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8/9/2019 Identifying Today's Key Industry Dynamics in the Middle East and Africa - March 2008
1/20
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: jav@deltapartnersgroup.comJosep Mara Moya - parner: jmm@deltapartnersgroup.comMosen Malak - prncpal: mma@deltapartnersgroup.com
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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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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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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