Facebook's Giant Profit Opportunity in Africa

By David Floyd | October 08, 2015

On Monday, Facebook Inc (FB) CEO Mark Zuckerberg announced that the company would partner with Eutelsat Communications SA, a French satellite operator, to deliver internet to vast swathes of sub-Saharan Africa as part of Facebook's Internet.org project. The satellite, called Amos 6, is being built by Space-Communication Ltd, or "Spacecom", an Israeli company, and is scheduled for launch in 2016.

Internet.org is a non-profit organization spearheaded by Facebook, together with six other companies: Samsung Electronics Co Ltd, Ericsson (ERIC), MediaTek Inc, Opera Software ASA, Nokia Corp. (NOK) and Qualcomm Inc. (QCOM). The group aims to bring internet access to the entire world, although the product it delivers is not the internet per se, but a stripped-down, proprietary version that offers limited services – Facebook's social media platform among them. Zuckerberg has called "connectivity" a "human right," and contends that Internet.org is providing it. Critics have called his version of "connectivity" a violation of net neutrality, referring to the principle that all traffic should be treated as equal by service providers. (See also: Internet.org: What It Is and How It Works.)

Proponents of net neutrality may have cause for complaint. Whether Facebook's shareholders do as well is less clear. The announcement had no perceptible affect on the company's share price. The cost of the project is reported to be $300 million over 16 years, plus $330 million for insurance coverage, but Facebook reported $5.1 billion in cash and equivalents at the end of June, so that shouldn't be of particular concern.

Sub-Saharan Africa By The Numbers

The opportunity, on the other hand, is immense. Zuckerberg's announcement did not provide specifics about the specific countries the project would cover, but we can still get a sense of the potential market. Sub-Saharan Africa is huge, with 974 million people, or more than triple the U.S. population. Only 19.22% of the region's people are internet users, compared to 40.69% worldwide. If the region were to catch up to the global internet penetration rate, 209 million people would come online.

To be fair, that's a big If, but Nigeria, Kenya, Mauritius and South Africa have already managed it. Given average incomes in the region, the windfall wouldn't be anything like if 209 million additional Americans came online. But we should also consider that 43.14% of sub-Saharan Africa's people are 14 years old or younger. That is less than China's proportion was before the one-child law, and China's demographic dividend has been a driver of global growth for decades. For those seeking broader exposure to these kids' (more than a fifth of the world's total) future productivity, there is the Market Vectors Africa ETF (AFK), trading at 11 times trailing twelve month earnings and yielding 3.8%.

Here is a map showing internet users in sub-Saharan Africa today. Red countries have the smallest numbers of users, green the most (scroll over individual countries to see the numbers):

And here is how many users these countries would have if internet penetration reached the global level of 40.69%. Yellow have the least, blue the most (note that Kenya, Nigeria, Mauritius and South Africa are not shown, since they already exceed the global penetration rate):

Shown another way, here are the 20 sub-Saharan countries that could have the largest numbers of internet users, if they were to reach the global penetration rate:

The Bottom Line

Facebook is definitely on to something here. Alphabet Inc (GOOG, GOOGL) is hard on its heels, however, with its own connectivity project, dubbed Project Loon. Their effort has caught the eye of Narendra Modi, prime minister to 1.3 billion Indians, nearly 1.1 billion of them still unconnected.