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The Delta Perspective

March 2008

Identifying today’s key


industry dynamics in the
Middle East and Africa
Authors Javier Alvarez - partner: jav@deltapartnersgroup.com
Josep Maria Moya - partner: jmm@deltapartnersgroup.com
Mohsen Malaki - principal: mma@deltapartnersgroup.com

Delta Partners takes a


high-level look at key
market dynamics, service
provider strategies, and
new technologies that will
emerge in 2008

Looking back to the year 2000, the Middle Drawing from knowledge and experience
East and Africa region was one of the few among our experts in the field, these are
remaining monopolistic telecom markets the industry dynamics that we consider
around the world, with a commensurately key in 2008:
low penetration rate of mobile and 1. Further Consolidation: Regional
fixedline services. Since then—and for players will not be alone in the race
various reasons, ranging from the need for to become pan-regional titans
socio-economic development to the need 2. Organizational Challenges:
to fill government coffers or pressure from Operators will have an uphill struggle
international bodies—the governments to extract value from merged entities
have established regulators that have 3. New Business Opportunities:
set the telecom market on a rapid pace Opportunities upstream in the
towards market liberalization. The result telecom value chain will start to
has been phenomenal growth in the emerge
mobile sector. 4. Customer Retention: Operators in
maturing mobile markets will shift
The MEA region is now at a crossroads their focus from share of subs to
again. The phenomenal growth resulting share of value
from the liberalization efforts in the 5. Reaching the Very Low Income
mobile sector is slowing down in the more Segment: Mobile operators will
developed markets, while in less developed need to rethink their business models
markets the challenge is to start serving to profitably serve the below US$5
very low income segments profitably, ARPU customer
and competition is increasing in fixedline 6. Broadband Growth: Operators
across the region. The industry is looking will seek to position themselves for
to consolidate its gains and search for the the growth prospects in broadband
next big growth driver beyond basic voice connectivity
for the high and middle income segments.

Industry dynamic #1
Further Regional players will not be alone in the race to
consolidation
become pan-regional titans

Pan-regional titans are now The years 2005 to 2007 saw a series themselves by other global players

in the process of integrating of M&A deals such as the MTC (now 2. Abundance of liquidity in the

Zain) acquisition of Celtel, MTN’s markets


their acquired operations in
acquisition of Investcom, Etisalat’s 3. Scarcity of Greenfield license
order to realize economies
acquisition of Atlantique Telecom, or opportunities
of scale. However, they
Qtel’s acquisition of Wataniya. There
are not shying away from
was also the acquisition of Greenfield Now that the most obvious target
further acquisitions and licenses—including Zain’s Saudi Arabian companies with substantial footprints
expansion opportunities third mobile license, Etisalat’s Egypt have been acquired already (with the

third mobile license, or STC’s Kuwait notable exception of Millicom and to

third mobile license— that lay the a lesser extent Comium and Warid,
cornerstone for the emergence of with 19, 6, and 4 country operations,
pan-regional players out of once single respectively), we believe that the
country or sub-regional operators. consolidation landscape in 2008 will
With the wave of consolidation that be characterized by:
occurred in the MEA region among the 1. Scarcer investment
top players, pan-regional titans have opportunities in the region:
emerged, namely, Etisalat, Zain, Qtel, While the pan-regional players
Orascom Telecom, and MTN Group. have consolidated already to a

handful of larger pan-regional


While these pan-regional titans are players during 2005-2007, there
now in the process of integrating their are still a substantial number of
acquired operations in order to realize small, single country operators
the synergies and economies of scale in much of Africa and the
inherent in an expanded customer base Middle East that often lack the

and geographic footprint, they are not efficiencies, economies of scale,

shying away from further acquisitions and access to financing that the

and expansion opportunities. This larger pan-regional players have.

continued thirst for expansion is driven As such, we expect there to be

by three key factors (see Exhibit 1): several smaller deals whereby

1. Ambitions of key pan-regional the pan-regional players seek

players to become global leaders controlling stakes in single country

and prevent being acquired operators across the region.

2
2. Investment in minority holdings: of MEA: In their quest to gain a cases, such as Vodafone’s Safaricom

Small stakes in larger players in stronger foothold in high growth and Orange Madagascar, already

other adjacent regions such as markets, European operators are proven success in Africa. A newer

South and Eastern Europe (like keen on Africa. Once aggressive source of competition will come

Orascom did in Greece and Italy about the MEA region prior to the from players in other high growth

and its interest in acquisition targets 3G license bubble in Europe in 2001, markets such as India, China,

in other Mediterranean countries), European operators are once again and Russia. Large players in these

and Southeast and Central willing to invest in the region and markets are keen to maintain

Asia (such as the Qtel and STC are increasingly aggressive with their their high growth momentum.

acquisitions of Asia Mobile Holdings license bids and M&A activity. Pan- Some examples of this new set of

Pte Ltd and Maxis, respectively, in regional players should expect stiff competitors are Russia’s Sistema and

South East Asia). competition from these European its acquisition of Shyam Telelink in

operators, as they bring to the table India, China Mobile’s Paktel deal, or

3. More intense competition strong operational and managerial VSNL’s interest in licenses in Qatar

from operators in Europe and experience, innovative R&D, globally and Saudi Arabia, or its acquisition

high growth markets outside recognizable brands, and in some of a stake in Neotel South Africa.

Exhibit 1: What is driving the need for expansion among pan-regional players?

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

1. First and foremost are the ambitions of pan- Africa and Bharti Airtel is following suit in South Africa.
regional players to become global leaders and China Mobile acquired Paktel and has a war chest of
prevent being acquired themselves by other US$30 billion. Russian operator Sistema acquired 10%
global players. Only a couple of years back, Middle in Shyam Telelink in India and has expressed interest in
Eastern operators only needed to watch within the the 3rd mobile license in Iran.
GCC to identify real competition into the next bid.
The situation has changed significantly in the last 12 2. The second drivers is the abundance of liquidity in
months, with global players becoming more aggressive the markets—driven by high oil prices and inward
with their bids within the emerging markets. Some investments by private sector and government
examples are Vodafone’s acquisition of Hutchinson funds—that facilitate easy access to financing for the
Essar in India, Telsim in Turkey, a mobile license in pan-regional players in spite of the current global
Qatar, and potential controlling stake in Vodacom or credit crunch.
even MTN. Other examples include Orange’s 51%
stake in Telkom Kenya, and talks of increased activity
3. Finally the scarcity of Greenfield license
in Africa by Portugal Telecom. Competition is also
opportunities (with the notable exception of a 3rd
coming from other high growth market players such as
license in Iran, Syria, and Bahrain, a 4th license in
Chinese, Russian and Indian operators, as predicted in
Sudan, and possible MVNOs in Oman and Jordan) is
Delta Partner’s White Paper in 2007, “The Emergence
driving pan-regional players to seek acquisitions of
of Global Industry Titans and Implications for Emerging
other players as a growth driver.
Market Players”. Reliance is making inroads into East

3
Industry dynamic #2
Organizational Operators will have an uphill struggle to extract
challenges
value from merged entities

With a wave of industry mergers and need to prove the value that their

acquisitions (see Exhibit 2) completed acquiring company is bringing to the

among the region’s top players in 2006 acquisition target. While the initial

and 2007 (17 of the largest regional and obvious benefits of cost synergies

M&A deals in the mobile sector in the from a broader customer base and

MEA had a total deal value of US$23 a diversified portfolio of operators

billion), the pan-regional players and are clear achievements in and of

emerging industry titans in the region themselves, more penetrating questions

are now keen on realizing the promises need to be answered. Specifically:

of synergies, efficiencies and scale that 1. What are the capabilities

come with such large M&A deals. that the acquiring company

brings to the target?

Executives spearheading the acquisition 2. How can the combined entity

drive among the regional titans now leverage combined assets to

Exhibit 2: Largest M&A deals from 2006 to-date, in the MEA region

(Millions)

Source: Press clippings

4
drive revenue synergies such As such, we believe that the year 2008 achievable along three major axis:

as P&S innovation, market will be one in which these regional titans Strategic: Group strategic direction,

reach, unique product platform will start dealing with the challenges including brand equity and architecture

deployments, churn management, of driving the cost synergies they have Organizational: Corporate governance

or revenue optimization? identified, while identifying ways of and leadership

3. Are there cost synergies realizing more revenue synergies. We Operational: Synergies from a cost and

other than improved buying believe that pan-regional players should revenue perspective

power from vendors? focus their efforts in 2008 on synergies

Exhibit 3: Identification of Big Ticket Items and Synergy Drivers


Illustrative

5
Without a clearly defined group and leadership model are put in companies can generate as standalone

strategic vision, reinforced by a place. Governance and leadership are entities (see Exhibit 4).

corporate governance model, acquiring thus of higher strategic importance

companies such as STC, Qtel, Etisalat, earlier on in the post deal stage, since In order to achieve these operational

or Zain all risk falling back on the these constitute the decision-making synergies, regional titans need to

comfortable position of keeping the structure of the merged entity. develop common platforms between

target operators as part of a de facto their country operations. As such, the

holding company, with the target’s Finally, with a unified direction through group as a whole brings value to the

strategic vision remaining unchanged a strategic vision, combined with the individual units, helps in clarifying the

and relatively independent of the appropriate governance model in place, future direction under the umbrella

acquiring company. Such a model is all the merged operational functions of of a common group strategic vision,

but sure to result in lost opportunities the overall group can start to deliver and enables better optimization of

for cost and revenue synergies. synergies in areas such as revenues, cost resources to achieve the future vision.

of sales, support, commercial, or billing

The group strategic direction can and technical (see Exhibit 3). These are Only truly integrated operators will be

only be translated into operational the operational synergies that create the winners of this wave of integration

synergies from a cost and revenue shareholder returns above and beyond in the telecom space of the MEA region.

perspective once the right governance the value of the target and acquired

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

It is vital for a merged entity to identify and quantify the synergies it can achieve. Such planning gives the organization the
time and focus to properly identify best practices and identify those areas which will drive value creation; companies that jump
into “execution mode” right from the start generally leave much potential untapped. Through quantification of synergies, value
drivers can be better understood, and focus areas for integration efforts become clearer. Setting targets for synergies provides
clear expectations and will drive integration efforts toward those activities which have been identified as key value drivers.
Identification of best practices among the two players helps to break paradigms and ensures getting the best of both companies.
Finally, taking some time to set the course for the integration allows management to get the buy-in from key stakeholders within
the merged entities.

Based on Delta Partners engagements in post merger integration deals, potential EBITDA improvements could reach up to 10%,
with a typical split of synergies between OPEX and CAPEX to be around 60-70% and 30-40%, respectively.

Illustrative
Synergies Impact
Potential cost reduction /
revenue increase (%)(1) Typical split of
Headcount reduction (mainly at HQ) 5-10% synergies: 60-70%
OPEX, 30-40% CAPEX
IT / MIS 0-5%
Network 10-15%
Offices 0-5%
Up to 10% on
Handsets, SIMs, scratch cards 10-25% EBITDA improvement
opportunity
Increase revenue growth 0-5%

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

6
Industry dynamic #3
New business Opportunities upstream in the telecom value chain
opportunities
will start to emerge

We have identified two In a previous paper published by regional players will focus on in 2008

emerging outsourcing Delta Partners in January 2006 we are going to be around the up-stream

anticipated the phenomena of the part of the value chain, especially


opportunities to watch out for
opening up of the value chain in the network and IT elements that can be
in 2008: network outsourcing
Middle East region as a consequence of outsourced or shared. Increasingly, we
and managed services, and
the increased competitive landscape for are seeing more operators starting to
outsourcing transmission to
telecom operators. At that time, initial view these as non- critical activities
wholesale operators consequences of that process were that can be performed by third parties.

mainly observed in the downstream We have identified two emerging

end (see Exhibit 5) of the value chain, outsourcing opportunities to watch out

around distribution and retail activities. for in 2008, namely:

The opening up of the value along 1. Network outsourcing and

the downstream or customer facing managed services, including tower

end has further developed and players management

such as Axiom, Cellucom, or i2, are 2. Outsourcing transmission to

consolidating their dominant position wholesale operators

as regional players in the Middle East

in retail and distribution as well as These emerging opportunities are

making further inroads with their driven at the base level by the need for

expansion into high growth markets economies of scale. In mature markets,

such as India and Africa. the increased competition is driving

down prices and creating near-parity

Downstream activity is also brewing in terms of network quality and

in the call center space, as operators coverage, which in turn is rendering

increasingly outsource some of the non- the network a non-core function

core functions to specialized niche players that is no longer a competitive

that can efficiently provide these services differentiator. In less developed and

on behalf of the telecom operators. lower income markets, the need to

serve the bottom of the pyramid

More importantly, we believe the next more efficiently is forcing operators to

wave of outsourcing opportunities that consider outsourcing elements of the

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network that would help lower costs. savings in sharing mode of 50%). outsourcing and managed services

In both types of markets, outsourcing For the development of an additional business divisions and are targeting

offers the opportunity to pool network 1,000 BTSs shared with another operators in mature and emerging

elements of multiple players and operator, the CAPEX reduction will be markets alike.

create the economies of scale that between US$62.5 million and US$115

would enable each operator to focus million (assuming CAPEX per tower More recently, examples are emerging

on its core functions while ensuring of US$125,000-230,000, and CAPEX from operators positioning themselves

desired service levels, at competitive savings in sharing mode of 50%). for these emerging opportunities

prices and thus business profitability. upstream in the value chain. Some

Taking the case of tower sharing, for Some of the first companies to prominent examples are the Bharti

an operator with 5,000 BTS, doing realize this emerging opportunity Airtel, Vodafone Essar tower sharing

tower sharing for 3,000 of those are traditional vendor equipment agreement where they have set up

with another operator, the potential providers, with Ericsson at the a joint venture independent tower

OPEX savings will be US$45 million, forefront and NokiaSiemens, Cisco and sharing company, Indus Tower. Other

or roughly 30% of annual BTS-related Huawei jumping on the bandwagon. examples are 3UK and T-Mobile’s

OPEX (assuming annual average OPEX These have already set up their network sharing agreement, or BT’s

per tower of US$30,000 and OPEX network operations and maintenance application hosting and management

Exhibit 5: Evolution of the Telecom Value Chain

8
solutions for other telecom operators, direction, we expect certain flourishing

such as its network and security of such companies, with potential

services, or its managed mobile consolidation later on around the

content, carrier-grade messaging, and better positioned players.

enhanced voice services.

Our second identified upstream

We believe that there is a narrow opportunity is wholesale telecom

timeframe in which new specialized services. Given the new competitive

players with strong capabilities in the landscape with additional access

network integration space within the provision players (FWA, Internet and

region will be able to capitalize on Data services providers, MVNO,…)

this emerging opportunity, namely, there is an emerging opportunity in

building and maintaining large the wholesale business, particularly

network infrastructures across the for incumbent operators. As a result

region and providing one-stop shop of the proliferation of new players,

solution to pan-regional operators. A incumbents are increasingly viewing

good example of that is Crown Castle, provisioning of wholesale services to

the largest owner of tower assets competing operators as an opportunity

in the US, with 75% of its revenue rather than a threat, complementing

coming from the top 4 US mobile the traditional retail business.

operators. Crown Castle provides

site leasing and network services, In 2008, we expect a significant

and has since moved into wholesale increase in investment activities

wireless backhaul services as well. The upstream in the telecom value chain,

company achieved its number one while the downstream activities will

position by acquiring tower assets continue to flourish. What are now

from major mobile operators in 1999- considered well established business

2000, and enjoyed an EBITDA margin lines among European players, such as

of 55% in 2007. Deutsche Telekom’s or BT’s wholesale

services, or the network outsourcing

Financial capacity, operational business line of Abertis in Southern

capabilities in the different markets Europe, or tower sharing companies in

where they operate, and access North America, are areas of investment

to large deals with pan-regional opportunities in the MEA region that is

operators are key requirements for open to both existing operators as well

such companies to succeed within as independent 3rd parties.

the MEA region. As the telecom

industry keeps moving towards this

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Industry dynamic #4

Customer Operators in maturing mobile markets will shift


retention
their focus from capturing share of subscribers
to share of value

For established operators, The year 2007 saw SIM card penetration one thing: churning customers from the

churn management becomes reach saturation or near-saturation levels existing players.

in the most developed of the MEA’s


a vital strategic objective.
mobile markets, particularly the littoral For established operators, churn
Such an effort needs to be
Arab states around the Gulf, as well as management thus becomes a vital
a company-wide initiative
markets such as Jordan, Morocco, and strategic objective. According to Delta
where all customer-facing
South Africa. As such, the traditional Partners analysis, a churn reduction of
and supporting back-office growth driver for the mobile operators 10 p.p could bring a US$600 million
functions of the operator in these countries will need to start value . For such incumbent operators
change their approach evolving away from an acquisition seeking to protect their customer base

and focus approach and towards a value from churning to the competition, a

development approach. To compound successful customer management effort

this growth challenge, incumbent is a vital need. Such an effort needs to

mobile operators in these markets are be a company-wide initiative where all

facing increasing competitive pressures customer-facing and supporting back-


with the entry of third or fourth mobile office functions of the operator change

operators in their markets. With heated their approach and focus, rather than a

bidding for these new licenses and very simple patch solution such as launching

high per capita license costs, such as in a standalone loyalty program.

Saudi Arabia (US$6.1 billion), Kuwait

(US$907 million for a 26% stake) and The first step is to analyze the

Qatar (unannounced, but possibly composition of the customer base

in excess of US$2.5 billion) in 2007, along with acquisition and direct costs

these new players’ business models will to identify which segments are most

be driven by very rapid market share profitable (see Exhibit 6). By doing this,

acquisition. With limited value left to the operator can understand which

extract from untapped segments (mainly segments it should invest in for retention

the low income segments), market share and which segments it should reduce

acquisition for these new players means investment due to low profitability.

10
Specifically, the strategy for retaining would require a better understanding of

profitable customers is derived from an the customer’s total experience with the

analysis of that particular customer’s operator across all of its product lines,

experience throughout his or her lifetime and across all interaction points with the

with the company. After having acquired organization and, as such, would require

a customer, an operator should focus on customer analytics that put the customer

developing the customer experience that as the main unit of measurement.

enables the telecom operator to retain

that customer and extend the duration Improving customer analytics is of

of his lifetime as well as his usage of course not an overnight task. Operators

mobile communication services. frequently need to re-evaluate the IT

infrastructure that they have deployed

As such, the role of analytical to capture and analyze customer

marketing and business intelligence data. As such, business intelligence

in general is a vital pre-requisite for tools, data warehousing solutions,

evolving the operator’s strategy from and customer data integration

customer acquisition to customer value solutions become necessary investment

development. Retaining a customer requirements for an operator.

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

11
Another key success factor to properly revenue growth out of the existing and value proposition. Given the

manage customer expectations customer base. increased need for micro-segmentation

and customer lifecycle is providing and segmented value propositions,

a meaningful and consistent brand Improved customer analytics and a and the need to coordinate between

experience across the different strategy focused on improving the high various departments in the operator

customer touch-points with the value customer’s experience across for the analytical marketing and the

company providing the service. The all product and touch-point with the promotional campaigns, operators

first challenge is to develop a relevant operator, means that the operator need to assign dedicated teams that

promise to the customer, starting needs to reassess its organizational look after the customer lifecycle

from the values associated to the structure as well. In order to better focus management and help in coordinating

brand. The second challenge is how to customer management and retention efforts across silos of the company.

successfully deliver that promise along efforts within particular customer The set up of a division within the

the different interactions with the segments, operators across the GCC, operator in charge of customer lifetime

customer, from an initial contact point such as Etisalat, Qatar Telecom, management is a good way to ensure

at any point of sale or through the web and Batelco have restructured their this will happen.

site, to the experience the customer organizations around the customer,

has when accessing the network creating Consumer, Business, and With such a customer-focused

and using the service to any further Wholesale divisions, rather than the organizational structure, improved brand

enquiry the customer might put to the more traditional, product-centric experience across all customer touch-

representatives at the call center. organizations of Fixedline, ISP, and points, and constant product and services

Mobile divisions. The second relevant innovation per customer segment, a

Managing customer expectations and organizational (structural) change proper customer management model can

customer satisfaction and loyalty to required to successfully deliver be implemented.

the brand is an on-going activity since according to customer expectations is

customer needs and attitudes towards to fully integrate back-office functions During 2008, we expect operators in

a brand evolve with time. A continuous (network, IT and other support areas maturing markets to solidify their moves

effort to segment—and even micro- within the organization) with the front- from customer acquisition to customer

segment—the customer base and target office functions of the organization retention by re-enforcing their newly

them with relevant value propositions (marketing, sales and customer created customer-centric organization

is required to properly satisfy or surpass care). New products development, or structure, invest time and effort in

customer expectations. In particular, enhanced customer care services can improved customer analytics, and launch

any operator willing to retain and not be conceptualized and realized a series of segmented and targeted

develop its customer lifetime value will just by the marketing and Customer customer retention and development

have to proactively come-up with new Care departments anymore. The initiatives focused on their high-value

segmented and targeted offerings that back-office areas have to play a more customers, including the delivery of a

will not only contribute to customer active role in understanding customer consistent brand experience across all

retention but one that will also generate expectations and delivering according customer touch-points.

demand for new services driving future to that and to the overall brand promise

12
Industry dynamic #5
Reaching the Mobile operators will need to rethink their
low income
segments
business models to profitably serve the below
US$5 ARPU customer

Given that the portion of the Cellular technology is changing the Telecom going on the acquisition trail

population able to afford a landscape in emerging markets. are good examples of that.

Today there are some 3 billion mobile


mobile handset or service
customers worldwide, and that will The tremendous network deployment
at current prices is very low,
grow to nearly 5 billion by 2012 across the countries of sub Saharan
operators are now facing
(according to WCIS predictions), when Africa has increased penetration
the challenge of increasing
two-thirds of the people on earth will levels dramatically, from less than
penetration rates among the have mobile phones. 3% in 2001 to 26% by the end of
bottom of the income pyramid 2007 . In the early years, this growth

In 2001, in sub Saharan Africa there was driven mainly by an increase in

were 17 million mobile connections, the competitors per market and a

while today there are some 190 million commensurate reduction in price per

(according to WCIS). Communication minute and handset prices, but has

is bringing people together, helping accelerated more recently as a result

develop societies and increasing of the decreasing costs of mobile

economic prosperity. network deployment, coupled with

increased investments by pan-regional

During the past three years, Africa saw and global players. However, given

a massive growth in interest from pan- that the portion of the population able

regional and international investors to afford a mobile handset or service

and telecom operators seeking to at current prices is very low, operators

ride the African growth bandwagon. are now facing the challenge of

Zain’s (formerly MTC) buyout of increasing penetration rates among

Celtel and its investments in Mobitel the bottom of the income pyramid

in Sudan and Vmobile in Nigeria, within African populations.

MTN’s acquisition of Investcom,

Etisalat’s partnering with Atlantique While the key element to drive

Telecom and European operators such demand is to lower the entry barriers

as Vodafone, Orange, or Portugal and the total cost of ownership

13
(see Exhibit 7), the challenge for any propositions that attract the bottom of As a starting point, affordability is

operator seeking to provide such value the pyramid is to do so profitably. what the customer perceives based

Exhibit 7: Transforming business models to attract the low income segments

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.

1. Reducing handsets costs: that match the lifestyle of young local entrepreneur would use the
Pioneering initiatives encouraged populations that are used to live mobile phone or wireless/mobile
by the GSMA and undertaken by day to day on a US$2 daily income. broadband service to create a
Motorola and Nokia are being Lower total cost of ownership, business that serves the overall

more recently followed by the particularly pricing plans that community he/she is a part of.

efforts of Chinese manufacturers offer long-term, even lifetime

(ZTE and Huawei) taking the retail validities need to be complemented 4. Micro-credit: Operators such

handset prices below US$20, as with affordable rates and low as Bangladesh’s Grameenphone

well as operators like Vodafone denominations in sachet-like are the pioneers of partnering

with their low end 125 and 225 recharge vouchers that ensure low with financial institutions to

models or Spice Mobile planned incremental spending. utilize their micro-credit facilities

sub-US$25 “people’s phone” in to enable low income segments

India. In several markets where 3. Community—or Shared— to purchase mobile phones via

these sub US$20 handsets were Access: To overcome the chicken a loan. In the Grameenphone

recently introduced growth has and egg problem of lack of buying model, the individual buying the

taken off, which clearly indicates power among the sub US$5 ARPU handset repays the loan with

this is the way to penetrate lower segment, community access is money she generates from selling

income markets and customer a convenient way for operators minutes on her newly acquired

segments. to tap into the bottom of the phone to her village community.

pyramid. The public call office Grameenphone claims 250,000

2. Rethinking pricing structures model, the village phone model, entrepreneurs conducting this

and price levels: Operators need or even the community Internet retail phone business in 60,000

to cleverly bundle these handsets and communications center model, villages in Bangladesh, giving

with attractive pricing plans for example, are ways in which a access to over 100 million users.

14
on the communication campaign the prevent churn. Some operators, such

operator designs. While it is a given that as Sudatel, Safaricom or Glomobile,

attracting low income customers will choose to leverage “national pride”

definitely erode ARPU for the operator, and position themselves as the national

managing the ARPU decline in such a carrier, while others concentrate on

way as to avoid excessive erosion should the young population, such as Tigo.

be a key element of any operator’s While operator branding in more

strategy to profitably serve the bottom developed markets increasingly focus

of the pyramid. As has been seen with on individuality of their customer base,

selected operators in East Africa such the exact opposite approach works

as Celtel or Tigo in Tanzania and UTL more effectively in high growth markets

in Uganda, a clever introduction of in Africa. Customers at the bottom of

headline tariffs in a direct and easy to the pyramid, historically marginalized

understand communication will convey in the era of globalization, crave for a

the affordability message without sense of belonging to a greater network

necessarily harming the operator’s or community. As such, pan-regional

margins. In each pricing package, operators such as MTN or Celtel (Zain)

the operator needs to design built-in focus on the community aspect and the

components—such as billing steps, sense of belonging to a greater network

set up fees, usage caps—that prevent in their branding campaign.

more ARPU erosion than is necessary to

attract the low income customers. These Technology is an important lever for

sensitive levers need to be managed operators seeking to decrease the

with care and accuracy, however, and cost of providing the service: mobile-

this can only take place when the voucher delivery systems, electronic-

operator is capable of achieving a large voucher delivery systems and IVRs

degree of intimacy with customer needs to promote self care are just some

and behaviors. examples. Technology can also be

used to increase revenue streams and

Even with these low ARPU customers— increase customer stickiness, such as

in fact, precisely because they are low money remittance systems which have

ARPU customers—customer loyalty is been a success in Kenya, South Africa

essential to extend customer lifetime and the Philippines and are being

and thus extract profits, and to prevent deployed in Afghanistan, Tanzania and

spiraling acquisition and winback several other high growth markets.

costs. As such, properly positioning the

brand and establishing an emotional Profitability can be further enhanced

connection with the customer will help through a more efficient approach to

15
distribution of the physical recharge efficient BTSs, as well as ones that

vouchers. Examples are partnerships with rely on alternative energy sources like

logistics companies to increase presence wind, bio fuels, solar or at the very least

efficiently, incorporating learnings from hybrid power solutions, promising cost

the FMCG world in order to increase reductions up to 40%.

rotation and traffic towards POS, such as

tailor-made events at the POS, or layout While the pan-regional players

and ambiance customization according are actively trying to consolidate

to target segment. procurement across country operations

to gain better leverage with vendors

It is worth noting that, considering that and reduce equipment costs, the real

over 65% (source: UNDP, 2006) of sub- drivers of infrastructure costs are BTS

Saharan Africa lives in rural areas, the site acquisition and civil works, together

FMCG model has proven successful in with the shortage of skilled engineers

penetrating rural areas. Learning from within Africa. These factors, combined,

the FMCG world would thus enable make the network outsourcing,

mobile operators to increase numeric managed services, and network sharing

distribution in rural areas, ensuring viable alternatives to build-own-manage

accessibility and visibility in order to models. Bolder operators in Africa are

address the latent demand coming trading sites, replicating the site sharing

from rural Africa. model that operators like Vodafone and

Orange are following in Europe, while

Network rollout and maintenance, several are engaging vendors for carrier

or network CAPEX and OPEX, are managed services.

important cost elements that, if not

managed properly, could significantly The year 2008 will see the launch of

impact profitability in serving low various initiatives by the more innovative

income segments. As for OPEX, site African mobile operators to reach

security and the shortage of reliable and serve the bottom of the pyramid

power supply are major challenges profitably. In order for these initiatives

in low income areas. In areas where to succeed, however, operators need to

the national electric grid lacks reach, learn from the lessons in other emerging

power generators are required, adding markets, and to understand that the

significantly to the cost of access traditional mobile operator business

rollout. Generally, two generators per model needs to be re-thought if the low

BTS are required, with a replacement income segment is to be served profitably.

cycle of 18 months. Solutions being

developed or deployed now are more

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Industry dynamic #6
Broadband Operators will seek to position themselves for the
growth
growth prospects in broadband connectivity

Even with the very high growth For over a decade, the phenomenal wireless broadband offering), all of

rates in broadband across the growth in mobile (with a global whom are keen to ride the wave of

2000-2006 CAGR of 24%) has growth expected from broadband.


region, the region is still a
overshadowed the fixedline, where
far cry from mass broadband
growth has stagnated (with a global Even with the very high growth rates in
adoption when taken as a
2000-2006 CAGR of 5%), mainly as a broadband across the region, the region
whole, and the room for
result of lack of investment. is still a far cry from mass broadband
growth is tremendous adoption when taken as a whole, and

With the emergence of broadband as a the room for growth is tremendous.

growth engine (with a global 2000-

2006 CAGR of 61%) for the stagnating Broadband development varies across
fixedline business, coupled with the MEA region
innovative new broadband technologies However, the level of development
that either reduce CAPEX significantly is not uniform (see Exhibit 8), and
(such as WiMAX) or enable a much there are selected countries that have
wider range of value added services achieved significant strides in increasing
(such as FTTx), the fixedline is attracting broadband penetration already, while
headlines once again. others are on the cusp of growth in

broadband. There are three country


The resurgence of fixedline in the groupings within the MEA region
MEA region with different levels of broadband
The MEA region is no exception. In development:
fact, adding to the resurgence of 1. Sub-Saharan Africa (excluding
the fixedline in this region is the late South Africa)
introduction of liberalization in this 2. GCC states (excluding Saudi Arabia)
sector, which is now attracting players 3. Rest of MENA
from the mobile and ISP markets (such

as Umniah’s and Zain Bahrain’s WiMAX Sub-Saharan African countries have


licenses, Mobily’s mobile broadband to-date lagged behind in not just
push, MTN Nigeria’s acquisition of 2 broadband adoption, but even dialup
fixed wireless operators, or Wana’s Internet adoption. Among many other

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factors—such as illiteracy, low PC

penetration, IT awareness, and low Exhibit 8: Broadband penetration of households in selected Middle East
and Africa countries in 2007
income levels—the 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


Source: Euromonitor 2007
broadband service provisioning as well,

with Nigeria’s active broadband market

being a good example (see Exhibit 9). already in full swing. As such, the broad- bandwidths (up to 4Mbps), while some

band players are keen to further expand are venturing into bundled offerings that

On the other extreme, the small littoral the pool of Internet users to enable combine Internet access, voice telephony,

states of the Persian Gulf, with already continued growth in the broadband cus- and video (IPTV or video on demand).

high dial-up Internet penetration tomer base. As such, the main challenge

coupled with a high income population for players in these markets is to create In fact, as the broadband growth rate

and more IT savvy businesses, have a compelling value proposition that will tapers off in the higher penetration

managed to migrate many of their dial- enable the previously unconnected to countries and Internet users become

up customers to broadband over the jump on the broadband bandwagon im- more sophisticated, incumbent fixedline

past couple of years. mediately, bypassing dial-up all together. operators are betting on these same

bundled offerings as a means to both

During this same period, countries such As a result, incumbent operators in such encourage incremental increases in

as South Africa, Saudi Arabia, Egypt, markets are revamping their broadband broadband ARPU, while also hoping

Morocco, and Jordan have successfully value propositions from two angles. For to lock in broadband customers with

put broadband on a rapid growth the unconnected customers, providers cross selling prior to the intensification

trajectory, thanks mainly to a successful such as Batelco, Awalnet, STC, Maroc of competition. Tying in the customers

push from governments coupled with Telecom and others are offering very through cross selling and value added

the incumbent operators’ need for low bandwidth broadband (128Kbps), services is thus becoming a necessity

growth drivers in their fixedline business. combined with limited monthly for incumbent players readying for

download capacity at more affordable fixedline competition.

Operator strategies in more developed prices to help acquire the novice internet

broadband markets users. For the Internet savvy and higher Benchmarking themselves against the

When it comes to operators in the last spending customers, operators such more advanced broadband markets in

two groups of countries, the migration as Etisalat, Qtel, Maroc Telecom and Asia and Western Europe, the fixedline

of dial-up connections to broadband is others are launching ever higher access operators in the high penetration

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broadband markets are considering such, we believe that the new entrants offering through cross-selling and

services and solutions catering to the in the fixedline markets, licensed altnets capture more of their mobile customer

broadband-connected residential and in Saudi Arabia, Bahrain, and soon in telecommunications spending.

business customers. Specifically, the Qatar, will all need to match or exceed

growing emphasis among Western the incumbent offerings if they are Operator strategies in less developed

European and Asian operators on to successfully capture any significant broadband markets

managed ICT services for SMEs broadband market share. In most of sub-Saharan Africa, where

(operators such as Belgacom and BT), fixedline broadband infrastructure

and IPTV and triple play to residential Finally, we expect the mobile operators is nearly non-existent, mobile and

customers (such as Orange France and in these markets to start positioning wireless broadband technologies are

PCCW), are two main themes that are themselves to capture a share of the the name of the game for players

attracting the attention of incumbent broadband pie during 2008, either interested in addressing the nascent

fixedline operators in the Middle East. through 3.5G technology and eventually broadband opportunity in this region.

LTE, through a WiMAX license, or Here, mobile operators will leverage

Newly licensed entrants into the acquisitions of existing broadband 3.5G deployments, and in some cases,

fixedline market of these more players in their respective countries. WiMAX, to target the broadband

developed broadband markets, keen The mobile players will be late comers opportunity, while ISPs and other new

on inducing customer churn from the to the broadband game in the more entrants will take advantage of WiMAX

incumbent operators, will need to keep developed broadband markets, and or broadband CDMA technologies to

up with the new service innovation and will mainly aim to use broadband as address the same broadband market.

price bundling of the incumbents. As a way to compliment their mobile

Exhibit 9: The Wireless Broadband Push in Africa—Nigerian Players Jostle for Position for the Broadband Opportunity

Nigeria is one of sub-Saharan Africa’s most competitive broadband markets with unified licensing that allows fixed and mobile
players and ISPs to compete for the small but fast growing broadband opportunity. The Internet competitive landscape in Nigeria
is very fragmented; while national operators leverage their fixed lines infrastructure and mobile players have not penetrated the
market yet, there are a large number of small players (PTOs, ISPs, etc) using CDMA technology and few using WiMAX technology
to offer internet / broadband services. Wireless is the name of the game in Nigeria’s broadband market.

Presence Main technologies

National Nitel Nationwide Fiber optic, SAT, CDMA


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

Starcomms 9 regions 3G CDMA-EVDO

Multilinks Lagos Fixed-line (TDMA) & CDMA


National
Reltel 12 cities plans 42 end ‘07 CDMA
PTOs
MTS first W. 5 regions CDMA; VSAT
Intercellular n/a CDMA

Rainbownet South East Nigeria CDMA & 3.5 GHz frequency

Regional Cyberspace Lagos VSAT; 3.5GHz DSL, cable solutions


PTOs Bourdex 9 regions CDMA

21st Century Lagos Dial-up, DSL, PABX, PSTN, VSAT, VOIP

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

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