Deloitte | A Middle East Point of View | Fall 2014 | 15

Telecommunications

An industrywith line lives

After years of strong growth, Gulf CooperationCouncil (GCC) telecom operators have slowlyadapted to the new realities of their maturingmarkets. Rising oil prices contributed to sharpincreases in the level of gross domestic product(GDP) per capita, creating an attractive telecomsmarket. Between 2004 and 2007, GCC telecomrevenues grew 15 percent annually, with earningsmargins hovering around 47 percent. Fueled bygrowing profits and healthy cash flow, GCCoperators went on a buying spree across theMiddle East, Africa, and Asia, acquiring existingoperators or licenses to launch their own networks.

Telecom operators in the GCC survived thefinancial crisis and maturing markets by adjustingto the end of explosive growth. How ready arethey to adapt again to new industry trends?

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Telecom operators worldwide face numerous obstaclesto their continued success such as stagnating growth,heightened competition, increasing investments in newtechnologies, and growing consumer sophistication. Asthese trends are still nascent in the region, GCC telecomoperators have thus far implemented tactical, short-terminitiatives to overcome these obstacles.

Opportunity abounds for GCC operators to prepare forfuture challenges by adopting a comprehensive costmanagement plan, addressing incremental efficiencies,process reengineering, and value chain restructuring.Operators that do not implement wide-ranging plans tomanage their costs run the risk of steep declines inprofitability.

Network costs are on the rise. An insatiable appetite formore data is forcing telecommunication companies toinvest heavily in next generation networks. At the sametime competition has gone global, creating enormous

price pressure in most markets. On the other hand, withdeclining revenues from traditional income sources suchas wire line and wireless voice, the pressure is on to lookfor new products and services, but many are struggling.

GCC operators are now turning their attention outwardagain–adapting to new industry dynamics and gettingahead of the latest trends in the global telecom industry.

Data, more data The Middle East has not been immune to the worldwideexplosion in data, driven by data-savvy consumers andthe deployment of a vast portfolio of mobileapplications. Statistics from YouTube, which accountsfor 24 percent of global mobile traffic, reveal that SaudiArabia has the world's most YouTube clicks per Internetuser (more than 90 million daily page views.) The MiddleEast ranks second after the United States in number ofdaily views, with 167 million video views per day. TheMiddle East and Africa are expected to have year-on-year data increases of 133 percent through 2014.

Technology To meet the rising demand for data, operators mustcontinually expand network capacity and roll out newtechnologies, such as fiber-optic networks and high-speed mobile broadband (4G), all while facing pressurefrom shareholders to limit capital expenditures andmaintain healthy cash flow and attractive returns.Several GCC telecom operators have made hugeinvestments in fiber networks and Internet Protocoltelevision (IPTV) platforms, although the financial returnsare not yet clear. Newer players are competing withembedded media ecosystems.

Aggressive OTT players The rise of new competitors, broadly dubbed over-the-top (OTT) players, has the potential to impact the globaltelecom industry. They offer attractive services via their

To meet the rising demand for data,operators must continually expandnetwork capacity and roll out newtechnologies, such as fiber-opticnetworks and high-speed mobilebroadband (4G), all while facingpressure from shareholders to limitcapital expenditures and maintainhealthy cash flow and attractive returns

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Telecommunications

own platforms and ecosystems, including voice overInternet Protocol (VoIP), instant messaging (IM), andservices such as TV, video, and music. And whilesubscribers pay telecom operators for fast connections,most revenue comes from pay-per-usage andadvertisements. Operators benefit by chargingsubscribers for data consumption, but it is oftenrestricted by data packages that offer unlimited data. As a result, the battle between operators and OTTplayers has begun for voice revenues (especially high-margin mobile international traffic), Short Message Services (SMS), and media.

Consumer behavior Not so long ago, subscribers would make consciousdecisions about which telecom operator to join, if theyhad a choice at all. Low-value subscribers generallychose the best value-for-money option, and high-valuesubscribers chose the operator with the best networkand the most extensive portfolio of value-addedservices. Today's subscribers want the latestsmartphones, tablets, applications, and content, most of which is neither owned nor sold by an operator.

How to adapt with new trendsAlthough some of these services have been around for a few years, operators have to actively offer value added services (VAS) such as M-Health, M-Education,and M-Banking. They will need to offer high qualityvoice solutions to limit the impact of eroding revenuesand profitability from Voice-over-Internet Protocol (VoIP)players such as Skype.

To fight the decrease in SMS usage, operators need toconsider offering enhanced functionalities in the instantmessaging (IM) domain such as multi-userconversations, sharing of pictures, and status updates,by either partnering or entering alliances with otherplayers, or by offering their own platforms.

Operators will need to also invest more in machine-to-machine (M2M) communication, which is expected tobe a major growth market. The right partnerships tobundle connectivity with high value products (forexample e-readers, cameras, laptops, cars and Internetof Things (IoT)) is critical.

Lastly, operators will increasingly need to enter thenascent, fast-growing cloud services market, which isopening up opportunities in consumer and enterprisebusinesses. Because the cloud market is relatively new,this is the optimum time for telecom operators to beginto capitalize on the opportunity with the right valuepropositions, the right technology and go-to-marketpartnerships and investing in large data centers.

The mobile telecoms market in theregion continues to display signs ofgrowth. Driven by strong mobilehandset data growth, telecoms servicerevenue in the Middle East and NorthAfrica (MENA) region will grow at acompound annual growth rate (CAGR)of 2.9 percent during 2013-2018(mobile at 3.3 percent and fixed at 2.8 percent), to reach US$96 billion in 2018.

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Growth of mobile in MENAThe mobile telecoms market in the region continues todisplay signs of growth. Driven by strong mobilehandset data growth, telecoms service revenue in theMiddle East and North Africa (MENA) region will grow ata compound annual growth rate (CAGR) of 2.9 percentduring 2013-2018 (mobile at 3.3 percent and fixed at2.8 percent), to reach US$96 billion in 2018.

The market will continue to be dominated by mobile.Mobile retail revenue will grow from US$50.4 billion in2013 to US$59.1 billion in 2018. Growth will be drivenby handset data spending, with smaller contributionscoming from non-handset mobile broadband andmobile voice. The fixed market will also continue togrow in all countries–from US$23.7 billion in 2013 toUS$27.3 billion in 2018, driven by fixed broadband andIPTV revenue, while fixed voice revenue will decline inmost countries.

At country level, five of the eight major markets that we model individually–Algeria, Morocco, Qatar, SaudiArabia and the UAE–show strong net growth intelecoms service revenue. The fastest growing of thesewill be the UAE, at just over 3 percent CAGR, closelyfollowed by Algeria and Saudi Arabia. In Kuwait,revenue will decline at a CAGR of -0.2 percent. Egyptwill only experience marginal growth because of political instability.

The focus in most markets is on reducing costs without impacting service quality. Thus key costoptimization strategies include networking outsourcing,organizational restructuring and rationalizing assetportfolios.

The power to surviveThe GCC telecoms industry continues to be a highlydynamic sector and GCC operators are faced withconsiderable challenges in 2014 and beyond. Operatorsthat act now will ensure they remain relevant andmaintain healthy growth and profit margins.

Operators, particularly those in GCC countries, need tobe prepared for the significant impact of over-the-top(OTT) messaging and eventually voice, as thepenetration of smartphones passes the 50 percent mark.Early movers in 4G deployment should aim to maximizethe initial opportunity for premium pricing for 4G, butinternational examples show that the 4G premium is notsustainable, so it is important to be realistic about thelength of time this can be maintained. Alternativestrategies to monetize mobile data are critical, as arestrategies to accelerate revenue development fromadjacent market partnerships and new business models.To cope with increasing network complexity, investment

The focus in most markets is onreducing costs without impactingservice quality. Thus key costoptimization strategies includenetworking outsourcing,organizational restructuring andrationalizing asset portfolios.

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Telecommunications

requirements and the financial expectations ofshareholders, GCC operators will continue to improvetheir balance sheets by off-loading assets and adoptinga more asset-light model in line with developments inAsia, Europe, and North America. As a consequence,more managed services outsourcing deals of coreactivities such as network operations and maintenanceare expected, as is the selling of assets, such as towers,to specialized tower companies. Operators will benefitfrom the scale and expertise of these third parties andbe able to move from the traditional network andinfrastructure focus to critical topics such as pricing,retention, customer experience, and digitaldiversification.

by Omar Massaed, senior director, Audit, DeloitteMiddle East

Operators, particularly those in GCCcountries, need to be prepared for thesignificant impact of over-the-top(OTT) messaging and eventually voice,as the penetration of smartphonespasses the 50 percent mark