And the combined broadband subscriber base is expected to reach 57 million, with 72 per cent of the total using mobile phone platforms, according to a new report. The MEA market offers major opportunities for mobile phone broadband operators. Africa has the potential to have 24 million clients while the figure for the Middle East is about 17 million.
In the long term, the average revenue per user (Arpu) for mobile phone broadband is expected to be between $10-$15, driven by new submarine cable developments.
The report by Delta Partners on MEA’s mobile phone broadband potential assesses the challenges for both mobile phone and fixed-line operators. The segment has emerged as a crucial revenue generator for telecom services worldwide, capturing a sizeable portion of basic voice and data traffic for both households and enterprises, says the report.
As in the rest of the world, the dominance of mobility is seen in the MEA too, particularly in the emerging markets of Africa. At the end of 2007, the ratio of broadband, fixed-line and mobile phone penetrations stood at 1:4:22 and 1:18:160 in MEA respectively. Owing to the strength of mobility, broadband over this medium is expected to register explosive growth, catapulting to new heights of high-speed demand.
According to the report, the three-year mobile phone broadband opportunity is valued at about $5.9bn, with the Middle East contributing $3bn and Africa $2.9bn.
The opportunity size will depend on the rollout speed of 3G networks or Edge by the leading players and reductions in mobile phone broadband prices. Price cuts will be driven by competition and fall in the cost of connectivity both internationally and regionally cuts core network costs driven by fibre deployments.
The evolution, or rather revolution, of the mobile phone sector has led to far greater choices for communications than the previous one of traditional public switched telephone network voice.
The strategy on the part of fixed-line and mobile phone operators has been aimed towards displacing each other as the preferred provider.
While the early trends of mobile phone uptake indicated an apparent complementary use to the fixed line, mobile phone operators have steadily become substitutive as they succeeded in eating into the share of fixed line markets.
Consequently the share of “mobile phone-only” households has been rising while the number of households with at least one fixed line has continued to decline. For instance at the end of December 2007 about 24 per cent of the households in the 27 European Union nations had opted for mobile phone access only, as the fixed-mobile phone substitution (FMS) syndrome has been more pronounced in countries with less developed fixed networks such as the Czech Republic, Finland and Hungary.
In a bid to outdo the mobile phone revolution, fixed players have chosen to combine communication services in order to meet collective TV, voice and data requirements, especially those of high and middle class households. This helped to mitigate the rate of line deactivations to some extent, but mobile phone players have been quick to retaliate by bundling mobile phone broadband and rolling out alternate technologies such as WiMAX.
In the Middle East, and especially Africa, the fixed networks are far less developed than in Europe, representing a mobile phone broadband opportunity of close to $6bn in revenues and $8bn to $12bn in shareholder value. For example, in Ghana and Saudi Arabia mobile phone operators constitute nearly 95 per cent and 80 per cent of revenues respectively.
To date operators in the region have been riding the volume game, focusing on maximising additional subscribers. However, penetration levels have continued to increase and reached near-saturation in the Middle East and 37 per cent in Africa at the end of 2008, so operators will need to explore new avenues for revenue growth.
Mobile phone operators view data services as a growth driver that is indispensible to their expansion. The intrinsic need for creating inroads into broadband together with the dominance of mobile phone operators in the telecom market will fuel the insurgence of mobile phone broadband in MEA.
With more than 500 million mobile phone subscribers in MEA at the end of 2008, the region has been one of the fastest growing across the world over the past few years, witnessing mobile phone overtake fixed line connections in 2000s.
The prohibitive costs of wiring the region versus the favourable economics of wireless technologies is expected to add to the mobile phone voice and data bonanza. Several of the regional titans have already begun to recognise this and use convergence and substitution measures to market a variety of offers, initially targeting high-Arpu business customers. These include promoting phones that support fixed-wireless technologies in a SME context, while encouraging wireless internet based on USB modems and wireless routers.
Owing to their dominance, mobile phone operators are well positioned to tap into the broadband opportunity by capitalising on the fixed networks’ lack of scale and competition. In the long term, the promise of the next wave of mobile phone growth is likely to depend on how soon subscribers latch on to the data bandwagon.
The data opportunity in the mobile phone world stems from two major sources. The first leads from the usage of internet access to meet basic fixed internet needs and the second is generated from within the mobile phone ecosystem. The former includes the likes of browsing and e-mail and the latter includes m-payment, services driven by operators’ portals, location-based applications, gaming and TV.
“Despite the existence of this opportunity, operators face technical and economic challenges,” says the report. “As they depend on data services to stabilise Arpu, the explosion in traffic and associated rise in costs can threaten quality of service. In addition, the increase in data service revenues does not always compensate for the increase in traffic levels on the network. Hence, the key question that plagues operators is how to optimise cost-to-serve, led by the extent of network development with respect to the rising data traffic,” it said.
According to estimates by Delta Partners, the total broadband market in MEA is expected to grow at a compound annual growth rate (CAGR) of 51 per cent in revenue terms between 2008 and 2011, reaching $8.6bn at the end of the period with a subscriber base of 57 million, coupled with a geographic split of 47 per cent and 53 per cent between Middle East and Africa respectively.
The dominance of the mobile phone market is estimated to control a majority of the households and small business enterprises broadband market with 41 million subscribers and mobile phone broadband revenues of $5.9bn across MEA at the end of 2011. The surge in innovative product offerings has the ability to translate into a shareholder value in the range of $8bn-$12bn in the next couple of years.
Typically regional majors such as Orascom, MTN, Zain, etisalat and, more recently, Vodafone, plus other established leaders in individual markets, are better suited to address the traditional fixed-telephone demands of high-speed networks. In order to be able to successfully drive profits based on a broadband play, operators would need to align their operating model, and gain access to backbone and international connectivity at competitive costs.
Furthermore, for markets where the regional titans do not have a presence, existing fixed and tier-II mobile phone operators have a chance to enhance their value proposition in broadband play.
The IP syndrome
The first set of concerns with the advent of competition is typically related to tariffs, as operators meet cut-throat pricing among their peer group. However, the threat today has moved beyond mere tariff wars and spread to newer frontiers of IP traffic. The advent of cheap voice over internet protocol (VoIP) calls with improving quality of service has led to the jettisoning of legacy circuit switched networks, corroding the core service offering of fixed-line and mobile phone players.
The VoIP providers have intensified their attack by offering freebies such as unlimited international calls to select countries. Mobile phone broadband enables increased value and retention of high-value clients.
Skype is already the second-largest operator in terms of subscribers in the world, with more than 370 million subscribers and revenues of $143m at the end of third quarter of last year.
In response to the VoIP threat, mobile phone players are creating service offerings such as the video over IP solutions to try to combat the migration to Skype.
Vodafone, for example, is already deploying some offerings in Europe. Fixed players, on the other hand, are being increasingly pushed into catering to the needs of corporate and large business entities. They are hopeful of regulatory support to enable investments in fibre to the home (FTTH) system across major cities, the underlying objective being to deliver broadband speeds that are unmatched by mobile phone operators, thus creating successful FTTH monopolies.
Alignment of objectives
Such a transformation is needed to enable fixed players to address the opportunity profitably and meet key broadband development requirements.
The report adds: “In our opinion, the factors that play a decisive role in creating a sustainable opportunity. Due to the lack of fibre in MEA, players such as MTN and Zain are deploying fibre network to fulfil backbone requirements, and in some cases metropolitan rings.
“Tower sharing and rural roaming must be explored to reduce cost of network. Sales and support towards data connections is far more complex than traditional pre-paid voice services.”
Operators need to rethink the number and role of owned-shops, devising a tailored channel strategy, for example IT agents as telecom sellers, designing distributor role and agreements and defining the mix of sales agents in terms of outsourced versus direct representatives. Regional telecom giants such as MTN, Zain, Vodafone (Vodacom), Orascom, and Orange are well positioned to lead mobile phone broadband development across the MEA region.
MTN currently leads this potential due to presence in the high-potential markets such as Iran, Nigeria and South Africa. However, the estimates are likely to be impacted by regional developments such as new licence awards in Iran a potential new licence in Tunisia and the privatisation of operators in Libya and Algeria.
Considering the backdrop of the current economic environment and the related difficulty in obtaining debt and cash, operators such as etisalat, STC, which is leveraging its strong home market, and Zain have an opportunity to lead the charge of players in capturing the mobile phone broadband space.
The perfect balance
The leading regional players can occupy one of the four highlighted positions in the broadband ecosystem. These are segregated based on the operators’ range of services, positioning and its individual objectives.
- The pure mobile phone play helps capture part of the potential but does not hold a leadership position in the market.
- The broadband player requires significant investment in radio technology (3.5G and WiMAX, depending on the country/city potential) plus access to backbone and international connectivity. For instance, MTN appears to be adopting this position with its investments in submarine cables, fibre backbone, 3G and WiMAX licences. On the other hand Vodafone is likely to leverage its expertise in mobile phone broadband in Europe.
- The broadband and information and communication technology play is more aligned to countries with a strong corporate segment. Pursuing a focus on this segment requires the mobile phone operator to acquire additional complimentary assets and competences. For instance, in South Africa MTN and Vodacom seem to be following this path, while in the UAE etisalat is leveraging its fixed and mobile phone business to tap market potential.
- Lastly, the selective triple/quad play is best suited for leading players with a larger geographical footprint and in more robust economies comprising high-value residential concentration.
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