The Delta Perspective

May 2009

Mobile Broadband in MEA:

Promises opportunity but
not a smooth ride
Authors Joao Sousa - partner: js@deltapartnersgroup.com
Stephen Clements - senior associate: sc@deltapartnersgroup.com
Adil Dilmen - associate: ad@deltapartnersgroup.com
Delta Partners Intelligence Unit

Delta Partners takes a look at

mobile broadband potential
in MEA and assesses
challenges for both mobile
and fixed operators

Introduction
The unprecedented take-off of the
mobile sector across the world has
been one of the most note-worthy Key highlights
milestones in telecommunications
history. With the passage of time, • The mobile broadband opportunity
operators have witnessed a migration in MEA is expected to reach
of PSTN voice traffic towards mobile USD5.9 billion by the end of 2011;
networks. The segment has emerged as comprising nearly 70% of the overall
a crucial revenue generator of telecom broadband market
services worldwide, capturing a sizeable
• Combined broadband subscriber base
portion of basic voice and data traffic
expected to reach 57 million, with 72%
of households and enterprises. As in
of the base over mobile platforms
the rest of the world, the dominance of
mobility is seen in the MEA region too, • Both the Middle East and Africa
particularly in the emerging markets display similar mobile broadband value
of Africa. At the end of 2007, the opportunity sizes; Africa has potential
ratio of broadband, fixed and mobile for 24 million subscribers, the Middle
penetrations stood at 1:4:22 and East has around 17 million subscribers
1:18:160 in Middle East and Africa
• Long term mobile broadband ARPU
respectively. Owing to the strength of
is expected to be between USD10-
mobility, broadband over this medium is
15 driven by new submarine cable
expected to register explosive growth,
developments
catapulting to new heights of high-
speed demand.
 In this paper, we explore the broadband
opportunity in the MEA region, outline
the external threats and internal
challenges faced by operators, and
detail the overall value proposition.
Significant growth potential exists
with a 3-year mobile broadband
opportunity valued at around USD5.9
billion, with Middle East contributing
USD3.0 billion and Africa USD2.9
billion. The opportunity size will
depend on:
• Rollout speed of 3G networks or
EDGE by the leading players
• Reduction in mobile broadband
price driven by competition and
decrease in cost of connectivity,
both internationally (completion of
existing submarine cable projects in
the region) and national core network
costs (driven by fiber deployments).

EXHIBIT 1: Comparative service penetration in Africa, Middle East and EU-25 nations

1
Includes Bahrain, KSA, Kuwait, Oman, Qatar, UAE, Israel, Lebanon and Libya
Source: ITU; IDC; World Cellular Information Service (WCIS); Delta Partner analysis

EXHIBIT 2: % of Households with only mobile connections in EU nations

Source: European Commission, Eurobarometer – E-Communications Household Survey, June 2008

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The ‘Fixed-Mobile’
Substitution (FMS)
The evolution, or rather revolution of the
mobile sector has led to far greater choices for
communications than the previous one of traditional
PSTN voice

The strategy on the part of fixed and
mobile operators has been aimed
towards displacing each other as the
preferred provider. Whilst the early
trends of mobile uptake indicated
an apparent complimentary use to
the fixed line, mobile operators have
steadily become substitutive and
succeeded in eating into the share
of fixed line markets. Consequently,
the share of ‘mobile-only’ households
has been rising, whilst the number of
households with at least one fixed line
has continued to decline. For instance,
at the end of December 2007 about
24% of the households in the EU-27
nations had opted for ‘mobile access
only’, as the FMS syndrome has been
more pronounced in countries with
less developed fixed networks such as
Czech Republic, Finland and Hungary.
In a bid to outdo the mobile
revolution, fixed players have
chosen to ‘bundle’ a bouquet of
communication services in order to
meet the collective TV, voice and data
requirements, especially those of high
and middle class households. Though,
this aided in mitigating the rate of line
deactivation to some extent, mobile
players have been quick to retaliate
by bundling mobile broadband and
rolling out alternate technologies such
as WiMAX.
Mobile Substitution (FMS). Some of
these are:
• Reduced differential between fixed
versus mobile in tariffs and services
• Mobile operators leverage upon a
range of price-plans across both
prepaid and postpaid platforms,
as fixed operators continue to
be ‘locked’ to their legacy line
rental-model
• The gap between fixed and mobile
broadband provisioning has been
trending downwards with the
roll-out of 3.5G networks and
‘unlimited consumption’ offers
• Rising numbers of ‘single-dweller’
households , leading to mobile
phones occupying the position of the
household communication device
• Proliferation of a mobile workforce
and the practice of businesses
encouraging mobile contacts as
reference points for clients

Several market and socio-demographic

factors have further fuelled the Fixed-

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 Mobile dominance in MEA
– Opportunity and Drivers
In the Middle East, and especially Africa, the fixed
networks are far less developed than in Europe,
representing a mobile broadband opportunity of
close to USD6 billion in revenues and USD8-12 billion
in shareholder value

For instance, in Ghana and Saudi
Arabia, mobile operators constitute
nearly 95% and 80% of the market
revenues respectively. To date, operators
in the region have been riding the
volume game, focusing on maximizing
subscriber additions. However, as
penetration levels continue to increase
and reach near saturation in Middle
East and 37% in Africa at the end of
2008, operators will need to explore
new avenues for revenue growth.
Mobile operators view data services as
a growth driver that is indispensible to
their expansion. The intrinsic need for
creating inroads into the broadband
play together with the dominance of
mobile operators in the telecom market,
will fuel the insurgence of mobile
broadband in MEA.
With over 500 million mobile subscribers
in MEA at the end of 2008, the region
has been one of the fastest growing
across the world over the past years,
witnessing mobile overtake fixed line
connections in the early 2000s. The
prohibitive costs of wiring the region
versus the favorable economics of
wireless technologies is expected to add
to the mobile voice and data bonanza.
Several of the regional titans have
already begun to recognize this and use
both ‘convergence and substitution’
measures to market a variety of offers,
initially targeting the high ARPU
business customers. These include
promoting phones that support fixed-
wireless access technologies in an SME
context, while encouraging high-speed
wireless internet based on USB modems

EXHIBIT 3: Broadband market potential – subscribers and revenues

Source: Delta Partners analysis

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 EXHIBIT 4: Services-suite aimed at capturing the broadband opportunity
Source: Websites
and wireless routers.
Owing to their dominance, mobile
operators are well positioned to tap
into the broadband opportunity
capitalizing on the fixed networks lack
of scale and competition. In the long
term, the promise of the next wave of
mobile growth is likely to depend on
how soon subscribers latch on to the
data bandwagon. The data opportunity
in the mobile world stems from two
major sources. The first leads from the
usage of internet access to meet with
basic fixed internet needs, the second
generated from within the mobile
ecosystem. The former includes the
likes of browsing, e-mails etc., the latter
including m-payment, services driven
by operators’ portal, location-based
applications, gaming, TV, etc.
Despite the presence of this opportunity,
operators face technical and economic
challenges. As they depend on data
services to stabilize ARPU, the explosion
in traffic and associated rise in costs can
threaten QoS. In addition, the increase
in data service revenues does not always
compensate for the increase in traffic
levels on the network. Hence, the key
question that plagues operators is how
to optimize cost-to-serve, led by the
extent of network development with
respect to the rising data traffic.
According to Delta Partners estimates,
the total broadband market in MEA is
expected to grow at a CAGR of 51% in
revenue terms between 2008 and 2011,
reaching USD8.6 billion at the end of
the period with a subscriber base of 57
million, coupled with a geographic split
of 47% and 53% between Middle East
and Africa respectively. Additionally,
the dominance of the mobile market
is estimated to control a majority of
the households and small business
enterprises broadband market with
41 million subscribers and mobile
broadband revenues of USD5.9 billion
across MEA at the end of 2011. The
surge in innovative product offerings
has the ability to translate into a
shareholder value in the range of USD8-
12 billion in the next couple of years
(Middle East:Africa representing 70:30
of this value).
Typically the regional titans, such as
Orascom, MTN, ZAIN, Etisalat, and
more recently Vodafone, plus other
established leaders in individual
markets, are better suited to address
the traditional ‘fixed’ telecom demands
of high-speed networks. As illustrated
in Exhibit 4 above, these include voice
and data service offerings across SMEs,
homes and public internet cafes/
payphones using mobile infrastructure.
In order to be able to successfully drive
profits based on a broadband play,
operators would need to align their
operating model, and gain access to
backbone and international connectivity
at competitive costs. Furthermore, for
markets where the regional titans do
not have a presence, existing fixed and
tier-II mobile operators have a chance
to enhance their value proposition in
broadband play.
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 Potential Roadblocks to
Success
Mobile broadband enables increased value, and
retention of high value clients but requires significant
investments, and opens the door to VoIP
The ‘IP’ Syndrome
The first set of concerns with the advent
of competition is typically related to
tariffs, as operators meet with cut
throat pricing amongst their peer
group. However, the threat today has
transitioned beyond mere tariff wars
and spread to newer frontiers of IP
traffic. The advent of cheap VoIP calls
with improving QoS, has led to the
jettisoning of legacy circuit switched
networks, corroding the core service
offering of fixed and mobile play and
making the future of voice revenues
unclear. Additionally, VoIP providers
have further intensified their attack,
by offering freebies such as unlimited
international calls to select countries as
EXHIBIT 5: Skype and its implications to the telco community
Source: Delta Partners analysis
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part of their basic subscription packages.
Currently, Skype is already the second
largest operator in terms of subscribers
in the world, with more than 370 million
subscribers and revenues of USD143
million at the end of Q3 2008.
In response to the VoIP threat, mobile
players are seen creating service offerings
such as the Video over IP solutions
to try to combat the Skype migration
– Vodafone for instance is already
deploying some offerings in Europe.
Fixed players on the other hand are
being increasingly pushed into catering
to the needs of corporate and large
business entities. Additionally, they are
hopeful of regulatory support to enable
EXHIBIT 6: Roll-out challenges faced by mobile players
Source: Delta Partners analysis
investments in FTTH across major cities,
the underlying objective being to deliver
broadband speeds that are unmatched
by mobile operators, thus creating
successful FTTH monopolies.
Perils of Rollout Overestimation
An evolution from traditional mobile
player to that of an integrated /
convergent one, calls for a revised
business model and organizational
revamp. The roadmap that lies ahead
is not simplistic as operators face key
challenges of meeting high-speed
connectivity expectations, with a range
of technical, commercial and financial
issues. To be able to successfully address
the opportunity, operators require access
to international capacity at competitive
costs, and significant investments in
both access and core networks. The
commercial challenges to be dealt
with include devising innovative ways
to address the ‘utopian’ high-speed
expectation. The financial challenge is
a basic one in some MEA markets. Even
the leading players are not realizing
results in line with the cost of capital
and the broadband rollout requires
significant capital. Furthermore, as the
broadband subscriber base rises, and the
popularity of IP voice, Instant Messaging
(IM) and video calls increase, the threat
to existing voice capacity, continues to
grow.
Thus, the key to success lies in
striking the right balance between
profitability and value creation, whilst
preventing data from cannibalizing
voice revenues. In the Middle East,
current regulatory conditions tend
to block VoIP services, maintaining
attractive conditions for local players
to push broadband development
without having to be overly concerned
about cannibalization of voice
revenue from the growth of VoIP.
However, freely available software
has made it possible, even under
such circumstances, to access VoIP
services despite regulatory restrictions,
demonstrating the risk they pose to
the operator.
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 Key Success Factors –
Realizing the Prospect
In order to address the broadband opportunity, mobile
operators need to first align their operating models
with business objectives

Such a transformation is needed to Efficient, Low Cost Core and

enable them to address the opportunity Backbone
profitably and meet key broadband • Improve control of network
development requirements. In our coverage, capacity and technology
opinion, the factors that play a decisive to manage service quality and costs
role in creating a sustainable opportunity • Make an informed and judicious
include the following: decision on the mix between
coverage and capacity in urban
Access to International Connectivity versus rural areas
at Competitive Costs • Due to the lack of fiber in MEA,
• Presently, 1GB of international players such as MTN and Zain are
connectivity in Africa ranges between deploying fiber to fulfill backbone
USD15 to USD30 depending on requirements, and in some cases
the country and service quality. metropolitan rings
This translates into very high priced • Explore tower sharing and rural
broadband service offerings roaming to reduce cost of network
• To improve upon the current scenario,
some mobile players are known to Improve Economies of Devices /
be investing in and also leading the CPEs Supply
development of submarine cables in • Currently, the operators’ cost of
the region a 3G data card / USB modem is

EXHIBIT 7: Broadband potential across markets with top 2 operators offering broadband services

1
Only Middle East and African countries, considering the full potential of the countries where the operator has equity stake; Etisalat includes Iran
2
Vodafone includes Vodacom countries as well
Source: Delta Partners analysis

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 EXHIBIT 8: Positioning methodology for the regional mobile players
1
The condition required are cumulative as we move from left to right scenarios
Source: Delta Partners analysis
higher (in excess of USD50) than
the consumer price in Europe
Dedicated Sales Channel and
Customer Support
• Sales and support towards data
connections is far more complex
than traditional pre-paid voice
services
• Operators need to rethink the
number and role of ‘Owned-shops’,
devising a tailored channel strategy
(e.g. IT agents as telecom sellers),
designing distributor role and
agreements, and defining the mix
of sales agents (outsourced versus
direct representatives)
• Enhance customer care structure
and dimensioning in terms of direct
support to users, sales agents and
corporate clients
Enhance Customer development and
design retention programs
• Educate clients in order to rapidly
rollout offers and protect high value
clients
• Improve value proposition for high
value business and residential
customers. In Africa, this segment
represents between 10-20% of
subs and 50-60% of revenues
Organizational transformation
• Revamping the ‘Go-to-Market’
strategy
• Partnering with other entities of the
value chain (e.g. ICT services) and
taking advantage of broadband play
(e.g. through vendor partnerships and
/ or infrastructure sharing)
Regional giants such as MTN, Zain,
Vodafone (Vodacom), Orascom, and
Orange are well positioned to lead
mobile broadband development across
the MEA region. MTN currently leads
this potential due to presence in the
high-potential markets of Iran, Nigeria
and South Africa. Exhibit 7 highlights
broadband penetration as % of
population and potential number of
mobile broadband subscribers.
Having said that, the estimates are
likely to be impacted by regional
developments such as new license
awards in Iran (awarded to Etisalat),
a potential new license in Tunisia and
privatization of operators in Libya,
Algeria, and Mozambique. Considering
the backdrop of the current economic
environment, and the related difficulty
in obtaining debt and cash, operators
such as Etisalat, STC (leveraging its
strong home market) and Zain have
an opportunity to lead the charge
of players in capturing the mobile
broadband space.
Striking the Right Balance
In our opinion, the leading regional
players can occupy one of the four
highlighted positions in the broadband
ecosystem. These are segregated based
on the operators’ range of services,
positioning and its individual objectives.
• The Pure mobile play helps capture
part of the potential but does not
hold a leadership position in the
market
• The Broadband player requires
significant investment in radio
technology (3.5G and WiMAX,
depending on the country / city
potential) plus access to backbone
and international connectivity.
For instance, MTN appears to be
adopting this position with its
investments in submarine cables,
fiber backbone, 3G and WiMAX
licenses. On the other hand,
Vodafone (Vodacom) is likely to
leverage their expertise in mobile
broadband from Europe
• Broadband and ICT play is more
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 aligned to countries with a strong
corporate / business segment.
Pursuing a focus on this segment
requires the mobile operator to
acquire additional complimentary
assets and competences. For instance,
in South Africa, MTN and Vodacom
(Vodafone) seem to be following
this path, while in UAE, Etisalat
is leveraging its’ fixed and mobile
business to exploit market potential
• Lastly, selective triple / quad play, is
best suited for leading players with
Fixed Line Operators –
Rethinking the Business Model
After having detailed the mobile broadband opportunity, the obvious question
left to be answered is what lies ahead for the fixed players in the MEA region
The situation and challenges for the
fixed players in MEA regions vary
considerably across nations. Exhibit
9 illustrates the threat, wherein the
countries with favorable conditions
in terms of submarine cable links and
presence of major leading mobile
players will present significant challenges
to fixed players’ profitability. Some
countries present favorable competitive,
regulatory, and ownership conditions for
the fixed players, allowing time for them
to significantly improve their broadband
portfolio and positioning. Such countries
include Angola, and Libya.
Three key future models for the fixed
incumbent would be as follows:
• European Incumbent Path – This
includes a focus on broadband and
data services plus integrated fixed
and mobile offers. In some countries
such as the leading GCC nations
and South Africa, the stage of fixed
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larger geographical footprint, and in
more robust economies comprising
high value residential concentration.
Another option is the ICT and/or TV
play combination, which requires a
significant transformation of existing
organizational and operational
structures of the operator (refer Delta
Partners paper on ICT Managed
Service dated October 2008). Telecom
references in these services include BT
Global Services and T-Systems which
network development plus density
of high value consumer and business
clients enables fixed players to pursue
a growth path within broadband and
data services. In addition, most of the
fixed incumbents in those countries
include a mobile operation that can
be leveraged to develop a cohesive
value proposition. In South Africa for
instance, Telkom, after the sale of
their stake in Vodacom to Vodafone,
clearly needs to rollout a mobile
offer, merely to try and sustain their
position in their home market
• Competitive Mobile African Path
– This model would entail the sale
of the business to a leading MEA
mobile player within the next few
years. In most African countries the
local fixed network is significantly
underdeveloped and lacks quality,
often with a significant number
of mobile players contributing to
have struggled to translate a growing
business segment into adequate
shareholder returns. The minimum ICT
play is likely to include connectivity
services charged on real service level,
data centre, security and email services.
This offer presents strong opportunity
in many countries, generating carrier
revenues and building loyalty of
corporate clients, whilst deviating
from the legacy tariffs and monthly
fee structure of broadband offers into
integrated solutions.
mobile domination of the market. In
such countries the potential of fixed
broadband is very limited, with the
FMS trend further increasing the risk
to fixed operators. In cases where
the fixed player owns or is part of a
group with mobile operations, the
situation is less critical. The popularity
of privatizations of incumbents is
expected to increase significantly
over the next two to three years,
coinciding with the time it will take
for the African submarine cable
developments and for fiber to be
laid out in most countries enabling a
strong broadband push
• The Government Path – In this
scenario, operators exploit the
monopoly/ duopoly scenarios
to substantially increase the
value of fixed business and drive
broadband before full liberalization.
Governments in countries like
EXHIBIT 9: Mobile broadband potential per country

1
Low is less than 2.25% penetration, medium is between 2.25% and 4.5% penetration and high is more than 4.5% penetration
2
MTN, Zain, Vodacom/fone, Orascom, Orange, Etisalat
Source: Delta Partners analysis

Angola and Mozambique can still

EXHIBIT 10: State of fixed network liberalization in (selective) MEA countries
have a major role to play in the
development of the state telecom
assets, and take advantage of
market control to generate value
before competition is introduced.
However, these governments
need to ensure their telecom
assets control significant access
to international connectivity at
competitive costs, deploy a state of
the art IP backbone network linking
key cities, deploy fiber rings and
drive broadband.

Source: Delta Partners analysis

Conclusion
It is clear that mobile broadband represents significant
potential for leading players in the MEA region. While,
the sheer growth potential makes it difficult for players
to disregard the opportunity, the strategy employed
would determine the dominant players and potential
impact on the shareholders’ value. Operators would
need to navigate the unique set of obstacles and
challenges intelligently, such as, government mindset
that largely focus on the telecom revenues’ contribution
to national budgets.
The more forward looking (liberal) Governments will
strike a balance between long and short-term objectives
- in ensuring there is sufficient opportunity to develop
a strong national telecoms infrastructure (a key driver
in sustained economic growth), with the funds derived
from revenues contributed by operators. Fixed players
contemplating on entering the race will need to identify
whether the opportunity is within their sights and if
so, deploy a clear entry strategy. In conclusion, while
mobile broadband holds great promise for the region’s
telecom landscape, market dynamics will eventually
determine the market leaders and the potential value
realized. It is certainly an exciting time for the regional
telecoms market.

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 Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology

(TMT) sector in high growth markets, with more than 130 professionals operating across the Middle East, Africa and South East Asia

from its offices in UAE, South Africa and Bahrain, and through its three highly synergetic business lines:

Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than

50 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them

address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity: As a fund manager, Delta Partners manages a $80M private equity fund, targeting investment opportunities in the

TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Group’s unique TMT industry

expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis,

and support to portfolio companies.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several telecom transactions in the

region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region,

either to the seller or buyer side of the transaction. Delta Partners actively leverages its close link to Delta Partners’ private equity arm

to access the investor community as well as top-level financial talent.

At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to

services, combining strategic advice and hands-on pragmatic approach.

Copyright © 2009 Delta Partners FZ-LLC. All rights reserved.

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