The Delta Perspective March 2008
Identifying today’s key industry dynamics in the Middle East and Africa Authors
Javier Alvarez - partner: jav@deltapartnersgroup.com Josep Maria Moya - partner: jmm@deltapartnersgroup.com Mohsen Malaki - principal: mma@deltapartnersgroup.com
Delta Partners takes a high-level look at key market dynamics, service provider strategies, and new technologies that will emerge in 2008 Looking back to the year 2000, the Middle
Drawing from knowledge and experience
East and Africa region was one of the few
among our experts in the field, these are
remaining monopolistic telecom markets
the industry dynamics that we consider
around the world, with a commensurately
key in 2008:
low penetration rate of mobile and
1. Further Consolidation: Regional
fixedline services. Since then—and for
players will not be alone in the race
various reasons, ranging from the need for
to become pan-regional titans
socio-economic development to the need to fill government coffers or pressure from international bodies—the governments have established regulators that have
2. Organizational Challenges: Operators will have an uphill struggle to extract value from merged entities 3. New Business Opportunities:
set the telecom market on a rapid pace
Opportunities upstream in the
towards market liberalization. The result
telecom value chain will start to
has been phenomenal growth in the
emerge
mobile sector.
4. Customer Retention: Operators in maturing mobile markets will shift
The MEA region is now at a crossroads again. The phenomenal growth resulting from the liberalization efforts in the
their focus from share of subs to share of value 5. Reaching the Very Low Income
mobile sector is slowing down in the more
Segment: Mobile operators will
developed markets, while in less developed
need to rethink their business models
markets the challenge is to start serving
to profitably serve the below US$5
very low income segments profitably,
ARPU customer
and competition is increasing in fixedline
6. Broadband Growth: Operators
across the region. The industry is looking
will seek to position themselves for
to consolidate its gains and search for the
the growth prospects in broadband
next big growth driver beyond basic voice
connectivity
for the high and middle income segments.
Industry dynamic #1 Further consolidation
Regional players will not be alone in the race to become pan-regional titans
Pan-regional titans are now
The years 2005 to 2007 saw a series
in the process of integrating
of M&A deals such as the MTC (now
their acquired operations in order to realize economies of scale. However, they are not shying away from
Zain) acquisition of Celtel, MTN’s acquisition of Investcom, Etisalat’s acquisition of Atlantique Telecom, or
themselves by other global players 2. Abundance of liquidity in the markets 3. Scarcity of Greenfield license opportunities
Qtel’s acquisition of Wataniya. There was also the acquisition of Greenfield
Now that the most obvious target
further acquisitions and
licenses—including Zain’s Saudi Arabian
companies with substantial footprints
expansion opportunities
third mobile license, Etisalat’s Egypt
have been acquired already (with the
third mobile license, or STC’s Kuwait
notable exception of Millicom and to
third mobile license— that lay the
a lesser extent Comium and Warid,
cornerstone for the emergence of
with 19, 6, and 4 country operations,
pan-regional players out of once single
respectively), we believe that the
country or sub-regional operators.
consolidation landscape in 2008 will
With the wave of consolidation that
be characterized by:
occurred in the MEA region among the
1. Scarcer investment
top players, pan-regional titans have
opportunities in the region:
emerged, namely, Etisalat, Zain, Qtel,
While the pan-regional players
Orascom Telecom, and MTN Group.
have consolidated already to a handful of larger pan-regional
2
While these pan-regional titans are
players during 2005-2007, there
now in the process of integrating their
are still a substantial number of
acquired operations in order to realize
small, single country operators
the synergies and economies of scale
in much of Africa and the
inherent in an expanded customer base
Middle East that often lack the
and geographic footprint, they are not
efficiencies, economies of scale,
shying away from further acquisitions
and access to financing that the
and expansion opportunities. This
larger pan-regional players have.
continued thirst for expansion is driven
As such, we expect there to be
by three key factors (see Exhibit 1):
several smaller deals whereby
1. Ambitions of key pan-regional
the pan-regional players seek
players to become global leaders
controlling stakes in single country
and prevent being acquired
operators across the region.
2. Investment in minority holdings:
of MEA: In their quest to gain a
cases, such as Vodafone’s Safaricom
Small stakes in larger players in
stronger foothold in high growth
and Orange Madagascar, already
other adjacent regions such as
markets, European operators are
proven success in Africa. A newer
South and Eastern Europe (like
keen on Africa. Once aggressive
source of competition will come
Orascom did in Greece and Italy
about the MEA region prior to the
from players in other high growth
and its interest in acquisition targets
3G license bubble in Europe in 2001,
markets such as India, China,
in other Mediterranean countries),
European operators are once again
and Russia. Large players in these
and Southeast and Central
willing to invest in the region and
markets are keen to maintain
Asia (such as the Qtel and STC
are increasingly aggressive with their
their high growth momentum.
acquisitions of Asia Mobile Holdings
license bids and M&A activity. Pan-
Some examples of this new set of
Pte Ltd and Maxis, respectively, in
regional players should expect stiff
competitors are Russia’s Sistema and
South East Asia).
competition from these European
its acquisition of Shyam Telelink in
operators, as they bring to the table
India, China Mobile’s Paktel deal, or
strong operational and managerial
VSNL’s interest in licenses in Qatar
from operators in Europe and
experience, innovative R&D, globally
and Saudi Arabia, or its acquisition
high growth markets outside
recognizable brands, and in some
of a stake in Neotel South Africa.
3. More intense competition
Exhibit 1: What is driving the need for expansion among pan-regional players? The continued thirst for expansion among pan-regional players is driven by three major factors. 1. First and foremost are the ambitions of pan-
Africa and Bharti Airtel is following suit in South Africa.
regional players to become global leaders and
China Mobile acquired Paktel and has a war chest of
prevent being acquired themselves by other
US$30 billion. Russian operator Sistema acquired 10%
global players. Only a couple of years back, Middle
in Shyam Telelink in India and has expressed interest in
Eastern operators only needed to watch within the
the 3rd mobile license in Iran.
GCC to identify real competition into the next bid. The situation has changed significantly in the last 12
2. The second drivers is the abundance of liquidity in
months, with global players becoming more aggressive
the markets—driven by high oil prices and inward
with their bids within the emerging markets. Some
investments by private sector and government
examples are Vodafone’s acquisition of Hutchinson
funds—that facilitate easy access to financing for the
Essar in India, Telsim in Turkey, a mobile license in
pan-regional players in spite of the current global
Qatar, and potential controlling stake in Vodacom or
credit crunch.
even MTN. Other examples include Orange’s 51% stake in Telkom Kenya, and talks of increased activity in Africa by Portugal Telecom. Competition is also coming from other high growth market players such as Chinese, Russian and Indian operators, as predicted in Delta Partner’s White Paper in 2007, “The Emergence of Global Industry Titans and Implications for Emerging Market Players”. Reliance is making inroads into East
3. Finally the scarcity of Greenfield license opportunities (with the notable exception of a 3rd license in Iran, Syria, and Bahrain, a 4th license in Sudan, and possible MVNOs in Oman and Jordan) is driving pan-regional players to seek acquisitions of other players as a growth driver.
3
Industry dynamic #2 Organizational challenges
Operators will have an uphill struggle to extract value from merged entities With a wave of industry mergers and
need to prove the value that their
acquisitions (see Exhibit 2) completed
acquiring company is bringing to the
among the region’s top players in 2006
acquisition target. While the initial
and 2007 (17 of the largest regional
and obvious benefits of cost synergies
M&A deals in the mobile sector in the
from a broader customer base and
MEA had a total deal value of US$23
a diversified portfolio of operators
billion), the pan-regional players and
are clear achievements in and of
emerging industry titans in the region
themselves, more penetrating questions
are now keen on realizing the promises
need to be answered. Specifically:
of synergies, efficiencies and scale that
1. What are the capabilities
come with such large M&A deals.
that the acquiring company brings to the target?
Executives spearheading the acquisition drive among the regional titans now
Exhibit 2: Largest M&A deals from 2006 to-date, in the MEA region (Millions)
Source: Press clippings
4
2. How can the combined entity leverage combined assets to
drive revenue synergies such
As such, we believe that the year 2008
achievable along three major axis:
as P&S innovation, market
will be one in which these regional titans
Strategic: Group strategic direction,
reach, unique product platform
will start dealing with the challenges
including brand equity and architecture
deployments, churn management,
of driving the cost synergies they have
Organizational: Corporate governance
or revenue optimization?
identified, while identifying ways of
and leadership
realizing more revenue synergies. We
Operational: Synergies from a cost and
other than improved buying
believe that pan-regional players should
revenue perspective
power from vendors?
focus their efforts in 2008 on synergies
3. Are there cost synergies
Exhibit 3: Identification of Big Ticket Items and Synergy Drivers Illustrative
5
Without a clearly defined group
and leadership model are put in
companies can generate as standalone
strategic vision, reinforced by a
place. Governance and leadership are
entities (see Exhibit 4).
corporate governance model, acquiring
thus of higher strategic importance
companies such as STC, Qtel, Etisalat,
earlier on in the post deal stage, since
In order to achieve these operational
or Zain all risk falling back on the
these constitute the decision-making
synergies, regional titans need to
comfortable position of keeping the
structure of the merged entity.
develop common platforms between
target operators as part of a de facto
their country operations. As such, the
holding company, with the target’s
Finally, with a unified direction through
group as a whole brings value to the
strategic vision remaining unchanged
a strategic vision, combined with the
individual units, helps in clarifying the
and relatively independent of the
appropriate governance model in place,
future direction under the umbrella
acquiring company. Such a model is all
the merged operational functions of
of a common group strategic vision,
but sure to result in lost opportunities
the overall group can start to deliver
and enables better optimization of
for cost and revenue synergies.
synergies in areas such as revenues, cost
resources to achieve the future vision.
of sales, support, commercial, or billing The group strategic direction can
and technical (see Exhibit 3). These are
Only truly integrated operators will be
only be translated into operational
the operational synergies that create
the winners of this wave of integration
synergies from a cost and revenue
shareholder returns above and beyond
in the telecom space of the MEA region.
perspective once the right governance
the value of the target and acquired
Exhibit 4: Crafting the strategic path – Synergy identification, quantification and target setting It is vital for a merged entity to identify and quantify the synergies it can achieve. Such planning gives the organization the time and focus to properly identify best practices and identify those areas which will drive value creation; companies that jump into “execution mode” right from the start generally leave much potential untapped. Through quantification of synergies, value drivers can be better understood, and focus areas for integration efforts become clearer. Setting targets for synergies provides clear expectations and will drive integration efforts toward those activities which have been identified as key value drivers. Identification of best practices among the two players helps to break paradigms and ensures getting the best of both companies. Finally, taking some time to set the course for the integration allows management to get the buy-in from key stakeholders within the merged entities. Based on Delta Partners engagements in post merger integration deals, potential EBITDA improvements could reach up to 10%, with a typical split of synergies between OPEX and CAPEX to be around 60-70% and 30-40%, respectively. Illustrative
Synergies
Impact
Potential cost reduction / revenue increase (%)(1)
(1)
6
Headcount reduction (mainly at HQ)
5-10%
IT / MIS
0-5%
Network
10-15%
Offices
0-5%
Handsets, SIMs, scratch cards
10-25%
Increase revenue growth
0-5%
Typical split of synergies: 60-70% OPEX, 30-40% CAPEX
Up to 10% on EBITDA improvement opportunity
Based on Delta Partners experience, will vary depending on existing cost structures and operators’ size and situation
Industry dynamic #3 New business opportunities
We have identified two
Opportunities upstream in the telecom value chain will start to emerge In a previous paper published by
regional players will focus on in 2008
emerging outsourcing
Delta Partners in January 2006 we
are going to be around the up-stream
opportunities to watch out for
anticipated the phenomena of the
part of the value chain, especially
opening up of the value chain in the
network and IT elements that can be
Middle East region as a consequence of
outsourced or shared. Increasingly, we
the increased competitive landscape for
are seeing more operators starting to
telecom operators. At that time, initial
view these as non- critical activities
consequences of that process were
that can be performed by third parties.
mainly observed in the downstream
We have identified two emerging
end (see Exhibit 5) of the value chain,
outsourcing opportunities to watch out
around distribution and retail activities.
for in 2008, namely:
The opening up of the value along
1. Network outsourcing and
in 2008: network outsourcing and managed services, and outsourcing transmission to wholesale operators
the downstream or customer facing
managed services, including tower
end has further developed and players
management
such as Axiom, Cellucom, or i2, are consolidating their dominant position
2. Outsourcing transmission to wholesale operators
as regional players in the Middle East in retail and distribution as well as
These emerging opportunities are
making further inroads with their
driven at the base level by the need for
expansion into high growth markets
economies of scale. In mature markets,
such as India and Africa.
the increased competition is driving down prices and creating near-parity
Downstream activity is also brewing
in terms of network quality and
in the call center space, as operators
coverage, which in turn is rendering
increasingly outsource some of the non-
the network a non-core function
core functions to specialized niche players
that is no longer a competitive
that can efficiently provide these services
differentiator. In less developed and
on behalf of the telecom operators.
lower income markets, the need to serve the bottom of the pyramid
More importantly, we believe the next
more efficiently is forcing operators to
wave of outsourcing opportunities that
consider outsourcing elements of the 7
network that would help lower costs.
savings in sharing mode of 50%).
outsourcing and managed services
In both types of markets, outsourcing
For the development of an additional
business divisions and are targeting
offers the opportunity to pool network
1,000 BTSs shared with another
operators in mature and emerging
elements of multiple players and
operator, the CAPEX reduction will be
markets alike.
create the economies of scale that
between US$62.5 million and US$115
would enable each operator to focus
million (assuming CAPEX per tower
More recently, examples are emerging
on its core functions while ensuring
of US$125,000-230,000, and CAPEX
from operators positioning themselves
desired service levels, at competitive
savings in sharing mode of 50%).
for these emerging opportunities
prices and thus business profitability.
upstream in the value chain. Some
Taking the case of tower sharing, for
Some of the first companies to
prominent examples are the Bharti
an operator with 5,000 BTS, doing
realize this emerging opportunity
Airtel, Vodafone Essar tower sharing
tower sharing for 3,000 of those
are traditional vendor equipment
agreement where they have set up
with another operator, the potential
providers, with Ericsson at the
a joint venture independent tower
OPEX savings will be US$45 million,
forefront and NokiaSiemens, Cisco and
sharing company, Indus Tower. Other
or roughly 30% of annual BTS-related
Huawei jumping on the bandwagon.
examples are 3UK and T-Mobile’s
OPEX (assuming annual average OPEX
These have already set up their
network sharing agreement, or BT’s
per tower of US$30,000 and OPEX
network operations and maintenance
application hosting and management
Exhibit 5: Evolution of the Telecom Value Chain
8
solutions for other telecom operators,
direction, we expect certain flourishing
such as its network and security
of such companies, with potential
services, or its managed mobile
consolidation later on around the
content, carrier-grade messaging, and
better positioned players.
enhanced voice services. Our second identified upstream We believe that there is a narrow
opportunity is wholesale telecom
timeframe in which new specialized
services. Given the new competitive
players with strong capabilities in the
landscape with additional access
network integration space within the
provision players (FWA, Internet and
region will be able to capitalize on
Data services providers, MVNO,‌)
this emerging opportunity, namely,
there is an emerging opportunity in
building and maintaining large
the wholesale business, particularly
network infrastructures across the
for incumbent operators. As a result
region and providing one-stop shop
of the proliferation of new players,
solution to pan-regional operators. A
incumbents are increasingly viewing
good example of that is Crown Castle,
provisioning of wholesale services to
the largest owner of tower assets
competing operators as an opportunity
in the US, with 75% of its revenue
rather than a threat, complementing
coming from the top 4 US mobile
the traditional retail business.
operators. Crown Castle provides site leasing and network services,
In 2008, we expect a significant
and has since moved into wholesale
increase in investment activities
wireless backhaul services as well. The
upstream in the telecom value chain,
company achieved its number one
while the downstream activities will
position by acquiring tower assets
continue to flourish. What are now
from major mobile operators in 1999-
considered well established business
2000, and enjoyed an EBITDA margin
lines among European players, such as
of 55% in 2007.
Deutsche Telekom’s or BT’s wholesale services, or the network outsourcing
Financial capacity, operational
business line of Abertis in Southern
capabilities in the different markets
Europe, or tower sharing companies in
where they operate, and access
North America, are areas of investment
to large deals with pan-regional
opportunities in the MEA region that is
operators are key requirements for
open to both existing operators as well
such companies to succeed within
as independent 3rd parties.
the MEA region. As the telecom industry keeps moving towards this
9
Industry dynamic #4 Customer retention
Operators in maturing mobile markets will shift their focus from capturing share of subscribers to share of value
For established operators,
The year 2007 saw SIM card penetration
one thing: churning customers from the
churn management becomes
reach saturation or near-saturation levels
existing players.
a vital strategic objective. Such an effort needs to be a company-wide initiative where all customer-facing and supporting back-office functions of the operator change their approach and focus
10
in the most developed of the MEA’s mobile markets, particularly the littoral
For established operators, churn
Arab states around the Gulf, as well as
management thus becomes a vital
markets such as Jordan, Morocco, and
strategic objective. According to Delta
South Africa. As such, the traditional
Partners analysis, a churn reduction of
growth driver for the mobile operators
10 p.p could bring a US$600 million
in these countries will need to start
value . For such incumbent operators
evolving away from an acquisition
seeking to protect their customer base
approach and towards a value
from churning to the competition, a
development approach. To compound
successful customer management effort
this growth challenge, incumbent
is a vital need. Such an effort needs to
mobile operators in these markets are
be a company-wide initiative where all
facing increasing competitive pressures
customer-facing and supporting back-
with the entry of third or fourth mobile
office functions of the operator change
operators in their markets. With heated
their approach and focus, rather than a
bidding for these new licenses and very
simple patch solution such as launching
high per capita license costs, such as in
a standalone loyalty program.
Saudi Arabia (US$6.1 billion), Kuwait
(US$907 million for a 26% stake) and
The first step is to analyze the
Qatar (unannounced, but possibly
composition of the customer base
in excess of US$2.5 billion) in 2007,
along with acquisition and direct costs
these new players’ business models will
to identify which segments are most
be driven by very rapid market share
profitable (see Exhibit 6). By doing this,
acquisition. With limited value left to
the operator can understand which
extract from untapped segments (mainly
segments it should invest in for retention
the low income segments), market share
and which segments it should reduce
acquisition for these new players means
investment due to low profitability.
Specifically, the strategy for retaining
would require a better understanding of
profitable customers is derived from an
the customer’s total experience with the
analysis of that particular customer’s
operator across all of its product lines,
experience throughout his or her lifetime
and across all interaction points with the
with the company. After having acquired
organization and, as such, would require
a customer, an operator should focus on
customer analytics that put the customer
developing the customer experience that
as the main unit of measurement.
enables the telecom operator to retain that customer and extend the duration
Improving customer analytics is of
of his lifetime as well as his usage of
course not an overnight task. Operators
mobile communication services.
frequently need to re-evaluate the IT infrastructure that they have deployed
As such, the role of analytical
to capture and analyze customer
marketing and business intelligence
data. As such, business intelligence
in general is a vital pre-requisite for
tools, data warehousing solutions,
evolving the operator’s strategy from
and customer data integration
customer acquisition to customer value
solutions become necessary investment
development. Retaining a customer
requirements for an operator.
Exhibit 6: Critical pre-requisites for customer management & loyalty
11
Another key success factor to properly
revenue growth out of the existing
and value proposition. Given the
manage customer expectations
customer base.
increased need for micro-segmentation
and customer lifecycle is providing
and segmented value propositions,
a meaningful and consistent brand
Improved customer analytics and a
and the need to coordinate between
experience across the different
strategy focused on improving the high
various departments in the operator
customer touch-points with the
value customer’s experience across
for the analytical marketing and the
company providing the service. The
all product and touch-point with the
promotional campaigns, operators
first challenge is to develop a relevant
operator, means that the operator
need to assign dedicated teams that
promise to the customer, starting
needs to reassess its organizational
look after the customer lifecycle
from the values associated to the
structure as well. In order to better focus
management and help in coordinating
brand. The second challenge is how to
customer management and retention
efforts across silos of the company.
successfully deliver that promise along
efforts within particular customer
The set up of a division within the
the different interactions with the
segments, operators across the GCC,
operator in charge of customer lifetime
customer, from an initial contact point
such as Etisalat, Qatar Telecom,
management is a good way to ensure
at any point of sale or through the web
and Batelco have restructured their
this will happen.
site, to the experience the customer
organizations around the customer,
has when accessing the network
creating Consumer, Business, and
With such a customer-focused
and using the service to any further
Wholesale divisions, rather than the
organizational structure, improved brand
enquiry the customer might put to the
more traditional, product-centric
experience across all customer touch-
representatives at the call center.
organizations of Fixedline, ISP, and
points, and constant product and services
Mobile divisions. The second relevant
innovation per customer segment, a
Managing customer expectations and
organizational (structural) change
proper customer management model can
customer satisfaction and loyalty to
required to successfully deliver
be implemented.
the brand is an on-going activity since
according to customer expectations is
customer needs and attitudes towards
to fully integrate back-office functions
During 2008, we expect operators in
a brand evolve with time. A continuous
(network, IT and other support areas
maturing markets to solidify their moves
effort to segment—and even micro-
within the organization) with the front-
from customer acquisition to customer
segment—the customer base and target
office functions of the organization
retention by re-enforcing their newly
them with relevant value propositions
(marketing, sales and customer
created customer-centric organization
is required to properly satisfy or surpass
care). New products development, or
structure, invest time and effort in
customer expectations. In particular,
enhanced customer care services can
improved customer analytics, and launch
any operator willing to retain and
not be conceptualized and realized
a series of segmented and targeted
develop its customer lifetime value will
just by the marketing and Customer
customer retention and development
have to proactively come-up with new
Care departments anymore. The
initiatives focused on their high-value
segmented and targeted offerings that
back-office areas have to play a more
customers, including the delivery of a
will not only contribute to customer
active role in understanding customer
consistent brand experience across all
retention but one that will also generate
expectations and delivering according
customer touch-points.
demand for new services driving future
to that and to the overall brand promise
12
Industry dynamic #5 Reaching the low income segments
Given that the portion of the population able to afford a mobile handset or service at current prices is very low, operators are now facing the challenge of increasing penetration rates among the
Mobile operators will need to rethink their business models to profitably serve the below US$5 ARPU customer
Cellular technology is changing the
Telecom going on the acquisition trail
landscape in emerging markets.
are good examples of that.
Today there are some 3 billion mobile customers worldwide, and that will
The tremendous network deployment
grow to nearly 5 billion by 2012
across the countries of sub Saharan
(according to WCIS predictions), when
Africa has increased penetration
two-thirds of the people on earth will
levels dramatically, from less than
have mobile phones.
3% in 2001 to 26% by the end of
bottom of the income pyramid
2007 . In the early years, this growth In 2001, in sub Saharan Africa there
was driven mainly by an increase in
were 17 million mobile connections,
the competitors per market and a
while today there are some 190 million
commensurate reduction in price per
(according to WCIS). Communication
minute and handset prices, but has
is bringing people together, helping
accelerated more recently as a result
develop societies and increasing
of the decreasing costs of mobile
economic prosperity.
network deployment, coupled with increased investments by pan-regional
During the past three years, Africa saw
and global players. However, given
a massive growth in interest from pan-
that the portion of the population able
regional and international investors
to afford a mobile handset or service
and telecom operators seeking to
at current prices is very low, operators
ride the African growth bandwagon.
are now facing the challenge of
Zain’s (formerly MTC) buyout of
increasing penetration rates among
Celtel and its investments in Mobitel
the bottom of the income pyramid
in Sudan and Vmobile in Nigeria,
within African populations.
MTN’s acquisition of Investcom, Etisalat’s partnering with Atlantique
While the key element to drive
Telecom and European operators such
demand is to lower the entry barriers
as Vodafone, Orange, or Portugal
and the total cost of ownership
13
(see Exhibit 7), the challenge for any
propositions that attract the bottom of
As a starting point, affordability is
operator seeking to provide such value
the pyramid is to do so profitably.
what the customer perceives based
Exhibit 7: Transforming business models to attract the low income segments
To profitably serve customers with daily income of US$2, operators need to rethink their business models in the search of maximum efficiency without sacrificing service levels and profit margins. The primary challenge is to encourage such customers to adopt the service. As such, reducing the barriers to entry, or adoption, and the total cost of ownership by the customers are essential. The main elements of the cost of ownership are handset costs and price per minute. There are several models by which these two can be reduced.
1. Reducing handsets costs:
that match the lifestyle of young
local entrepreneur would use the
Pioneering initiatives encouraged
populations that are used to live
mobile phone or wireless/mobile
by the GSMA and undertaken by
day to day on a US$2 daily income.
broadband service to create a
Motorola and Nokia are being
Lower total cost of ownership,
business that serves the overall
more recently followed by the
particularly pricing plans that
community he/she is a part of.
efforts of Chinese manufacturers
offer long-term, even lifetime
(ZTE and Huawei) taking the retail
validities need to be complemented
handset prices below US$20, as
with affordable rates and low
as Bangladesh’s Grameenphone
well as operators like Vodafone
denominations in sachet-like
are the pioneers of partnering
with their low end 125 and 225
recharge vouchers that ensure low
with financial institutions to
models or Spice Mobile planned
incremental spending.
utilize their micro-credit facilities
sub-US$25 “people’s phone” in India. In several markets where
to enable low income segments 3. Community—or Shared—
to purchase mobile phones via
these sub US$20 handsets were
Access: To overcome the chicken
a loan. In the Grameenphone
recently introduced growth has
and egg problem of lack of buying
model, the individual buying the
taken off, which clearly indicates
power among the sub US$5 ARPU
handset repays the loan with
this is the way to penetrate lower
segment, community access is
money she generates from selling
income markets and customer
a convenient way for operators
minutes on her newly acquired
segments.
to tap into the bottom of the
phone to her village community.
pyramid. The public call office
Grameenphone claims 250,000
model, the village phone model,
entrepreneurs conducting this
and price levels: Operators need
or even the community Internet
retail phone business in 60,000
to cleverly bundle these handsets
and communications center model,
villages in Bangladesh, giving
with attractive pricing plans
for example, are ways in which a
access to over 100 million users.
2. Rethinking pricing structures
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4. Micro-credit: Operators such
on the communication campaign the
prevent churn. Some operators, such
operator designs. While it is a given that
as Sudatel, Safaricom or Glomobile,
attracting low income customers will
choose to leverage “national pride”
definitely erode ARPU for the operator,
and position themselves as the national
managing the ARPU decline in such a
carrier, while others concentrate on
way as to avoid excessive erosion should
the young population, such as Tigo.
be a key element of any operator’s
While operator branding in more
strategy to profitably serve the bottom
developed markets increasingly focus
of the pyramid. As has been seen with
on individuality of their customer base,
selected operators in East Africa such
the exact opposite approach works
as Celtel or Tigo in Tanzania and UTL
more effectively in high growth markets
in Uganda, a clever introduction of
in Africa. Customers at the bottom of
headline tariffs in a direct and easy to
the pyramid, historically marginalized
understand communication will convey
in the era of globalization, crave for a
the affordability message without
sense of belonging to a greater network
necessarily harming the operator’s
or community. As such, pan-regional
margins. In each pricing package,
operators such as MTN or Celtel (Zain)
the operator needs to design built-in
focus on the community aspect and the
components—such as billing steps,
sense of belonging to a greater network
set up fees, usage caps—that prevent
in their branding campaign.
more ARPU erosion than is necessary to attract the low income customers. These
Technology is an important lever for
sensitive levers need to be managed
operators seeking to decrease the
with care and accuracy, however, and
cost of providing the service: mobile-
this can only take place when the
voucher delivery systems, electronic-
operator is capable of achieving a large
voucher delivery systems and IVRs
degree of intimacy with customer needs
to promote self care are just some
and behaviors.
examples. Technology can also be used to increase revenue streams and
Even with these low ARPU customers—
increase customer stickiness, such as
in fact, precisely because they are low
money remittance systems which have
ARPU customers—customer loyalty is
been a success in Kenya, South Africa
essential to extend customer lifetime
and the Philippines and are being
and thus extract profits, and to prevent
deployed in Afghanistan, Tanzania and
spiraling acquisition and winback
several other high growth markets.
costs. As such, properly positioning the brand and establishing an emotional
Profitability can be further enhanced
connection with the customer will help
through a more efficient approach to
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distribution of the physical recharge
efficient BTSs, as well as ones that
vouchers. Examples are partnerships with
rely on alternative energy sources like
logistics companies to increase presence
wind, bio fuels, solar or at the very least
efficiently, incorporating learnings from
hybrid power solutions, promising cost
the FMCG world in order to increase
reductions up to 40%.
rotation and traffic towards POS, such as tailor-made events at the POS, or layout
While the pan-regional players
and ambiance customization according
are actively trying to consolidate
to target segment.
procurement across country operations to gain better leverage with vendors
It is worth noting that, considering that
and reduce equipment costs, the real
over 65% (source: UNDP, 2006) of sub-
drivers of infrastructure costs are BTS
Saharan Africa lives in rural areas, the
site acquisition and civil works, together
FMCG model has proven successful in
with the shortage of skilled engineers
penetrating rural areas. Learning from
within Africa. These factors, combined,
the FMCG world would thus enable
make the network outsourcing,
mobile operators to increase numeric
managed services, and network sharing
distribution in rural areas, ensuring
viable alternatives to build-own-manage
accessibility and visibility in order to
models. Bolder operators in Africa are
address the latent demand coming
trading sites, replicating the site sharing
from rural Africa.
model that operators like Vodafone and Orange are following in Europe, while
Network rollout and maintenance,
several are engaging vendors for carrier
or network CAPEX and OPEX, are
managed services.
important cost elements that, if not managed properly, could significantly
The year 2008 will see the launch of
impact profitability in serving low
various initiatives by the more innovative
income segments. As for OPEX, site
African mobile operators to reach
security and the shortage of reliable
and serve the bottom of the pyramid
power supply are major challenges
profitably. In order for these initiatives
in low income areas. In areas where
to succeed, however, operators need to
the national electric grid lacks reach,
learn from the lessons in other emerging
power generators are required, adding
markets, and to understand that the
significantly to the cost of access
traditional mobile operator business
rollout. Generally, two generators per
model needs to be re-thought if the low
BTS are required, with a replacement
income segment is to be served profitably.
cycle of 18 months. Solutions being developed or deployed now are more
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Industry dynamic #6 Broadband growth
Even with the very high growth
Operators will seek to position themselves for the growth prospects in broadband connectivity For over a decade, the phenomenal
wireless broadband offering), all of
rates in broadband across the
growth in mobile (with a global
whom are keen to ride the wave of
region, the region is still a
2000-2006 CAGR of 24%) has
growth expected from broadband.
far cry from mass broadband adoption when taken as a whole, and the room for
overshadowed the fixedline, where growth has stagnated (with a global
Even with the very high growth rates in
2000-2006 CAGR of 5%), mainly as a
broadband across the region, the region
result of lack of investment.
is still a far cry from mass broadband
growth is tremendous
adoption when taken as a whole, and With the emergence of broadband as a
the room for growth is tremendous.
growth engine (with a global 20002006 CAGR of 61%) for the stagnating
Broadband development varies across
fixedline business, coupled with
the MEA region
innovative new broadband technologies
However, the level of development
that either reduce CAPEX significantly
is not uniform (see Exhibit 8), and
(such as WiMAX) or enable a much
there are selected countries that have
wider range of value added services
achieved significant strides in increasing
(such as FTTx), the fixedline is attracting
broadband penetration already, while
headlines once again.
others are on the cusp of growth in broadband. There are three country
The resurgence of fixedline in the
groupings within the MEA region
MEA region
with different levels of broadband
The MEA region is no exception. In
development:
fact, adding to the resurgence of
1. Sub-Saharan Africa (excluding
the fixedline in this region is the late
South Africa)
introduction of liberalization in this
2. GCC states (excluding Saudi Arabia)
sector, which is now attracting players
3. Rest of MENA
from the mobile and ISP markets (such as Umniah’s and Zain Bahrain’s WiMAX
Sub-Saharan African countries have
licenses, Mobily’s mobile broadband
to-date lagged behind in not just
push, MTN Nigeria’s acquisition of 2
broadband adoption, but even dialup
fixed wireless operators, or Wana’s
Internet adoption. Among many other
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factors—such as illiteracy, low PC penetration, IT awareness, and low income levels—the lack of fixedline
Exhibit 8: Broadband penetration of households in selected Middle East and Africa countries in 2007
infrastructure has been one of the key inhibitors preventing broadband adoption. It is for this reason that the mobile operators and emerging fixed wireless access providers in this region are now keen on leveraging wireless technologies (such as CDMA EVDO, WiMAX, UMTS or HSPA) to move into broadband service provisioning as well,
Source: Euromonitor 2007
with Nigeria’s active broadband market already in full swing. As such, the broad-
bandwidths (up to 4Mbps), while some
band players are keen to further expand
are venturing into bundled offerings that
On the other extreme, the small littoral
the pool of Internet users to enable
combine Internet access, voice telephony,
states of the Persian Gulf, with already
continued growth in the broadband cus-
and video (IPTV or video on demand).
high dial-up Internet penetration
tomer base. As such, the main challenge
coupled with a high income population
for players in these markets is to create
In fact, as the broadband growth rate
and more IT savvy businesses, have
a compelling value proposition that will
tapers off in the higher penetration
managed to migrate many of their dial-
enable the previously unconnected to
countries and Internet users become
up customers to broadband over the
jump on the broadband bandwagon im-
more sophisticated, incumbent fixedline
past couple of years.
mediately, bypassing dial-up all together.
operators are betting on these same
being a good example (see Exhibit 9).
bundled offerings as a means to both During this same period, countries such
As a result, incumbent operators in such
encourage incremental increases in
as South Africa, Saudi Arabia, Egypt,
markets are revamping their broadband
broadband ARPU, while also hoping
Morocco, and Jordan have successfully
value propositions from two angles. For
to lock in broadband customers with
put broadband on a rapid growth
the unconnected customers, providers
cross selling prior to the intensification
trajectory, thanks mainly to a successful
such as Batelco, Awalnet, STC, Maroc
of competition. Tying in the customers
push from governments coupled with
Telecom and others are offering very
through cross selling and value added
the incumbent operators’ need for
low bandwidth broadband (128Kbps),
services is thus becoming a necessity
growth drivers in their fixedline business.
combined with limited monthly
for incumbent players readying for
download capacity at more affordable
fixedline competition.
Operator strategies in more developed
prices to help acquire the novice internet
broadband markets
users. For the Internet savvy and higher
Benchmarking themselves against the
When it comes to operators in the last
spending customers, operators such
more advanced broadband markets in
two groups of countries, the migration
as Etisalat, Qtel, Maroc Telecom and
Asia and Western Europe, the fixedline
of dial-up connections to broadband is
others are launching ever higher access
operators in the high penetration
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broadband markets are considering
such, we believe that the new entrants
offering through cross-selling and
services and solutions catering to the
in the fixedline markets, licensed altnets
capture more of their mobile customer
broadband-connected residential and
in Saudi Arabia, Bahrain, and soon in
telecommunications spending.
business customers. Specifically, the
Qatar, will all need to match or exceed
growing emphasis among Western
the incumbent offerings if they are
Operator strategies in less developed
European and Asian operators on
to successfully capture any significant
broadband markets
managed ICT services for SMEs
broadband market share.
In most of sub-Saharan Africa, where
(operators such as Belgacom and BT),
fixedline broadband infrastructure
and IPTV and triple play to residential
Finally, we expect the mobile operators
is nearly non-existent, mobile and
customers (such as Orange France and
in these markets to start positioning
wireless broadband technologies are
PCCW), are two main themes that are
themselves to capture a share of the
the name of the game for players
attracting the attention of incumbent
broadband pie during 2008, either
interested in addressing the nascent
fixedline operators in the Middle East.
through 3.5G technology and eventually
broadband opportunity in this region.
LTE, through a WiMAX license, or
Here, mobile operators will leverage
Newly licensed entrants into the
acquisitions of existing broadband
3.5G deployments, and in some cases,
fixedline market of these more
players in their respective countries.
WiMAX, to target the broadband
developed broadband markets, keen
The mobile players will be late comers
opportunity, while ISPs and other new
on inducing customer churn from the
to the broadband game in the more
entrants will take advantage of WiMAX
incumbent operators, will need to keep
developed broadband markets, and
or broadband CDMA technologies to
up with the new service innovation and
will mainly aim to use broadband as
address the same broadband market.
price bundling of the incumbents. As
a way to compliment their mobile
Exhibit 9: The Wireless Broadband Push in Africa—Nigerian Players Jostle for Position for the Broadband Opportunity Nigeria is one of sub-Saharan Africa’s most competitive broadband markets with unified licensing that allows fixed and mobile players and ISPs to compete for the small but fast growing broadband opportunity. The Internet competitive landscape in Nigeria is very fragmented; while national operators leverage their fixed lines infrastructure and mobile players have not penetrated the market yet, there are a large number of small players (PTOs, ISPs, etc) using CDMA technology and few using WiMAX technology to offer internet / broadband services. Wireless is the name of the game in Nigeria’s broadband market. Presence National operators
National PTOs
Regional PTOs
Main technologies
Nitel
Nationwide
Fiber optic, SAT, CDMA
Globacom
Nationwide
Fiber optic; Expects Next Generation Network (NGN) & submarine cable
Starcomms
9 regions
3G CDMA-EVDO
Multilinks
Lagos
Fixed-line (TDMA) & CDMA
Reltel
12 cities plans 42 end ‘07
CDMA
MTS first W.
5 regions
CDMA; VSAT
Intercellular
n/a
CDMA
Rainbownet
South East Nigeria
CDMA & 3.5 GHz frequency
Cyberspace
Lagos
VSAT; 3.5GHz DSL, cable solutions
Bourdex
9 regions
CDMA
21st Century
Lagos
Dial-up, DSL, PABX, PSTN, VSAT, VOIP
Source: Operators websites; Paul Budde 2007 report; All Africa News Aug ‘07; Jidaw Systems Q307 ratings; Delta Partners analysis
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