January 5, 2011

Riding the Data Tsunami in the MENA Region and Beyond

Explosion in data traffic is increasingly disrupting the traditional economics of the telecom industry, challenging operators’ network topology and business models around the globe. In the MENA region, it is expected that there will be a fixed broadband telecom connections penetration rate of almost 32 % by 2014 and a mobile broadband penetration of 57% by 2015. To ride and thrive through the data tsunami, operators must redefine networks, invest in new technology, pursue growth in the application space, and monetize service levels.

A formidable transformation is taking place beneath the placid surface of the telecommunications industry. As the global economy becomes increasingly digital, data traffic over both fixed and wireless networks is exploding. This is especially true in the MENA region. According to one forecast, there will be 22 million fixed broadband telecom connections in the MENA region by 2014. This projection is based on anticipated growth that will significantly exceed the worldwide annual growth rate of 13 percent. Internationally, mobile TV and mobile music connections are expected to rise by 25% and 19% respectively by 2014. Similarly in KSA, mobile TV and mobile music connections are expected to increase by 18% and 40% respectively by 2014.

This presents telecom operators with a major challenge: They must invest more and more capital in next-generation networks that can absorb this wave of data even as increasing competition, regulatory pressure, and the proliferation of flat-rate pricing for data services put enormous pressure on their margins. How can operators manage the exponential increase in data volumes? And where will the money come from to build the networks needed to handle the coming data tsunami? The answers to these questions lie in the ability of operators to monetize the huge volumes of data that are flowing and will continue to flow over their networks.

Telecom Issues in the MENA Region

Rapid Changes
The telecom industry is facing major changes. Despite relatively stable growth, the industry’s sources of revenue are changing rapidly. “In the MENA region, mobile content revenues are expected to grow at 10% yearly, reaching USD 1.3 billion by 2014. Similarly, the KSA market has witnessed growth in data and content, driven by decrease in content prices and by connectivity prices becoming more and more commoditized via unlimited data packages,” said Karim Sabbagh, Partner and the Global Practice Leader for the Communications, Media and Technology Practice at Booz & Company.

The most dramatic trend in the telecom industry is the massive increase in global demand for data services. Over the past few years, video services have become a major contributor to this trend. This has led to an explosion in the amount of video data flowing over the infrastructure of telecom operators. Broadband users—both consumers and businesses—in the 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. Applications such as videoconferencing, telepresence, telecommuting, and teleworking, all of which require high bandwidth, are starting to gain momentum in the region. This in turn is shifting broadband demand in favour of high speeds, in line with the rest of the globe.

MENA customers increasingly go online for communication, infotainment, and social media needs. “The Twitter community in the MENA region grew by almost 300 percent during the first six months of 2009 with 61 percent of social networkers updating their Twitter status at least twice a day and 80 percent of them accessing Twitter through a mobile device. There are 10 million active Facebook users in the MENA region. In countries like the UAE, Jordan, and Lebanon, more than 40 percent of the online population uses Facebook. Regional broadband growth has been strong and will sustain its pace,” said Bahjat El-Darwiche, partner with Booz & Company.

“A recent forecast revealed that there will be 22 million fixed broadband telecom connections in the MENA region by 2014, representing a household penetration rate of almost 32 percent; a projection based on anticipated growth that will significantly exceed the worldwide annual growth rate of 13 percent,” said Sabbagh.

MENA telecommunications operators appear on the brink of exponential growth in broadband and, more specifically, mobile broadband. Unfortunately, because of the physics of radio transmissions, mobile networks cannot easily be scaled up to meet this explosion of data. The mobile networks of the future will need to be vastly more efficient than they are today.

Future Forecasts
The telecom market in the MENA region likely will follow the same trend and see growth in broadband applications in the near future. Through premium content, interactivity, and personalization, IPTV could evolve as a key application in next-generation homes, despite the abundance of piracy and free-to-air TV channels. VoD could prove to be a huge regional success, given the popularity of DVD rental shops and the lack of movie theaters in countries such as Saudi Arabia. “Forecasts indicate that roughly 10 percent of broadband connections in the region will be bundled with IPTV in the next few years,” said El-Darwiche.

Online gaming in the MENA region could also emerge as a strong growth opportunity, despite software piracy. This trend is expected mainly because of the region’s large population of young people; 72 percent of the MENA population is below the age of 35. In addition, relatively few alternate entertainment choices are currently available, and the recent growth of collaborative online communities allows remote gaming between individuals. As a result, MENA online gaming revenue could reach $111 million in 2014; furthermore, online music revenues are also expected to grow sharply at a CAGR of 60 percent, reaching $33 million in 2014. Other next-generation applications such as remote storage, 3-D TV, tele-presence, tele-medicine, and virtual sports will all likely follow.

Operators are already experiencing pressure on both revenues and margins from numerous sources, including increased competition, regulations that are squeezing the strong margins operators have attained on some services, and flat-rate pricing structures.

Further, the sources of revenue that some operators might use to help pay for the necessary infrastructure investments may not materialize. In short, telecom operators will find it very difficult to fund the infrastructure upgrades required to serve the digital economy of the future.

Surviving the Ride
Operators have four main levers they can pull to help themselves survive and thrive in the coming years. They can:

  • Redefine the network architecture of the future. Operators can offload mobile data traffic to fixed-line radio access points and redefine their network architectures by allowing “intermodal” roaming between fixed and mobile networks, and charge for the privilege.

  • Invest in data compression technology to better manage growing data volumes. Operators will require technologies that can mitigate the impact of the data tsunami, including LTE and other radio efficiency technologies.

  • Pursue growth opportunities in the B2C and B2B applications space. Operators can be legitimate players in this market, thanks to their technical skills and network infrastructures. They can also benefit from strong brand recognition and trust, particularly among small and midsized businesses.

  • Monetize the service levels on their networks. Today’s broadband service offerings do not allow for pricing based on service levels. The only way to increase service levels is to increase a line’s bandwidth. But that can be changed. Singapore has overcome this limitation through its Nucleus Connect services and other markets can to.

In Conclusion

The fast-developing data tsunami will lead to profound changes in the topology of telecommunications networks, and building those networks will require massive investments. Several avenues are possible for the deployment of this infrastructure, and several different models are likely to emerge, depending on local regulations and on the results of the approaches chosen by different operators.

The best models are likely to be those that allow for open networks over which service providers can profitably sell their services and operators can monetize the value of their network infrastructure. Creating such a model will take a great deal of energy and effort, but operators that succeed will be able to ride the data tsunami and become driving forces in the ongoing development of the digital economy.