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Wed 29 Oct 2008 04:00 AM

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Liberalising the telco landscape

How the Middle East and North Africa is moving from a monopolistic to a liberalised market model.

How the Middle East and North Africa is moving from a monopolistic to a liberalised market model.

Almost every market in the Middle East and North Africa (MENA) 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 - according to a new study by management consultancy firm Booz & Company.

Increased telecom service use improves information and communications tech-nology (ICT) literacy, encourages entrepreneurship, and enables an ICT workforce.

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," says Karim Sabbagh, a partner with Booz & Company.

Virtual competition

Stimulating market development through new network-based operators may not be a feasible option for some MENA countries.

Investors may be reluctant to enter markets and some regulators and local authorities limit entry due to scarce resources or adverse impacts.

Some markets are too small for more network-based operators, so 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 are not economical.

Spectrum availability is also an issue for facilities-based operators, and unless further spectrum is available, licensing mobile network operators (MNOs) is unfeasible.

Bahjat El-Darwiche, a principal with Booz & Company, says: "Service-based competition allows for a greater number of operators that don't need spectrum allocations of their own," Network construction has adverse social and environmental impacts that may be allayed by infrastructure-sharing agreements.

"Regulators should allow service-based competition to enable opportunities for operators to consider alternatives to the rollout of a facilities-based network," he adds.

Service-based competitors operate by relying on the existing infrastructure of network operators. They buy wholesale minutes, capacity, or services and tailor services to their own customers' needs.

Incumbents must recognise 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.

Introducing competition

"Introducing service-based competition means incremental and selective investments, greater penetration of services, and a positive multiplier effect on the economy," says Sabbagh.

Service-based competition can stimulate retail services and the use of existing networks as 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 need to recognise that introducing service-based competition must be done only after effective facilities-based competition is in place.

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.

Increased investment augments sector spending, creates employment, and drives economic growth. El-Darwiche says: "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%.

Operators, incumbents and new entrants are all affected by service-based competition's impact on the sector and its economics. Increased competition impacts prices, as operators bring in more attractive offerings.

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," says Sabbagh.

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 fully-fledged local loop unbundling.

In the mobile market, it can range from operators relying on simple resale to full mobile virtual network operators (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.

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.

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.

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 have been successful in attracting customers to service-based competitors, especially in mobile.

Portfolio expansion 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.

The strategy of brand extension has been adopted mostly in the mobile market by retailers with strong distribution networks, for example retailers that entered the mobile reseller business due to their established access to customers.

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.

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," says Sabbagh.

Powerful brands often drive the success of service-based operators, with branding closely linked to success. Access to consumers also explains the success of service-based operators, and those with massive distribution networks can drive the success of mobile ventures.

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.

They should not restrict the market by determining the number of licensees the market can sustain, as this undermines the potential of maximising consumer welfare.

A regulator's role is to enable market entry and participation and manage anti-competitive behaviour. The timing of liberalisation 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," explains El-Darwiche.

Regulators need to gauge timing fairly, to avoid adversely affecting benefits for consumers from competition.

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.

The success of service-based competition is tied to the existence of facilities-based competition, and where facilities-based markets are monopolies or duopolies, regulators must work for facilities-based market liberalisation 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 realised.

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