The Delta Perspective May 2009
Mobile Broadband in MEA: Promises opportunity but not a smooth ride Authors
Joao Sousa - partner: js@deltapartnersgroup.com Stephen Clements - senior associate: sc@deltapartnersgroup.com Adil Dilmen - associate: ad@deltapartnersgroup.com Delta Partners Intelligence Unit
Delta Partners takes a look at mobile broadband potential in MEA and assesses challenges for both mobile and fixed operators
Introduction The unprecedented take-off of the mobile sector across the world has been one of the most note-worthy milestones in telecommunications history. With the passage of time, operators have witnessed a migration of PSTN voice traffic towards mobile networks. The segment has emerged as a crucial revenue generator of telecom services worldwide, capturing a sizeable portion of basic voice and data traffic of households and enterprises. As in the rest of the world, the dominance of mobility is seen in the MEA region too, particularly in the emerging markets of Africa. At the end of 2007, the ratio of broadband, fixed and mobile penetrations stood at 1:4:22 and 1:18:160 in Middle East and Africa respectively. Owing to the strength of mobility, broadband over this medium is expected to register explosive growth, catapulting to new heights of highspeed demand.
Key highlights • The mobile broadband opportunity in MEA is expected to reach USD5.9 billion by the end of 2011; comprising nearly 70% of the overall broadband market • Combined broadband subscriber base expected to reach 57 million, with 72% of the base over mobile platforms • Both the Middle East and Africa display similar mobile broadband value opportunity sizes; Africa has potential for 24 million subscribers, the Middle East has around 17 million subscribers • Long term mobile broadband ARPU is expected to be between USD1015 driven by new submarine cable developments
In this paper, we explore the broadband opportunity in the MEA region, outline the external threats and internal challenges faced by operators, and detail the overall value proposition. Significant growth potential exists with a 3-year mobile broadband opportunity valued at around USD5.9 billion, with Middle East contributing USD3.0 billion and Africa USD2.9 billion. The opportunity size will
EXHIBIT 1: Comparative service penetration in Africa, Middle East and EU-25 nations
Includes Bahrain, KSA, Kuwait, Oman, Qatar, UAE, Israel, Lebanon and Libya Source: ITU; IDC; World Cellular Information Service (WCIS); Delta Partner analysis 1
EXHIBIT 2: % of Households with only mobile connections in EU nations
Source: European Commission, Eurobarometer – E-Communications Household Survey, June 2008
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depend on: • Rollout speed of 3G networks or EDGE by the leading players • Reduction in mobile broadband price driven by competition and decrease in cost of connectivity, both internationally (completion of existing submarine cable projects in the region) and national core network costs (driven by fiber deployments).
The ‘Fixed-Mobile’ Substitution (FMS) The evolution, or rather revolution of the mobile sector has led to far greater choices for communications than the previous one of traditional PSTN voice The strategy on the part of fixed and mobile operators has been aimed towards displacing each other as the preferred provider. Whilst the early trends of mobile uptake indicated an apparent complimentary use to the fixed line, mobile operators have steadily become substitutive and succeeded in eating into the share of fixed line markets. Consequently, the share of ‘mobile-only’ households has been rising, whilst the number of households with at least one fixed line has continued to decline. For instance, at the end of December 2007 about 24% of the households in the EU-27 nations had opted for ‘mobile access only’, as the FMS syndrome has been more pronounced in countries with less developed fixed networks such as Czech Republic, Finland and Hungary.
Mobile Substitution (FMS). Some of these are: • Reduced differential between fixed versus mobile in tariffs and services • Mobile operators leverage upon a range of price-plans across both prepaid and postpaid platforms, as fixed operators continue to be ‘locked’ to their legacy line rental-model • The gap between fixed and mobile broadband provisioning has been trending downwards with the roll-out of 3.5G networks and ‘unlimited consumption’ offers • Rising numbers of ‘single-dweller’ households , leading to mobile phones occupying the position of the household communication device
In a bid to outdo the mobile revolution, fixed players have chosen to ‘bundle’ a bouquet of communication services in order to meet the collective TV, voice and data requirements, especially those of high and middle class households. Though, this aided in mitigating the rate of line deactivation to some extent, mobile players have been quick to retaliate by bundling mobile broadband and rolling out alternate technologies such as WiMAX.
• Proliferation of a mobile workforce and the practice of businesses encouraging mobile contacts as reference points for clients
Several market and socio-demographic factors have further fuelled the Fixed3
Mobile dominance in MEA – Opportunity and Drivers In the Middle East, and especially Africa, the fixed networks are far less developed than in Europe, representing a mobile broadband opportunity of close to USD6 billion in revenues and USD8-12 billion in shareholder value For instance, in Ghana and Saudi Arabia, mobile operators constitute nearly 95% and 80% of the market revenues respectively. To date, operators in the region have been riding the volume game, focusing on maximizing subscriber additions. However, as penetration levels continue to increase and reach near saturation in Middle East and 37% in Africa at the end of 2008, operators will need to explore new avenues for revenue growth. Mobile operators view data services as a growth driver that is indispensible to their expansion. The intrinsic need for creating inroads into the broadband play together with the dominance of mobile operators in the telecom market, will fuel the insurgence of mobile broadband in MEA.
EXHIBIT 3: Broadband market potential – subscribers and revenues
Source: Delta Partners analysis
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With over 500 million mobile subscribers in MEA at the end of 2008, the region has been one of the fastest growing across the world over the past years, witnessing mobile overtake fixed line connections in the early 2000s. The prohibitive costs of wiring the region versus the favorable economics of wireless technologies is expected to add to the mobile voice and data bonanza. Several of the regional titans have already begun to recognize this and use both ‘convergence and substitution’ measures to market a variety of offers, initially targeting the high ARPU business customers. These include promoting phones that support fixedwireless access technologies in an SME context, while encouraging high-speed wireless internet based on USB modems
EXHIBIT 4: Services-suite aimed at capturing the broadband opportunity
Source: Websites
and wireless routers. Owing to their dominance, mobile operators are well positioned to tap into the broadband opportunity capitalizing on the fixed networks lack of scale and competition. In the long term, the promise of the next wave of mobile growth is likely to depend on how soon subscribers latch on to the data bandwagon. The data opportunity in the mobile world stems from two major sources. The first leads from the usage of internet access to meet with basic fixed internet needs, the second generated from within the mobile ecosystem. The former includes the likes of browsing, e-mails etc., the latter including m-payment, services driven by operators’ portal, location-based applications, gaming, TV, etc. Despite the presence of this opportunity, operators face technical and economic challenges. As they depend on data services to stabilize ARPU, the explosion in traffic and associated rise in costs can
threaten QoS. In addition, the increase in data service revenues does not always compensate for the increase in traffic levels on the network. Hence, the key question that plagues operators is how to optimize cost-to-serve, led by the extent of network development with respect to the rising data traffic. According to Delta Partners estimates, the total broadband market in MEA is expected to grow at a CAGR of 51% in revenue terms between 2008 and 2011, reaching USD8.6 billion at the end of the period with a subscriber base of 57 million, coupled with a geographic split of 47% and 53% between Middle East and Africa respectively. Additionally, the dominance of the mobile market is estimated to control a majority of the households and small business enterprises broadband market with 41 million subscribers and mobile broadband revenues of USD5.9 billion across MEA at the end of 2011. The surge in innovative product offerings has the ability to translate into a
shareholder value in the range of USD812 billion in the next couple of years (Middle East:Africa representing 70:30 of this value). Typically the regional titans, such as Orascom, MTN, ZAIN, Etisalat, and more recently Vodafone, plus other established leaders in individual markets, are better suited to address the traditional ‘fixed’ telecom demands of high-speed networks. As illustrated in Exhibit 4 above, these include voice and data service offerings across SMEs, homes and public internet cafes/ payphones using mobile infrastructure. In order to be able to successfully drive profits based on a broadband play, operators would need to align their operating model, and gain access to backbone and international connectivity at competitive costs. Furthermore, for markets where the regional titans do not have a presence, existing fixed and tier-II mobile operators have a chance to enhance their value proposition in broadband play. 5
Potential Roadblocks to Success Mobile broadband enables increased value, and retention of high value clients but requires significant investments, and opens the door to VoIP The ‘IP’ Syndrome The first set of concerns with the advent of competition is typically related to tariffs, as operators meet with cut throat pricing amongst their peer group. However, the threat today has transitioned beyond mere tariff wars and spread to newer frontiers of IP traffic. The advent of cheap VoIP calls with improving QoS, has led to the jettisoning of legacy circuit switched networks, corroding the core service offering of fixed and mobile play and making the future of voice revenues unclear. Additionally, VoIP providers have further intensified their attack, by offering freebies such as unlimited international calls to select countries as
EXHIBIT 5: Skype and its implications to the telco community
Source: Delta Partners analysis
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part of their basic subscription packages. Currently, Skype is already the second largest operator in terms of subscribers in the world, with more than 370 million subscribers and revenues of USD143 million at the end of Q3 2008. In response to the VoIP threat, mobile players are seen creating service offerings such as the Video over IP solutions to try to combat the Skype migration – Vodafone for instance is already deploying some offerings in Europe. Fixed players on the other hand are being increasingly pushed into catering to the needs of corporate and large business entities. Additionally, they are hopeful of regulatory support to enable
EXHIBIT 6: Roll-out challenges faced by mobile players
Source: Delta Partners analysis
investments in FTTH across major cities, the underlying objective being to deliver broadband speeds that are unmatched by mobile operators, thus creating successful FTTH monopolies. Perils of Rollout Overestimation An evolution from traditional mobile player to that of an integrated / convergent one, calls for a revised business model and organizational revamp. The roadmap that lies ahead is not simplistic as operators face key challenges of meeting high-speed connectivity expectations, with a range of technical, commercial and financial issues. To be able to successfully address the opportunity, operators require access to international capacity at competitive costs, and significant investments in both access and core networks. The commercial challenges to be dealt with include devising innovative ways to address the ‘utopian’ high-speed expectation. The financial challenge is a basic one in some MEA markets. Even the leading players are not realizing
results in line with the cost of capital and the broadband rollout requires significant capital. Furthermore, as the broadband subscriber base rises, and the popularity of IP voice, Instant Messaging (IM) and video calls increase, the threat to existing voice capacity, continues to grow. Thus, the key to success lies in striking the right balance between profitability and value creation, whilst preventing data from cannibalizing voice revenues. In the Middle East, current regulatory conditions tend to block VoIP services, maintaining attractive conditions for local players to push broadband development without having to be overly concerned about cannibalization of voice revenue from the growth of VoIP. However, freely available software has made it possible, even under such circumstances, to access VoIP services despite regulatory restrictions, demonstrating the risk they pose to the operator. 7
Key Success Factors – Realizing the Prospect In order to address the broadband opportunity, mobile operators need to first align their operating models with business objectives Such a transformation is needed to enable them to address the opportunity profitably and meet key broadband development requirements. In our opinion, the factors that play a decisive role in creating a sustainable opportunity include the following: Access to International Connectivity at Competitive Costs • Presently, 1GB of international connectivity in Africa ranges between USD15 to USD30 depending on the country and service quality. This translates into very high priced broadband service offerings • To improve upon the current scenario, some mobile players are known to be investing in and also leading the development of submarine cables in the region
Efficient, Low Cost Core and Backbone • Improve control of network coverage, capacity and technology to manage service quality and costs • Make an informed and judicious decision on the mix between coverage and capacity in urban versus rural areas • Due to the lack of fiber in MEA, players such as MTN and Zain are deploying fiber to fulfill backbone requirements, and in some cases metropolitan rings • Explore tower sharing and rural roaming to reduce cost of network Improve Economies of Devices / CPEs Supply • Currently, the operators’ cost of a 3G data card / USB modem is
EXHIBIT 7: Broadband potential across markets with top 2 operators offering broadband services
Only Middle East and African countries, considering the full potential of the countries where the operator has equity stake; Etisalat includes Iran Vodafone includes Vodacom countries as well Source: Delta Partners analysis 1 2
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EXHIBIT 8: Positioning methodology for the regional mobile players
The condition required are cumulative as we move from left to right scenarios Source: Delta Partners analysis 1
higher (in excess of USD50) than the consumer price in Europe Dedicated Sales Channel and Customer Support • Sales and support towards data connections is far more complex than traditional pre-paid voice services • Operators need to rethink the number and role of ‘Owned-shops’, devising a tailored channel strategy (e.g. IT agents as telecom sellers), designing distributor role and agreements, and defining the mix of sales agents (outsourced versus direct representatives) • Enhance customer care structure and dimensioning in terms of direct support to users, sales agents and corporate clients Enhance Customer development and design retention programs • Educate clients in order to rapidly rollout offers and protect high value clients • Improve value proposition for high value business and residential customers. In Africa, this segment represents between 10-20% of subs and 50-60% of revenues
Organizational transformation • Revamping the ‘Go-to-Market’ strategy • Partnering with other entities of the value chain (e.g. ICT services) and taking advantage of broadband play (e.g. through vendor partnerships and / or infrastructure sharing) Regional giants such as MTN, Zain, Vodafone (Vodacom), Orascom, and Orange are well positioned to lead mobile broadband development across the MEA region. MTN currently leads this potential due to presence in the high-potential markets of Iran, Nigeria and South Africa. Exhibit 7 highlights broadband penetration as % of population and potential number of mobile broadband subscribers. Having said that, the estimates are likely to be impacted by regional developments such as new license awards in Iran (awarded to Etisalat), a potential new license in Tunisia and privatization of operators in Libya, Algeria, and Mozambique. Considering the backdrop of the current economic environment, and the related difficulty in obtaining debt and cash, operators such as Etisalat, STC (leveraging its
strong home market) and Zain have an opportunity to lead the charge of players in capturing the mobile broadband space. Striking the Right Balance In our opinion, the leading regional players can occupy one of the four highlighted positions in the broadband ecosystem. These are segregated based on the operators’ range of services, positioning and its individual objectives. • The Pure mobile play helps capture part of the potential but does not hold a leadership position in the market • The Broadband player requires significant investment in radio technology (3.5G and WiMAX, depending on the country / city potential) plus access to backbone and international connectivity. For instance, MTN appears to be adopting this position with its investments in submarine cables, fiber backbone, 3G and WiMAX licenses. On the other hand, Vodafone (Vodacom) is likely to leverage their expertise in mobile broadband from Europe • Broadband and ICT play is more 9
aligned to countries with a strong corporate / business segment. Pursuing a focus on this segment requires the mobile operator to acquire additional complimentary assets and competences. For instance, in South Africa, MTN and Vodacom (Vodafone) seem to be following this path, while in UAE, Etisalat is leveraging its’ fixed and mobile business to exploit market potential • Lastly, selective triple / quad play, is best suited for leading players with
larger geographical footprint, and in more robust economies comprising high value residential concentration. Another option is the ICT and/or TV play combination, which requires a significant transformation of existing organizational and operational structures of the operator (refer Delta Partners paper on ICT Managed Service dated October 2008). Telecom references in these services include BT Global Services and T-Systems which
have struggled to translate a growing business segment into adequate shareholder returns. The minimum ICT play is likely to include connectivity services charged on real service level, data centre, security and email services. This offer presents strong opportunity in many countries, generating carrier revenues and building loyalty of corporate clients, whilst deviating from the legacy tariffs and monthly fee structure of broadband offers into integrated solutions.
Fixed Line Operators – Rethinking the Business Model After having detailed the mobile broadband opportunity, the obvious question left to be answered is what lies ahead for the fixed players in the MEA region The situation and challenges for the fixed players in MEA regions vary considerably across nations. Exhibit 9 illustrates the threat, wherein the countries with favorable conditions in terms of submarine cable links and presence of major leading mobile players will present significant challenges to fixed players’ profitability. Some countries present favorable competitive, regulatory, and ownership conditions for the fixed players, allowing time for them to significantly improve their broadband portfolio and positioning. Such countries include Angola, and Libya. Three key future models for the fixed incumbent would be as follows: • European Incumbent Path – This includes a focus on broadband and data services plus integrated fixed and mobile offers. In some countries such as the leading GCC nations and South Africa, the stage of fixed 10
network development plus density of high value consumer and business clients enables fixed players to pursue a growth path within broadband and data services. In addition, most of the fixed incumbents in those countries include a mobile operation that can be leveraged to develop a cohesive value proposition. In South Africa for instance, Telkom, after the sale of their stake in Vodacom to Vodafone, clearly needs to rollout a mobile offer, merely to try and sustain their position in their home market • Competitive Mobile African Path – This model would entail the sale of the business to a leading MEA mobile player within the next few years. In most African countries the local fixed network is significantly underdeveloped and lacks quality, often with a significant number of mobile players contributing to
mobile domination of the market. In such countries the potential of fixed broadband is very limited, with the FMS trend further increasing the risk to fixed operators. In cases where the fixed player owns or is part of a group with mobile operations, the situation is less critical. The popularity of privatizations of incumbents is expected to increase significantly over the next two to three years, coinciding with the time it will take for the African submarine cable developments and for fiber to be laid out in most countries enabling a strong broadband push • The Government Path – In this scenario, operators exploit the monopoly/ duopoly scenarios to substantially increase the value of fixed business and drive broadband before full liberalization. Governments in countries like
EXHIBIT 9: Mobile broadband potential per country
Low is less than 2.25% penetration, medium is between 2.25% and 4.5% penetration and high is more than 4.5% penetration MTN, Zain, Vodacom/fone, Orascom, Orange, Etisalat Source: Delta Partners analysis 1 2
Angola and Mozambique can still have a major role to play in the development of the state telecom assets, and take advantage of market control to generate value before competition is introduced. However, these governments need to ensure their telecom assets control significant access to international connectivity at competitive costs, deploy a state of the art IP backbone network linking key cities, deploy fiber rings and drive broadband.
EXHIBIT 10: State of fixed network liberalization in (selective) MEA countries
Source: Delta Partners analysis
Conclusion It is clear that mobile broadband represents significant potential for leading players in the MEA region. While, the sheer growth potential makes it difficult for players to disregard the opportunity, the strategy employed would determine the dominant players and potential impact on the shareholders’ value. Operators would need to navigate the unique set of obstacles and challenges intelligently, such as, government mindset that largely focus on the telecom revenues’ contribution to national budgets. The more forward looking (liberal) Governments will strike a balance between long and short-term objectives
- in ensuring there is sufficient opportunity to develop a strong national telecoms infrastructure (a key driver in sustained economic growth), with the funds derived from revenues contributed by operators. Fixed players contemplating on entering the race will need to identify whether the opportunity is within their sights and if so, deploy a clear entry strategy. In conclusion, while mobile broadband holds great promise for the region’s telecom landscape, market dynamics will eventually determine the market leaders and the potential value realized. It is certainly an exciting time for the regional telecoms market.
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Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology (TMT) sector in high growth markets, with more than 130 professionals operating across the Middle East, Africa and South East Asia from its offices in UAE, South Africa and Bahrain, and through its three highly synergetic business lines:
Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than 50 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them address their most challenging strategic issues in a fast-growing and liberalizing market environment.
Private Equity: As a fund manager, Delta Partners manages a $80M private equity fund, targeting investment opportunities in the TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Group’s unique TMT industry expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis, and support to portfolio companies.
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At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to services, combining strategic advice and hands-on pragmatic approach.
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