Research paper presented to Arab Academy Graduate of school of Business

Will mobile virtual network operator MVNO succeed in Egypt? (Case Telecom Egypt)

Radwan Mahmoud and Sherif Mansour

Sherif Mansour is an Engineer at Telecom Egypt and have BSC from Ain-Shams University, E g y p t

Radwan Mahmoud Elsayed is an Engineer at Telecom Egypt and have BSC and MSC from Cairo University, E g y p t

Sent: 23 Jan 2014This work was supported by Arab Academy Graduate School of Business AASGB

Abstract

Purpose – The use of mobile wireless data services continue to increase worldwide. This paper analyze how Telecom Egypt company could evolve with having a mobile virtual operator (MVNO) license at Egyptian market, the opportunities and threats of network operators and MVNOs .

Design/methodology/approach – This study provides competitive analysis, customer needs, new technologies, market evaluation and current regulatory assessment of the Egypt MVNO marketplace.

Findings – While there are many positive prospec ts of MVNO in Egypt, a series of complicated technology, economic, political issues arise.

Practical implications – The current development of MVNO exaggerate the growing challenges of the dynamics of industry, regulation and technology specially on Telecom Egypt company.

Social implications – While MVNOs continue to increase in some markets, their diffusion in other regions is often very limited and continues to decrease.

Research limitations/implications – saturation of voice market that make a new operator is highly difficult and new services available could be provided through MVNO

Originality/value – The framework is developed based on a perspective of technical, marketing, technological characteristics because these characteristics intrinsically constrain the successful opportunities for Telecom Egypt to have to compete at mobile market. In addition the framework should be useful in exploring opportunities of a new mobile applications and services.

Keywords Mobile virtual network operator, Egypt, Competition, Telecommunications policy, Competitive strategy, Telecommunication, Technology, 4G, regulatory

Paper type Research paper

1. Introduction

Mobile Virtual Network Operator is a wireless communications services provider that does not own the wireless network infrastructure over which the MVNO provides services to its customers. An MVNO enters into a business agreement

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With a mobile network operator to obtain bulk access to network services at wholesale rates, then sets retail prices independently. An MVNO may use its own Customer services, Billing support system, marketing, and sales personal.The emergence of the MVNO model in various markets worldwide varied based on local factors. In some markets, the MVNO concept came about as the result of regulatory intervention. Regulators wished to force established mobile network operators to offer wholesale access to their network to ensure robust competition to benefit the consumer. In other markets, mobile network operators responded to market opportunities to offer their excess capacity at wholesale rates to other entities in an effort to bring in incremental revenue on what would otherwise be unused network capacity. Mobile network operators believed that savings from not providing customer service and marketing would offset any revenue lost by selling network access at wholesale rates.Globally, MVNO has experienced ups and downs over the past decade. Even a few years back, the emergence of MVNOs had been considered as the rollout of the next generation of telecom services. It was predicted that MVNO had disruptive effects on the mobile industry (Shin, 2010; Kim and Seol, 2007). MVNO was taking significant market share, altering the supply chain of telecommunications and increasing churn and subscriber acquisition costs in the mobile markets. It was believed that the MVNO market continued to expand, contributing to the strong mobile industry growth. Recently, however, the MVNO business model has proven to be an abject failure in some countries. The MVNOs, which buy airtime from providers such as AT&T, Verizon and Bell Canada on a wholesale basis, have disappeared from the North American wireless scene almost as quickly as these companies appeared (MVNO Directory, 2009). Korea

The first commercially successful MVNO in the United Kingdom was Virgin Mobile UK, which was launched in 1999 (http://www.virginmobilemea.com/Pages/Index.aspxThe success of Virgin Mobile UK was replicated by the United States licensee of the Virgin Mobile brand. Initially an independent company, Virgin Mobile USA was eventually acquired by its host mobile network operator, Sprint Nextel, for approximately US$483 million The first MVNO was created by Tele2 in Denmark, and subsequently rolled out in several European markets. This model formed the basis between the cooperation between Tele2 in Sweden and Telia, created when Telia failed to obtain a 3G license in their home market (Cecilia Kang, 28 July 2009 ) .

Against the background of the decreasing trend of MVNO, the rising questions are: what is the appropriate model Telecom Egypt have to run an MVNO operator at Egypt? What are the consequences of adopting such entrance MVNO at Egyptian market?, which factors will, or will not, make MVNOs by Telecom Egypt work in the dynamic Egyptian mobile markets? What’s the successful opportunities of new operator at Egypt? What’s the new technology could help Telecom Egypt as an MVNO to success at Egyptian market? To These questions have become more noteworthy with the MVNO’s dismal records in the Asian market (MVNO Directory, 2009). For example, Virgin Mobile, which was successful in Western markets, has retreated from its operation from Singapore in early 2003 after only two-years of failing operation (Merry, 2005). The Virgin Mobile exit from Singapore was ensured with other failures in Asian countries, such as Taiwan, Hong Kong and Malaysia. As the Asian MVNO market development is not as visible as in Western markets (Shin and Bartolacci, 2007), the national Egyptian regulatory try to adopt MVNO raises a question as to whether or not MVNO would succeed in

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the Egyptian market, and how MVNO will play out in the highly saturated and competitively concentrated market. Against this backdrop, this study forecasts the MVNO diffusion in the Egyptian market by assessing the impact of the introduction of MVNO on the market and on society. In light of the introduction of MVNOs, it is important to study their impact on the competition and on consumer welfare, the study will also study the effect of new technology as 4G due to the spread of smart phones and highly growing need for data

This study investigates a set of factors influencing MVNO diffusion in Egypt in order to answer the following questions:

RQ1. What is the appropriate model of Telecom Egypt to operate MVNO at Egypt? RQ2. What are the consequences of adopting such entrance of a new operator? RQ3. Which factors will, or will not, make Telecom Egypt as MVNOs work in the dynamic Egyptian mobile markets?RQ4. What’s the successful opportunities of new MVNO operator at Egypt? RQ5.What’s the new technology could help an MVNO to success at Egyptian market?

This paper is organized as follows. First section provide the definition of MVNO briefly introduced a description of MVNO evolution and of the research that has been done on MVNOs. Section 2 provides an overview of the Egyptian mobile market with some technical aspects o f MVNOs , their integration with the underlying MNOs and a discussion of the various components of MVNO operations. Section 3 also detai ls the regulatory issues as wel l as market structure and condition. Section 5 discusses the challenges, and d r i v e r s o f MVNO in the Egyptian m a r k e t . Section 6 study the 4G as opportunity for MVNO and the customer needs for its applications . The final section draws the conclusions by outlining the findings and suggestions of MVNOs.

2. Literature review: current trend of MVNOs

MVNO is a mobile service operator that neither has its own licensed spectrum nor the infrastructure to provide mobile services to its customers (Ulset, 2002). Instead, MVNOs lease wireless capacity from pre-existing mobile service providers and establish their own brand names that differ from those of the providers (Shin, 2008). It is estimated that there are approximately 360 operational MVNOs worldwide with various models and concepts. The number of MVNOs has drastically increased since 2006. According to the MVNO Directory (2009), there were 59 MVNOs in Western Europe in 2002. That number has grown to 190 MVNOs in Europe in 2006. Western Europe is the largest market with 69 percent of total MVNOs and 65 percent of total subscriptions, whereas non-western countries are just beginning to launch active MVNO business models. While MVNOs have succeeded in growing their share of mature markets, the growth trend is obscured when looking at the global picture. Worldwide statistics show that the growth of MVNO subscribers has not kept pace with the overall growth of wireless subscribers.

Back in the early days of MVNO, a group of researchers predicted that MVNOs were totally poised to be the next big trend. Nowadays, some argue that the MVNO business model has proven to be an abject failure (Clark et al., 2005). It appears as if 2008 was the year of turning point for MVNOs as their market share started to decrease. Many people started to question the viability of the MVNO model. Some critical industry experts argue that the MVNO model has proven to be a difficult proposition in the

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hyper-competitive mobile market (Anderson, 2009). Most MVNOs do not have what it takes to succeed in the telecom market. New customer acquisition is a game of switchers from one carrier to the other. MVNOs only fuel this problem and drive churn rates even higher. This will compound the money necessary to acquire and retain customers. This escalates cash burn rates for everyone. Pre-paid vehicles and hybrid offerings will only complicate the picture. In particular, Helio cast further doubt on the viability of the business model in Korea. Helio was a joint venture between US internet service provider and SKT, but it closed its operation within less than a two-year dismal record. Similarly, Virgin Mobile has shut down operations in Australia and Singapore. Voce, Disney Mobile, ESPN Mobile and Amp’d Mobile have disappeared from the US market over the past 18 months. Only major independent MVNO, Virgin Mobile Canada, has had modest success in Canada largely because of the support Bell Canada that owns half the venture. Virgin Mobile has had great success largely because of its knowledge of the UK market. Given the decreasing trend of MVNO, (Donghee Shin,2012) the question here – will the MVNO model work or succeed in Egypt?

3. Study of Egyptian Mobile market

Mobile telephony is capturing an increasing share of global telecommunications services, accounting for 23 per cent of global telecommunications revenues (up from 3 per cent in 1990). Mobile telephony is one of the high growth market segments of the Egyptian telecommunications sector, having outpaced the growth of fixed-line telephony, which currently stands at 7.5 million lines, growing at a compound annual growth rate (CAGR) of approximately 14.6 per cent during the period 1995/2000, compared with the staggering CAGR of 169 per cent for mobile telephony during the period 1997/2002 (American Chamber of Commerce in Egypt 2001, p. 14). Since the opening up of the sector to private investment in 1998, the Egyptian mobile telecommunications sector has been host to two of the world’s largest mobile operators, namely France Telecom and Vodafone. The two companies, in partnership with their Egyptian counterparts, have been operating as a duopoly, in what is perceived to be a market of remarkable growth potential relative to Africa and the rest of the Middle East region. Egypt has the third-largest number of mobile subscribers in the region, outnumbered only by South Africa and Morocco. Penetration rates, which currently stand at 5.4 per cent of the population, are forecast to reach 15.5 per cent by 2008 (American Chamber of Commerce in Egypt 2001).

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4- Mobile Data services Mobile data services have spread in the whole world, establishing their way in developing,as well as developed countries. As for Egypt, the developments in mobile data services come along with the phenomenal performance of the Egyptian mobile market at large; that resulted from the collaborative effort exerted by all players in the industry. The growth in mobile subscribers has continued during the past years to increase from 41.27 million subscribers in 2008, to 55.35 million subscribers in 2009 with annual growth rate of 34.12%, then to 58.97 million subscribers in June 2010. Mobile Penetration also increased steadily from 54.8% in 2008, to 72.13% in 2009 and finally 76.2% in June 2010. In this regard, the Egyptian mobile market seems very promising and encouraging to the entrance of new products and extension of existing ones, especially those related to mobile data services; which has the potential for growth and development, in addition to its role in development and economic growth, due to the wide range of services it provides. (http://www.mcit.gov.eg)need comments on graph of 4 graph

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Hence, Egypt’s Ministry of Communication and Information Technology (MCIT) in cooperation with the University of Southern California, and The National Telecom Regulatory Authority (NTRA), has conducted a study to measure the mobile data services usage habits and quality of services in Egypt. Mobile data services is the usage of mobiles in any other services other than voice calling, including mobile broadband services. Examples of such services are sending text and picture messages, accessing the internet through the mobile for emailing, getting information, downloading, internet browsing and communicating. The study measures usage patterns of mobile data services, with detailed analysis on frequency of usage, compatibility with lifestyles, location of usage, willingness to pay, customer satisfaction and potential interests of customers. The analysis of such patterns helps to evaluate the quality of services provided, their advantages as well as their shortcomings The study is based on a survey conducted by phone, in which the target population was mobile subscribers who are using mobile data services through their wireless cell phones. The survey was aimed to reach a sample of 1,000 subscriber using data services via their mobiles. Hence, 1,433 interviews were conducted at Greater Cairo, and Alexandria from Mobinil, Etisalat and Vodafone. The sample is a stratified random sample according to operators, subscription system and gender. Survey results revealed that 73% of the subscribers interviewed are using the mobile data services, most of them are males who are youth at the age of 18-34 years old, with monthly expenditure ranges from 500 – 1500 EGP.

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Studying the pattern of mobile data service usage, the study reveals that the most used activity of the service is Getting Information and News (57.2% of the users), followed by exchanging e-mails (22.8%). Most of the respondents use the mobile data service for personal purposes more than work related purposes (87% versus 2%, while 11% use it for both). The most likely location of using the service is at home (42%), followed by at transit (35%). Also, the highest frequency of mobile data service usage is more than 120 minutes/week (55.3%). Furthermore, the survey reveals that being not interested was the highest barrier for not using the mobile data service (14.2%). On the other hand reducing the service cost is the most attractive factor for future use (49%). Finally, the survey studies the main features of the Egyptian mobile phone market, which reveals that people tend to use mobile phone brands, established in the market for long periods, and consider Multifunction as the most important specification. (http://www.mcit.gov.eg)

5- Regulatory impact at Egypt- Model of MVNO- Political - Society (smart phone)- Employee - Methodolgy , design - Imparical work -

6- The impact of new technology Mckinsy (seizing the 4G opportunity)many mobile operators asked about their significant investments in long term evolution (LTE) technology. from a competitive standpoint. As a result, MVNO should now pose a different question: When he will build it, how he could generate from 4G the greatest returns from these massive investments? MVNO can use this opportunity to strengthen their market positions while new entrants and small players can take advantage of 4G to attack market leaders and quickly increase market shares

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Currently, LTE offers a range of significant customer experience improvements over wireless technologies: ■ Higher user speeds: LTE enables users to download more content than 3G in the same amount of time. This makes data-intensive, on-the-go downloads such as music or high-definition video streaming a reality. ■ Faster connection times: LTE requires 95 percent less time to connect than evolved high-speed packet access (HSPA+), assuring an “always-on” service experience. ■ Less round-trip latency: LTE offers a 50 percent reduction in round-trip latency compared to HSPA+, making real-time applications such as VoIP, video calls, and online gaming possible.

The surveys confirmed that, for the most part, demand for 4G is latent at this In other words, consumers want the benefits of 4G, but haven’t yet been able to obtain them because few such networks exist. Our research shows that more than 30 percent of smartphone users and 37 percent of non-users would upgrade to a 4G smartphone package if one were available. Likewise, 37 percent of current mobile broadband users and 41 percent of non-users would opt for 4G service. In all of the markets we surveyed, price was the single most important criteria from a smartphone perspective, ranking significantly higher than either coverage or speed. In mobile broadband, price was also the leading purchase-related criteria, but quality of service (QoS) elements such as speed and coverage were also considered important. Mckensy

7- Smart phones and the intention to pay for mobile internet:

With the development of mobile internet services, more and more consumers are adopting smart phones as their primary communication device. A smart phone offers more advanced computing ability and connectivity than a feature phone, and typically includes a high-resolution touch screen and offers Wireless-internet access to web pages through a built-in web browser. Telecommunication companies have recently begun to promote smart phone products in hopes of promoting mobile internet services as a way to increase revenues. Accordingly telecom service providers have a strong interest in exploring ways to increase user intention to use mobile internet through smart phones.

Many factors affect the user intention to adopt smart phone such as:

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1- Interface convenience.2- Perceived content.3- Perceived infrastructure.4- Design aesthetics.5- Attitude.6- Intention.7- Perceived value.

Moreover, the increasing race of issuing new applications and games on smart phones attracts more new users every day. Also smart phones educational use is a new trend making the opportunity of using internet service on smart phone applications is very high.

The following table illustrates the results of an online survey was developed to collect the data for a study of the educational use of smart phones (Catharine Reese Bomhold, Educational use of smart phone technology). The instrument was a 14 question mixed response survey that inquired into student ownership and the frequency of use of different types of mobile computing apps.

Table (): Percentage of students reporting frequency of use of apps, by app type.

If this was for worldwide so, there is no doubt that the Egyptians have similar attitude and purchase behavior towards smart phones.

We have our own try to measure the intention of Egyptians to pay for mobile internet and to answer the question "is this is still growing?"We can answer such question by the help of the official report of "The State of The Internet" issued by www.Akamai.com web site.

Table (): Average and Average Peak Connection Speeds by Mobile Provider

4th Quarter 2012 1st Quarter 2013 2nd Quarter 2013

EG-1: Average Peak: from 5.2Mbps (Q4-2012) to 6.1Mbps (Q1-2013) to 9.1Mbps (Q2-2013).As we see from the report table above that the average connection speed and the peak connection speed of the mobile broadband for the Egyptian provider is increasing quarter to quarter that means that there is a trend of the Egyptian internet user to increase its internet usability and there

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is an opportunity for any operator specially telecom Egypt that has the huge infrastructure to exploit this trend.

8- Enterprise Mobile and Broadband Services:

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Corresponding author

Donghee Shin can be contacted at: dshin@skku.edu

- Mckensy