identifying today's key industry dynamics in the middle east and africa - march 2008

8/9/2019 Identifying Today's Key Industry Dynamics in the Middle East and Africa - March 2008

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March 2008

The Delta Perspective

Delta Partners takes a

high-level look at key

market dynamics, service

provider strategies, and

new technologies that will

emerge in 2008

Idenifying odays keyindusry dynamics in eMiddle Eas and Africa

Auors Javer Alvarez - parner: [email protected] Mara Moya - parner: [email protected] Malak - prncpal: [email protected]

Looking back to the year 2000, the Middle

East and Africa region was one of the few

remaining monopolistic telecom markets

around the world, with a commensurately

low penetration rate of mobile and

fixedline services. Since thenand for

various reasons, ranging from the need for

socio-economic development to the need

to fill government coffers or pressure from

international bodiesthe governments

have established regulators that have

set the telecom market on a rapid pace

towards market liberalization. The result

has been phenomenal growth in the

mobile sector.

The MEA region is now at a crossroads

again. The phenomenal growth resulting

from the liberalization efforts in the

mobile sector is slowing down in the more

developed markets, while in less developed

markets the challenge is to start serving

very low income segments profitably,

and competition is increasing in fixedline

across the region. The industry is looking

to consolidate its gains and search for the

next big growth driver beyond basic voice

for the high and middle income segments.

Drawing from knowledge and experience

among our experts in the field, these are

the industry dynamics that we consider

key in 2008:

Furer Consolidaion:1. Regional

players will not be alone in the race

to become pan-regional titans

Organizaional Callenges:2.

Operators will have an uphill struggle

to extract value from merged entities

New Business Opporuniies:3.

Opportunities upstream in the

telecom value chain will start to

emerge

Cusomer Reenion:4. Operators in

maturing mobile markets will shifttheir focus from share of subs to

share of value

Reacing e Very Low Income5.

Segmen: Mobile operators will

need to rethink their business models

to profitably serve the below US$5

ARPU customer

Broadband Grow:6. Operators

will seek to position themselves for

the growth prospects in broadband

connectivity


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2

Indusry dynamic #1

The years 2005 to 2007 saw a series

of M&A deals such as the MTC (now

Zain) acquisition of Celtel, MTNs

acquisition of Investcom, Etisalats

acquisition of Atlantique Telecom, or

Qtels acquisition of Wataniya. There

was also the acquisition of Greenfield

licensesincluding Zains Saudi Arabian

third mobile license, Etisalats Egypt

third mobile license, or STCs Kuwait

third mobile license that lay the

cornerstone for the emergence of

pan-regional players out of once single

country or sub-regional operators.

With the wave of consolidation that

occurred in the MEA region among the

top players, pan-regional titans have

emerged, namely, Etisalat, Zain, Qtel,

Orascom Telecom, and MTN Group.

While these pan-regional titans are

now in the process of integrating their

acquired operations in order to realize

the synergies and economies of scale

inherent in an expanded customer base

and geographic footprint, they are not

shying away from further acquisitions

and expansion opportunities. This

continued thirst for expansion is driven

by three key factors (see Exhibit 1):

1. Ambitions of key pan-regional

players to become global leaders

and prevent being acquired

themselves by other global players

2. Abundance of liquidity in the

markets

3. Scarcity of Greenfield license

opportunities

Now that the most obvious target

companies with substantial footprints

have been acquired already (with the

notable exception of Millicom and to

a lesser extent Comium and Warid,

with 19, 6, and 4 country operations,

respectively), we believe that the

consolidation landscape in 2008 will

be characterized by:

Scarcer invesmen1.

opporuniies in e region:

While the pan-regional players

have consolidated already to a

handful of larger pan-regional

players during 2005-2007, there

are still a substantial number of

small, single country operators

in much of Africa and the

Middle East that often lack the

efficiencies, economies of scale,

and access to financing that the

larger pan-regional players have.

As such, we expect there to be

several smaller deals whereby

the pan-regional players seek

controlling stakes in single country

operators across the region.

Regional players will not be alone in the race to

become pan-regional titans

Further

consolidation

Pan-regional titans are now

in the process of integrating

their acquired operations in

order to realize economies

of scale. However, they

are not shying away fromfurther acquisitions and

expansion opportunities


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Invesmen in minoriy oldings:2.

Small stakes in larger players in

other adjacent regions such as

South and Eastern Europe (like

Orascom did in Greece and Italy

and its interest in acquisition targets

in other Mediterranean countries),

and Southeast and Central

Asia (such as the Qtel and STC

acquisitions of Asia Mobile Holdings

Pte Ltd and Maxis, respectively, in

South East Asia).

More inense compeiion3.

from operaors in Europe and

ig grow markes ouside

of MEA: In their quest to gain a

stronger foothold in high growth

markets, European operators are

keen on Africa. Once aggressive

about the MEA region prior to the

3G license bubble in Europe in 2001,

European operators are once again

willing to invest in the region and

are increasingly aggressive with their

license bids and M&A activity. Pan-

regional players should expect stiff

competition from these European

operators, as they bring to the table

strong operational and managerial

experience, innovative R&D, globally

recognizable brands, and in some

cases, such as Vodafones Safaricom

and Orange Madagascar, already

proven success in Africa. A newer

source of competition will come

from players in other high growth

markets such as India, China,

and Russia. Large players in these

markets are keen to maintain

their high growth momentum.

Some examples of this new set of

competitors are Russias Sistema and

its acquisition of Shyam Telelink in

India, China Mobiles Paktel deal, or

VSNLs interest in licenses in Qatar

and Saudi Arabia, or its acquisition

of a stake in Neotel South Africa.

Exhibit 1: Wa s drvng e need for epanson among pan-regonal players?

First and foremost1. are the ambiions of pan-

regional players o become global leaders and

preven being acquired emselves by oer

global players. Only a couple of years back, Middle

Eastern operators only needed to watch within the

GCC to identify real competition into the next bid.

The situation has changed significantly in the last 12

months, with global players becoming more aggressive

with their bids within the emerging markets. Some

examples are Vodafones acquisition of HutchinsonEssar in India, Telsim in Turkey, a mobile license in

Qatar, and potential controlling stake in Vodacom or

even MTN. Other examples include Oranges 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 Partners White Paper in 2007, The Emergence

of Global Industry Titans and Implications for Emerging

Market Players. Reliance is making inroads into East

Africa and Bharti Airtel is following suit in South Africa.

China Mobile acquired Paktel and has a war chest of

US$30 billion. Russian operator Sistema acquired 10%

in Shyam Telelink in India and has expressed interest in

the 3rd mobile license in Iran.

The second drivers i2. s the abundance of liquidiy in

e markesdriven by high oil prices and inward

investments by private sector and government

fundsthat facilitate easy access to financing for the

pan-regional players in spite of the current global

credit crunch.

Finally the3. scarciy of Greenfield license

opporuniies (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.

The continued thirst for expansion among pan-regional players is driven by three major factors.


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Indusry dynamic #2

With a wave of industry mergers and

acquisitions (see Exhibit 2) completed

among the regions top players in 2006

and 2007 (17 of the largest regional

M&A deals in the mobile sector in the

MEA had a total deal value of US$23

billion), the pan-regional players and

emerging industry titans in the region

are now keen on realizing the promises

of synergies, efficiencies and scale that

come with such large M&A deals.

Executives spearheading the acquisition

drive among the regional titans now

need to prove the value that their

acquiring company is bringing to the

acquisition target. While the initial

and obvious benefits of cost synergies

from a broader customer base and

a diversified portfolio of operators

are clear achievements in and of

themselves, more penetrating questions

need to be answered. Specifically:

1. What are the capabilities

that the acquiring company

brings to the target?

2. How can the combined entity

leverage combined assets to

ExhIBIt 2: LargestM&A deals from 2006 to-date, in the MEA region

Source: Press clippings

Operators will have an uphill struggle to extractvalue from merged entities

Organizationalchallenges

(Millions)


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drive revenue synergies such

as P&S innovation, market

reach, unique product platform

deployments, churn management,

or revenue optimization?

3. Are there cost synergies

other than improved buying

power from vendors?

As such, we believe that the year 2008

will be one in which these regional titans

will start dealing with the challenges

of driving the cost synergies they have

identified, while identifying ways of

realizing more revenue synergies. We

believe that pan-regional players should

focus their efforts in 2008 on synergies

achievable along three major axis:

Sraegic: Group strategic direction,

including brand equity and architecture

Organizaional: Corporate governance

and leadership

Operaional: Synergies from a cost and

revenue perspective

ExhIBIt 3: Identification of Big Ticket Items and Synergy Drivers

Illustrative


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Without a clearly defined group

strategic vision, reinforced by a

corporate governance model, acquiring

companies such as STC, Qtel, Etisalat,

or Zain all risk falling back on the

comfortable position of keeping the

target operators as part of a de facto

holding company, with the targets

strategic vision remaining unchanged

and relatively independent of the

acquiring company. Such a model is all

but sure to result in lost opportunities

for cost and revenue synergies.

The group strategic direction can

only be translated into operational

synergies from a cost and revenue

perspective once the right governance

and leadership model are put in

place. Governance and leadership are

thus of higher strategic importance

earlier on in the post deal stage, since

these constitute the decision-making

structure of the merged entity.

Finally, with a unified direction through

a strategic vision, combined with the

appropriate governance model in place,

the merged operational functions of

the overall group can start to deliver

synergies in areas such as revenues, cost

of sales, support, commercial, or billing

and technical (see Exhibit 3). These are

the operational synergies that create

shareholder returns above and beyond

the value of the target and acquired

companies can generate as standalone

entities (see Exhibit 4).

In order to achieve these operational

synergies, regional titans need to

develop common platforms between

their country operations. As such, the

group as a whole brings value to the

individual units, helps in clarifying the

future direction under the umbrella

of a common group strategic vision,

and enables better optimization of

resources to achieve the future vision.

Only truly integrated operators will be

the winners of this wave of integration

in the telecom space of the MEA region.

ExhIBIt 4: Crafting the strategic path Synergy identification, quantification and target setting

I is vial for a merged eniy o idenify and quanify e synergies i can acieve. Suc planning gives e organizaion e

ime and focus o properly idenify bes pracices and idenify ose areas wic will drive value creaion; companies a jump

ino eecuion mode rig from e sar generally leave muc poenial unapped. troug quanificaion of synergies, value

drivers can be beer undersood, and focus areas for inegraion effors become clearer. Seing arges for synergies provides

clear epecaions and will drive inegraion effors oward ose aciviies wic ave been idenified as key value drivers.

Idenificaion of bes pracices among e wo players elps o break paradigms and ensures geing e bes of bo companies.

Finally, aking some ime o se e course for e inegraion allows managemen o ge e buy-in from key sakeolders wiin

e merged eniies.

Based on Dela Parners engagemens in pos merger inegraion deals, poenial EBItDA improvemens could reac up o 10%,

wi a ypical spli of synergies beween OPEx and CAPEx o be around 60-70% and 30-40%, respecively.

typical spli of

synergies: 60-70%

OPEx, 30-40% CAPEx

Up o 10% on

EBItDA improvemen

opporuniy

Poenial cos reducion /

revenue increase (%)(1)

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%

ImpacSynergies

Illustrative

(1) Based on Delta Partners experience, will vary depending on existing cost structures and operators size and situation


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In a previous paper published by

Delta Partners in January 2006 we

anticipated the phenomena of the

opening up of the value chain in the

Middle East region as a consequence of

the increased competitive landscape for

telecom operators. At that time, initial

consequences of that process were

mainly observed in the downstream

end (see Exhibit 5) of the value chain,

around distribution and retail activities.

The opening up of the value along

the downstream or customer facing

end has further developed and players

such as Axiom, Cellucom, or i2, are

consolidating their dominant position

as regional players in the Middle East

in retail and distribution as well as

making further inroads with their

expansion into high growth markets

such as India and Africa.

Downstream activity is also brewing

in the call center space, as operators

increasingly outsource some of the non-

core functions to specialized niche players

that can efficiently provide these services

on behalf of the telecom operators.

More importantly, we believe the next

wave of outsourcing opportunities that

regional players will focus on in 2008

are going to be around the up-stream

part of the value chain, especially

network and IT elements that can be

outsourced or shared. Increasingly, we

are seeing more operators starting to

view these as non- critical activities

that can be performed by third parties.

We have identified two emerging

outsourcing opportunities to watch out

for in 2008, namely:

1. Network outsourcing and

managed services, including tower

management

2. Outsourcing transmission to

wholesale operators

These emerging opportunities are

driven at the base level by the need for

economies of scale. In mature markets,

the increased competition is driving

down prices and creating near-parity

in terms of network quality and

coverage, which in turn is rendering

the network a non-core function

that is no longer a competitive

differentiator. In less developed and

lower income markets, the need to

serve the bottom of the pyramid

more efficiently is forcing operators to

consider outsourcing elements of the

Indusry dynamic #3

Opportunities upstream in the telecom value chainwill start to emerge

New businessopportunities

We have identified two

emerging outsourcing

opportunities to watch out for

in 2008: network outsourcing

and managed services, and

outsourcing transmission to

wholesale operators


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network that would help lower costs.

In both types of markets, outsourcing

offers the opportunity to pool network

elements of multiple players and

create the economies of scale that

would enable each operator to focus

on its core functions while ensuring

desired service levels, at competitive

prices and thus business profitability.

Taking the case of tower sharing, for

an operator with 5,000 BTS, doing

tower sharing for 3,000 of those

with another operator, the potential

OPEX savings will be US$45 million,

or roughly 30% of annual BTS-related

OPEX (assuming annual average OPEX

per tower of US$30,000 and OPEX

savings in sharing mode of 50%).

For the development of an additional

1,000 BTSs shared with another

operator, the CAPEX reduction will be

between US$62.5 million and US$115

million (assuming CAPEX per tower

of US$125,000-230,000, and CAPEX

savings in sharing mode of 50%).

Some of the first companies to

realize this emerging opportunity

are traditional vendor equipment

providers, with Ericsson at the

forefront and NokiaSiemens, Cisco and

Huawei jumping on the bandwagon.

These have already set up their

network operations and maintenance

outsourcing and managed services

business divisions and are targeting

operators in mature and emerging

markets alike.

More recently, examples are emerging

from operators positioning themselves

for these emerging opportunities

upstream in the value chain. Some

prominent examples are the Bharti

Airtel, Vodafone Essar tower sharing

agreement where they have set up

a joint venture independent tower

sharing company, Indus Tower. Other

examples are 3UK and T-Mobiles

network sharing agreement, or BTs

application hosting and management

ExhIBIt 5: Evolution of the Telecom Value Chain


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solutions for other telecom operators,

such as its network and security

services, or its managed mobile

content, carrier-grade messaging, and

enhanced voice services.

We believe that there is a narrow

timeframe in which new specialized

players with strong capabilities in the

network integration space within the

region will be able to capitalize on

this emerging opportunity, namely,

building and maintaining large

network infrastructures across the

region and providing one-stop shop

solution to pan-regional operators. A

good example of that is Crown Castle,

the largest owner of tower assets

in the US, with 75% of its revenue

coming from the top 4 US mobile

operators. Crown Castle provides

site leasing and network services,

and has since moved into wholesale

wireless backhaul services as well. The

company achieved its number one

position by acquiring tower assets

from major mobile operators in 1999-

2000, and enjoyed an EBITDA margin

of 55% in 2007.

Financial capacity, operational

capabilities in the different markets

where they operate, and access

to large deals with pan-regional

operators are key requirements for

such companies to succeed within

the MEA region. As the telecom

industry keeps moving towards this

direction, we expect certain flourishing

of such companies, with potential

consolidation later on around the

better positioned players.

Our second identified upstream

opportunity is wholesale telecom

services. Given the new competitive

landscape with additional access

provision players (FWA, Internet and

Data services providers, MVNO,)

there is an emerging opportunity in

the wholesale business, particularly

for incumbent operators. As a result

of the proliferation of new players,

incumbents are increasingly viewing

provisioning of wholesale services to

competing operators as an opportunity

rather than a threat, complementing

the traditional retail business.

In 2008, we expect a significant

increase in investment activities

upstream in the telecom value chain,

while the downstream activities will

continue to flourish. What are now

considered well established business

lines among European players, such as

Deutsche Telekoms or BTs wholesale

services, or the network outsourcing

business line of Abertis in Southern

Europe, or tower sharing companies in

North America, are areas of investment

opportunities in the MEA region that is

open to both existing operators as well

as independent 3rd parties.


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Indusry dynamic #4

The year 2007 saw SIM card penetration

reach saturation or near-saturation levels

in the most developed of the MEAs

mobile markets, particularly the littoral

Arab states around the Gulf, as well as

markets such as Jordan, Morocco, and

South Africa. As such, the traditional

growth driver for the mobile operators

in these countries will need to start

evolving away from an acquisition

approach and towards a value

development approach. To compound

this growth challenge, incumbent

mobile operators in these markets are

facing increasing competitive pressures

with the entry of third or fourth mobile

operators in their markets. With heated

bidding for these new licenses and very

high per capita license costs, such as in

Saudi Arabia (US$6.1 billion), Kuwait

(US$907 million for a 26% stake) and

Qatar (unannounced, but possibly

in excess of US$2.5 billion) in 2007,

these new players business models will

be driven by very rapid market share

acquisition. With limited value left to

extract from untapped segments (mainly

the low income segments), market shareacquisition for these new players means

one thing: churning customers from the

existing players.

For established operators, churn

management thus becomes a vital

strategic objective. According to Delta

Partners analysis, a churn reduction of

10 p.p could bring a US$600 million

value . For such incumbent operators

seeking to protect their customer base

from churning to the competition, a

successful customer management effort

is a vital need. 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, rather than a

simple patch solution such as launching

a standalone loyalty program.

The first step is to analyze the

composition of the customer base

along with acquisition and direct costs

to identify which segments are most

profitable (see Exhibit 6). By doing this,

the operator can understand which

segments it should invest in for retention

and which segments it should reduceinvestment due to low profitability.

Operators in maturing mobile markets will shift

their focus from capturing share of subscribers

to share of value

Customer

retention

For established operators,

churn management becomes

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


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Specifically, the strategy for retaining

profitable customers is derived from an

analysis of that particular customers

experience throughout his or her lifetime

with the company. After having acquired

a customer, an operator should focus on

developing the customer experience that

enables the telecom operator to retain

that customer and extend the duration

of his lifetime as well as his usage of

mobile communication services.

As such, the role of analytical

marketing and business intelligence

in general is a vital pre-requisite for

evolving the operators strategy from

customer acquisition to customer value

development. Retaining a customer

would require a better understanding of

the customers total experience with the

operator across all of its product lines,

and across all interaction points with the

organization and, as such, would require

customer analytics that put the customer

as the main unit of measurement.

Improving customer analytics is of

course not an overnight task. Operators

frequently need to re-evaluate the IT

infrastructure that they have deployed

to capture and analyze customer

data. As such, business intelligence

tools, data warehousing solutions,

and customer data integration

solutions become necessary investment

requirements for an operator.

ExhIBIt 6: Critical pre-requisites for customer management & loyalty


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Another key success factor to properly

manage customer expectations

and customer lifecycle is providing

a meaningful and consistent brand

experience across the different

customer touch-points with the

company providing the service. The

first challenge is to develop a relevant

promise to the customer, starting

from the values associated to the

brand. The second challenge is how to

successfully deliver that promise along

the different interactions with the

customer, from an initial contact point

at any point of sale or through the web

site, to the experience the customer

has when accessing the network

and using the service to any further

enquiry the customer might put to the

representatives at the call center.

Managing customer expectations and

customer satisfaction and loyalty to

the brand is an on-going activity since

customer needs and attitudes towards

a brand evolve with time. A continuous

effort to segmentand even micro-

segmentthe customer base and target

them with relevant value propositions

is required to properly satisfy or surpass

customer expectations. In particular,

any operator willing to retain and

develop its customer lifetime value will

have to proactively come-up with new

segmented and targeted offerings that

will not only contribute to customer

retention but one that will also generate

demand for new services driving future

revenue growth out of the existing

customer base.

Improved customer analytics and a

strategy focused on improving the high

value customers experience across

all product and touch-point with the

operator, means that the operator

needs to reassess its organizational

structure as well. In order to better focus

customer management and retention

efforts within particular customer

segments, operators across the GCC,

such as Etisalat, Qatar Telecom,

and Batelco have restructured their

organizations around the customer,

creating Consumer, Business, and

Wholesale divisions, rather than the

more traditional, product-centric

organizations of Fixedline, ISP, and

Mobile divisions. The second relevant

organizational (structural) change

required to successfully deliver

according to customer expectations is

to fully integrate back-office functions

(network, IT and other support areas

within the organization) with the front-

office functions of the organization

(marketing, sales and customer

care). New products development, or

enhanced customer care services can

not be conceptualized and realized

just by the marketing and Customer

Care departments anymore. The

back-office areas have to play a more

active role in understanding customer

expectations and delivering according

to that and to the overall brand promise

and value proposition. Given the

increased need for micro-segmentation

and segmented value propositions,

and the need to coordinate between

various departments in the operator

for the analytical marketing and the

promotional campaigns, operators

need to assign dedicated teams that

look after the customer lifecycle

management and help in coordinating

efforts across silos of the company.

The set up of a division within the

operator in charge of customer lifetime

management is a good way to ensure

this will happen.

With such a customer-focused

organizational structure, improved brand

experience across all customer touch-

points, and constant product and services

innovation per customer segment, a

proper customer management model can

be implemented.

During 2008, we expect operators in

maturing markets to solidify their moves

from customer acquisition to customer

retention by re-enforcing their newly

created customer-centric organization

structure, invest time and effort in

improved customer analytics, and launch

a series of segmented and targeted

customer retention and development

initiatives focused on their high-value

customers, including the delivery of a

consistent brand experience across all

customer touch-points.


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Indusry dynamic #5

Cellular technology is changing the

landscape in emerging markets.

Today there are some 3 billion mobile

customers worldwide, and that will

grow to nearly 5 billion by 2012

(according to WCIS predictions), when

two-thirds of the people on earth will

have mobile phones.

In 2001, in sub Saharan Africa there

were 17 million mobile connections,

while today there are some 190 million

(according to WCIS). Communication

is bringing people together, helping

develop societies and increasing

economic prosperity.

During the past three years, Africa saw

a massive growth in interest from pan-

regional and international investors

and telecom operators seeking to

ride the African growth bandwagon.

Zains (formerly MTC) buyout of

Celtel and its investments in Mobitel

in Sudan and Vmobile in Nigeria,

MTNs acquisition of Investcom,

Etisalats partnering with Atlantique

Telecom and European operators such

as Vodafone, Orange, or Portugal

Telecom going on the acquisition trail

are good examples of that.

The tremendous network deployment

across the countries of sub Saharan

Africa has increased penetration

levels dramatically, from less than

3% in 2001 to 26% by the end of

2007 . In the early years, this growth

was driven mainly by an increase in

the competitors per market and a

commensurate reduction in price per

minute and handset prices, but has

accelerated more recently as a result

of the decreasing costs of mobile

network deployment, coupled with

increased investments by pan-regional

and global players. However, 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 bottom of the income pyramid

within African populations.

While the key element to drive

demand is to lower the entry barriers

and the total cost of ownership

Reaching thelow income

segments

Mobile operators will need to rethink theirbusiness models to profitably serve the below

US$5 ARPU customer

Given that the portion of the

population able to afford a

mobile handset or serviceat current prices is very low,

operators are now facing

the challenge of increasing

penetration rates among the

bottom of the income pyramid


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Exhibit 7: transformng usness models o arac e low ncome segmens

(see Exhibit 7), the challenge for any

operator seeking to provide such value

propositions that attract the bottom of

the pyramid is to do so profitably.

As a starting point, affordability is

what the customer perceives based

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.

Reducing andses coss:1.

Pioneering initiatives encouraged

by the GSMA and undertaken by

Motorola and Nokia are being

more recently followed by the

efforts of Chinese manufacturers

(ZTE and Huawei) taking the retail

handset prices below US$20, as

well as operators like Vodafone

with their low end 125 and 225

models or Spice Mobile planned

sub-US$25 peoples phone in

India. In several markets where

these sub US$20 handsets were

recently introduced growth has

taken off, which clearly indicates

this is the way to penetrate lower

income markets and customer

segments.

Reinking pricing srucures2.

and price levels: Operators need

to cleverly bundle these handsets

with attractive pricing plans

that match the lifestyle of young

populations that are used to live

day to day on a US$2 daily income.

Lower total cost of ownership,

particularly pricing plans that

offer long-term, even lifetime

validities need to be complemented

with affordable rates and low

denominations in sachet-like

recharge vouchers that ensure low

incremental spending.

Communiyor Sared3.

Access: To overcome the chicken

and egg problem of lack of buying

power among the sub US$5 ARPU

segment, community access is

a convenient way for operators

to tap into the bottom of the

pyramid. The public call office

model, the village phone model,

or even the community Internet

and communications center model,

for example, are ways in which a

local entrepreneur would use the

mobile phone or wireless/mobile

broadband service to create a

business that serves the overall

community he/she is a part of.

Micro-credi:4. Operators such

as Bangladeshs Grameenphone

are the pioneers of partnering

with financial institutions to

utilize their micro-credit facilities

to enable low income segments

to purchase mobile phones via

a loan. In the Grameenphone

model, the individual buying the

handset repays the loan with

money she generates from selling

minutes on her newly acquired

phone to her village community.

Grameenphone claims 250,000

entrepreneurs conducting this

retail phone business in 60,000

villages in Bangladesh, giving

access to over 100 million users.


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on the communication campaign the

operator designs. While it is a given that

attracting low income customers will

definitely erode ARPU for the operator,

managing the ARPU decline in such a

way as to avoid excessive erosion should

be a key element of any operators

strategy to profitably serve the bottom

of the pyramid. As has been seen with

selected operators in East Africa such

as Celtel or Tigo in Tanzania and UTL

in Uganda, a clever introduction of

headline tariffs in a direct and easy to

understand communication will convey

the affordability message without

necessarily harming the operators

margins. In each pricing package,

the operator needs to design built-in

componentssuch as billing steps,

set up fees, usage capsthat prevent

more ARPU erosion than is necessary to

attract the low income customers. These

sensitive levers need to be managed

with care and accuracy, however, and

this can only take place when the

operator is capable of achieving a large

degree of intimacy with customer needs

and behaviors.

Even with these low ARPU customers

in fact, precisely because they are low

ARPU customerscustomer loyalty is

essential to extend customer lifetime

and thus extract profits, and to prevent

spiraling acquisition and winback

costs. As such, properly positioning the

brand and establishing an emotional

connection with the customer will help

prevent churn. Some operators, such

as Sudatel, Safaricom or Glomobile,

choose to leverage national pride

and position themselves as the national

carrier, while others concentrate on

the young population, such as Tigo.

While operator branding in more

developed markets increasingly focus

on individuality of their customer base,

the exact opposite approach works

more effectively in high growth markets

in Africa. Customers at the bottom of

the pyramid, historically marginalized

in the era of globalization, crave for a

sense of belonging to a greater network

or community. As such, pan-regional

operators such as MTN or Celtel (Zain)

focus on the community aspect and the

sense of belonging to a greater network

in their branding campaign.

Technology is an important lever for

operators seeking to decrease the

cost of providing the service: mobile-

voucher delivery systems, electronic-

voucher delivery systems and IVRs

to promote self care are just some

examples. Technology can also be

used to increase revenue streams and

increase customer stickiness, such as

money remittance systems which have

been a success in Kenya, South Africa

and the Philippines and are being

deployed in Afghanistan, Tanzania and

several other high growth markets.

Profitability can be further enhanced

through a more efficient approach to


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16

distribution of the physical recharge

vouchers. Examples are partnerships with

logistics companies to increase presence

efficiently, incorporating learnings from

the FMCG world in order to increase

rotation and traffic towards POS, such as

tailor-made events at the POS, or layout

and ambiance customization according

to target segment.

It is worth noting that, considering that

over 65% (source: UNDP, 2006) of sub-

Saharan Africa lives in rural areas, the

FMCG model has proven successful in

penetrating rural areas. Learning from

the FMCG world would thus enable

mobile operators to increase numeric

distribution in rural areas, ensuring

accessibility and visibility in order to

address the latent demand coming

from rural Africa.

Network rollout and maintenance,

or network CAPEX and OPEX, are

important cost elements that, if not

managed properly, could significantly

impact profitability in serving low

income segments. As for OPEX, site

security and the shortage of reliable

power supply are major challenges

in low income areas. In areas where

the national electric grid lacks reach,

power generators are required, adding

significantly to the cost of access

rollout. Generally, two generators per

BTS are required, with a replacement

cycle of 18 months. Solutions being

developed or deployed now are more

efficient BTSs, as well as ones that

rely on alternative energy sources like

wind, bio fuels, solar or at the very least

hybrid power solutions, promising cost

reductions up to 40%.

While the pan-regional players

are actively trying to consolidate

procurement across country operations

to gain better leverage with vendors

and reduce equipment costs, the real

drivers of infrastructure costs are BTS

site acquisition and civil works, together

with the shortage of skilled engineers

within Africa. These factors, combined,

make the network outsourcing,

managed services, and network sharing

viable alternatives to build-own-manage

models. Bolder operators in Africa are

trading sites, replicating the site sharing

model that operators like Vodafone and

Orange are following in Europe, while

several are engaging vendors for carrier

managed services.

The year 2008 will see the launch of

various initiatives by the more innovative

African mobile operators to reach

and serve the bottom of the pyramid

profitably. In order for these initiatives

to succeed, however, operators need to

learn from the lessons in other emerging

markets, and to understand that the

traditional mobile operator business

model needs to be re-thought if the low

income segment is to be served profitably.


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Indusry dynamic #6

For over a decade, the phenomenal

growth in mobile (with a global

2000-2006 CAGR of 24%) has

overshadowed the fixedline, where

growth has stagnated (with a global

2000-2006 CAGR of 5%), mainly as a

result of lack of investment.

With the emergence of broadband as a

growth engine (with a global 2000-

2006 CAGR of 61%) for the stagnating

fixedline business, coupled with

innovative new broadband technologies

that either reduce CAPEX significantly

(such as WiMAX) or enable a much

wider range of value added services

(such as FTTx), the fixedline is attracting

headlines once again.

The resurgence of fixedline in the

MEA region

The MEA region is no exception. In

fact, adding to the resurgence of

the fixedline in this region is the late

introduction of liberalization in this

sector, which is now attracting players

from the mobile and ISP markets (such

as Umniahs and Zain Bahrains WiMAX

licenses, Mobilys mobile broadband

push, MTN Nigerias acquisition of 2

fixed wireless operators, or Wanas

wireless broadband offering), all of

whom are keen to ride the wave of

growth expected from broadband.

Even with the very high growth rates in

broadband across the region, the region

is still a far cry from mass broadband

adoption when taken as a whole, and

the room for growth is tremendous.

Broadband development varies across

the MEA region

However, the level of development

is not uniform (see Exhibit 8), and

there are selected countries that have

achieved significant strides in increasing

broadband penetration already, while

others are on the cusp of growth in

broadband. There are three country

groupings within the MEA region

with different levels of broadband

development:

1. Sub-Saharan Africa (excluding

South Africa)

2. GCC states (excluding Saudi Arabia)

3. Rest of MENA

Sub-Saharan African countries have

to-date lagged behind in not just

broadband adoption, but even dialup

Internet adoption. Among many other

Operators will seek to position themselves for thegrowth prospects in broadband connectivity

Broadband

growth

Even with the very high growth

rates in broadband across the

region, the region is still a

far cry from mass broadband

adoption when taken as a

whole, and the room for

growth is tremendous


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ExhIBIt 8: Broadband penetration of households in selected Middle Eastand Africa countries in 2007

factorssuch as illiteracy, low PC

penetration, IT awareness, and low

income levelsthe lack of fixedline

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,

with Nigerias active broadband market

being a good example (see Exhibit 9).

On the other extreme, the small littoral

states of the Persian Gulf, with already

high dial-up Internet penetration

coupled with a high income population

and more IT savvy businesses, have

managed to migrate many of their dial-

up customers to broadband over the

past couple of years.

During this same period, countries such

as South Africa, Saudi Arabia, Egypt,

Morocco, and Jordan have successfully

put broadband on a rapid growth

trajectory, thanks mainly to a successful

push from governments coupled with

the incumbent operators need for

growth drivers in their fixedline business.

Operator strategies in more developed

broadband markets

When it comes to operators in the last

two groups of countries, the migrationof dial-up connections to broadband is

already in full swing. As such, the broad-

band players are keen to further expand

the pool of Internet users to enable

continued growth in the broadband cus-

tomer base. As such, the main challenge

for players in these markets is to create

a compelling value proposition that will

enable the previously unconnected to

jump on the broadband bandwagon im-

mediately, bypassing dial-up all together.

As a result, incumbent operators in such

markets are revamping their broadband

value propositions from two angles. For

the unconnected customers, providers

such as Batelco, Awalnet, STC, MarocTelecom and others are offering very

low bandwidth broadband (128Kbps),

combined with limited monthly

download capacity at more affordable

prices to help acquire the novice internet

users. For the Internet savvy and higher

spending customers, operators such

as Etisalat, Qtel, Maroc Telecom and

others are launching ever higher access

bandwidths (up to 4Mbps), while some

are venturing into bundled offerings that

combine Internet access, voice telephony,

and video (IPTV or video on demand).

In fact, as the broadband growth rate

tapers off in the higher penetration

countries and Internet users become

more sophisticated, incumbent fixedline

operators are betting on these same

bundled offerings as a means to both

encourage incremental increases in

broadband ARPU, while also hoping

to lock in broadband customers with

cross selling prior to the intensification

of competition. Tying in the customersthrough cross selling and value added

services is thus becoming a necessity

for incumbent players readying for

fixedline competition.

Benchmarking themselves against the

more advanced broadband markets in

Asia and Western Europe, the fixedline

operators in the high penetration

Source: Euromonitor 2007


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broadband markets are considering

services and solutions catering to the

broadband-connected residential and

business customers. Specifically, the

growing emphasis among Western

European and Asian operators on

managed ICT services for SMEs

(operators such as Belgacom and BT),

and IPTV and triple play to residential

customers (such as Orange France and

PCCW), are two main themes that are

attracting the attention of incumbent

fixedline operators in the Middle East.

Newly licensed entrants into the

fixedline market of these more

developed broadband markets, keen

on inducing customer churn from the

incumbent operators, will need to keep

up with the new service innovation and

price bundling of the incumbents. As

such, we believe that the new entrants

in the fixedline markets, licensed altnets

in Saudi Arabia, Bahrain, and soon in

Qatar, will all need to match or exceed

the incumbent offerings if they are

to successfully capture any significant

broadband market share.

Finally, we expect the mobile operators

in these markets to start positioning

themselves to capture a share of the

broadband pie during 2008, either

through 3.5G technology and eventually

LTE, through a WiMAX license, or

acquisitions of existing broadband

players in their respective countries.

The mobile players will be late comers

to the broadband game in the more

developed broadband markets, and

will mainly aim to use broadband as

a way to compliment their mobile

offering through cross-selling and

capture more of their mobile customer

telecommunications spending.

Operator strategies in less developed

broadband markets

In most of sub-Saharan Africa, where

fixedline broadband infrastructure

is nearly non-existent, mobile and

wireless broadband technologies are

the name of the game for players

interested in addressing the nascent

broadband opportunity in this region.

Here, mobile operators will leverage

3.5G deployments, and in some cases,

WiMAX, to target the broadband

opportunity, while ISPs and other new

entrants will take advantage of WiMAX

or broadband CDMA technologies to

address the same broadband market.

Niel

Globacom

Sarcomms

Relel

Mulilinks

MtS firs W.

Inercellular

Rainbowne

Bourde

Cyberspace

21s Cenury

Naional

operaors

Naional

PtOs

Regional

PtOs

Fiber optic; Expects Next Generation Network (NGN) & submarine cable

Fiber optic, SAT, CDMA

3G CDMA-EVDO

Fixed-line (TDMA) & CDMA

CDMA

CDMA; VSAT

CDMA

CDMA & 3.5 GHz frequency

VSAT; 3.5GHz DSL, cable solutions

CDMA

Dial-up, DSL, PABX, PSTN, VSAT, VOIP

Main ecnologies

Nationwide

Nationwide

9 regions

Lagos

12 cities plans 42 end 07

5 regions

n/a

South East Nigeria

Lagos

9 regions

Lagos

Presence

Source: Operators websites; Paul Budde 2007 report; All Africa News Aug 07; Jidaw Systems Q307 ratings; Delta Partners analysis

ExhIBIt 9: The Wireless Broadband Push in AfricaNigerian Players Jostle for Position for the Broadband Opportunity

Nigeria is one of sub-Saaran Africas mos compeiive broadband markes wi unified licensing a allows fied and mobile

players and ISPs o compee for e small bu fas growing broadband opporuniy. te Inerne compeiive landscape in Nigeria

is very fragmened; wile naional operaors leverage eir fied lines infrasrucure and mobile players ave no peneraed e

marke ye, ere are a large number of small players (PtOs, ISPs, ec) using CDMA ecnology and few using WiMAx ecnology

o offer inerne / broadband services. Wireless is e name of e game in Nigerias broadband marke.


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identifying today's key industry dynamics in the middle east and africa - march 2008

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