Start a VOIP Business in Uganda?

So You Want to Start a VOIP Business in Uganda?




I have recently been reviewing the business form for a company that is dealing in VOIP. For the uninitiated, VOIP stands for Voice Over Internet Protocol(VOIP). It is basically a technology/ies that allows telephone calls to be made over the internet instead of over traditional telephone lines.

I set out my simple and straight forward observations.

First the cons (of course)

1. Internet stability.

Internet in Uganda can be very unreliable and where it is reliable it is very expensive. Now this is very basic as to make calls over the internet you need VERY RELIABLE internet and so this is the starting point for anyone looking to invest in this sector. It is however not uncommon for an ISP to charge $1400 per month for 64 kbps. That’s not a lot of bandwidth as a typical telephone call requires about 8kbps at any time and so 64kbps supports only about 8 at the same time conversations or less depending on internet conditions. The good news of course is that this is changing with fibre optic cables being laid all the time and so internet costs reduce. My best advice, use ADSL and shared bandwidth. UTL does a good job here, with a great value and generally reliable product if you can get the telephone line.

2. Competition

VOIP prides itself in being cheaper than the traditional telephone companies and many a VOIP provider will give you rates that are much cheaper than the networks. That was until recently. Many telecom providers in Uganda for example Orange have great international calling bundles that give the VOIP provider a run for their money. The VOIP provider is consequently having to compete with the telecom companies in offering customers international calling sets. You have to consequently be prepared to look at your financials closely and regularly lest you fall into losses so do yourself a favour, get a good accountant!

3. The Exchange rate

The Uganda shilling is depreciating against the dollar and this may continue to be the case. In 2006 for example the rate was Shs 1,700 to the dollar. In 2011 at the time of writing, it is Shs 2800. For VOIP,this is basic as the main buy is “digital airtime” from international VOIP providers. This is purchased in dollars and as such the prices charged to customers need to factor in the exchange rate, in addition to ensuring remaining competitive against the BIG BAD WOLVES (I average the telecom companies).

4. Technology know how

VOIP is a specialised sector and so it of course requires someone with interest but this is not such a meaningful matter as employing an IT person will help reduce the entreprenuers need to worry about this.

5. Start up capital

From my rough estimates, a typical VOIP business (say a phone shop to sustain 6 phone booths) can ideally start up business from as little as UGX 8.7m. This should cover; rent at 500k per month (including 2 month place bringing it to 1.5m), internet installation and subscription; 700k, buy of the VOIP and computer equipment; 1.975m, furniture/ fittings; 1m an inverter; 2m, legal and related costs; 700k and signage(to advertise); 500k.

From my examination, a VOIP business on its own is however not profitable and consequently it is basic to also have an internet cafe running side by side. The costs of the internet cafe side plus the VOIP side stripping out the shared start up costs like rent and inverter will be 20,383,275. I have written about an internet cafe set up costs separately in the article on the internet cafe. The total start up cost is consequently about Shs 20m

AND NOW THE PROS

1. Profitability and quick return on capital

Like the rest of Africa, In Uganda there are tremendous growth opportunities in the ICT/ communications sector and per Uganda Investment Authority, this is one of their meaningful sectors for investment. Call traffic continually increases as Ugandans enjoy higher incomes. Despite the sharp inflation, there is a constant increase in call traffic. VOIP is not being left behind and assuming ICT sector growths averaging 25% per year turnover averaging Shs 53m would not be an exaggeration. On the basis of my knowledge of this sector, I set out a summary profitability picture in addition as the return on capital (this includes a diversified form which includes an internet cafe). All estimates are in UGX. The exchange rate to the USD is about 1 USD = Shs 2,700.

Gross profit

1.Revenue- calls: 65,520,000. Assuming 7 days a week at 180k per day.

2.Revenue- internet: 13,884,000. Assuming Shs 290k per week from 4 computers and multi purpose maching.

3.Cost of sales: -49,140,000. Assuming it is 75% of revenue for calls on basis of exchange rate and reseller margin.

4.credit move cost: -1,228,500. Assuming 2.5% of cost of sales

5.Franchise fee: – 655,200. 1% of revenue-calls.

Gross profit: 28,380,300

Overheads

Rent: Shs 4,800,000

Internet: Shs 3,840,000

Staff costs:Shs 6,000,000

Other overheads: Shs. 1,800,000

Total overheads: 16,440,000

Net Profit: 11,940,300

Capital investment: 20,383,275

Return on Investment: 1.71 years.

2. Return on capital

On the basis of the above profit picture consequently, this business should be able to have a return on capital of 1.71 years. A information of caution here. The form above assumes complete capacity growth and so may not necessarily mirror a start up business in say its first few months. In addition the form assumes the internet cafe and call shop will run side by side and concurrently. I have done a separate examination of the VOIP form on its own and from my examination it will take 90 years to get a return on your capital! In Uganda, there is consequently no different for a VOIP investor but to integrate the call shop and the VOIP sets.

3. Diversified sets

Despite the fierce competition, a VOIP business can survive by being different. Many VOIP providers do not only provide low cost international calls. They also provide other related sets like cheap calls on your internet enabled phone, a foreign number(for example USA) already while in Uganda and use of VOIP in homes/offices. Some like http://www.telebm.com provide a special Uganda rate. In addition many integrate an internet cafe within their models in addition as selling telephones and accessories. The diverisifed sets spread the over head costs and permit continued profitability. In the profitability examination above, I assume this business is different offering both VOIP and internet cafe sets.

4. Franchise form.

The beauty about a VOIP business is that it is very scalable meaning you can keep on expanding to other towns, other urban centres, other countries. The typical VOIP provider will give you a software management system which can be accessed anywhere on the internet (after all since calls are made over the internet, call logs are likewise internet based). This gives a meaningful advantage of far away monitoring for the business owner. You don’t have to necessarily worry about revenue as you can remotely monitor the sales(calls) on a real time basis because the call logs characterize calls(and costs) as they occur. The form can consequently be replicated by having you the business owner setting up agents who also get access to your system. I believe this is the form that http://www.mafudian.co.uk a Ugandan VOIP company is promoting.

SUMMARISING AND THE FINAL information

First the numbers

On the basis of my examination:

* Capital investment(internet and VOIP equipment) (A): Shs 20,383,275

* Revenue per year: Shs 79,404,000

* Profit per year (after all expenses (B) is Shs 11,940,300

* Return on capital(years to get capital back)(A/B) is 1.71 years

Now the basics you must get right before investing.

* Internet stability and reliability. Get a good ISP who supports VOIP

* Diversification of sets. Don’t only do the VOIP sets, consider an internet cafe, multipurpose machine, WIFI hot spots or already selling cell phones and related accessories.

* Location, Location, Location. This business best thrives in an urban setting with heavy traffic particularly of business users.

* Get an IT person, VOIP can be tricky to continuously configure.

FINAL information, YES OR NO?

This is not an easy sector to invest in with internet stability in addition as the fierce competition with local telecom companies who now offer some good international calling bundles. Furthermore the exchange rates are continually changing due to the falling shilling hence potentially eating into the profit. I know many VOIP businesses that have failed and so to invest in it you need to have not only technology know how but like looking at the financial numbers as the margins can be very tight! A business which has taken off can however enjoy a meaningful amount of turnover and diversifying and expansion by franchising seem to keep up the meaningful to success.




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