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Virgin Mobile’s Steve Bailey is focusing on prepaid users.

With virtual networks in the Middle East just launching, CommsMEA looks at the opportunities in Africa and speaks with the CEO of Virgin Mobile about some of the trials of running an MVNO.

The most important aspect of running a successful virtual network is a tight focus, according to Virgin Mobile South Africa CEO Steve Bailey. He has just presided over a shift in the operator's priorities that has seen Africa's only MVNO turn its back on the prepaid market in favour of more lucrative postpaid customers. It is a tactic that he says is starting to pay off.

"We've increased our postpaid connections significantly, and we're taking about 10% of the growth in the South African market on postpaid," he says. "At the moment, that's up from about 2%. It was about 70/30 in favour of prepaid and we've turned that around to be the same split in favour of postpaid."

The upturn in fortune must be a welcome relief for joint-owners Virgin and South African operator and wholesale partner Cell C. The South African arm of Virgin Mobile, which launched in 2006, has yet to turn a profit and has been eclipsed by the performance of some of its global cousins. Virgin Mobile South Africa recently shed 40% of its workforce, reducing the headcount to 250 staff.

Bailey says the cuts were a direct consequence of the refocus and not "general redundancies", but reducing the wage bill in such a significant way should help towards balancing the books.

Despite Virgin Mobile's tribulations in one of the more buoyant markets in Africa, analysts and industry experts agree that the continent could hold more promise for virtual operators than the Middle East. Rogier Van Driessche of Delta Partners says that he would not be surprised if during the next 12 months operators in Africa reach out to MVNOs and ask them to play a role in their markets - which he says will be completely different from the attitude that some of the operators in the Middle East have taken.

"If you take a good look at the Middle East, the fundamental landscape hasn't changed a lot in the last 18-24 months," he says. "But when the first domino falls in Africa things will move a lot quicker than they will in the Middle East."

He says that even though subscriber growth in many African markets is still strong, some operators are finding it hard to continue growing. "Some of the operators in that kind of situation could be looking for alternative revenue streams in wholesale revenue. The bottom line is that it's going to be more minutes."

Target market

A report on the potential for MVNOs in Africa by research firm mmC Group claims that virtual networks in Africa need between 200,000 and 400,000 subscribers in order to break even. A lot will depend on the average revenue per user (ARPU), but it claims that falling below this threshold will have severe implications for an MVNO. Virgin Mobile South Africa scrapes into their lower boundary with 200,000 users.

"If you look at Virgin's subscriber numbers it can be a bit misleading," says Bailey. "The subscriber base is improving in quality, in that it is becoming more and more proportionately a postpaid base," he says.

Bailey won't be drawn on the targets he has set for increasing the APRU of a Virgin Mobile user, but amassing a subscriber base of higher spending contract customers should help to push it upwards and above the average of other operators in South Africa.

A forecast by analysis firm Research and Markets estimates that by 2010 MTN will have ARPU of $19. The contrast with Cell C's projected ARPU of $13.74 gives further insight into the reasons behind the renewed focus at Virgin Mobile.

"Obviously I would like to see that increase in growth translate into a profitable business. It's fine to have subscribers, but you need to make sure they make money as well. I'm sure they will, but given we have increased connections only in the last four or five months we are looking with interest to see what quality of those subscribers are and their ARPUs, but initial indications are good," Bailey says.

Regional focus

Although Virgin Mobile may have taken a while to identify its target market, South Africa is ranked alongside Morocco, Algeria, Tunisia, Egypt and Ghana as one of the "high potential markets" by analysts at mmC Group.

Bailey says that he has is aware of a lot of interest from companies that are looking at the opportunities across Africa. But for the time being it seems as though the Virgin Mobile brand will not be exported to other countries in the continent. A spokeswoman for the group said that while Virgin Mobile is open to opportunities that fit with its business requirements and are of "significant scale" nothing was currently being worked on in the African region.

Specifically it is this area of the Maghreb that holds the most interest for Van Driessche, who says MVNO activity in Africa will take place somewhere between Egypt and Morocco. Dubai-based MVNO Friendi, which launched the first MVNO in Oman at the start of this month, has long held ambitions to expand operations across North Africa.

In January this year Friendi opened an office in Casablanca, Morocco and appointed a VP for business development for Africa and the Mediterranean and to help examine the potential of markets further away from its Dubai HQ. As well as North Africa, Friendi has acknowledged the potential that exists in sub-Saharan Africa.

Van Driessche describes competition in the Middle East as "benign" and he says that the business case for the two or three players in each market is still positive.

"GDPs and ARPUs are a lot higher so profitability per client is a lot higher and competition is less, so it's easier to make a living," he explains. "Obviously, if you are making a relatively decent living then the arrival of MVNOs is perceived by most operators, at least at first glance, as something that is potentially disruptive to their business case.

"But it is far less comfortable in Africa, and it is far more competitive. Margins are margins per minute, and the average revenues per subscriber are a lot lower which means you need much more market share to make a minimum amount of margin that allows you to pay back some of the fixed investments that have been made."

It is the third and fourth placed operators, and not the regional behemoths that analysts say will be most suited to the niche targeting capabilities of MVNOs.

Carlos Valdecantos, founding partner of mmC Group, says that the "huge acquisition effort" over the past two years in Africa from the likes of Zain, MTN, Orascom and Qtel and France Telecom and Vodafone means that their priorities will be to consolidate their own operations and create synergies before even considering striking wholesale deals. "It is going to be extremely difficult for the big operators to be receptive to open up their model to third parties," Valdecantos explains.

Virgin Mobile South Africa's wholesale agreement is with its 50% shareholder Cell C, which is third in terms of market share with a 13% stake in the market, behind market leader Vodacom, (which claims a 53% market share) and MTN (34% share).

Not all MVNOs have such a close relationship with their wholesale partner, but Bailey believes that the MNO needs to have a strong interest in the fortunes of any firm that uses its network and a belief that it can help it increase its total share of the mobile market.

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