March 8, 2010

Telecom in the Middle East

In 2010, as the recession begins to lift, telecom operators in the Middle East will face a very different world. They will have to manage a greater variety of new business models and strategies than ever before, as they balance human and economic capital across geographies in hopes of countering diverse challenges, in both developed and developing markets. They will face even more competitors and increasing demands from savvier customers. And they will encounter a proliferation of new technologies. Meanwhile, governments and regulators will play an active role in driving sector development and, hence, stimulating economic growth, according to a new study by Booz & Company.

“In looking across these issues, four imperatives will come into even greater focus in 2010 for operators: revive growth momentum, accelerate innovation in services, harvest broadband potential and transform cost structures,” commented Karim Sabbagh, a partner at Booz & Company and the firm’s Communications, Media & Technology Global Practice Leader. Operators will need to develop the right capabilities to address these, if they are to continue growing in all their markets.


Revive Growth Momentum

In general, the recession has been less severe for Middle East operators than for their global peers, and their markets continued to grow. Since the beginning of the recession in late 2008, operators have been slashing their strategic investments in both organic and inorganic growth. In most cases it was self-inflicted, as operators hoarded their cash in anticipation of worse conditions to come. As a result, many investment opportunities were lost.

Investment in infrastructure deployment also slowed. During 2009, operators struggled to optimize their deployment plans, shared networks with competitors, and squeezed vendors into even more lenient payment terms and innovative financing models. Customers, however, continued to sign up.

This year, Middle East operators will again be actively seeking growth. “Operators will resume their inorganic growth through acquisitions, but will simultaneously focus on mastering operations in their emerging markets to secure hoped-for growth. Most will be working to find the right balance in their efforts to extract value from their extended footprint,” noted David Tusa, a principal at Booz & Company.

In their emerging markets, Middle East–based operators will focus on capturing volume while the entire market experiences growth spurts, which typically last for three or four years and then fade. Operators that adopt the right strategies and invest up front during such finite periods of opportunity will create long-term sustainable advantage through scale, securing financial performance superior to that of their more reluctant competitors.

While investing in network expansion, savvy operators should focus on building ever-larger customer communities by encouraging customers to leverage highly attractive on-net prices between carefully identified community members. Operators should work to build strong brands and support them with heavy media coverage and an extensive retail and distribution presence. The resulting effect will allow the larger operators to build momentum and gravity, making smaller operators less and less attractive to consumers.

In their developed markets, Middle East operators must search for pockets of growth by addressing new market segments, focussing on share of value as the only meaningful indicator of success. Operators will need to target specific offerings to each segment if they hope to secure high-value customers and particular user groups.

“Although Middle East operators currently face different sets of challenges in their developed markets and in their emerging markets, these concerns are increasingly converging,” said Mohamad Mourad, a principal at Booz & Company.


Accelerate Innovation in Services

Much of the telecom world is being rapidly commoditised—from connectivity and basic services to low-end handsets, to networking equipment to the networks themselves—prompting most players in the sector to seek out new sources of value. The clear solution: services.

As rivals in the telecom sector battle to move up the value chain, the world is quickly moving toward an “all digital, all the time” model. Consumers are coming to expect the digital experience—texting, social networking, news and information, high-definition movies—anywhere, anytime. Telecom operators are already beginning to view their Internet portals as a critical asset in the race to provide services. “This trend will affect every aspect of the telecom industry—from the high-speed networks consumers will insist on, to the variety of new devices on which they will expect to be able to connect, to the ever-expanding kinds of applications they will be willing to pay for,” commented Sabbagh. “And the new generation of ‘digital natives,’ those who know no other world than always-on connectivity, will only grow more demanding.”

Although a focus on service innovation is clearly a priority, the trend is still in its infancy. Thus, this area offers the most innovative players many opportunities for growth—as well as the capacity to be disruptive to those that can’t keep up.

Middle East operators must counter the threats from the likes of Apple, Google, BlackBerry, and Nokia who are trying to disintermediate them by offering applications directly to users through their own or third-party handsets—and from social networking sites such as Facebook, YouTube, and Twitter which are drawing users by the millions, by fostering innovation and drawing independent applications developers to their side. They have an advantage over global players in this regard thanks to their deep knowledge of local consumers and their ability to offer Arabic content.

Convergence will also be a key theme driving service innovation in 2010. Intra-telecom industry convergence will drive seamless communications and user experiences through both mobile and fixed-line technologies and across various end-user devices. Enabling technologies such as femtocells, which are maturing rapidly, will help drive this trend forward. In addition, operators with widespread geographic coverage will focus on cross-border services such as unified roaming services and m-payments remittance services to differentiate themselves.

A number of operators are still stuck in the traditional “tit-for-tat” game of service development. “Operators playing this game will soon find themselves in a reactive, short-term, price-based battle with their direct competitors, oblivious to the shifts in user behaviors that may eventually render the whole traditional telecom model irrelevant,” explained Tusa. To counter this, operators must look beyond their direct competitors for ideas—to other markets, other industries, or even subsidiaries within their group: driving true innovation will be the real sustainable differentiator.


Harvest Broadband Potential

Broadband demand is exploding globally, in terms of both subscriber uptake and bandwidth requirements. For Middle East operators, the broadband growth story is compelling. Broadband subscriptions in the Middle East region were expected, by the end of 2009, to grow by about 44 percent over the previous year, although penetration remains low, at 2.4 percent of the region’s population.

In emerging markets such as India, Indonesia, and Nigeria wireless broadband will play a central role, given their limited fixed-line infrastructures, their difficult geographic terrains, and the wide geographic spread of their populations. For Middle East operators, these numbers suggest great potential for broadband growth in the short to medium term.

Broadband users—both consumers and businesses—in more developed markets within the Middle East are not just looking for a fast Internet connection, but also want to experience the many bandwidth-hungry applications and value-added services that are emerging.

In emerging markets, operators will service increasing broadband demand through wireless connectivity. With the proliferation of low-cost netbooks and the falling prices of mobile handsets, users—especially the young—will find ways to jump on the broadband bandwagon.
 
“Still, the economics of next-generation broadband remain challenging, hindering deployment in both developed and emerging markets as operators struggle to generate returns that can justify the cost of broadband rollout,” said Mourad. Governments, having come to realize the beneficial effects of national broadband networks on social and economic development, are becoming more prescriptive and more interventionist as they look to support economic growth through large-scale broadband network deployment.

Middle East operators must engage early on with governments and policymakers to ensure they have a voice in the next-generation broadband programs in all of their markets. Managing the interplay between the continued deregulation of retail and wholesale telecom services and the renewed regulation of national networks will require a critical strategic capability for industry players that hope to succeed in a more highly regulated future.


Transform Cost Structures

During the recession, operators around the world, including those in the Middle East, rushed to take a broad-brush approach to cutting costs. Instead of short-term measures, operators must bring a strategic perspective to their cost-cutting programs, ideally through a capability-driven strategy. Operators must identify the core capabilities that generate their competitive advantage and avoid cutting related costs, while they ruthlessly focus on cutting other expenses.

“This targeted approach will become critical as the commoditization of multiple links in the telecom value chain forces all players in the industry to create the most efficient operations they possibly can,” Sabbagh explained. The goal, ultimately, is to free up cash and resources for further investment in strategic assets, such as new services, new technologies, and new business models that will differentiate players from their competitors.

In 2010, operational efficiency will be a priority for Middle East operators in all their markets. In established markets, the main goal will be to drive sustainable profitability levels as growth prospects diminish. In developing markets, the uncertainty of future performance will call for prudence in spending. It will also demand variable cost structures, underpinned by the outsourcing of nonstrategic activities and the adoption of innovative procurement terms.

Having held centre stage in Europe and North America for the last decade, outsourcing will be popular among Middle East operators in 2010, as falling margins force operators to look hard at the long-term rightsizing of their organizations. Candidates for outsourcing in emerging markets are similar to those in developed markets: call centers, IT support, network infrastructure construction, and network operations and maintenance. “For operators with footprints in more than one geography, the similarity in execution of such programs from market to market will leave room for coordination or centralization, in order to maximize effectiveness and share knowledge across geographies,” commented Mourad.

Operators must take care in the execution of outsourcing by choosing the right business model and the right partnership model, as well as selecting the right partner. Operators will need new capabilities to effectively manage outsourcing transition programs as well as service-level agreements with their providers.

Finally, operators must also revisit their balance sheets to gain a holistic view of their fixed assets, assess their productivity, and determine how they can better release value.


Conclusion

This year will be a telling one for Middle East telecom operators, especially those with a global presence. In reestablishing their strategies for growth, however, they must take into account real changes in all their markets. Rates of growth will continue to vary considerably in different markets, and will be triggered in part by rapidly increasing demand for broadband access at ever-higher speeds. Successful competitors must play a “land grab” game in their emerging markets, while learning to offer innovative value-added services in developed markets.

“Middle East operators must get their cost structures in order in either market, both to ensure financial strength in the short term and to free up capital for longer-term strategic investments,” explained Sabbagh. In order to meet these priorities, and to succeed in an increasingly competitive telecom arena, Middle East operators have two overarching tasks ahead of them. First, they must look carefully at all their operations in all their markets, and reassess and reorganise their strategic priorities in each. Second, they must tighten up their execution now in order to be ready for the changes coming to all their markets, especially as issues in developed and emerging markets begin to converge.

For Middle East operators, only those with the capabilities to generate true and differentiated value will continue on their trajectories of growth.