IDENTIFYING TODAY'S KEY INDUSTRY DYNAMICS IN THE MIDDLE EAST AND AFRICA

 

March 2008

 

Authors		Javier Alvarez - Partner
		Josep Maria Moya - Partner
		Mohsen Malaki - Principal

 

 

 

 

 

 

 

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

 

Looking back to the year 2000, the Middle East and Africa region was one of the few remaining monopolistic telecom markets around the world, with a commensurately low penetration rate of mobile and fixedline services. Since then—and for various reasons, ranging from the need for socio-economic development to the need to fill government coffers or pressure from international bodies—the governments have established regulators that have set the telecom market on a rapid pace towards market liberalization. The result has been phenomenal growth in the mobile sector.

 

The MEA region is now at a crossroads again. The phenomenal growth resulting from the liberalization efforts in the mobile sector is slowing down in the more developed markets, while in less developed markets the challenge is to start serving very low income segments profitably, and competition is increasing in fixedline across the region. The industry is looking to consolidate its gains and search for the next big growth driver beyond basic voice for the high and middle income segments.

 

Drawing from knowledge and experience among our experts in the field, these are the industry dynamics that we consider key in 2008:

 

1. Further Consolidation: Regional players will not be alone in the race to become pan-regional titans
2. Organizational Challenges: Operators will have an uphill struggle to extract value from merged entities
3. New Business Opportunities: Opportunities upstream in the telecom value chain will start to emerge
4. Customer Retention: Operators in maturing mobile markets will shift their focus from share of subs to share of value
5. Reaching the Very Low Income Segment: Mobile operators will need to rethink their business models to profitably serve the below US$5 ARPU customer
6. Broadband Growth: Operators will seek to position themselves for the growth prospects in broadband connectivity

 

 

Industry Dynamic #1

 

 

Further Consolidation

Regional players will not be alone in the race to become pan-regional titans

 

 

The years 2005 to 2007 saw a series of M&A deals such as the MTC (now Zain) acquisition of Celtel, MTN’s acquisition of Investcom, Etisalat’s acquisition of Atlantique Telecom, or Qtel’s acquisition of Wataniya. There was also the acquisition of Greenfield licenses—including Zain’s Saudi Arabian third mobile license, Etisalat’s Egypt third mobile license, or STC’s Kuwait third mobile license - that lay the cornerstone for the emergence of pan-regional players out of once single country or sub-regional operators. With the wave of consolidation that occurred in the MEA region among the top players, pan-regional titans have emerged, namely, Etisalat, Zain, Qtel, Orascom Telecom, and MTN Group.

 

While these pan-regional titans are now in the process of integrating their acquired operations in order to realize the synergies and economies of scale inherent in an expanded customer base and geographic footprint, they are not shying away from further acquisitions and expansion opportunities. This continued thirst for expansion is driven by three key factors (see Exhibit 1):

 

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

 

 

 

1. Ambitions of key pan-regional players to become global leaders and prevent being acquired themselves by other global players
2. Abundance of liquidity in the markets
3. Scarcity of Greenfield license opportunities

 

Now that the most obvious target companies with substantial footprints have been acquired already (with the notable exception of Millicom and to a lesser extent Comium and Warid, with 19, 6, and 4 country operations, respectively), we believe that the consolidation landscape in 2008 will be characterized by:

 

1. Scarcer investment opportunities in the region: While the pan-regional players have consolidated already to a handful of larger pan-regional players during 2005-2007, there are still a substantial number of small, single country operators in much of Africa and the Middle East that often lack the efficiencies, economies of scale, and access to financing that the larger pan-regional players have. As such, we expect there to be several smaller deals whereby the pan-regional players seek controlling stakes in single country operators across the region.
2. Investment in minority holdings: Small stakes in larger players in other adjacent regions such as South and Eastern Europe (like Orascom did in Greece and Italy and its interest in acquisition targets in other Mediterranean countries), and Southeast and Central Asia (such as the Qtel and STC acquisitions of Asia Mobile Holdings Pte Ltd and Maxis, respectively, in South East Asia).
3. More intense competition from operators in Europe and high growth markets outside of MEA: In their quest to gain a stronger foothold in high growth markets, European operators are keen on Africa. Once aggressive about the MEA region prior to the 3G license bubble in Europe in 2001, European operators are once again willing to invest in the region and are increasingly aggressive with their license bids and M&A activity. Panregional players should expect stiff competition from these European operators, as they bring to the table strong operational and managerial experience, innovative R&D, globally recognizable brands, and in some cases, such as Vodafone’s Safaricom and Orange Madagascar, already proven success in Africa. A newer source of competition will come from players in other high growth markets such as India, China, and Russia. Large players in these markets are keen to maintain their high growth momentum. Some examples of this new set of competitors are Russia’s Sistema and its acquisition of Shyam Telelink in India, China Mobile’s Paktel deal, or VSNL’s interest in licenses in Qatar and Saudi Arabia, or its acquisition of a stake in Neotel South Africa.

 

 

Industry Dynamic #2

 

Organizational challenges

Operators will have an uphill struggle to extract value from merged entities

 

 

 

Executives spearheading the acquisition drive among the regional titans now need to prove the value that their acquiring company is bringing to the acquisition target. While the initial and obvious benefits of cost synergies from a broader customer base and a diversified portfolio of operators are clear achievements in and of themselves, more penetrating questions need to be answered. Specifically:

 

1. What are the capabilities that the acquiring company brings to the target?
2. How can the combined entity leverage combined assets to drive revenue synergies such as P&S innovation, market reach, unique product platform deployments, churn management, or revenue optimization?
3. Are there cost synergies other than improved buying power from vendors? As such, we believe that the year 2008 will be one in which these regional titans will start dealing with the challenges of driving the cost synergies they have identified, while identifying ways of realizing more revenue synergies. We believe that pan-regional players should focus their efforts in 2008 on synergies achievable along three major axis:

   Strategic: Group strategic direction, including brand equity and architecture
   Organizational: Corporate governance and leadership
   Operational: Synergies from a cost and revenue perspective

 

 

Without a clearly defined group strategic vision, reinforced by a corporate governance model, acquiring companies such as STC, Qtel, Etisalat, or Zain all risk falling back on the comfortable position of keeping the target operators as part of a de facto holding company, with the target’s strategic vision remaining unchanged and relatively independent of the acquiring company. Such a model is all but sure to result in lost opportunities for cost and revenue synergies.

 

The group strategic direction can only be translated into operational synergies from a cost and revenue perspective once the right governance and leadership model are put in place. Governance and leadership are thus of higher strategic importance earlier on in the post deal stage, since these constitute the decision-making structure of the merged entity.

 

Finally, with a unified direction through a strategic vision, combined with the appropriate governance model in place, the merged operational functions of the overall group can start to deliver synergies in areas such as revenues, cost of sales, support, commercial, or billing and technical (see Exhibit 3). These are the operational synergies that create shareholder returns above and beyond the value of the target and acquired companies can generate as standalone entities (see Exhibit 4).

 

 

In order to achieve these operational synergies, regional titans need to develop common platforms between their country operations. As such, the group as a whole brings value to the individual units, helps in clarifying the future direction under the umbrella of a common group strategic vision, and enables better optimization of resources to achieve the future vision.

 

Only truly integrated operators will be the winners of this wave of integration in the telecom space of the MEA region.

 

 

Industry dynamic #3

 

New business opportunities

Opportunities upstream in the telecom value chain will start to emerge

 

 

 

In a previous paper published by Delta Partners in January 2006 we anticipated the phenomena of the opening up of the value chain in the Middle East region as a consequence of the increased competitive landscape for telecom operators. At that time, initial consequences of that process were mainly observed in the downstream end (see Exhibit 5) of the value chain, around distribution and retail activities. The opening up of the value along the downstream or customer facing end has further developed and players such as Axiom, Cellucom, or i2, are consolidating their dominant position as regional players in the Middle East in retail and distribution as well as making further inroads with their expansion into high growth markets such as India and Africa.

 

 

Downstream activity is also brewing in the call center space, as operators increasingly outsource some of the non-core functions to specialized niche players that can efficiently provide these services on behalf of the telecom operators.

 

 

More importantly, we believe the next wave of outsourcing opportunities that regional players will focus on in 2008 are going to be around the up-stream part of the value chain, especially network and IT elements that can be outsourced or shared. Increasingly, we are seeing more operators starting to view these as non- critical activities that can be performed by third parties. We have identified two emerging outsourcing opportunities to watch out for in 2008, namely:

 

1. Network outsourcing and managed services, including tower management
2. Outsourcing transmission to wholesale operators

 

These emerging opportunities are driven at the base level by the need for economies of scale. In mature markets, the increased competition is driving down prices and creating near-parity in terms of network quality and coverage, which in turn is rendering the network a non-core function that is no longer a competitive differentiator. In less developed and lower income markets, the need to serve the bottom of the pyramid more efficiently is forcing operators to consider outsourcing elements of the network that would help lower costs. In both types of markets, outsourcing offers the opportunity to pool network elements of multiple players and create the economies of scale that would enable each operator to focus on its core functions while ensuring desired service levels, at competitive prices and thus business profitability. Taking the case of tower sharing, for an operator with 5,000 BTS, doing tower sharing for 3,000 of those with another operator, the potential OPEX savings will be US$45 million, or roughly 30% of annual BTS-related OPEX (assuming annual average OPEX per tower of US$30,000 and OPEX savings in sharing mode of 50%). For the development of an additional 1,000 BTSs shared with another operator, the CAPEX reduction will be between US$62.5 million and US$115 million (assuming CAPEX per tower of US$125,000-230,000, and CAPEX savings in sharing mode of 50%).

 

Some of the first companies to realize this emerging opportunity are traditional vendor equipment providers, with Ericsson at the forefront and NokiaSiemens, Cisco and Huawei jumping on the bandwagon. These have already set up their network operations and maintenance outsourcing and managed services business divisions and are targeting operators in mature and emerging markets alike.

 

More recently, examples are emerging from operators positioning themselves for these emerging opportunities upstream in the value chain. Some prominent examples are the Bharti Airtel, Vodafone Essar tower sharing agreement where they have set up a joint venture independent tower sharing company, Indus Tower. Other examples are 3UK and T-Mobile’s network sharing agreement, or BT’s application hosting and management solutions for other telecom operators, such as its network and security services, or its managed mobile content, carrier-grade messaging, and enhanced voice services.

 

We believe that there is a narrow timeframe in which new specialized players with strong capabilities in the network integration space within the region will be able to capitalize on this emerging opportunity, namely, building and maintaining large network infrastructures across the region and providing one-stop shop solution to pan-regional operators. A good example of that is Crown Castle, the largest owner of tower assets in the US, with 75% of its revenue coming from the top 4 US mobile operators. Crown Castle provides site leasing and network services, and has since moved into wholesale wireless backhaul services as well. The company achieved its number one position by acquiring tower assets from major mobile operators in 1999-2000, and enjoyed an EBITDA margin of 55% in 2007.

 

Financial capacity, operational capabilities in the different markets where they operate, and access to large deals with pan-regional operators are key requirements for such companies to succeed within the MEA region. As the telecom industry keeps moving towards this direction, we expect certain flourishing of such companies, with potential consolidation later on around the better positioned players.

 

Our second identified upstream opportunity is wholesale telecom services. Given the new competitive landscape with additional access provision players (FWA, Internet and Data services providers, MVNO, ...) there is an emerging opportunity in the wholesale business, particularly for incumbent operators. As a result of the proliferation of new players, incumbents are increasingly viewing provisioning of wholesale services to competing operators as an opportunity rather than a threat, complementing the traditional retail business.

 

In 2008, we expect a significant increase in investment activities upstream in the telecom value chain, while the downstream activities will continue to flourish. What are now considered well established business lines among European players, such as Deutsche Telekom’s or BT’s wholesale services, or the network outsourcing business line of Abertis in Southern Europe, or tower sharing companies in North America, are areas of investment opportunities in the MEA region that is open to both existing operators as well as independent 3rd parties.

 

 

Industry dynamic #4

 

Customer retention

Operators in maturing mobile markets will shift their focus from capturing share of subscribers to share of value

 

 

 

The year 2007 saw SIM card penetration reach saturation or near-saturation levels in the most developed of the MEA’s mobile markets, particularly the littoral Arab states around the Gulf, as well as markets such as Jordan, Morocco, and South Africa. As such, the traditional growth driver for the mobile operators in these countries will need to start evolving away from an acquisition approach and towards a value development approach. To compound this growth challenge, incumbent mobile operators in these markets are facing increasing competitive pressures with the entry of third or fourth mobile operators in their markets. With heated bidding for these new licenses and very high per capita license costs, such as in Saudi Arabia (US$6.1 billion), Kuwait (US$907 million for a 26% stake) and Qatar (unannounced, but possibly in excess of US$2.5 billion) in 2007, these new players’ business models will be driven by very rapid market share acquisition. With limited value left to extract from untapped segments (mainly the low income segments), market share acquisition for these new players means one thing: churning customers from the existing players.

 

For established operators, churn management thus becomes a vital strategic objective. According to Delta Partners analysis, a churn reduction of 10 p.p could bring a US$600 million value . For such incumbent operators seeking to protect their customer base from churning to the competition, a successful customer management effort is a vital need. Such an effort needs to be a company-wide initiative where all customer-facing and supporting back-office functions of the operator change their approach and focus, rather than a simple patch solution such as launching a standalone loyalty program.

 

The first step is to analyze the composition of the customer base along with acquisition and direct costs to identify which segments are most profitable (see Exhibit 6). By doing this, the operator can understand which segments it should invest in for retention and which segments it should reduce investment due to low profitability.

 

 

Specifically, the strategy for retaining profitable customers is derived from an analysis of that particular customer’s experience throughout his or her lifetime with the company. After having acquired a customer, an operator should focus on developing the customer experience that enables the telecom operator to retain that customer and extend the duration of his lifetime as well as his usage of mobile communication services.

 

As such, the role of analytical marketing and business intelligence in general is a vital pre-requisite for evolving the operator’s strategy from customer acquisition to customer value development. Retaining a customer would require a better understanding of the customer’s total experience with the operator across all of its product lines, and across all interaction points with the organization and, as such, would require customer analytics that put the customer as the main unit of measurement.

 

Improving customer analytics is of course not an overnight task. Operators frequently need to re-evaluate the IT infrastructure that they have deployed to capture and analyze customer data. As such, business intelligence tools, data warehousing solutions, and customer data integration solutions become necessary investment requirements for an operator.

 

Another key success factor to properly manage customer expectations and customer lifecycle is providing a meaningful and consistent brand experience across the different customer touch-points with the company providing the service. The first challenge is to develop a relevant promise to the customer, starting from the values associated to the brand. The second challenge is how to successfully deliver that promise along the different interactions with the customer, from an initial contact point at any point of sale or through the web site, to the experience the customer has when accessing the network and using the service to any further enquiry the customer might put to the representatives at the call center.

 

Managing customer expectations and customer satisfaction and loyalty to the brand is an on-going activity since customer needs and attitudes towards a brand evolve with time. A continuous effort to segment—and even micro-segment—the customer base and target them with relevant value propositions is required to properly satisfy or surpass customer expectations. In particular, any operator willing to retain and develop its customer lifetime value will have to proactively come-up with new segmented and targeted offerings that will not only contribute to customer retention but one that will also generate demand for new services driving future revenue growth out of the existing customer base.

 

Improved customer analytics and a strategy focused on improving the high value customer’s experience across all product and touch-point with the operator, means that the operator needs to reassess its organizational structure as well. In order to better focus customer management and retention efforts within particular customer segments, operators across the GCC, such as Etisalat, Qatar Telecom, and Batelco have restructured their organizations around the customer, creating Consumer, Business, and Wholesale divisions, rather than the more traditional, product-centric organizations of Fixedline, ISP, and Mobile divisions. The second relevant organizational (structural) change required to successfully deliver according to customer expectations is to fully integrate back-office functions (network, IT and other support areas within the organization) with the front-office functions of the organization (marketing, sales and customer care). New products development, or enhanced customer care services can not be conceptualized and realized just by the marketing and Customer Care departments anymore. The back-office areas have to play a more active role in understanding customer expectations and delivering according to that and to the overall brand promise and value proposition. Given the increased need for micro-segmentation and segmented value propositions, and the need to coordinate between various departments in the operator for the analytical marketing and the promotional campaigns, operators need to assign dedicated teams that look after the customer lifecycle management and help in coordinating efforts across silos of the company. The set up of a division within the operator in charge of customer lifetime management is a good way to ensure this will happen.

 

With such a customer-focused organizational structure, improved brand experience across all customer touch-points, and constant product and services innovation per customer segment, a proper customer management model can be implemented.

 

During 2008, we expect operators in maturing markets to solidify their moves from customer acquisition to customer retention by re-enforcing their newly created customer-centric organization structure, invest time and effort in improved customer analytics, and launch a series of segmented and targeted customer retention and development initiatives focused on their high-value customers, including the delivery of a consistent brand experience across all customer touch-points.

 

 

Industry dynamic #5

 

Reaching the low income segments

Mobile operators will need to rethink their business models to profitably serve the below US$5 ARPU customer

 

 

Cellular technology is changing the landscape in emerging markets. Today there are some 3 billion mobile customers worldwide, and that will grow to nearly 5 billion by 2012 (according to WCIS predictions), when two-thirds of the people on earth will have mobile phones.

 

In 2001, in sub Saharan Africa there were 17 million mobile connections, while today there are some 190 million (according to WCIS). Communication is bringing people together, helping develop societies and increasing economic prosperity.

 

During the past three years, Africa saw a massive growth in interest from pan-regional and international investors and telecom operators seeking to ride the African growth bandwagon. Zain’s (formerly MTC) buyout of Celtel and its investments in Mobitel in Sudan and Vmobile in Nigeria, MTN’s acquisition of Investcom, Etisalat’s partnering with Atlantique Telecom and European operators such as Vodafone, Orange, or Portugal Telecom going on the acquisition trail are good examples of that.

 

The tremendous network deployment across the countries of sub Saharan Africa has increased penetration levels dramatically, from less than 3% in 2001 to 26% by the end of 2007 . In the early years, this growth was driven mainly by an increase in the competitors per market and a commensurate reduction in price per minute and handset prices, but has accelerated more recently as a result of the decreasing costs of mobile network deployment, coupled with increased investments by pan-regional and global players. However, given that the portion of the population able to afford a mobile handset or service at current prices is very low, operators are now facing the challenge of increasing penetration rates among the bottom of the income pyramid within African populations.

 

While the key element to drive demand is to lower the entry barriers and the total cost of ownership (see Exhibit 7), the challenge for any operator seeking to provide such value propositions that attract the bottom of the pyramid is to do so profitably. As a starting point, affordability is what the customer perceives based on the communication campaign the operator designs. While it is a given that attracting low income customers will definitely erode ARPU for the operator, managing the ARPU decline in such a way as to avoid excessive erosion should be a key element of any operator’s strategy to profitably serve the bottom of the pyramid. As has been seen with selected operators in East Africa such as Celtel or Tigo in Tanzania and UTL in Uganda, a clever introduction of headline tariffs in a direct and easy to understand communication will convey the affordability message without necessarily harming the operator’s margins. In each pricing package, the operator needs to design built-in components—such as billing steps, set up fees, usage caps—that prevent more ARPU erosion than is necessary to attract the low income customers. These sensitive levers need to be managed with care and accuracy, however, and this can only take place when the operator is capable of achieving a large degree of intimacy with customer needs and behaviors.

 

 

 

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

 

 

Even with these low ARPU customers—in fact, precisely because they are low ARPU customers—customer loyalty is essential to extend customer lifetime and thus extract profits, and to prevent spiraling acquisition and winback costs. As such, properly positioning the brand and establishing an emotional connection with the customer will help prevent churn. Some operators, such as Sudatel, Safaricom or Glomobile, choose to leverage “national pride” and position themselves as the national carrier, while others concentrate on the young population, such as Tigo. While operator branding in more developed markets increasingly focus on individuality of their customer base, the exact opposite approach works more effectively in high growth markets in Africa. Customers at the bottom of the pyramid, historically marginalized in the era of globalization, crave for a sense of belonging to a greater network or community. As such, pan-regional operators such as MTN or Celtel (Zain) focus on the community aspect and the sense of belonging to a greater network in their branding campaign.

 

Technology is an important lever for operators seeking to decrease the cost of providing the service: mobile-voucher delivery systems, electronic-voucher delivery systems and IVRs to promote self care are just some examples. Technology can also be used to increase revenue streams and increase customer stickiness, such as money remittance systems which have been a success in Kenya, South Africa and the Philippines and are being deployed in Afghanistan, Tanzania and several other high growth markets.

 

Profitability can be further enhanced through a more efficient approach to distribution of the physical recharge vouchers. Examples are partnerships with logistics companies to increase presence efficiently, incorporating learnings from the FMCG world in order to increase rotation and traffic towards POS, such as tailor-made events at the POS, or layout and ambiance customization according to target segment.

 

It is worth noting that, considering that over 65% (source: UNDP, 2006) of sub-Saharan Africa lives in rural areas, the FMCG model has proven successful in penetrating rural areas. Learning from the FMCG world would thus enable mobile operators to increase numeric distribution in rural areas, ensuring accessibility and visibility in order to address the latent demand coming from rural Africa.

 

Network rollout and maintenance, or network CAPEX and OPEX, are important cost elements that, if not managed properly, could significantly impact profitability in serving low income segments. As for OPEX, site security and the shortage of reliable power supply are major challenges in low income areas. In areas where the national electric grid lacks reach, power generators are required, adding significantly to the cost of access rollout. Generally, two generators per BTS are required, with a replacement cycle of 18 months. Solutions being developed or deployed now are more efficient BTSs, as well as ones that rely on alternative energy sources like wind, bio fuels, solar or at the very least hybrid power solutions, promising cost reductions up to 40%.

 

While the pan-regional players are actively trying to consolidate procurement across country operations to gain better leverage with vendors and reduce equipment costs, the real drivers of infrastructure costs are BTS site acquisition and civil works, together with the shortage of skilled engineers within Africa. These factors, combined, make the network outsourcing, managed services, and network sharing viable alternatives to build-own-manage models. Bolder operators in Africa are trading sites, replicating the site sharing model that operators like Vodafone and Orange are following in Europe, while several are engaging vendors for carrier managed services.

 

The year 2008 will see the launch of various initiatives by the more innovative African mobile operators to reach and serve the bottom of the pyramid profitably. In order for these initiatives to succeed, however, operators need to learn from the lessons in other emerging markets, and to understand that the traditional mobile operator business model needs to be re-thought if the low income segment is to be served profitably.

 

 

Industry dynamic #6

 

Broadband growth

Operators will seek to position themselves for the growth prospects in broadband connectivity

 

 

 

For over a decade, the phenomenal growth in mobile (with a global 2000-2006 CAGR of 24%) has overshadowed the fixedline, where growth has stagnated (with a global 2000-2006 CAGR of 5%), mainly as a result of lack of investment.

 

With the emergence of broadband as a growth engine (with a global 2000-2006 CAGR of 61%) for the stagnating fixedline business, coupled with innovative new broadband technologies that either reduce CAPEX significantly (such as WiMAX) or enable a much wider range of value added services (such as FTTx), the fixedline is attracting headlines once again.

 

 

The resurgence of fixedline in the MEA region

 

The MEA region is no exception. In fact, adding to the resurgence of the fixedline in this region is the late introduction of liberalization in this sector, which is now attracting players from the mobile and ISP markets (such as Umniah’s and Zain Bahrain’s WiMAX licenses, Mobily’s mobile broadband push, MTN Nigeria’s acquisition of 2 fixed wireless operators, or Wana’s wireless broadband offering), all of whom are keen to ride the wave of growth expected from broadband.

 

Even with the very high growth rates in broadband across the region, the region is still a far cry from mass broadband adoption when taken as a whole, and the room for growth is tremendous.

 

 

Broadband development varies across the MEA region

 

However, the level of development is not uniform (see Exhibit 8), and there are selected countries that have achieved significant strides in increasing broadband penetration already, while others are on the cusp of growth in broadband. There are three country groupings within the MEA region with different levels of broadband development:

1. Sub-Saharan Africa (excluding South Africa)
2. GCC states (excluding Saudi Arabia)
3. Rest of MENA

 

 

Sub-Saharan African countries have to-date lagged behind in not just broadband adoption, but even dialup Internet adoption. Among many other factors—such as illiteracy, low PC penetration, IT awareness, and low income levels—the lack of fixedline infrastructure has been one of the key inhibitors preventing broadband adoption. It is for this reason that the mobile operators and emerging fixed wireless access providers in this region are now keen on leveraging wireless technologies (such as CDMA EVDO, WiMAX, UMTS or HSPA) to move into broadband service provisioning as well, with Nigeria’s active broadband market being a good example (see Exhibit 9).

 

 

On the other extreme, the small littoral states of the Persian Gulf, with already high dial-up Internet penetration coupled with a high income population and more IT savvy businesses, have managed to migrate many of their dial-up customers to broadband over the past couple of years.

 

During this same period, countries such as South Africa, Saudi Arabia, Egypt, Morocco, and Jordan have successfully put broadband on a rapid growth trajectory, thanks mainly to a successful push from governments coupled with the incumbent operators’ need for growth drivers in their fixedline business.

 

 

Operator strategies in more developed broadband markets

 

When it comes to operators in the last two groups of countries, the migration of dial-up connections to broadband is already in full swing. As such, the broadband players are keen to further expand the pool of Internet users to enable continued growth in the broadband customer base. As such, the main challenge for players in these markets is to create a compelling value proposition that will enable the previously unconnected to jump on the broadband bandwagon immediately, bypassing dial-up all together.

 

As a result, incumbent operators in such markets are revamping their broadband value propositions from two angles. For the unconnected customers, providers such as Batelco, Awalnet, STC, Maroc Telecom and others are offering very low bandwidth broadband (128Kbps), combined with limited monthly download capacity at more affordable prices to help acquire the novice internet users. For the Internet savvy and higher spending customers, operators such as Etisalat, Qtel, Maroc Telecom and others are launching ever higher access bandwidths (up to 4Mbps), while some are venturing into bundled offerings that combine Internet access, voice telephony, and video (IPTV or video on demand).

 

In fact, as the broadband growth rate tapers off in the higher penetration countries and Internet users become more sophisticated, incumbent fixedline operators are betting on these same bundled offerings as a means to both encourage incremental increases in broadband ARPU, while also hoping to lock in broadband customers with cross selling prior to the intensification of competition. Tying in the customers through cross selling and value added services is thus becoming a necessity for incumbent players readying for fixedline competition.

 

Benchmarking themselves against the more advanced broadband markets in Asia and Western Europe, the fixedline operators in the high penetration broadband markets are considering services and solutions catering to the broadband-connected residential and business customers. Specifically, the growing emphasis among Western European and Asian operators on managed ICT services for SMEs (operators such as Belgacom and BT), and IPTV and triple play to residential customers (such as Orange France and PCCW), are two main themes that are attracting the attention of incumbent fixedline operators in the Middle East.

 

Newly licensed entrants into the fixedline market of these more developed broadband markets, keen on inducing customer churn from the incumbent operators, will need to keep up with the new service innovation and price bundling of the incumbents. As such, we believe that the new entrants in the fixedline markets, licensed altnets in Saudi Arabia, Bahrain, and soon in Qatar, will all need to match or exceed the incumbent offerings if they are to successfully capture any significant broadband market share.

 

Finally, we expect the mobile operators in these markets to start positioning themselves to capture a share of the broadband pie during 2008, either through 3.5G technology and eventually LTE, through a WiMAX license, or acquisitions of existing broadband players in their respective countries. The mobile players will be late comers to the broadband game in the more developed broadband markets, and will mainly aim to use broadband as a way to compliment their mobile offering through cross-selling and capture more of their mobile customer telecommunications spending.

 

 

Operator strategies in less developed broadband markets

 

In most of sub-Saharan Africa, where fixedline broadband infrastructure is nearly non-existent, mobile and wireless broadband technologies are the name of the game for players interested in addressing the nascent broadband opportunity in this region. Here, mobile operators will leverage 3.5G deployments, and in some cases, WiMAX, to target the broadband opportunity, while ISPs and other new entrants will take advantage of WiMAX or broadband CDMA technologies to address the same broadband market.