Detailed analysis of various business sectors in Uganda

So you want to start a VOIP business in Uganda?

Outside Looking in
D E Wasake

About the writer:

For over 8 years I have worked with several clients in Uganda, The Bahamas and the United Kingdom in providing audit, tax, accounting and advisory services. My sector experience with clients in various sectors including IT related services enables me have good understanding of this sector. To see the full depth of my experience, please see my profile.

Article summary

This is a difficult sector to invest in particularly with the increasing cheap options from telecom providers for cheap international calls as well as internet options like Internet Calling cards, Skype, Viber, Whatsapp, Yahoo, Google et al. The investor in this sector almost has no option but to integrate this with an internet cafe in order to achieve reasonable profit. We estimate this profit after following the “advancing thinking” tips of this article to be Shs. 12m per year from an initial investment of Shs. 20m hence taking 1.71 years to get your capital back (return on investment).

I have recently been reviewing the business model 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 rather than 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 critical 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 alot of bandwidth as a typical telephone call requires about 8kbps at any time and so 64kbps supports only about 8 simultaneous 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 therefore having to compete with the telecom companies in offering customers international calling services. You have to therefore be prepared to look at your financials closely and constantly 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 critical as the main purchase 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 mean 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 significant 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 support 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 deposit bringing it to 1.5m), internet installation and subscription; 700k, purchase 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 analysis, a VOIP business on its own is however not profitable and therefore it is ESSENTIAL 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 therefore 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 as per Uganda Investment Authority(see link here ). Call traffic continually increases as Ugandans enjoy higher incomes. Despite the biting inflation, there is a continual 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 as well as the return on capital (this includes a diversified model which includes an internet cafe).

Revenue- calls 5,460,000 65,520,000 assuming a 7 day working week with average revenue of 180k per day.
Revenue-internet 1,157,000 13,884,000 estimated on basis of 290k per week from the 4 computers and multi purpose machine.
Cost of sales(75%) -4,095,000 -49,140,000 estimated on average margins of all calls but this fluctuates depending on margins of specific destinations called. This has been estimated on current margin.
credit transfer cost -102,375 -1,228,500 Charged as credit card fee on purchase from US VOIP company, allocated 2.5% of cost of sales.
Franchise fee -54,600 -655,200 1% of gross turnover
Gross profit 2,365,025 28,380,300
Over heads
Rent 400,000 4,800,000 estimated based on location in Kampala suburbs
Internet 320,000 3,840,000 estimated on basis of 200k for 512kbps for phones and internet
Staff costs 500,000 6,000,000 estimated on basis of 2 staff and 1 IT support personnel(part time).
other overheads 150,000 1,800,000 estimated. Excludes depreciation and other none cash adjustments or cost of financing.
Sub Total 1,370,000 16,440,000
Profit/Loss 995,025 11,940,300
Capital investment 20,383,275
ROI(years) 1.71
2. Return on capital

On the basis of the above profit picture therefore, this business should be able to have a return on capital of 1.71 years. A word of caution here. The model above assumes full capacity growth and so may not necessarily reflect a start up business in say its first few months. In addition the model assumes the internet cafe and call shop will run side by side and concurrently. I have done a separate analysis of the VOIP model on its own and from my analysis it will take 90 years to get a return on your capital! There is therefore no alternative for a VOIP investor to integrate the call shop and the VOIP services.

3. Diversified services

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

4. Franchise model.

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 key advantage of remote 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 display calls(and costs) as they occur. The model can therefore be replicated by having you the business owner setting up agents who also get access to your system. I believe this is the model that this Ugandan VOIP company is promoting.

SUMMARISING AND THE FINAL WORD
First the numbers

On the basis of my analysis:

  • 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 or 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 services. Don’t only do the VOIP services, consider an internet cafe, multipurpose machine, WIFI hot spots or even 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 WORD, YES OR NO?

This is not an easy sector to invest in with internet stability as well 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 significant amount of turnover and diversifying and expansion through franchising seem to hold the key to success.

P.S

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And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I shall therefore not be held responsible for any loss you may incur when acting on this information.

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