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So, do you want to start a VOIP business in Uganda?

I was recently reviewing the business model of a company dealing with VOIP. For the uninitiated, VOIP stands for Voice Over Internet Protocol (VOIP). It is basically a technology or technologies that allow you to make phone calls over the Internet instead of traditional phone lines.

I set forth my simple and direct 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 important since to make calls over the Internet you need VERY RELIABLE Internet, so this is the starting point for anyone looking to invest in this sector. However, it is not uncommon for an ISP to charge $1,400 per month for 64 kbps. That’s not a lot of bandwidth, as a typical phone call requires about 8 kbps at any one time, and thus 64 kbps supports only about 8 simultaneous conversations or less, depending on internet conditions. The good news of course is that this is changing with fiber optic cables being installed all the time and therefore internet costs are going down. 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 phone line.

2. Competition

VOIP prides itself on being cheaper than traditional phone companies and many VOIP providers will give you rates that are much cheaper than the networks. That was until recently. Many telecom providers in Uganda, for example Orange, have excellent international calling packages that give the VOIP provider a run for their money. Therefore, the VOIP provider has to compete with the telecommunications companies to offer customers international calling services. Therefore, you must be prepared to watch your finances closely and constantly in order not to fall into losses, so do yourself a favor, get a good accountant!

3. The exchange rate

The Ugandan shilling is depreciating against the dollar and may continue to do so. In 2006, for example, the rate was 1,700 shs per dollar. In 2011 at the time of writing this is Shs 2800. For VOIP this is critical as the main purchase is “digital airtime” from international VOIP providers. This is bought in dollars, and as such, the prices charged to customers must take into account the exchange rate, as well as guaranteeing competitiveness against the BIG BAD WOLF (I am referring to the telecommunications companies).

4. Technological knowledge

VOIP is a niche industry and of course requires someone with an interest, but this is not such a big deal as hiring an IT person will help reduce the need for the employer to worry about this.

5. Initial capital

Based on my rough estimates, a typical VOIP business (for example, a phone shop to support 6 phone booths) can ideally start a business from as little as UGX 8.7 million. This should cover; rent at 500k per month (including 2 months deposit to bring it to 1.5m), installation and internet subscription; 700k, purchase of VOIP and computer equipment; 1,975m, furniture/fittings; 1m an inverter; 2m, legal and related costs; 700k and sign (to advertise); 500k.

However, based on my analysis, a VOIP business on its own is not profitable and therefore it is ESSENTIAL to also have an internet cafe running at the same time. The costs of the Internet cafe side plus the VOIP side, excluding the shared start-up costs such as rent and investor, will be 20,383,275. I have written about the costs of setting up an Internet cafe separately in the article on the internet cafe. Therefore, the total start-up cost is around Shs 20 million.

AND NOW THE PROS

1. Profitability and fast return on capital

Like the rest of Africa, Uganda has tremendous growth opportunities in the ICT/communications sector and according to the Uganda Investment Authority, this is one of its key sectors for investment. Call traffic is continually increasing as Ugandans enjoy higher incomes. Despite the scathing inflation, there is a continuous increase in call traffic. VOIP is not far behind and assuming ICT sector growth of an average of 25% per year with an average turnover of Shs 53 million would not be an exaggeration. Based on my knowledge of this sector, I have established a summary profitability chart as well as the return on capital (this includes a diversified model including an internet cafe). All estimates are in UGX. The exchange rate to USD is approximately 1 USD = 2700 Shs.

big profit

1. Income-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 multipurpose machining.

3. Cost of sales: -49,140,000. Assuming 75% of call revenue based on exchange rate and reseller margin.

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

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

Big win: 28,380,300

General expenses

Rent: Shs 4,800,000

Internet: Shs 3,840,000

Personnel costs: Shs 6,000,000

Other general expenses: Shs. 1,800,000

Total general expenses: 16,440,000

Net Income: 11,940,300

Investment capital: 20,383,275

Return on Investment: 1.71 years.

2. Return on capital

So based on the earnings picture above, this business should be able to have a return on equity of 1.71 years. A word of caution here. The above model assumes full capacity growth and therefore may not necessarily reflect a business start-up, for example, in its first few months. Furthermore, the model assumes that the cyber cafe and the call center will run in parallel and at the same time. I have done a separate analysis of the VOIP model on its own and according to my analysis it will take 90 years to get a return on your capital! In Uganda, therefore, there is no other alternative for a VOIP investor than to integrate call shop and VOIP services.

3.Diversified services

Despite the fierce competition, a VOIP business can survive by being diverse. Many VOIP providers don’t just provide low-cost international calls. They also provide other related services such as cheap calls on your internet enabled phone, a foreign number (eg USA) even while you are in Uganda and the use of VOIP in homes/offices. Some like http://www.telebm.com offer a special Ugandan rate. In addition, many integrate an Internet cafe into their models, as well as sell phones and accessories. Diversified services spread overhead costs and allow for continued profitability. In the profitability analysis above, I assume that this business is diverse and offers Internet cafe and VOIP services.

4. Franchise model.

The beauty of a VOIP business is that it’s very scalable, which means you can keep expanding to other cities, other urban centers, other countries. The typical VOIP provider will provide you with a software management system that can be accessed from anywhere on the Internet (after all, since calls are made over the Internet, call logs are also Internet-based). This provides a key advantage of remote monitoring for the business owner. You don’t necessarily have to worry about revenue, as you can remotely monitor sales (calls) in real time because call logs show calls (and costs) as they happen. Therefore, the model can be replicated if you, the business owner, set up agents that also gain access to your system. I think this is the model that http://www.mafudian.co.uk a VOIP company from Uganda is promoting.

SUMMARY AND FINAL WORD

first the numbers

Based on my analysis:

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

* Income per year: Shs 79,404,000

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

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

Now the basics you need to get right before you invest.

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

* Diversification of services. Don’t just do VOIP services, consider a cyber cafe, multipurpose machine, WIFI hotspots, or even selling cell phones and related accessories.

* Rent, Rent, Rent. This business thrives best in an urban environment with heavy traffic, especially from business users.

* Get an IT person, VOIP can be complicated to set up on an ongoing basis.

FINAL WORD, YES OR NO?

This is not an easy sector to invest in with the stability of the internet as well as the fierce competition with local telecom companies now offering some good international calling packages. Also, exchange rates are continually changing due to the falling shilling, potentially eating into profits. I know of many VOIP companies that have failed and so to invest in them you need to not only be technologically savvy but also look at the financial numbers as the margins can be very tight! However, a business that has taken off can enjoy a significant amount of turnover and diversifying and expanding through franchising seems to be the key to success.

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