D-20: Rising Stars in the Telecom Space


March 2012


Authors    Andreas von Maltzahn
Mar Pages
Alberto Pamias
Loic Sadoulet
Contributors    Tami Abadi
Anna Arlorio
Pavel Duzhnikov
Cedric Garrigues
Humaira Surve













Joint Whitepaper


Shift in world growth towards emerging markets: The trigger for this paper


A recent quote in The Economist magazine read1 - "emerging markets have produced more than 80% of global real GDP growth in the last five years and will continue to drive the majority of real GDP growth going forward". The days when developed markets dominated the world economy are over. Instead, emerging markets account for an increasingly high share of growth and innovation. These emerging economies already host eight of the 10 largest cities2. They will contribute 700 million people to the global middle class by 2015. Consumer spending in emerging markets represents an ever-growing share of global total - 34% in 2010. This is particularly noteworthy when cast against a declining US share, which is down to 24%3 in 2010. And undoubtedly, emerging markets present huge opportunities for both businesses and investors.


1 The Economist, June 2011
2 McKinsey Global Institute - 'Urban World: Mapping the Economic Power of Cities', March 2011
3 JP Morgan


The mobile industry in emerging markets closely mirrors the host macro and socio-economic environment. However, the growth story witnessed over the last decade will continue at a different pace, with a different set of drivers and characterised by a different set of products and services. Therefore, a clear understanding of the trajectory for mobile telecom industry in emerging markets is of strategic importance for investors and decision makers.


The key objectives of this white paper, a joint effort between INSEAD and Delta Partners, are to:


Define the core 20 markets that present the next wave of growth for the mobile telecommunications industry Describe the key industry shifts taking place within these markets and define different paths towards maturity Cluster these markets to identify similarities, opportunities and challenges for operators as well as for investors



Identifying the core emerging markets and defining the 20 "drivers" of growth ("D-20")


In order to manage the scope of the analysis and zoom in on key trends and opportunities in some detail, we have selected 20 countries to be the focus of this paper. Similarly to what BRICs and Next 11 (see the exhibit on existing clusters below) represent in terms of economic growth opportunities in the years to come, D-20 represent the largest emerging nations with the highest opportunities for mobile telecommunications industry in the next five years. The analysis considered key drivers such as population size, GDP and mobile revenues, both in terms of current size as well as projected growth. Additional qualitative indicators were used to further fine-tune the selection.


Our list of 20 countries comprises Argentina, Bangladesh, Brazil, China, Egypt, India, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Poland, Russia, Saudi Arabia, South Africa, South Korea, Thailand, Turkey and Vietnam.



Understanding existing clusters of emerging markets


The key emerging markets on everyone's radar are the BRICs - Brazil, Russia, India and China. And for a good reason as, collectively, they are expected to generate US$8 trillion in GDP growth by 2016, or a 53% of world's total. The BRIC acronym was coined in 1999 by Goldman Sachs' Jim O'Neill in a paper titled "Building Better Global Economic BRICs". In that paper, he argued that these four economies would overtake the G7 and turn into global manufacturers (China and India) and global providers of raw materials (Russia and Brazil).


More recently, several other clusters have come about trying to identify the next layer of emerging markets. These include:


Next 11 (Indonesia, South Korea, Mexico, Turkey, Nigeria, Iran, Egypt, Philippines, Vietnam, Pakistan, Bangladesh) from Goldman Sachs CIVETS (Colombia, Indonesia, Venezuela, Egypt, Turkey, South Africa) from HSBC New EM (Indonesia, Mexico, Turkey, Egypt, Saudi Arabia, South Africa, Algeria, Botswana, Libya, Morocco, Tunisia) from The Economist BRICS (Brazil, Russia, India, China and South Africa) - the expanded version of the original, with South Africa becoming an official member in December 2010


Some investment banks and funds have already picked up on these new groupings and launched investment vehicles to target these new groupings.



Exhibit 1: The world and D-20 countries in 20164

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4 GDP data - IMF, Euromonitor & Delta Partners analysis. Mobile subscriber data - Wireless Intelligence.



The list of countries within the D-20 echoes many popular emerging market groupings highlighted earlier. All 4 BRICs are present in the list, along with the majority of the NEXT 11 and CIVETS. The markets in this list all have large populations, rapidly growing economies and a sizable mobile communications industry in a state of transition towards maturity. The group is heterogeneous in many ways as well: the countries are spread out across all continents, with varying levels of economic, political and social development and with different degrees of openness to trade and investor protection. This heterogeneity will critically influence their respective mobile industries on their way to the next level of development.



A high-level overview of the macroeconomic environment and the mobile telecom industry withing the D-20


With 4.4 billion inhabitants, the D-20 markets are home to almost 65% of the world population. The group generates 30% of current global GDP and is expected to create almost 75% of global GDP growth between 2011 and 2016. Excluding China and India, the remaining 18 markets have a population of 1.87 billion. By 2016, out of 16 markets with over 100 million subscribers, 13 are part of the D-20 (the other three being USA, Japan and Germany).


The expected growth in population and GDP will undoubtedly reflect on the telecom industry. The mobile penetration of the D-20 countries went from only 26% in 2005 to 86% in 2011. That translates to over 3.8 billion mobile subscribers, generating over US$329 billion revenue in 2011. And although net subscriber growth has already peaked, the D-20 markets are forecast to add a further 1.5 billion mobile subscribers in the next five years (a growth of 54% or a CAGR of 9%)5.



Exhibit 2: World GDP and contribution of D-20 in 2011 and 20166

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5 GDP & population data - IMF, Euromonitor & Delta Partners analysis. Mobile subscriber data - Wireless Intelligence. Mobile revenue data - WCIS, Wireless Intelligence, Pyramid Research and Delta Partners analysis.
6 IMF, Euromonitor & Delta Partners analysis



Understanding the challenges of D-20 markets on their way to maturity


As well as identifying the D-20 as a group, the purpose of this paper is to understand the different trajectories the mobile telecommunications industry will follow as well as the different opportunities and challenges the operators will face. Unlike the D-20, the mobile industry in developed markets is already suffering from negative or limited revenue growth in the traditional business of voice and SMS. These markets will continue to be negatively affected by multiple external factors such as the changing competitive landscape, increasing market saturation and pressure on termination rates.



Mobile telecom industry of the past - the drivers behind Old Game / Old Rules


Over a decade ago, while still in its infancy, the key drivers of the mobile telecom industry were:


Limited competition - predominantly monopolistic / oligopolistic situations with one to two players, sometimes state-owned Significant latent demand, or in other words, need for basic communication services (voice and SMS) - low penetration of existing services Limited infrastructure (mostly based on 2G network) - better coverage provided an edge over the competition and assured first-mover advantage Revenue growth driven by an influx of new subscribers (by way of declining tariffs), not by ARPU expansion High customer tolerance for low quality - quality of service was not a competitive advantage


Although emerging market operators faced a multitude of challenges, especially when deploying networks in conflict areas or complex operating environments, those that built up scale and achieved #1 or #2 positions in their respective markets were almost always successful in creating strong and profitable businesses. This was the 'old game', played by the 'old rules', and it can now be challenged.



Mobile telecom industry today - understanding the New Game / New Rules


As the industry matured, the old drivers have been exhausted or replaced with new ones:


Markets have opened up and are now extremely competitive Growth in demand for traditional services has peaked and penetration of traditional services reached saturation levels Infrastructure has covered the majority of the population and the focus is now on upgrading it to meet the demand for data-driven services Revenue growth is driven by APRU expansion as well as new products and services beyond traditional voice and SMS Customers no longer tolerate lower quality of service


The operators within emerging markets are facing a rapidly evolving landscape and are forced to adapt to an ever-more-complex set of circumstances. The industry, accustomed to easy double-digit annual growth, is now facing intense competition, saturated markets, an emerging landscape of new products & services and growing pressure from investors to deliver on promised returns. This is the 'new game' and everyone is invited.



As a result, prices on communications decreased by an annual rate of 12-15%7 in most markets in the last five years. Shrinking margins, coupled with heightened expectations of investors and analysts force the industry to reinvent itself to continue growing as fast as the nominal GDP.


In this path, rather than a slow evolution towards a new business model, we believe there is a series of fundamental shifts currently happening and driving a migration from the 'old game' governed by the 'old rules' towards a 'new game' with new dynamics. This 'new game' will require breakthrough and innovative models that will not only catalyse change in the telecoms industry but also in the economy as a whole. This new competitive landscape will challenge the existing incumbents as well as provide a host of opportunities for new players with business models that are adapted to this new reality and can ride the next wave of growth.



The four key shifts that are taking place and shaping the future of the mobile telecommunications industry are:



Hyper-Competition: The transition from markets characterised by domestic monopolies with little competition to open markets with numerous and disruptive competitors, some coming from abroad. Saturation: The limited prospects for upside of traditional voice and SMS products from natural population and economic growth. New Services: The emergence of new data-driven products and services, primarily as a result of technological advances such as next-generation networks and devices. Focus on Efficiency: The shift of management priorities from "build it and they will come" to optimisation of existing asset base and increasing return on assets and invested capital.



To link these four shifts in a very simple way, we can say that hyper-competition and saturation have significantly stressed prices (and margins) down, pushing the industry to develop new services (fueled by technological advances) and focus on efficiency to justify the vast needs of new CAPEX to be deployed. To simplify the analysis, "revenue per activity" and "subscriber growth" have been chosen as two axes that can illustrate how these four shifts interact together and define the path from the 'old game' / 'old rules' to 'new game' / 'new rules'. Higher competition results in lower Revenue per Activity (RPA) while higher saturation leads to lower growth. Together, they create the need for new services and a focus on efficiency.


Definition of the axis:


Revenue per activity - RPA is a weighted calculation consisting of prevalent prices of service multiplied by average total activity (where total activity = total minutes of use + 50% of total number of SMS sent). We believe this metric more accurately reflects the pricing and revenue trajectories of markets versus traditional APRU (average revenue per user) and PPM (price per minute) metrics. A falling RPA is a sign of markets transitioning from the 'old game' to the 'new game' environment. Subscriber growth - Refers to the annual rate at which mobile operators are forecast to add new subscribers, adjusted for instances of multi-simming8. An 'old game' driver of growth was subscriber acquisition. We believe that the transition towards a 'new game' environment is accompanied by slowing growth in subscriber acquisitions.



As previously mentioned, the varying levels of economic, regulatory, technological and social developments in the D-20 markets will allow executives to smartly manage the path to the 'new game' and maximise value for their shareholders.


7 WCIS & Delta Partners analysis
8 'Multi-simming' refers to the phenomenon of individuals owning two or more mobile SIM cards from different telecom opera tors. See 'Shift 2 - Saturation' for more on multi-simming.



Exhibit 3: The concept and possible paths of market evolution from 'old game' to 'new game'

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The following section describes the four industry shifts in detail, identifies their respective drivers and illustrates examples and manifestations of the individual shifts within the D-20 markets.


Industry shift 1: Hyper-competition


The competitive landscape in the mobile telecom space of the past generally could be characterised as a market dominated by the incumbent operator (usually a manifestation of the former fixed-line government monopoly) with one to two new players emerging via newly sold licenses. The last decade saw this landscape evolve to an environment where competition has intensified. Most of the D-20 markets have five or more operators, many of which come from abroad as international groups emerged and began expanding into new markets.


The hyper-competition within the markets has been driven primarily by the liberalisation of the industry with regulators / governments opening the markets up to domestic as well as foreign competition. This also led to the emergence of international players as operators from mature markets began to seek investment outside their home turf.


Presence of international players in the D-20 markets intensifies competition


The emergence of international groups and their expansion into emerging markets has intensified over the past three years. Operator groups such as Vodafone, Telenor, Orange, Etisalat and Axiata have embraced the need to grow organically, as their respective domestic markets mature. The international expansion strategy is challenging and risky, usually battling against established incumbents and myriad of regulatory challenges. More often, these groups are prepared for the long-haul in these new markets, and are more often equipped with the attributes to see through success. These attributes take the form of:


Strong financial standing to finance networks and sustain market competitiveness (e.g. price war) Group-scale benefits such as group-wide agreements with device vendors and network contractors Management expertise to manage new operations in competitive environments



Exhibit 4: Top 20 international telecom groups and their presence in the D-20 markets9

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Based on analysis of top 20 international groups ranked by proportionate subscribers, each and every one of them has exposure to at least one of the D-20 markets. Although the typical international group in a D-20 market is hailing from a mature market, there have been instances of groups emerging and expanding within the D-20. MTN is a perfect example, with operations starting in South Africa in 1994 and slowly spreading to cover 21 markets at the end of 2011, including Nigeria and Iran - fellow D-20 members10.


The variation of competitive intensity within the D-20 markets


However, to more accurately demonstrate and subsequently understand the nature of the shift in the D-20, we analysed the markets individually along a custom competition matrix. We have assessed each market for presence of three distinct types of operators:



Subscale - a subscale operator has 5% or less market share Disruptive - a disruptive operator has a market share of 10% to 20% Dominant - a dominant operator has a market share of over 20%


9 Wireless Intelligence, data as of 4Q 2011
10 MTN Group website and public presentations



Exhibit 5: Competition intensity comparison11

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Note: Some markets of D-20 do not entirely fit into the model, therefore, have been associated with the closest tier


Four competitive market environments emerge in the D-20:


Tier 1 - Benign competition with none or one sub-scale or disruptive operator present. This is observed in China, Mexico, Turkey and Argentina. There are only three or four competitors, and markets are dominated by either the local incumbents exclusively (with Mexico's Telcel controlling a 70% market share) or split by the local incumbent and international players. Attempts by late entrants to disrupt the market have put pressure on pricing in Mexico and Turkey but significantly changed the balance of power.


Tier 2 - Heated competition among several dominant players with at least two sub-scale and/or disruptive players present. This is witnessed in markets like Poland, South Africa and South Korea. The markets in this tier all have one sub-scale player and one disruptive player competing in conjunction with two (or three in case of Poland) dominant players. The disruptive player usually finds it tough to compete with the larger dominant players while the sub-scale player usually drives prices down in order to gain scale. 8ta, the South African incumbent's mobile arm, has been instrumental in driving down mobile broadband prices in South Africa since its launch12.


Tier 3 - Intense competition amongst several dominant players with numerous sub-scale players and in some cases disruptive players. This is seen in the large, liberalised markets of the D-20. With seven-plus operators battling it out in a market like Vietnam, it becomes a game of scale. The large operators compete amongst each other while keeping an eye on the growth ambitions of the subscale operators (with minor market share). That said, a national share of 10% can easily disguise regional-level leadership (where an operator is weak nationwide but strong in a small area). Tele2 in Russia is a distant 4th nationwide but has leadership in some of the regional markets. In general, Tier 3 competition is a good competitive situation for the large operators, and a tough one for the small players. This environment enables larger players to aggressively outplay smaller ones in key markets (a situation witnessed in the aforementioned Vietnam) and keep them from reaching competitive nationwide scale.


Tier 4 -Fierce competition with at least four sub-scale and disruptive players. The Indian market is exceptionally complex, with about 15 operators battling it out with each other nationwide, although not all are present in every region. It could be considered the most competitive market in the world. The immense levels of competition led many Indian operators to adapt business models that call for outsourcing non-core activities, thus allowing profitable operations in an environment of very low tariffs. The Indian situation is also unique in that no operator currently has a dominant position according to our definition (although Bharti is very close). The Pakistani and Nigerian markets are perhaps closest amongst D-20 to India in terms of competitiveness - both markets have two dominant players, but the presence of several disruptive and sub-scale players (something not seen on the same level in Tier 3) puts these dominant operators at greatest risk of losing market share.


11 Delta Partners analysis based on Wireless Intelligence data as of 4Q 2011
12 SA IT News, November 2011



Industry shift 2: Saturation


The Saturation shift is all about market maturity, as penetration and market revenue growth wanes, largely attributed to traditional businesses such as voice and SMS services. As global operators expanded their networks and consumers embraced mobile telecommunications, the traditional business lines of voice and SMS became saturated. Many D-20 markets now exhibit 100%+ SIM penetration rates.



Exhibit 6: Population and mobile penetration in D-20 countries13

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However, emerging markets are characterised by a high degree of "multi-simming" - individuals who own more than one SIM from the same or different operators, usually to hunt for the best promotional deal. Multi-simming masks the true levels of unique subscriber service penetration.


Although some markets display penetration rates above 100%, there is still growth left. There are interesting approaches that operators have begun taking, leveraging internal knowledge/analysis to understand the remaining market potential and explore uncharted territories or untapped segments. These remaining buckets of growth will come from:


I) Grabbing new land - Expanding into rural coverage and under-penetrated areas


The current population coverage is only about 84% in Nigeria (MTN) and between 83% (Oi) and 90% (Vivo) in Brazil whereas most other D-20 markets have near complete coverage by at least one operator14.


13 Population data - IMF & Euromonitor. Mobile penetration - Wireless Intelligence
14 Data sourced from press clippings and company announcements


This means that only the most rural areas are outside of the coverage areas and without a mobile subscription. However, beyond this limited upside and disregarding any potential churn arriving from the competition, in order to continue growing the subscriber base of the traditional voice and SMS users, the operators must extend the networks to cover remaining rural areas or come up with creative offers that make the services accessible to the remotest areas.


Although solid figures are hard to obtain, based on our estimates, as much as 5% (or roughly 300 million) of people are still outside of coverage areas within the D-20, with significant portions of uncovered population located in rural areas of countries like Nigeria and India (when accounting for multi-simming, the penetration in the latter is around 40%15). Unfortunately, even if the operators want to extend the coverage into the deep rural areas in these markets, the question is always whether it is actually worth it. Moreover, with rural areas in emerging markets an operator always faces two issues - sparse population pockets and widespread poverty. So even if the village has enough people to warrant coverage, they are likely to be so poor that even a basic subscription will be out of reach.


II) Increasing disposable incomes


The D-20 economies are forecast to continue growing, lifting living standards and income levels. This means the number of subscribers will grow as people move up from the lowest income levels into the middle class. The disposable income in the D-20 markets is set to rise from roughly US$4,500 in 2011 to US$5,300 by 2016 (that's an increase of roughly US$3.7 trillion across the D-20)16.


At the same time, the increasing affordability of handsets such as the Nokia 1200 (the "emerging market classic") which retails at around US$15 in some markets as well as the advent of (Indian-made) tablets that can be bought for as low as US$60 will further benefit the operators in pursuing the poorest of the poor17.


One strategy some D-20 operators are pursuing in their attempts to address the bottom of the pyramid is sachet pricing. Although pricing SMS and voice in small denominations is straightforward, pricing 3G data services is another matter. However, Indian operators have all introduced data packages that allow minimal data usage with extremely short validity periods. Idea Cellular's tariffs for 3G start at just Rs. 7 (approximately 14 US cents) and include 10 Mbs of data with a one-day validity period18.


III) Children growing up


Many of these countries are populous, with a high percentage of population in the 0-14 age category. More operators are growing their brands and targeting these segments with specific youth propositions. Moreover, this segment will naturally grow up and as a result, the population of the 15-64 age groups of the D-20 countries will expand by almost 170 million people between 2011 and 201619.


Although it might seem counterintuitive, saturation should not necessarily drive price reduction in markets that are in stable equilibrium. However, as mentioned in the previous chapter, if saturated markets host disruptive competitors, prices (or RPA) will inevitably go down. Counteracting this fact, saturated markets will quickly develop sophisticated marketing tools to sub-segment the base and efficiently target their own (cross-sell or up-sell) as well as competitors' clients (to acquire new share of wallet).


Such sophisticated tools and targeted actions will on many occasions increase margins (through a more efficient use of marketing initiatives) even at the expense of lower headline tariffs.


15 Financial Times quoting Sigve Brekke, executive vice-president at Telenor, February 2012
16 Delta Partners analysis based on data from IMF and Euromonitor
17 The Akash tablet was launched by the Indian government towards the end of 2011, with a commercial price tag of Rs 2,999 or about US$ 60 (using October 2011 exchange rates)
18 Idea Cellular website
19 Delta Partners analysis based on data from IMF and Euromonitor


Industry shift 3: New services


As mentioned earlier, while hyper-competition and saturation drive declining growth rates and prices, the next two shifts (new services and focus on efficiency) are paramount to operators to keep ROIC at the levels expected by shareholders.


Two main drivers are behind the shift towards emergence and adoption of new services. On the one hand, technological advances have led to emergence and mass adoption of new IT and media devices, namely laptops, smartphones and tablets that are driving demand for relevant connectivity services. On the other hand, the TMT industry is pushing a steady supply of innovative products and services that create previously unseen demand for IP bandwidth and data consumption over the telecom networks.


As a result of the above, the landscape for the telecom operators is becoming more challenging as the provision of new services brings along its own unique set of challenges, not to mention threats from new competition and a mounting uncertainty regarding the vast amounts of CAPEX to be deployed in new networks.


New products and services are being rolled out by the mobile operators


As a result, telecom operators over the last decade began expanding their service lines into adjacent businesses, growing their portfolios organically and through acquisition of external players.



Exhibit 7: Globally, telecom operators generate about 33% of revenue in 2011 from 'new services'20

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20 Delta Partners analysis based on data from Pyramid Research, Machina, IDC, GSMA, WITSA, IE Research, IDATE and PWC


To illustrate the significance of new services on the growth of the mobile industry within the D-20, one can look at the current as well as the forecast contribution of new services towards the overall revenue stream. Based on Delta Partners analysis, the new services will contribute 78% towards the overall expected growth.



Exhibit 8: New sources of revenue growth for operators in the D-20 markets21

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New services for the consumer segment


In terms of consumer services, mobile broadband and related Value Added Services (VAS) are undoubtedly the major new sources of growth. In D-20 markets, virtually all operators continue to expand their 3G network coverage, with some already conducting LTE trials. Due to weak fixed infrastructure deployments in most of the D-20 markets, the mobile phone will remain the key gateway to the Internet. As a result, combined data and content revenues of D-20 countries are forecast to more than double by 2016.


The emergence of online social networks is the leading driver behind uptake of mobile broadband services for operators in mature and emerging countries alike. According to Facebook's stats page, over 430 million active users access Facebook through mobile phones (approximately half of all active users).


The emergence of smartphones is driving operators explore opportunities arising out of apps. Currently, operators range from being passive (no strategy or management of access to app stores) to those that are rolling out own app stores and customised content. China Mobile's Mobile Market (MM) is a particularly successful case of the latter strategy amongst the D-20 operators, with latest figures showing a whopping 150 million users registered users at the beginning of 201222.


Another example of a newly emerged service that is taking off in many of the D-20 markets is mobile money. The case of M-PESA by Safaricom in Kenya (a market outside of D-20) is the most commonly cited success story, but there are plenty of others that started even before M-PESA, with several success cases in the D-20 countries. Smart Money from Philippine operator Smart has been around since 2001, and apart from generating direct revenues through commission for transfers, the client stickiness (loyalty) aspect is perhaps the key value-added benefit to the operator.


21 Delta Partners analysis based on data from Pyramid Research, Wireless Intelligence, WCIS & Business Monitor International.
21 Figures released by China Mobile and circulated in the press, January 2012


New services for the enterprise segment


When addressing the enterprise (or corporate) segment, this shift is forcing operators to expand into the adjacent ICT and BPO business lines. The key to success is commitment of relevant investment - both financial as well as management's time and effort. IT-centric and BPO-like services are typically lower-margin businesses when compared with telecom services, have different drivers of growth, require a different set of capabilities and come with a new range of global competitors. The challenge for operators in the D-20 and similar markets will be one of capabilities and competition. Not only do they have to invest in growing the business (organically or otherwise), recruiting the right people and luring in key accounts to create a significant pipeline or work, they have to do it while competing against established IT players like Google, Accenture and IBM.


Successes within the ICT space in developed markets have been primarily amongst large integrated incumbents (such as BT in the UK or Deutsche Telekom in Germany) that leveraged their existing fixed infrastructure and industry relations to up sell ICT services. A strong fixed infrastructure is notably lacking among main D-20 operators. However, even this capability can be acquired, as was the case with major Russian operators. Within two years, with Megafon acquiring Synterra, MTS integrating Comstar, and Vimpelcom taking over Golden Telecom, the Big 3 went from "purely mobile" to "fully integrated" and ready to offer advanced ICT products and services to their corporate clients23.


Industry shift 4: Focus on efficiency


Driven by lower growth and declining RPA, the final shift - focus on efficiency - is an industry mindset change. Management changes its focus from growth of the top line revenue to efficiency and optimisation of the way the existing asset base is used and how much bottom line return it generates.


Peak in growth, pressure on margins and changing investor expectations drive this shift. The traditional operating model in emerging markets 10 years ago was something along the lines of "build it and they will come" - as long as you roll out the network, the customers will eventually sign up. While most mature market operators evolve into dividend-paying cash machines, the majority of the D-20 operators are in the mid-cycle growth stage.



Exhibit 9: Majority of D-20 operators are in a state of 'mid-cycle' growth

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23 Press clippings and Delta Partners analysis


This means that year-on-year EBITDA expansion is in single digits, margins are under pressure and efficiency takes centre stage as analysts and investors look towards ROIC (return on invested capital) and similar financial ratios that examine how well the operator is utilising the existing asset base. Based on our analysis, the average operator in D-20 markets has a 41% EBITDA margin as of 2011, which compares favourably with the developed market counterparts. However, we have also seen a decline of 1.2% between 2010 and 2011, a trend that is likely to continue going forward24.



Exhibit 10: Blended service EBITDA margins in 201124

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With this in mind, it is expected that operators will be addressing this trend in a number of ways, namely via operational improvements, divestment of non-core assets, domestic expansion and integration as well as cross-border M&A.


Operational Improvement and Optimisation


Besides improving internal operations via evolution of management techniques, right-sizing of the workforce and operations as well as other internal changes, operators often turn to business process outsourcing as a way to optimise and improve the overall efficiency of the organisation. Bharti pioneered the network outsourcing model in 2004 by awarding IBM a 10-year contract worth US$750 million, the scope of which is now worth over US$3 billion. Since then, Bharti has gone even further by outsourcing the building, maintenance and operations of their networks, which essentially turned Bharti into a company that is focused on services. In 2010/2011, with Bharti's foray into Africa, it has deployed very similar tactics to ensure efficiency in the African market25.


Technology selection is also crucial for an efficient operation. In most of the D-20 countries, a mix of technologies will have to coexist, each serving a specific need. For example, 2G EDGE network can be used in rural areas for SMS and SMS-based app usage, 3G HSPA network can cover semi-urban dwellings and HSPA+ can be extended in cities with a combined Wi-Fi off-loading strategy and fibre infrastructure to meet the demand for data in densely populated areas.


24 Delta Partners analysis based on data from operators, Wireless Intelligence and Merrill Lynch Wireless Matrix (as of 4Q 2011)
25 Press clippings and Delta Partners analysis


Divestment of network and non-core assets


Divestment of infrastructure assets can radically shift an operator's business model, allowing the company to focus on service and marketing as well as reap the financial benefits of long-term lease payments versus large sums of tied-up capital. Indonesia is a market where divestment of network assets has been going on for a while. The most recent deal at the time of writing to highlight this trend is Indosat's sale of its 2,500 towers to Tower Bersama Infrastructure Tbk (TBIG), an independent tower operator. The conditions of the deal are such that Indosat will take a non-interfering minority stake in TBIG while at the same time leasing back the sold towers26.


Domestic expansion and integration


Although incumbent operators in mature markets often integrate own fixed and mobile business units under one roof, the more common approach within the D-20 markets is to do so via acquisitions, as most mobile operators emerged without a fixed-line business. This is a trend observed over the last few years in Brazil, starting with Telecom Italia's acquisition of the long-distance fibre player Intelig, in 2009. Telefonica bought out Portugal Telecom in 2010 to become the sole owner of Vivo, partly to more closely integrate the unit with its local fixed arm, Telesp. Finally, In 2011, America Movil brought together Claro and its fixed-line arm, Embratel, as well as conducted another bolt-on acquisition of cable firm Net Servicos de Comunicacao - all to create a fully integrated Brazilian portfolio27.


International expansion


Over the last decade, operators from developed countries have greatly expanded their businesses by moving into emerging markets (see Hyper-competition shift). Apart from growing the revenue base, a larger scale allows the operators to utilise their management know-how, bargaining power with suppliers and financial strength to quickly and efficiently penetrate new markets. In recent years, as the shift towards focusing on efficiency sets in within some of the emerging markets, the D-20 operators are also starting to look abroad. VimpelCom is a Russian operator that has pursued international expansion for a number of years, starting with nearby CIS countries. However, in 2010, the operator took a bold step and acquired over US$20 billion of Weather Investments' telecom assets, thereby expanding into several parts of Africa, Italy and south-east Asia. The operator expects that this transaction generates an NPV of US$2.5 billion in OPEX and CAPEX synergies28.


Clustering the D-20 markets to assess their potential


To understand where D-20 markets are in their transition from 'old game' to 'new game', we have identified their current RPA (revenue per activity) and expected subscriber growth until 2016 and plotted the data onto the cluster map.


The x-axis represents the subscriber growth trend in the matrix and illustrates the various degrees of impact brought about the saturation shift. The y-axis quantifies the intensity and urgency to address the challenges of the 'new game' as rock-bottom tariff prices force operators to address the need to roll out new services and focus on efficiency (the last two shifts).


26 Press clippings and company announcements, February 2012
27 Wireless Intelligence, February 2012
28 Vimpelcom presentation entitled "Global Vimpelcom - diversifying for growth", October 2010


Four distinct clusters of countries are identified by the D-20 cluster map; contrasted by the different levels of intensity, market maturity and competition dynamics.



Exhibit 11: D-20 cluster map: Price level (Revenue Per Activity) vs. expected subscriber growth 2011-201629

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As explained earlier in this paper, the four key industry shifts are taking place within each and every D-20 market. However, the different combination (and intensity) of the 4 Industry shifts have grouped the D-20 markets into 4 clusters.


The Crown Jewel cluster
Favorable economic conditions driving telecom penetration growth


This cluster consists of Brazil, Mexico and Nigeria - the growth engines of their respective continents. All three have very large populations of over 150 million people, as well as high poverty rates, especially in Nigeria. Most importantly, all three are fast-growing economies, set to experience 5-7% real GDP CAGR until 2016.


The countries all have relatively high RPA and anticipate high subscriber growth rates. Therefore, the operators' business models in theory allow for experimentation with new service lines, while the traditional business continues to deliver positive returns. The presence of international players is also greatly shaping the markets. Brazil and Nigeria are dominated by international groups while Mexico remains largely in the hands of an America Movil subsidiary, itself a major international group.


The Goldmine cluster
Relatively mature markets with high tariff levels yet thirsty for new sources of growth


South Africa, Poland, Saudi Arabia, Argentina, Turkey, South Korea and Iran are all part of The Goldmine cluster - the largest of the four. Compared to other members of the D-20, these countries are slightly smaller in terms population (average of 50 million), but have the highest GDP per capita levels. Broadly speaking, these are relatively more mature or developed markets but with growing economies.


29 Delta Partners analysis based on data from Wireless Intelligence, Pyramid Research, company websites


The level of development in the economies of the Goldmine cluster is reflected in the telecom industry. The historical growth has resulted in today's maturity and the urgent need to find new sources of growth - therefore the shift towards new services is felt greatest in this cluster. These markets are the champions of D-20 when it comes to the next generation of services, the consumers are more sophisticated and coverage by the next generation of networks is greater. As growth is no longer coming from subscriber acquisition as much as before, operators need to invest in the "next big thing", with services such as those based on sale of content and apps at the core. In some of these markets, these new revenue streams are not only flourishing but are also setting the pace and example for players from more developed markets to follow. South Korea already has one of the highest LTE penetrations in the world and it took Korean operators only five years to migrate virtually all the mobile subscribers from 2G to 3G networks (it took approximately 10 years in Japan)30.


The Rough Diamond cluster
Large countries with low-income populations and high growth rates in service penetration


The cluster consists of China, India, Indonesia, Pakistan and Bangladesh. They are all very populous yet very poor nations, each with a population of over 150 million and GDP per capita levels below the D-20 average (China being an exception). This cluster includes some of the fastest growing economies in the world (8-10% GDP CAGR until 2016). The telecom industry mirrors the economy in this cluster. These markets are home to over two billion mobile subscribers, nearly 40% of the world's total. The mobile tariffs are relatively low with rates per minute hovering around 1-2 US cents. The operators still expect easy revenue growth to come from latent demand. Currently the service penetration is between 40-60% in the entire Rough Diamond cluster except for Indonesia, the subscription levels of which are inflated by multi-simming. These factors position these countries in the "Low RPA + High Growth" cluster.


The impact of the Hyper-competition shift is felt greatly in this cluster. The promise of growth has attracted many international players - the likes of Vodafone, Telenor, Vimpelcom, Axiata and others. These markets can be characterised as hyper-competitive, with the earlier analysis placing them in Tier 3 - Tier 4 competitive environments (with the exception of China). Business models adopted by the players in this group rely on scale and volume, more so than in the other clusters. This business model ensures appropriate return on investment as prices of services are close to the marginal cost of servicing.


The Coal cluster
Maturity and saturation with low tariffs levels causing pressure on growth


The countries that make up the Coal cluster are Vietnam, Philippines, Egypt, Thailand and Russia. This is the most economically and regionally diverse of the clusters, characterised by a relatively poor population, (with Russia being an exception) yet robust economies expecting 7-11% GDP growth to 2016. Low tariff levels have led to highly penetrated markets. The Coal cluster was at 143% penetration at the end of 2011 but penetration reaches well above 150% in Vietnam and Russia, primarily due to multi-simming. These factors position all of these markets in the "Low RPA + Low Growth" cluster.


The growth in the traditional business lines will come only if the economies continue expanding and if operators manage to tame the ongoing price wars. The Saturation shift had a deep impact on the markets within this cluster, and the next few years will see operators shifting their focus towards efficiency and managing returns.


30 Delta Partners analysis based on press clippings



Exhibit 12: Cluster Characteristics - the 'old game' and 'new game' assessment31

  Click on image to view large  


Observation #1: The Rough Diamond and the Crown Jewel clusters enjoy the 'old game' benefits within the 'new game' environment


The markets of the Rough Diamond and the Crown Jewel clusters face a 'new game' environment where the intensity of hyper-competition has greater impact than the other shifts outlined in this paper.


Operators in these clusters can explore opportunities for growth from both existing and new business lines. Seeking growth by adding traditional service subscribers needs to be finely balanced, because investment in infrastructure needed to cover the lower value segments may not yield desired returns. New service lines and expansion along the value chain are just a question of time. The right timing is everything- the first-mover advantage is no longer guaranteed.


The 'old game' benefits of relatively high tariff levels and room for growth in the traditional business lines provide a buffer for management and an incentive for investors to keep the highly performing assets competitive.


Observation #2: The Goldmine and the Coal clusters face the 'new game' impact


The Goldmine and the Coal clusters are undoubtedly feeling the 'new game' impact harder than the other two clusters, where the intensity of New Businesses and Focus on Efficiency shifts becomes more relevant and has greater impact than the other shifts.


These markets have grown rapidly over the last decade and have reached maturity in the traditional telecom services. Operators in these two clusters experience less intense competition with fewer players and less aggressive price wars. This enables the operators in those markets to plan their strategies on revenue growth, margin protection and returns on CAPEX more carefully. Operators in the Goldmine markets serve relatively wealthier consumers. They have the luxury of waiting to learn which of the new strategies tried by their developed-market counterparts succeed and replicate them accordingly and with minimal risk.


31 Delta Partners analysis


Conversely, Coal cluster operators, especially in the Philippines and Egypt, need to urgently step up the search for new growth avenues. While their traditional businesses are eroding due to competitive pressure, the uptake of data-based services balances the books by offsetting the decline in voice and SMS usage. However, the situation can quickly turn into a full-blown case of product cannibalisation, especially in a market like the Philippines, with one of the highest percentage of revenues coming from traditional SMS.


Overall, the degree of impact on the shifts depends largely on the characteristics of each cluster. The exhibit above shows the degree of impact in each cluster. While most shift elements have affected the way these clusters are shaped, some of the elements have greater impact in the market dynamics than others.


In summary, operators in each of the D-20 clusters should pay attention to the different set of challenges and mitigate them accordingly. Likewise, investors should balance their portfolios in accordance with desired risk/reward appetite - while 'old game' still favours players with strong traditional models, 'new game' markets present more opportunities for those with strong positioning that allows for a smooth transition towards the next phase of telecom evolution.




In conclusion, the 20 markets profiled are the key growth engines for the world economy as well as the telecom industry. Nearly 75% of incremental growth is expected from the D-20 markets. In the mobile telecom world, all these markets are emerging giants, with 15 already in the Global Top 20, as measured by subscribers.


This grouping represents 4.25 billion mobile subscribers. With more than one billion new subscribers joining the ranks in the next five years, investors and players in adjacent businesses such as content and infrastructure should find them attractive. Large D-20 operators should also view this as an opportunity for them in terms of international expansion via Greenfield licenses or direct acquisitions.


This paper draws the following four conclusions:


1. D-20 markets present highest growth opportunities despite the challenges within the industry


D-20 markets are the drivers of progress for the telecoms industry. The current mobile industry revenue of US$329 billion in 2011 will cumulatively increase by almost 25% by 2016. The emerging markets telecom revenue is projected to slow in the coming years but it will still outpace the GDP growth. This trend sees all of the 20 largest telecom groups operating in the D-20 countries.


Growth may have peaked among the D-20 countries but a slower growth rate is still better than most developed markets. These markets will be saturated but still enjoy the highest growth albeit with tough conditions. Single-digit growth is expected from these markets while operators seek new profitable ventures to sustain overall growth. Data services are expected to grow at 18% CAGR by 2016, contributing to a substantial part of overall growth. EBITDA margins may erode under pressure from unsustainably low-priced data pricing and unlimited plans.


2. Multiple shifts with different degrees of impact have reshaped today's markets


While each market has very different dynamics, the shifts illustrated in this paper are relevant across all these emerging markets. The degree of impact may differ across all four clusters but these elements should be heeded by all operators to anticipate challenges


In clusters where RPA remains very competitive, these markets are expected to innovate and ride on the wave of change. Clusters such as the Rough Diamond and Crown Jewel may not need to react to these elements as much as the Coal and the Goldmine.


3. Data and content revenues will double by 2016


With 1.6 billion new 3G subscribers coming onboard by 2016, associated revenues are anticipated to grow at 16% CAGR. Data and content revenues are expected to double to nearly US$230 billion in 2016 and represent the key growth vertical for the Coal and Goldmines clusters, facing stagnating or declining voice and SMS revenue growth.


The anticipated cost reduction on smartphones and better data pricing will encourage growth. However, monetising the data opportunity will not be as simple as it was for its voice and SMS predecessors. Operators will need to act decisively in navigating the complex economies of data services, substitution of core voice and SMS revenues and the growing threat of OTT players. This is coupled with the myriad of CAPEX-hungry network technologies necessary to cope with the surge in traffic32.


Operators are expected to explore other adjacent businesses catering to both the consumer and enterprise at large. Under the consumer segment, mobile money becomes a relevant service; where over 730 million m-money users are expected in the D-20 countries by 2016 (from about 60 million today)33. The enterprise segment will be exciting for operators as ICT opportunities such as cloud computing, hosting and other related cloud activities present themselves. These ICT opportunities are attractive but operators will need to invest in IT capabilities, fixed infrastructure and international connectivity to tap into the opportunity.


Operators are expected to innovate in order to tap into the D-20 opportunity for a sustained future.


4. The focus on efficiency and ROIC will become increasingly central


Return on Invested Capital (ROIC) will be an increasingly important metric, as cost control and CAPEX allocation become critical within operators to drive greater returns. In a mind-cycle market, analysts pay more attention to cash flows and dividends than before. Cost optimisation activities such as infrastructure sharing, co-building and partnering will deliver the required returns. Outsourcing of non-core activities and business model innovation such as Bharti’s minute factory model will pave the way for greater efficiencies. Customised innovation such as this is expected to radically shape the telecom industry in some of the D-20 markets.


Domestic market consolidation (M&A) is likely to offset competitive pressure in most D-20 markets where hyper-competition has been a mainstay. Consolidation will be necessary for survival as sub-scaled operators will be acquired to establish pricing stability within the market.


This is an exciting time for operators in the D-20 markets. These economies will play a greater role on the global stage. We foresee the operators who succeed in competing within the D-20 countries taking a similarly central role in the telecom industry.


32 Refer to our article entitled "Navigating the Challenges of Data Monetisation" from January 2012 for more on this topic
33 Delta Partners analysis based on data from GSMA Mobile Money tracker and Wireless Intelligence




This is the introductory paper for the D-20 markets series. Future releases will focus on several topics relevant to telecom investors, operators and consumers. Some of the topics include: the assessment of broadband challenges; a followup analysis on the attractiveness of the D-20 markets through the lens of investor; and an assessment of the anticipated value of reverse innovation from D-20 markets that can most benefit mature market operators.


About the Authors


Andreas von Maltzahn


Andreas von Maltzahn is a Principal at Delta Partners, based in Singapore. During his 10 years of experience in the Telecom and Media industry, he has worked with leading TMT companies in Asia, Europe, Middle East and Africa. His specialisations are in due dilligence / M&A, corporate strategy, marketing & sales strategies and performance improvement for leading telecom, media and IT companies. He has acted as shadow CXO in several telecom operators. Previously, Andreas worked at Accenture’s Telecom Strategy team in London.


Andreas holds a Degree in Economics from University College London (UCL) in the UK.


Mar Pagès


Mar Pagès is a Principal at Delta Partners, based in Singapore. Throughout her career, she has worked across 20 markets in the Middle East, Africa and South East Asia focused on corporate and commercial strategy for fixed, mobile and converged players. Her expertise ranges from conceptualization of commercial value proposition and go-to-market Strategies to operationalization/implementation of turnaround plans for both traditional business and new growth areas such as data and content.


Mar holds a Degree in Business Administration from ESADE, Barcelona.


Alberto Pamias


Alberto Pamias is a Managing Partner at Delta Parnters, based in Dubai. During his almost 20 years of experience in management consulting he has served leading TMT companies in Western and Eastern Europe, South America, Russia/CIS and Asia across their entire life cycle. His key areas of focus are due diligence/M&A, corporate strategy, marketing & sales, business transformation, operations and network for all kinds of TMT companies. On many occasions, Alberto has temporarily taken over CXO positions, driving the whole process from strategy conceptualization to implementation. Previously, Alberto worked at AT Kearney and was a Partner at DiamondCluster and Oliver Wyman in South America, Eastern Europe, Russia/CIS and Asia.


Alberto holds a BS in Telecommunications Engineering with an MsC in Microwaves & Antennas from Polytechnic University of Catalonia and an MBA from IESE, Barcelona.


Loïc Sadoulet


Loïc Sadoulet is Affiliate Professor of Economics at INSEAD, Academic Lead for the Africa Initiative, and Visiting Professor at CEDEP. Loïc holds a Ph.D. in Economics from Princeton University. He has been teaching at INSEAD since 2000 in Executive Development Programmes, MBA and Executive-MBA programmes covering topics such as macroeconomics, economic development, negotiation analysis, innovation for new markets and projects-based courses. His research focuses on business development and expansion in emerging economies, creating profitable agreements in environments with substantial information gaps. A major line of his research has concentrated on the design of financial services that can be extended (profitably) to traditionally neglected segments. Recently, he has also been involved in investigating ICT-based solutions to create new profitable markets.


Previously, Loïc has worked for the World Bank; in a microfinance institution in Guatemala; at the European Centre for Advanced Research in Economics and Statistics (ECARES) at the Free University of Brussels; and at the Solvay Business School (Belgium).













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