MVNOs IN THE MIDDLE EAST: THREAT OR OPPRTUNITY?

 

June 2007

 

Authors		Rogier van Driessche - Partner
		Antonio Carvalho - Principal
		Andreas von Maltzahn - Associate

 

 

 

 

 

 

 

MVNOs, or Mobile Virtual Network operators, are operators that provide mobile telecom services to end consumers over the infrastructure of existing Mobile Network Operators (MNOs)

 

 

The MVNO market has experienced exponential growth worldwide, with new MVNOs launched in nearly every continent. It is a business model that has revolutionized the mobile telecoms landscape in many mature markets particularly in Europe, but also the US and Asia.

 

 

With the first wave of telecoms liberalization in the Middle East almost completed, and new license opportunities becoming increasingly scarce, excitement is growing in the region around MVNOs as an alternative route to market. This has led many Middle Eastern regulators, operators and industry investors to analyze the potential of MVNOs and assess whether they are just a buzz, an opportunity or a threat. Delta Partners, a Dubai based telecoms advisory and investment firm, analyses the question.

 

 

EXHIBIT 1: Examples of MVNO market impact

 

 

 

MVNO’s: Opportunity or threat in the Middle East

 

 

 

 

 

At present, many Middle Eastern markets hardly lag behind their European peers in terms of penetration. Quite a remarkable feat, taking into account that competition in most of these markets is still very young and only in the early stages. Most markets have not more than 2 players competing. However, as some of these markets are slowly but surely reaching the maturity phase, the MVNO question is becoming a pertinent one in the region, for regulators, operators and entrepreneurs/investors alike.

 

 

Regulators: When and how to push tor MVNOs?

 

 

Below the reader can find a summary of the discussion in some of the regions main markets, illustrating the level of activity and debate in the region:

 

Saudi Arabia issued a public consultation about how to introduce competition as far back as 2006 – raising questions about MVNOs and service-based competition – but opted for a third network operator license instead for the moment.

 

The Omani Telecoms Regulatory Authority (TRA), though, has already included Class B licenses, including MVNO permits, on its liberalization calendar.

The Bahraini TRA is currently conducting a similar consultation process as this article went to press, with results expected after the summer of 2007.

 

The Jordanian regulator is the first in the region to have already acted by issuing a draft decision paper in June 2007 outlining its intended framework to govern MVNO services in Jordan. The cornerstones of Jordan’s proposed MVNO regulatory framework

Open to more than one MVNO

MNOs and MVNOs shall be free to negotiate the model that best fulfills their interests and business strategiesRegulators

Each MVNO required to apply for a license in accordance with current licensing regime

MVNOs shall be eligible to negotiate their own interconnection arrangements

Any agreement between the host MNO and MVNO requires approval by the regulator

 

Are MVNOs about to arrive in the Middle East? Judging by recent activity, the conclusion from regulators in the Middle East seems to be that MVNOs present an opportunity to benefit consumers and opening up the market to competition, without harming the country’s infrastructure. They seem to be more concerned about “when” the market conditions are right and "how" to subsequently go about facilitating MVNO entry, as opposed to whether they should be introduced at all.

 

 

"When" regulators should facilitate MVNO entry:

 

Generally, telecom regulators seek to ensure a country’s network infrastructure development and to regulate and stimulate competition to benefit the end consumer.

 

The availability of a network-based competition model in which players compete on their own infrastructure is widely regarded as more sustainable than so called service-based competition in which regulatory intervention is required to avoid monopolization of scarce network assets.

 

In addition, the availability of several sets of infrastructure is considered strategic for any country. Relying on one company or one set of telecommunication infrastructure makes the economy and country vulnerable to unforeseen failure or market pressures. The first wave of liberalization has begun to address this by diversifying the number of players. A few weeks ago Qatar, the last monopoly in the Middle East, announced the prequalification of 12 bidders for its second mobile license, completing this first round of liberalization.

 

However, there are countries that seem fully served for the size of the remaining market opportunity and where additional network investments do not seem feasible. In these markets, MVNO introduction may present a viable option to enhance competition (See Exhibit 2). Bahrain and Jordan are today the clearest examples. Saudi Arabia, after awarding its 3rd mobile license in 2007, could be another potential candidate to introduce MVNOs in the near future. Who will follow Jordon first? Exact dates are not known but the next 18 months could show significant develpment in the region.

 

EXHIBIT 3: Some guidelines that can help assess "when" to help intoducing MVNOs are

 

 

 

"How" regulators can facilitate MVNO entry in the region:

 

In general, regulators have three options to facilitate the introduction of MVNOs. They vary from strong market interference to creating more favourable entry conditions. Regulatory tools to facilitate MVNO entry include:

 

"Heavy-handed interference" by direct intervention and establishment of a strict regulatory framework

 

"Signaling regulation" by suggesting operators voluntarily open their networks and negotiate wholesale agreements with potential MVNOs

 

"Enabling" by introducing enabling factors that would facilitate the entry of MVNOs without directly regulating them (lowering switching and entry barriers)

 

 

Heavy-handed interference

 

As is often the case, both mobile operators and regulators find it preferable to leave the matter up to the market. Imposing MVNOs via a direct regulatory framework is not only difficult (there are many technical and commercial aspects to be taken into account, particularly around regulating the wholesale access), but even harder to enforce. This requires a well informed regulator that is willing to stand up and enforce the rules - often a difficult and politically sensitive undertaking.

 

In addition, forcefully mandating MVNOs into a market may have negative consequences if not taking all factors into consideration. In the north of Europe, for instance, regulators used the "heavy-handed" approach, mandated very low wholesale access prices via a "cost-plus model" that allowed MVNOs to discount heavily on price (see Exhibit 4). The result was a price war that rendered conditions in the market unsustainable for everyone - Orange withdrew from market and TDC was forced to consolidate. Further, players focused their funds on fighting competition, resulting in significantly lower 3G investments.

 

 

Signaling interference

 

An alternative option for the regulator is to "signal" to operators that it is thinking about interfering and passing more regulation than the required basics, unless they open up their networks voluntarily. Advantages over a "heavy-handed" approach are that the market can come to a satisfactory arrangement without interference. Regulatory signaling only serves as a trigger to see MVNOs enter.

 

 

Enabling

 

An all-together different approach is to only introduce the overall frameworks required to ensure a stable environment for decisions and to support MVNO entry by reducing barriers. Examples include introducing Mobile Number Portability (MNP) allowing users to switch provider and keeping their old number. Also, controlling handset subsidies and promotions by imposing certain ceiling criteria that will make it easier for MVNOs – at lower scale – to create a sustainable and profitable business.

 

Overall, it seems that Middle East regulators are inclined to follow the Jordanian example, of consulting with key stakeholders, "signaling" interest in MVNOs and then proposing a regulatory framework based on creating strong and transparent rules, but leaving negotiations to the players.

 

 

EXHIBIT 4: Three different wholesale arrangement options between host carrier & MVNO

 

 

 

Middle East Operators - are MVNOs a threat or an opportunity?

 

 

 

Overview

 

However, Middle Eastern markets are likely to follow similar trends than other more mature markets. Subsequently, MVNOs are likely to emerge in the not too distant future. This leaves regional operators with a fundamental decision to make: embrace MVNOs as a strategy and add wholesale as a new business segment or continue with a retail-only approach.

 

The question operators need to answer is essentially three-fold:

Would MVNOs add value to their existing operation by growing the overall size of the market and addressing previously untapped segments?

Regardless of the opportunity or threat assessment, how to play the competive games? How to beat the competition to it?

Do MVNO’s represent an alternative route to expand into new geographies?

 

To help answer these questions, it is important to understand the possible MVNO models that operators could engage in (See Exhibit 5).

 

 

EXHIBIT 5: Come examples of MVNO proposition...

 

 

...and business models

 

 

 

What they all have in common is that they try and leverage a specific asset to appeal to an identified segment. Each MVNO type represents different opportunities and threats and is dependent on operators’ market position, the existence of under saturated segments that could be potentially targeted by MVNOs and the remaining value potential left in the market.

 

In general, MVNOs create value when they support an operators’ strategy to pursue growth by capturing so far untapped segments and generating new wholesale revenues in excess of cannbalised retail revenues. The amount of value depends on how much overlap there is to the operators’ existing business and thus the risk of cannibalization. The ideal scenario consists of a network operator ensuring its MVNO partner is successful in supplementing its core business and being an opportunity for value creation. However, how do network operators control this? How to make sure surplus value exceeds cannibalization? These are tricky trade-offs and calculations to make and obviously the stakes are high – hence the reluctance of most regional operators.

 

Discount MVNOs, from European experience, are those that operators were historically most afraid of – as they were perceived to have the highest risk of value cannibalisation. Increasingly, however, operators in MVNO mature markets start to realize that a well placed and managed MVNO on their network that addresses complimentary (low-end segments) where they don’t play isn’t necessarily bad. Many regional operators – mainly incumbents – still very much focus on the high ends of the market. As a result of the new entrants in the market, they are often very much under attack in the low-end segments, where growth is highest and defenses weakest. As a result, many incumbents are loosing valuable market share and are providing room to breathe for their competitors. For those Middle Eastern operators that do not feel comfortable in changing their strategies from value to volume over night (and there will be many, given the high weight of high value customers in those countries and the relative insignificance of the lower end), the trend towards MVNOs seems a logical and probably inevitable one. Accepting this reality is a difficult process – but an important one in order to turn a potential threat into an opportunity

 

 

Below are some key success factors, based on international learnings that network operators should take into account in this critical process:

 

 

 

 

 

Entrepreneurs and Investors: Are MVNOs an alternative route to value creation?

 

 

 

Easy way to enter a high growth market: as license fees for Greenfield operations and acquisition prices for existing operators go through the roof, launching an MVNO may be a capital-light way to gain access to a market that is growing at 15% per annum – the quickest growing telecom market in the world

 

Still opportunity to launch a differentiated offer: although markets seem already quite mature in terms of penetration, most Middle Eastern markets are still quite basic in terms of segmentation of the offer. A more segmented approach to the market as tried by many MVNOs in Europe may very well work in the region. Target segments that may be attractive starting points are immigrant workers, women and youth. The recent launch of MobiSud in Belgium, a partnership between Belgacom and Maroc Telecom targeting the Moroccan minority in Belgium is an interesting example of such segment play that may be seen soon in the Middle East markets as well

 

A fast rotating population facilitates entry: the fact that most markets in the Middle East are home to a significant portion of expats, is good news for any new entrant. Such a significant proportion of the population being replaced on a 4 to 5 year basis provides a huge platform for growth for those looking for a way into the market – and again provides fertile ground for a more segmented approach

 

Operators likely to stick with a value strategy: potentially leaving the volume game for someone else to tap into?

 

 

Two classes of potential MVNO operators can be differentiated in the market place. On one hand the pure play entrepreneurs – often telecom executives from Western Europe trying to capitalize on their experience. Companies like the Bahrain based Noor Telecom or DIC based Friendi fall in this category. On the other hand one can find the types of players that are winning the European MVNO battle – mainly actors in the retail and distribution or financial services market (Emaar, Axiom…).

 

The key challenge today for these entrepreneurs and investors is to find a Many players are convinced by the potential that MVNOs in the Middle East offer, and are warming up on the side linesmarket opening to launch. This requires active lobbying and persuasion to regulators and operators alike. The main arguments MVNO start-ups are bringing up are the following:

 

The introduction of MVNOs in Europe has renewed market growth after markets reached maturity. Leveraging unique assets of non-telecom players (brand, distribution networks and customer bases), MVNO players managed to add another layer of competition in the market that propelled the market forward (See Exhibit 7)

 

 

 

 

MVNOs have brought prices down and therefore benefited the general public

 

Hosting MVNOs has proven a successful strategy for some operators - mainly those that were about to lose out in the traditional network operator battle. Clear case studies exist of network operators that have gained significant market share by becoming the preferred host network operator. For example Telfort in the Netherlands managed to triple its market share of total users on its network, by being the most proactive operator to host MVNOs. Other operators have successfully used MVNOs to counteract competitors in lower end segments, or used MVNOs as an equity vehicle for international expansion (e.g. TDC in Denmark).

 

The arguments carried by the regional MVNO start-ups however, have not found a receptive ear - yet. One reason for this is the fact that regulators still struggle with "when" to facilitate MVNO entry, with Jordan now the first country to be actively moving on this front. Another reason is that in Europe it was mainly the smaller operators that opened up first to MVNOs, trying to fight their way into the establishment, which is less the case in the region. In summary, some of the operator concerns described in the previous section are still to be overcome.

 

 

Conclusion

 

The MVNO business model holds many opportunities for the Middle Eastern region:

 

A way to continue today's growth rates in markets that are maturing rapidly

Further possibilities for regulators to enhance levels of competition and market availability beyond the existing network operators, provided regulators do not heavily interfere

An opportunity for current operators to capture untapped segments and develop new wholesale revenues

An excellent investment opportunity to gain access to an attractive telecoms sector, without the huge entry barriers and investments required for a fully-fledged network play

 

If the European model is anything to go by, the total value of the MVNO opportunity in the Middle East region alone could be close to $5bn – a figure that is attracting a lot of interest amongst small to medium investors and players.

 

Some MVNO openings are expected in the mid-term future in the Middle East starting with Jordan. Other markets are still question marks with some signaling in Bahrain, Oman and Saudi Arabia. UAE and Kuwait, however, look less likely at this stage.

 

However, with the liberalization process continuing in full swing, competition still maturing and new network licenses still being awarded – in some markets is still early days for MVNO activity and it will take some time before this opportunity will materialize across the region.

 

It is clear though that when it does, the industry will be fundamentally changed and all players should be thoroughly prepared.