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8/6/2019 Reverse innovation in telecoms: The increased integration of developed and developing markets
1/16
February 2011
The Delta Perspective
Reverse innovation in telecoms:The increased integration ofdeveloped and developing markets
Authors Victor Font - Group Managing DirectorDaniel Torras -Associate PartnerTammy Whyman - Principal
OVERVIEW
As the leading Management Advisory and Investment Firm specialised
in Telecoms, Media, and Technology within the Middle East, Africa,
Central & Eastern Europe and Emerging Asia, Delta Partners believes
that the telecommunications industry in emerging markets provides
significant product and service innovation opportunities to be adopted
in more advanced markets and across other emerging markets.
This white paper explores the reasons why emerging markets are
becoming more active as producers of innovation in telecommunications,
which are the key innovations, and the implications for operators and
vendors from developed and developing markets.
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A short history of reverse
innovation
After the World Wars, as technology and geo-politics allowed for the opening up of
world trade, we entered into a period of globalisation whereas Western inventions
reached economies of scale by being distributed on a worldwide basis. Eventually,
these products were slightly adapted, or de-featured, to appeal to more segments in
emerging markets. This phase of global trade is often referred to as glocalisation.
As glocalised products were not originally designed with emerging markets in mind,
there were still significant pockets of consumers in those markets who were not servedby these products, either due to price or to unattractive product features.
Over the past fifteen to twenty years, as emerging markets consumers have gained
acquisition power, local firms who understood the needs and limitations of these
consumers, and who had access to low cost production, soon began producing hit
products for developing economies. These hit products for emerging markets have
made many Western firms stand up and take notice, especially as their home markets
are stagnating. The process introducing emerging markets innovations into Western
markets has been coined by Dartmouth Professors Vijay Govindarajan and Chris Trimble
as Reverse Innovation.1 These innovations, when exported to developed nations, have
often opened up entirely new product categories that would not have existed if it werenot for reverse innovation.
In its 2003 almanac, Encyclopdia Britannica listed what
it considered to be the greatest inventions of all time.
Of these, 90% are credited as either North American
or Western European inventions. Now innovations from
emerging markets are beginning to have an impact.
EXHIBIT 1: ENCYCLOPDIA BRITANNICAS GREATEST INVENTIONS SPLIT BY REGION
(20TH CENTURY INVENTIONS ONLY)
Source: Encyclopdia Britannica 2003 Almanac
1 How GE is disrupting itself, Harvard Business Review, Oct. 2009
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Why emerging markets matter
In the last 15 years, the global telecom market has
almost tripled in size. Most of the growth has taken
place in emerging markets.
In the period between 1995 and 2010, the contribution of mobile to the global telecom
revenue pie increased from 14% to 63%. Emerging markets have been the catalyst ofthe majority of this growth. While in 1995 mobile revenues from emerging markets
represented a mere 2% of global telecom revenues, this figure had ballooned to 28%
by 2010.
In subscriber terms, the increasing weight of emerging markets is even more palpable. In
1995, only 15% of the worlds mobile subscribers resided in developing markets. By the
end of 2010, 79% of the worlds subscribers were in emerging markets. Undoubtedly,
emerging countries have been and will continue to be the engine of growth in the global
telecom market and the role that market players from the developing world will play in
the years to come will shape the direction of the industry.
EXHIBIT 2: GLOBAL TELECOM MARKET EVOLUTION, 1995-2010
Source: Delta Partners, Pyramid Research, Ovum, ITU, W TO
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Following the collapse of the high-tech bubble in 2001, many of the traditional
international consolidators from developed markets have been under shareholder
pressure to dispose of underperforming and non-core assets and adjust their regional
focus. Some of the early consolidators, such as Hutchison Telecom, KPN or NTT DoCoMo,
have abandoned or significantly downscaled their global expansion ambitions. In their
place, emerging market players such as Russias Vimpelcom and MTS, South Africas
MTN, Indias Bharti, Mexicos Amrica Mvil, and the Middle Easts Etisalat, STC, Qtel
and Zain, among others, have become true powerhouses, and have built their footprint
through aggressive M&A and licence acquisitions.
The appearance of these emerging market telecom superpowers is no coincidence. First,
these operators were producing strong cash flows from their growing home markets,
such as South Africa and the Middle East. Second, the emerging players viewed entry
into other emerging markets as less operationally risky, given their understanding of
the cultures and business practices of the regions. These factors coincided at a time
when greenfield opportunities were abundant and were snapped up by the emerging
players.
Finally, market fundamentals have added further pressure to the need to build scale.
Much of the subscriber growth in the developing world is coming from bottom-of-
the-pyramid consumers and multiple SIM card-holders that generate ARPUs in the low
single dollar digits. In addition, intensifying competition has led to aggressive tariff cuts
and hefty marketing and network investments, all of which have led to a reduction in
EBITDA margins in most parts of the world. In this context, consolidation promoted by
or involving operators from developing countries has been driven by the need to build
the necessary scale to compete effectively.
Proliferation of emerging
market challengers
At the start of this century, the global mobile market
was dominated by a handful of very large operating
groups, most of them with European roots, acting as
global consolidators. Today, the competitive landscape
has changed dramatically.
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EXHIBIT 3: MOBILE OPERATOR GLOBAL POSITIONING MATRIX, 2000 AND 2010
Note: Axis positions are indicative and not absolute
Source: Delta Partners
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In most instances, emerging market telecom innovation has been in the form of new
business models aimed at addressing profitably the needs of consumers with low
disposable incomes, as well as product offerings designed to stimulate usage of basic
and value added telecommunication services.
Reverse innovation in
telecommunications
Emerging market players in the mobile communications
space have been quite successful in building successful
regional and even global businesses, often through
innovation. But have they been successful at reverse
innovation, or at bringing those innovations to thedeveloped world?
EXHIBIT 4: BUSINESS MODEL INNOVATION DRIVERS, DEVELOPED VS. DEVELOPING
MARKETS
Source: Delta Partners
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While developed markets operators have traditionally focused on investing in the most
advanced technologies, and have sought competitive advantage by physically owning
the entire front- and back-end infrastructure required to provide services (e.g. passiveand active network infrastructure, customer care, IT, sales channels, etc.), emerging
market operators have taken different strategies. Some operators, faced with much lower
ARPUs and a predominantly prepaid (and thus less loyal) customer base, have resorted
to outsourcing non-core activities to achieve scalability, and turn capital expenditures
into operational costs to better manage cash flows. Other emerging players have been
able to successfully skim the barely penetrated markets by charging high price per minute
thus maintaining high margins as the business has grown.
By adopting new business models, and despite the fairly generalised drop in EBITDA
margins in most regions of the world in the past few years, emerging market mobile
operators have been able to record EBITDA margins that are on average higher than themargins of their developed market counterparts.
EXHIBIT 5: MOBILE OPERATOR EBITDA MARGINS BY REGION, 2005-2009
* APAC region includes some developed markets, e.g. Japan, South Korea, Hong Kong, Singapore, Australia
and New Zealand
Source: WCIS, Merrill Lynch, Delta Partners
(% EBITDA margin)
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The inherently different economic realities of the telecom business in emerging countries
have forced operators to look for creative avenues to tap into low revenue generating
customers without compromising profitability. In this section, we highlight those
innovations that have transformed business models in their markets and beyond.
Delta Partners selection
of innovations intelecommunications
While not all of the emerging market telecom innovations
selected may have the potential for immediate application
in developed markets, operators in developed markets
should take note of our selection.
EXHIBIT 6: SELECT TELECOM INNOVATIONS
Source: Delta Partners
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1. Micropayment and remittance transfer by SMART
2. OPEX and CAPEX outsourcing by Bharti
The concept In 2000, SMART was one of the worlds first tointroduce a remittance (SMART Padala) and micro-
payment (SMART Money) service aimed at the low-
income market
Theserviceexpandedtheaddressablecustomerbase,
created higher ARPUs and reduced airtime recharge
commission costs
Sincethen,manyemergingplayershaveintroduced
similar services but many are still struggling to gain
critical mass
ReverseInnovation
potential
With a worldwide potential micropayments marketof ~1.2Bn users and $700-900Bn of transfers by
20142, there is a significant drive for market players
(technology providers, financial and telecom players) to
attain a relevant position within its value chain
Operatorsindevelopedmarketscancreatetheirown
micropayment platforms to serve unbanked and low-
end segments
Micropaymentplatformscanalsoreplacetheneed
for cash which traditional debit or credit card business
models do not allow
The concept Bharti pioneered the network outsourcing model in2004 by awarding IBM a 10-year, $750Mn contract, the
scope of which is now worth over $3Bn3
Whilesomeoperatorshadoutsourcedcertainelements
of their networks previously, Bharti took the model a
step further by divesting infrastructure assets, including
active and passive elements, which was a first in the
industry
Sincethen,Bhartihasgoneevenfurtherbyoutsourcingthe building, maintaining and operating of their
networks, which essentially has turned Bharti into a
company that buys minutes from a third party
Reverse
Innovation
potential
Network outsourcing and the divestments of
infrastructure assets can radically shift an operators
business model, but caution should be taken when
setting up agreements and transferring assets and
operations, which is where most attempts tend to fail
AsmoreoperatorsadopttheOPEXandCAPEX
outsourcing model, mobile broadband networks will be
rolled out more quickly due to increased economies ofscale, thus precipitating a technology revolution
2 Delta Partners3 The Economic Times, 14 Nov. 2010
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3. Freelance sales force by Tigo
4. Location based management by Econet
The concept In 2006, Tigo Tanzania began introducing a freelancesales force to fill the gap where distributors did not
reach and where an owned sales force was not cost-
effective. The main focus of freelancers was on street
smart agents who would sell mostly voice products.
By implementing the freelance model in Tanzania, Tigo
was initially able to:
- Significantly increase effective presence in target
locations
- Address a powerful consumer decision driver in
operator selection in immature markets, namely
the availability of prepaid recharges
- Create a dynamic channel, able to capitalise on
opportunities and mitigate market trends quickly
- Provide competition between direct and indirect
channels, leading to overall better channel
performance
Reverse
Innovation
potential
Although a freelance sales force concept is not new to
developed markets, it is often used for more specialised
segments such as high end residential or SMEs. Tigos
model was innovative in that it targeted underserved
geographic regions and led to more visibility on thestreet
The concept A value-based investment method to allocateinvestment resources selectively where the pockets of
value are located. The overlay of in-depth customer
behaviour with network, sales, branding and actual
customer service performance data allows operators
to prioritise network and commercial investments for
specific segments of the market
AttheheartofLBMisthegeo-mappingofcustomer
value against specific network and distribution channel
assets (e.g. BTS, stores, etc.)
Reverse
Innovation
potential
In developed markets, LBM is most relevant for
operators looking to prioritise 3.5G and 4G network
rollout and optimise their sales channels
Indevelopingmarkets,LBMisapowerfultoolfornew
entrants that must make trade-offs between CAPEX and
time to break even, as well as larger operators looking
to improve cash flows and profitability
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5. Dynamic discount solution by MTN / Ericsson
6. One Network by Zain
The concept Named MTN Zone, it is a service designed to optimisenetwork capacity utilisation by offering consumers a
dynamic discount based on the current network load
in their coverage cell. Calls during periods when the
network is not busy are eligible for discounts of up to
100 percent, which are communicated to customers
through cell broadcast
Recognisedin2008byAfricaComastheMost
Innovative New Service of the Year
Reverse
Innovation
potential
As the amount of data transferred on mobile networks
in the US and Europe explodes and endangers overall
network quality, dynamic discounts can be applied for
mobile broadband as a way to control peak data usage
Thisisespeciallyrelevantascertaintypesofdata(e.g.
music downloads) are not time critical and can be
scheduled when there is spare network capacity
The concept The worlds first borderless mobile network, allowingZain customers to make calls at local rates across 12
countries using their home SIM card
CommentingaboutOneNetworkinSeptember2006,
The Economist said Celtel [Zains former brand name]
has, in effect, created a unified market of the kind that
regulators can only dream about in Europe4
Reverse
Innovation
potential
Creating a one network offer can quickly build a
strong and differentiated positioning for an operator,
especially in mature markets where brand strength is
the core differentiating element
Europeanoperatorswithalargefootprintcan
encourage their customers to continue to use their
home SIM when travelling without having to worry
about roaming costs. Operators will maintain share of
wallet (out of country and upon return) and can build
loyalty amongst high value segments
4 Zain press release, no date specified
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1. The Asian telecom network vendors are set to
become innovation leaders
On the equipment front, it is important to differentiate between the network infrastructure
market, pertaining to the manufacturing of access and core network components, and
the handset market. Until 2008, the infrastructure market was the larger of the two,
as operators were focused on building greenfield networks covering huge swaths of
territories, and also overlaying 3G capabilities on their existing 2G networks.
In the network infrastructure space, former North American giants Lucent, Nortel
Networks and Motorola have been acquired by their European counterparts Alcatel,
Ericsson and Nokia Siemens Networks, respectively. The consolidation among North
America and Europe-based network equipment vendors of the past five years was an
attempt by the incumbent players to defend their dominance in a stagnating global
network infrastructure market, and to compete more effectively with the Chinese
newcomers.
This consolidation, however, has not impeded Huawei from making a significant dent
on the market share of the established vendors. The combined market share of ZTE and
Huawei in the infrastructure space grew five-fold in the period between 2006 and 2009,from 5% to 26%. Today, Huawei is the worlds third largest infrastructure vendor, and it
is breathing down Nokia Siemens Networks neck for the number two spot.
Huawei has also been at the forefront of innovation in the network equipment space.
Huawei was the first vendor to commercially deploy a software-defined-radio (SDR)
GSM/UMTS network in Europe for TeliaSonera in Finland in June 2009 (ZTE, however,
claims that Hong Kongs CSL SDR-based HSPA+ network, launched in March 2009 and
built by ZTE, was the first of its kind in the world).
The future of reverse innovation
in telecommunications
While the past has helped us identify certain emerging
market innovations which could have the potential to
open new business categories in developed markets,
what does the future hold?
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2. Reverse innovation in handsets: A long road ahead
As markets have matured, operators focus has shifted to customer acquisition and
retention, and usage stimulation. In this evolving competitive landscape, devices have
played a key role as it is one of the major considerations that consumers weigh when
making a mobile purchase decision. Furthermore, the rapid pace of technological
development in the handset space, with new form factors and enhanced capabilities
being introduced at breakneck speed, has helped the handset market outpace the
network infrastructure market two-fold in recent years, and surpass it in total sales
volume since 2008.
Traditional handset makers such as Nokia, SonyEricsson and Motorola have been losing
share to the Asian vendors for quite some time. But unlike the infrastructure space
where we have not seen any genuinely new entrants for a while, in the handset market,
smartphone specialist vendors such as Apple (iPhone) and RIM (Blackberry) have grown
from virtually zero to a very respectable size. And if we consider only mobile broadband
USB modems, the Chinese dominance is overwhelming. Huawei and ZTE alone account
for over three quarters of the market by some estimates.
EXHIBIT 7: NETWORK EQUIPMENT VENDOR EVOLUTION
Source: Bernstein Research, DellOro, Delta Partners
EXHIBIT 8: MOBILE DEVICE VENDOR MARKET SHARE
Source: ABI Research, Delta Partners
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The handset space, however, has an important peculiarity that favours developed
market vendors: there is a strong trend towards convergence of networks, services and
applications. The recent rise of tablets, epitomised by the overnight success of ApplesiPad, illustrates how the boundaries between mobile phones, PCs, TV sets and music
players are getting increasingly blurry.
Companies such as Google and Apple are leading innovators in this space and provide
products and services that are software-centric but also include hardware components,
in addition to content and social networking utilities.
The innovation lead of western vendors in the handset space, however, might be short-
lived or at least challenged once again by developing market vendors such as Huawei
and others. A simple observation at the amount of R&D conducted and the number of
patent applications filed by the leading Chinese and Japanese vendors demonstrates thatAsian players are bound to exert very considerable influence in the consumer electronics
industry in the years to come.
3. Indias (and to a lesser extent Chinas) IT outsourcing
firms are gaining momentumIn an increasingly commoditised telecom market, ICT services present an opportunity for
telecom operators to differentiate, sustain growth and generate new revenue streams.
For most of the 90s and the 2000s, North American and European specialised IT
firms, many of which were offshoots of telecommunication operators, dominated the
ICT space. More recently, Indian firms such as Tata, Infosys and Tech Mahindra, and to
some extent also Chinas Huawei, have been gaining momentum, aided by the large
and inexpensive pool of human resources available to them in their home markets and
their ability to provide world-class solutions to their clients, often via managed services
platforms and offshore software development capabilities, at a fraction of the cost of
previously available alternatives. However, as long as ICT firms in emerging markets are
primarily relying on cost advantage to grow, the industry will contribute few reverse
innovations to the market.
EXHIBIT 9: TOP GLOBAL PATENT APPLICANTS
Source: WIPO, Delta Partners
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4. Infotainment will need to be wrestled away from
the developed world
As the least mature subsector of the telecom value chain, it is no surprise that much of
the innovation observed in the infotainment space has occurred in developed markets.
On the Internet front, search engines were originally conceived as directory businesses
by American companies (Yahoo!, Altavista, etc.), but it was Google that introduced the
now familiar single search box user interface and pretty much wiped out the competition.
Google then went on to further organise the worlds information and make it universally
accessible and useful with innovations such as Google Maps, Google Earth, Google
Docs, Google Realtime Search, and more. Social networking was first popularised by
MySpace and later on revolutionised by Facebook and Twitter.
In essence, most of the innovation in the area of utilities and infotainment applications
has sprung from developed markets. But in many cases developing market players have
seized the opportunity and adapted (and in some cases also enhanced) these innovations
to meet the needs of their own customers.
The Chinese online search market provides a case in point. Despite Googles world
dominance in online search, China has proven a difficult market to crack for the American
company. Only in large markets with specific language and cultural barriers will emerging
content players succeed, but that success will likely be restrained to their home turf.
Wake up call for developedmarkets
This whitepaper has established that business-transforming innovations in the
telecommunications industry are originating more and more frequently in emerging
markets, and that many of these innovations have the potential to transform developed
markets. Additionally, we have seen that emerging markets players are extending their
reach and influence across the value chain and are building their footprint through
aggressive expansion strategies.
Telecommunication industry players in developed markets, even if their strategy is to
focus on their current markets, need to realise that emerging market players will likely be
on their doorstep, either as competitors or vendors in their supply chain. One example
of an operator who is channeling innovation from emerging markets to its European
headquarters is Orange, who has built eighteen innovation centres dubbed Orange Labs,
across three continents.
With such examples of reverse innovations making their way back into the developed
markets, western operators should find a way to embrace the opportunities of reverse
innovation before their competition does.
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Delta Partnersis the leading TMT advisory and investment irm in emerging markets. With more than 160 proessionals, the
irm operates across 50 markets in the Middle East, Arica, Central & Eastern Europe and Emerging Asia. Delta Partners provides
three synergistic services: management advisory, corporate inance and investments rom its oices in the UAE, Bahrain, South
Arica, Spain and Singapore.
Advisory: Delta Partners advisory proessionals partner with C-Level executives in telecom operators, vendors and other TMT
players to help them address their most challenging strategic issues in a ast-growing and liberalising market environment in
over 50 markets.
Investments: As a und manager, Delta Partners manages an $80Mn private equity und, targeting investment opportunities in
the TMT space in high growth markets. The ocus is the Middle East, Arica, Eastern Europe and Emerging Asia. Delta Partners
private equity und leverages the frms unique TMT industry expertise to create value or its investors throughout each stage o the
investment cycle, rom deal sourcing to supporting portolio companies in driving value extraction.
Corporate Finance: Delta Partners provides corporate fnance services and has been involved in several buy-side and sell-side
telecom transactions in the region. As true industry specialists, the frm oers a dierentiated value proposition to investors
and industry players in the region. Delta Partners actively leverages i ts close link to its private equity arm to access the investor
community as well as top-level fnancial talent.
Delta Partners delivers tangible results to its clients and investors through its exclusive sector ocus on telecom, media and
technology, and a unique approach to services, combining strategic advice and a hands-on pragmatic approach.
Copyright 2011 Delta Partners FZ-LLC. All rights reserved.
For a list o all Delta Partners white papers please visit:
http://www.deltapartnersgroup.com/our_insights/whitepapers
For more inormation about Delta Partners please visit:
www.deltapartnersgroup.com