September 7, 2008

Driving the Next Wave of Growth in the MENA Telecom Industry through Service-based Competition

Middle Eastern and North African (MENA) countries have evolved from monopolistic to liberalized telecom markets. Almost every market in the region now has at least two mobile network operators, and fixed-network markets are becoming increasingly liberalized. However, the region is idling in value to market development by competing facilities-based operators, and new competitive development may be reinforced by service-based operators; telecom providers that do not operate their own networks - found a new study by Booz & Company. These operators rely on traditional, facilities-based operators’ networks, developing their business on the service side.

Increased competition has driven market players to be more efficient, offer better services, an improved product portfolio, better pricing, better customer care, and an improved customer experience. “Market liberalization has enabled operators to expand regionally and bring shareholders greater value from international operations,” commented Karim Sabbagh, a Partner  with Booz & Company.
Limitations of Facilities-Based Competition
New network-based operators may not be a feasible option to stimulate market development in some MENA countries. Investors may be reluctant to enter markets; furthermore, some regulators and local authorities limit entry due to scarce resources or adverse impacts:
Market limitations: Some markets are too small for more network-based operators; licensing a mobile virtual network operator (MVNO) is an option for improving market competitiveness. Service-based operators have lower capital requirements and can be profitable with fewer revenues and subscribers: they can encourage the entrance of smaller investors where large investments aren’t economical.
Technical limitations: Spectrum availability is an issue for facilities-based operators; unless further spectrum is available, licensing mobile network operators (MNOs) is unfeasible. “Service-based competition allows for a greater number of operators that don’t need spectrum allocations of their own,” said Bahjat El-Darwiche, a Principal with Booz & Company.
Social and environmental impacts: Network construction has adverse social and environmental impacts that may be allayed by infrastructure-sharing agreements and requirements. “Regulators should allow service-based competition to enable opportunities for operators to consider alternatives to the rollout of a facilities-based network,” El-Darwiche added.
Moving Forward
Service-based competitors operate by relying on existing infrastructure of network operators; buying wholesale minutes, capacity, or services and tailoring and providing services to their own customers. Incumbents must recognize how to benefit from such opportunities, so regulators open the markets effectively, and investors enter them prudently.
Some regulators in the region have started facilitating service-based operators’ entry through liberalized Internet resale and local loop unbundling regulation.
Impact on the Telecom Sector
“Introducing service-based competition means incremental and selective investments, greater penetration of services, and a positive multiplier effect on the economy,” stated Sabbagh.
Investment: Service-based competition can stimulate retail services and the use of existing networks; facilities-based incumbents are encouraged to invest in improving and upgrading infrastructure. Service-based providers usually enter the market with a level of different investments and upon success; they can start building up operations and investments. Regulators must recognize that introducing service-based competition must be done only after effective facilities-based competition is in place.
Penetration: Competition is a major driver of improvements in penetration. Service-based competition offers an effective way of reinvigorating competition in the industry and fostering service-based competition allows dramatic increases in broadband penetration.
Economic impact: Increased investment augments sector spending, creates employment, and drives economic growth. El-Darwiche said; “Increased telecom service use improves information and communications technology (ICT) literacy, encourages entrepreneurship, and enables an ICT workforce.” Improvement in ICT use in enterprises in developing countries can improve profitability by more than 5 %, productivity by 1% and investment rate by 2.5%.
Impact on operators: Operators, incumbents and new entrants are all affected by service-based competition’s impact on the sector and its economics including: 
Prices: Increased competition impacts prices, as operators bring in more attractive offerings. Operators’ efforts to attract and retain customers with optimized tariffs are reflective of consumer commitment. Packages targeting niche markets and improved customer service are all outcomes of improved competition.
Service usage: Mobile data services usage is indicative of how far mobile users take advantage of available services. “Operators in countries with service-based mobile competition are more successful at encouraging customers to use mobile data services, as increased competition compels operators to find avenues for improving revenues,” explained Sabbagh.
Subscriber acquisition: New entrants to facilities-based markets invest heavily in rolling out their networks. Some operators may embrace service-based competitors, to stimulate traffic on their own networks and make a profit.
Service-Based Competition Possibilities
Companies can choose from different models of service-based competition. In the fixed market, these can range from offering VoIP services or relying on simple resale, to voice operators relying on carrier pre-selection or full-fledged local loop unbundling. In the mobile market, it can range from operators relying on simple resale to full MVNOs.
The relationship between service-based operators and network operators depends on the degree of infrastructure ownership, attributable to service-based operators, and the extent of services provided by the network operator. “The greater access a service-based operator has to existing infrastructure, the greater the flexibility it has in developing services and setting tariffs,” Sabbagh commented.
Service-based operators can offer services agreed with the infrastructure provider. As infrastructure access grows, the service-based operator can introduce more of its own soft infrastructure, taking greater control over offered services.
Service-based providers have no major infrastructure fixed costs, without a need to own or manage networks. Without network-management concerns, resellers have a better scope for service differentiation and customer experience improvement. They can enter the market more quickly, segment it, and target particular niches and their needs – all help improve customer experiences and additional growth.
Several global service-based competition plays have emerged over the past decade:
Low cost: The low-cost approach was introduced by fixed-voice resellers through carrier selection and carrier pre-selection, and was picked up by Internet resellers using local loop unbundling or resale through bitstream unbundling. VoIP providers noted successes across the voice market with no-frills, low-cost voice services over IP.
Brand plays: Brand plays have been successful in attracting customers to service-based competitors, especially in mobile. “Using brand strength and marketing savvy, companies have approached network operators to create attractive mobile offerings,” said El-Darwiche.
Portfolio expansion: This is adopted by players looking to expand. Fixed-network operators could acquire mobile reselling licenses, while mobile network operators could similarly acquire fixed-service licenses,in order to offer customers the benefits of convergence.
Brand extension: This strategy has been adopted mostly in the mobile market by retailers with strong distribution networks e.g. retailers that entered the mobile reseller business due to their established access to customers.
Niche players: These offer targeted and tailored offerings to particular groups. Many successful niche players in fully liberalized markets have focused on the youth market.
Lessons for investors
A cautious approach to investing in the telecoms sector is warranted. Launching a successful service-based operation is no easy venture; margins are generally lower than those of facilities-based operators, and in addition to good positioning, access and branding, they require careful planning.
First movers tend to maintain market positions as the leading mobile resellers or MVNOs, regardless of the adopted strategy.
Strategic partnership. It is imperative that mobile service-based operators form appropriate partnerships with network operators. On the fixed side, it is difficult to choose partnerships, due to the incumbent’s dominance over fixed infrastructure. Dominant operators are required to offer unbundling, and access to resellers. “Prices tend to be fixed and closely monitored by regulators to ensure operators do not behave in a discriminatory manner,” stated Sabbagh.
Distinct positioning with a clear value proposition is important for providers to distinguish themselves from competition, especially when competing for specific segments.
Powerful brands often drive the success of service-based operators, with branding closely linked to success.
Access to consumers explains the success of service-based operators, and those with massive distribution networks can drive the success of mobile ventures.
Region-wide reach is based on the cultural, linguistic, and geographic proximity of a region’s countries. “Resellers can capitalize on this by targeting users in several countries at once, thereby expanding their potential market,” explained El-Darwiche.
Regulators’ Roles
Regulators often aim to enable sector development through increased penetration and investment, greater consumer welfare through better service, competitive pricing, and innovative offerings; these are achievable by opening markets to service-based competition.
Market size: Regulators should not restrict the market by determining the number of licensees the market can sustain. This undermines the potential of maximizing consumer welfare. A regulator’s role is to enable market entry and participation and manage anticompetitive behavior.
License type: Service-based competition has driven regulators to reorganize licensing procedures in line with commercial developments. Regulators are making a facilities/service distinction to encourage the development of broad options for telecom service provisioning. “Distinguishing between facilities and service licenses allows service-based operators more flexibility in offerings and fosters greater market development,” said Sabbagh.
Timing: Liberalization timing can play a role in market development. Giving facilities-based opera­tors time before opening up to service-based competition, can boost long-term sector development. As infrastructure devel­opment is capital intensive, a gap between licenses can help providers establish a position in the market to build a revenue base for cost recovery.
Allowing facilities-based operators this time also facilitates the ease in which service competition can develop if greater infrastructure competition is in place. The timing of service-based competition’s entrance within the liberalization plan impacts an entrants’ competitive position.
“The regulator could allow service competition to be introduced in a predetermined timeframe after the licensing of the newest network opera­tor, to motivate new network entrants to quickly establish a market presence,” explained El-Darwiche. Regulators need to gauge timing fairly, to avoid adversely affecting benefits for consumers from competition.
Required regulation: Regulators need to be aware of the need for a supportive regulatory framework for competition to be fair and effective.
The Market Potential
Introducing service-based competition can drive telecom sector development in the region with greater telecommunications service usage, and positive economic and social impacts. Service-based competition can be very beneficial to national markets; increasing forecasted broadband penetration and tangible increases in mobile penetration. “More competition means greater consumer choice of both operators and services. Service-based operators’ agility and strategies will result in more vibrant and innovative sectors,” concluded Sabbagh.
Issues in facilities-based markets must not be neglected in considering the positive impacts that service-based competition may have on telecommunications markets. The success of service-based competition is tied to the existence of facilities-based competition. Where facilities-based markets are monopolies or duopolies, regulators must work for facilities-based market liberalization to provide a boost to sector investments, revenues, and performance.
Service-based competition holds potential for the region. Operators, investors, and regulators alike should align themselves in order for this potential to be realized.