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Mon 4 Jan 2010 04:00 AM

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Road ahead: 2010

After a turbulent 2009, the region's telecoms sector is upbeat about prospects for the year ahead.Fe

Road ahead: 2010
Booz & Co’s David Tusa sees more caution in M&A activity in 2010.
Road ahead: 2010
Independent telecoms consultant Milan Sallaba thinks operators will continue to focus on driving efficiencies at group level in 2010.

After a turbulent 2009, the region's telecoms sector is upbeat about prospects for the year ahead.Fe

Few would dispute that 2009 was a tough year for the telecoms sector, with growth slowing and capital becoming harder to find.

But while 2009 was the year that the financial crisis truly gripped the Middle East and Africa, it was also a year that forced the region's operators to wrestle with some of the challenges that they would have had to confront at a later stage anyway, such as the need to be more discerning in acquisition targets, consolidate portfolios, and focus more on higher ARPU services.

While the telecoms sector is widely viewed as being somewhat insulated compared to many other sectors, operators and vendors in the Middle East and the rest of the world certainly felt the effects of the economic turmoil.

Global capex from telecom operators is expected to have declined by almost 6% in 2009, mainly due to a significant capex shakeout in the Middle East and Africa, a weakening US dollar and delays in US broadband stimulus funding, according to a recent report from analyst Infonetics Research.

Capex is expected to reach a trough in 2010, with a new investment cycle starting in 2011, driven by 3G rollouts in India and Central and Latin America, and the start of 3G rollouts in Africa, according to Stéphane Téral, principal analyst for mobile and FMC infrastructure at Infonetics Research.

But for many industry experts, the effects of the financial crisis, including reduced growth and funding are playing out in an interesting way in the telecoms sector in the Middle East and Africa. Indeed, for most operators, the situation has been a reality check after the excesses of the past few years of low-cost debt.

This in turn is compelling operators to reach a new level of maturity by consolidating operations, increasing efficiency and where necessary, trimming operations through the disposal of non-core assets and services.

Measured expansion

This is most clear in terms of mergers and acquisitions.  After a "land grab" mentality in the run up to 2009, operators now look set to take a more prudent approach to deals, according to David Tusa, principal at management consulting firm Booz & Co.

Tusa says that while he sees heavyweights such as Etisalat, STC and Qtel continuing to expand geographically, they will now adopt a more strategic approach and look for well-priced assets that fit with their existing portfolio.

 "It is a chance for them to say: ‘How can we extend our footprints properly and how can we keep on taking advantage of growth and momentum we have had in the past few years?'" he says.

"The difference in 2010 is that operators will get a little bit more selective about the nature of their portfolios."

Operators will increasingly question how an acquisition target would fit with the company and add value to the group, according to Tusa, who adds that "interesting markets" including Iraq, Afghanistan and Iran could be a focal point for operators in the coming year.

"They are going to be assembling their portfolios with a view towards extracting better value from them. I know it sounds simple, but maybe that has not been practiced as one of the key drivers of M&A in the past," he says.

Milan Sallaba, an independent telecoms consultant agrees that continued M&A activity is likely in 2010 - albeit at a less frenetic pace - particularly among the larger operators with healthy balance sheets.

"While some operators appear to have been caught out by the downturn's double whammy of slowing revenue growth and profits and increasing cost of capital, others are in a strong position and benefit from advantageous debt positions underpinned by strong cash flows - Etisalat being a notable example," he says.

"It is to be expected that some telecom assets that continue to struggle could become available and may indeed be snapped up if the price is right and provided there is a good fit with the acquirer's portfolio."

In addition to a more considered M&A approach, 2010 could also be a year when some operators trim back their portfolios and dispose of operations that are failing to add genuine value to the group, a trend that already appears to have started with Zain's proposed sale of most of its African operations in 2009, according to Tusa.

"I wouldn't rule out some portfolio trimming," he says. "I wouldn't rule out some of the shareholders and sponsors sitting around and questioning whether X operator in Y territory is really contributing value."

Efficiency drive

Expansion is not the only area where operators will show a growing maturity in 2010. The region's operators are also expected to continue to focus on improving their group-level procurement and deployment of services.

"Most players have shifted their focus from continued expansion to more closely focus on managing the EBITDA of the assets in their portfolio," says Sallaba.

"In the face of tightening budgets and capital, operators have made great strides to increase the degree of professionalism of their selection, approval and purchasing processes for large contracts, for instance."

Tusa adds that this trend is likely to continue in 2010 as operators look to extract greater value from existing assets and boost efficiency across their operations.

"The big operators have built fantastic portfolios but they have to look at how they can extract value out of the groups.

"I am talking about a deep level of commonality between how they are going to bring out some of the product portfolios and talk to different customers in different markets, and how they project themselves across the footprints in a way that really starts to make sense," he says.

For example, Tusa says that operators with multiple operations might need to look at the number of suppliers they source various products and services from, not least because using multiple suppliers across the group is likely to hinder an operator's ability to create common services platforms and propositions.

But as well as trying to cuts costs, operators will also rely more on their ability to deliver new products and services across their footprints.

"What we have seen in the past 10 years with European carriers since 2001 and 2002 is they have cut costs all across the operations and in very similar ways.

"What they are now starting to do is look where they can get the extra revenue. The carriers in our region are starting to move very aggressively down that line, and it is going to quite interesting to see where that takes us," Tusa says.

Limited roll out of LTE

Despite the hype that surrounds LTE, ABI Research suggests that "most LTE rollouts will not start for a few years". Instead, many operators will focus capital spending on squeezing out faster data rates and increased capacity from existing 3G networks.

"Nor will there be many types of LTE-enabled devices, apart from some USB modems and perhaps some demo LTE handsets."

Path to innovation

In Booz & Co's 2009 end of the year letter, the organisation pointed out that all parts of the telecom ecosystem, from connectivity, basic services, low-end handsets, networking equipment, and even the networks themselves, are rapidly being commoditised, leaving all players in the sector to seek out new sources of value.

The report adds that the "clear answer" is services that allow organisations to move up the value chain.

"Equipment manufacturers are offering networking and field operations services, handset manufacturers are building high-end smartphones complete with added services and fully stocked ‘app stores,' and operators are moving to provide customers with more and more online applications, including content deals," the report states.

However, the trend remains in its infancy, which could allow operators with the right ideas sufficient time to innovate and take on some of the new disruptive services offered by the likes of web-based services such as Google and VoIP operators.

Tusa points to mobile commerce services such as M-PESA in Kenya as the type of offering that operators can support in order to bring in new revenue streams and also ensure that the mobile phone gains a new level of importance in people's lives.

"M-PESA Kenya has been an extraordinary success, making an enormous and positive difference. This sets the benchmark for how products and services can be driven by a mobile carrier that sees an opportunity," he says, adding that such services could then be rolled out across a group's operations.

Wireless way

Many industry insiders also expect to see a renewed focus on data services in 2010 led by developments in 3G and HSPA in the mobile sector and FTTH in the fixed sector. WiMAX also looks set to continue increasing broadband coverage, while LTE tests could start paving the way for deployments the following year.

 "As we approach voice saturation one of the key trends will see the focus switch heavily to broadband," says Noel Kirkaldy, director wireless broadband for Motorola Networks in Middle East and Africa.

"The trend is going to move away from copper, DSL and cable, to the fibre, GPon, and FTTX type solutions. We have started to see some traction in the WiMAX area and that will continue to evolve in the region, and that is of interest because it's not only of interest to the ‘usual suspects', but it is also bringing in new entrants."

In the mobile broadband space, Kirkaldy says the industry is likely to start seeing the movement from HSPA to LTE, which will become commercial during the course of 2010 and beyond.

"It's big news for the region, because if you go back to 2000, as an industry - the media and vendors - we were guilty of putting a solution ahead of a requirement," he says.

"In 2000 we had WAP, but the solution was ahead of the requirement. If you listen to any of the talk from operators now, when you look at the tsunami of data that is coming in from their domestic markets the requirement is now ahead of the solutions. As an industry, we need to be dragged into and get ourselves up and running rather than the other way around."

Continuation of GSM

Although the attention of the industry has been held by 4G developments such as LTE, ABI Research warns against forgetting about the role that GSM continues to play in the telecom sector.

"Every year the bell is tolled for the demise of GSM but somehow this air interface seems to keep rolling on," it commented in a recent research paper. "Although the trend is certainly downward, much of the third world is still rolling out GSM/GPRS/EDGE infrastructure and mobile devices."

It points to the fact that "a sizeable block of the world's population" has only recently joined the mobile community, and that many people are still enjoying low speed data functions like SMS.

"In this communications universe, cost drives almost everything and inexpensive base stations and ten-dollar handsets with five-dollar monthly bills will be the norm."

Depressed spending is “unsustainable”

Mashood Ahmad, regional managing director for the Middle East for network specialists Ciena says 2010 could see an end to the network build out freeze of last year.

"The global telecommunications industry is currently about 20-25% into a significant network upgrade cycle towards Next Generation infrastructures," he says. "This trend is caused and fuelled by the changing traffic mix - with increasing packet traffic from consumer broadband, including mobile broadband, as well as IPTV and enterprise private lines gaining on significance.

"Current depressed levels of spending are unsustainable over time, particularly given the combination of traffic growth and new service demands on the networks. In this light, 2010 could become a year of slow - but stable - recovery, and of come-back to the pre-crisis pace of network upgrades. Recession or not, end users have not stopped using telecom networks - on the contrary, the strain they impose on the infrastructure is growing at a steady pace.

After the network build-out freeze of 2009 carriers will likely have some catching up to do, and 2010 could, though doesn't have to - lessons from the world's recent economic turmoil convince us - be the time when this process begins."

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