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Sun 16 Dec 2007 09:41 AM

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Mobilising markets

With the current wave of market liberalisation paving the way for the first MENA mobile virtual network operation, CommsMEA examines the business case for the model and the possible consequences for the regional telco space.

When i2 eventually realised its ambition to become the first MVNO in Jordan and the MENA market, it was hailed as a ‘natural step' in the development of the kingdom's telco market.

Industry analysts had touted the Jordanian telco space as the most obvious MENA market to debut the model, given the presence of four infrastructure-based mobile operators and the country's regulator articulating its desire to drive investment there.

It is a truly disruptive model that requires careful analysis by all stakeholders” Rogier van Driessche, a partner with Delta Partners.

With the Saudi company in the final stages of its agreements with both the Jordanian TRC and its prospective host operator, the identity of which was unknown as CommsMEA went to press, the next 12 months is expected to witness the proliferation of the model throughout the MENA region.

Dubai-based consultancy firm Delta Partners produced a report entitled ‘MVNOs in the Middle East - Threat or Opportunity' using the examples of MVNOs in European markets as a potential yardstick to measure the feasibility of the model in the MENA region.

At present, many Middle Eastern markets hardly lag behind their European peers in terms of penetration, which is viewed as quite a remarkable feat, taking into account that competition in most of these markets is still very young and only in its early stages, according to the report.

"The introduction of MVNOs would fundamentally change the industry landscape," says Rogier van Driessche, a partner with Delta Partners and co-author of the report. "It is a truly disruptive model that requires careful analysis by all stakeholders.

Published in July 2007, the report correctly predicted that Jordan would be the first market to house such an operator with Delta Partners also predicting that more will follow in the coming 12 months.

The firm thinks that launching an MVNO could be a "capital-light" way to gain access to a market that is growing at 15% a year, making it the fastest growing telecom market in the world.

For investors in the Middle East's telecommunications market, the arrival of MVNOs represents an exciting opportunity for exposure in the telecom sector, according to Delta Partners. Based on the experience of European MVNOs, the company predicts that the potential value of MVNOs in the Middle East market could be as much as US$5 billion.

"As the last of the monopolies in the Middle East telco space comes to an end, with the second mobile licence auction in Qatar, the regional telco space is approaching the next phase of liberalisation," says van Driessche.

He adds that markets cannot be described as ‘competitive' until there are three or four players in a given market's mobile space and that the MVNO model can offer favourable margins to operators.

"It would be difficult for an infrastructure-based operator to turn a profit and generate a significant return-on-investment for investors in a market that already hosts four mobile operators," van Driessche adds. "The main reason for this is that infrastructure-based operators almost universally rely on volume to maintain profitability.
Cost-control is key to success in a crowded marketplace and the MVNO model is a viable option for prospective entrants, according to van Driessche, who also notes that while MVNOs have a variable cost model, the biggest cost of launching in a market will be consumed by establishing brand-equity.

Jihad El-Eit, i2 vice president of marketing, remarks on how his company's reputation in the mobile telephony sector will allow it to launch as an MVNO.

We are expecting to launch our first MVNO service in the region in the latter half of 1Q08 and this progress will accelerate rapidly over the next two-to-three years. Mikkel Vinter, CEO of Friendi Mobile.

"Our launch as an MVNO means that we will have a presence in every link of the value chain that complements our vision of becoming a fully-integrated service provider in the mobile telephony services," he says.

The Saudi Arabian company's distribution infrastructure and brand awareness among consumers, through its retail presence, bodes well for its ambitions in the mobile telephony services arena, according to El-Eit.

"Our route to market is extremely quick and this is key to succeeding in any industry," claims El-Eit.

He also points out that company can leverage its existing relationships with incumbent operators across the region to launch themselves successfully in the market. "You only have to look at the success of the Carphone Warehouse in the UK to see the potential for such a transition," El-Eit adds.

A recent report published by research firm Frost & Sullivan entitled ‘Mobile Virtual Network Operators in the European Market' identifies the main drivers behind the success of such operators in the market.

Two main elements have allowed MVNOs to be successful in the highly competitive and saturated European mobile market: their unique ability to effectively address the specific needs of different social groups and their capacity to offer aggressive price strategies, reads the report.

"MVNOs are not the Cinderella of the European mobile market," says Frost & Sullivan research analyst, Saverio Romeo. "They are able to aggressively compete with the main mobile network operators and are effectively addressing the mobility needs of specific social groups that big mobile operators find difficult to reach."

However, Delta Partners analysts note that existing mobile players in the Middle East market would do well to perceive the prospective new players as potential customers and not competitors.

The introduction of MVNOs in Europe produced market growth after the sector had reached maturity. Leveraging unique assets of non-telecom players (brand distribution networks and customer bases), MVNO players managed to add another layer of competition that propelled it forward, reads the report.

Furthermore, prospective Middle East MVNO operators Friendi Mobile and i2 are at pains to point out that their plans aim to complement existing telecommunications players.

"The presence of MVNOs can help maximise the value of a market by aiding the segmentation of a given market," says Mikkel Vinter, CEO of Dubai-based Friendi Mobile.

He goes on to say that at present the number of MVNOs in Europe far outstrips the amount of facilities-based operators by as much as 4:1, without jeopradising the market.

Middle East MVNOs – When and where?• Saudi Arabia issued a public consultation about how to introduce competition as far back as 2006 - raising questions about MVNOs and service-based competition - but has opted for a third network operator licence at present.

• The Omani Telecoms Regulatory Authority (TRA), though, has already included Class B licences, including MVNO permits, on its liberalisation calendar.

• The Bahraini TRA is currently conducting a similar consultation, with results expected in the next few months.

• The Jordanian regulator is the first in the region to have already acted by issuing a draft decision paper in June 2007, outlining its intended framework to govern MVNO services in Jordan.

The cornerstones of Jordan's proposed MVNO regulatory framework were that it was open to more than one MVNO and that both the host operator (MMNO) and new entrant are free to negotiate the model that best fulfills their interests.

Source: Delta Partners

"We are here to grow the pie and I'm honestly quite surprised by the positive reaction we've received from the companies we've approached so far," Vinter adds.

The start-up company, manned by a team of executives with experience of the MVNO model in Europe and Asia Pacific markets, is currently in commercial negotiations with operators across 14 markets in the MENA region.

MVNOs are able to aggressively compete with the main mobile network operators and are effectively addressing the mobility needs of specific social groups that big mobile operators find difficult to reach.

"Across the telecoms industry, companies are moving away from the ‘one size fits all' approach towards a more focused strategy," he said. "This can have a positive effect for the [host] operator and the MVNO," adds Vinter.

He also predicts that Friendi Mobile will be operational in 10 markets within the following three years. He welcomes the Jordanian TRC's framework for MVNO-entry as a significant milestone in the development of the regional telco space, adding that his own company has made "significant progress" in its negotiations since the ruling.

"We are expecting to launch our first MVNO service in the region in the latter half of 1Q08 and this progress will accelerate rapidly over the next two-to-three years," he says.

Unable to disclose which market Friendi Mobile will initially launch its services in, Vinter does note that the regulatory climate and market conditions in both Bahrain and Jordan are amenable to the presence of MVNO players.

Delta Partner's van Driessche claims the ongoing public consultation currently being carried out by Bahrain's TRA makes it unlikely that Bahrain will be the first to follow in the Jordan TRA's footsteps. He also notes that high ARPU levels in Qatar and Bahrain make it possible that MVNO players could make a successful entry in the respective kingdoms.

The Delta Partners study suggests Saudi Arabia might prove a positive hunting ground for prospective MVNOs when the present moratorium barring the entrant of another mobile player for two years eventually expires.

"Saudi Arabia's regulator [the CITC] is primarily commissioned to encourage investment in the local telco space," says van Driessche.

"The entrance of Zain in the Saudi mobile market next year means that the next player in the Saudi mobile market will have to compete against STC, Mobily [Etisalat] and Zain.

"Even though Saudi Arabia is a huge market, the prospect of competing against such stern competition might dishearten any new entrant.

"If this is the case, then the option of tendering an MVNO licence might be the only feasible option if the CITC are to encourage the entrance of another player," he adds.

Similarly, Friendi Mobile executives note that they have received most interest in markets where "new elements" are being introduced to the mix.
For example, market conditions in Oman, with its comparatively modest scale and reasonably high levels of mobile penetration, lead van Driessche to conclude that it would be another viable option for potential MVNO players.

Abdul Hammed Al Sunaid, CEO of i2, previously discussed his ambitions to bring the business model to the burgeoning Egyptian market, although van Driessche notes how low mobile penetration in the country, currently estimated to be somewhere between 30-40%, could yet leave room for a fourth infrastructure-based licensee.

With the entrance of MVNO players in the MENA telco space widely regarded as inevitable the question remains as to what kind of an impact their presence will have on the market dynamics.

Delta Partners' report claims that MVNOs in the European markets have an overall market share of about 15%, although van Driessche says that the Middle East market might vary.

"I think the Middle East market will be a different story for MVNO players and I'd say that a three-to-four percent market share within three years of launching would be a reasonable aspiration for such operators," he says.

Vinter agrees with this assertion, stating that his company is targeting a "single digit market share" across all areas of operation.

Addressing the present market players of the regional mobile marketplace, van Driessche notes how hosting MVNOs has proven a successful strategy for operators that were about to lose out in the traditional network operator battle.

"Clear case studies exist of how network operators that have gained significant market share by becoming the preferred host network operator.

"For example Telfort in the Netherlands managed to triple its market share of total users on its network by being the most proactive operator to host MVNOs," he says.

"With the liberalisation process continuing in full swing, competition still maturing and new network licences still being awarded, it is still early days for MVNO activity and it will take time before this opportunity will materialise across the region.

"However, it is clear though that when it does, the industry will be fundamentally changed and all players should be thoroughly prepared," van Driessche adds.

MVNOs in EuropeAt the end of 2Q07, there were 355 MVNOs in operation or ready to start functioning in Europe with the number expected to rise over the next three years, according to research firm Frost & Sullivan.

MVNOs have become increasingly commonplace in Northern Europe since the late 1990s but are still in the developmental stage in Southern and Eastern European markets although their numbers are growing sharply. And successfully addressing needs of niche markets at low cost prices and establishing high-quality customer management are all key to competing against infrastructure-based operators according to the research firm.

"For MVNOs, identifying the right market segment is a key for being successful in the highly competitive mobile market," says Saverio Romeo, of Frost & Sullivan.

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