Mobile phone giant i2 has taken yet another step in its ambitious expansion strategy. Traditionally known as a handset distributor and retailer, the company is preparing to become the Middle East's first mobile virtual network operator (MVNO).
The Saudi Arabian company recently announced its intention to acquire its first MVNO licence in the kingdom of Jordan and publicly claimed that it is currently in talks with several operators to offer MVNO services across the region.
"This move is in line with our business strategy to expand the value proposition of our services and be part of the pioneering developments in the Middle East's telecommunications industry," says Abdul Hameed Al Sunaid, CEO of i2.
The regulatory climate in Jordan makes it the only country in the region where such an operation can be launched.
Jordan's Telecom Regulatory Authority (TRA) recently said it would begin allowing MVNOs to operate alongside the three existing mobile providers, Orange, Zain and Umniah.
Al Sunaid claims that i2 is scheduled to sign the Jordanian MVNO licensing agreement in late November, or early December, with a proposed launch date of January 1, 2008.
He also adds that the company is currently conducting negotiations with Jordan's existing network operators for the wholesale purchase of airtime.
Unable to disclose the total cost of i2's market entry in Jordan, Al Sunaid does note that the company will invest US$10 million in the initial marketing campaign of the MVNO launch.
He also claims that the total investment will depend largely on the amount of spectrum outsourcing the incumbent operators are willing to undertake.
"Virtually all of the work has been completed from our end, we've completed all of our technical proposals and are in advanced stages of negotiations with operators. We are virtually ready to push the button," adds Al Sunaid.
But MVNOs do face challenges when it comes to the price of the voice minutes they are re-selling, according to Stephanie Pittet, a principal research analyst for research firm Gartner, mobile devices and consumer services group.
"MVNOs are at a disadvantage because they are charged relatively high wholesale fees for voice minutes, and voice calls account for the largest portion of their revenue," she says. "In many cases, the rate negotiated with the network owner determines the viability of the MVNO."
But this has done little to deter Al Sunaid, who is convinced that Jordan's liberalised market is ideal for the MVNO concept. He explains that the decision to develop into an integrated communications provider in Jordan was governed by the comparatively liberalised telco market in the kingdom.
"We want to apply and get MVNO licences in every market we operate in, if the business model allows it," he says.
"Jordan is the first market we are launching these operations in as the regulatory climate there makes it the only country in the region where such an operation can be established," he adds.
The move by Jordan's TRA to introduce MVNO services is a key step in boosting competition and a major step towards the decentralisation of the mobile market in the region, according to Al Sunaid.
He also explains the rationale behind such moves is dictated by the market dynamics of each individual country.
"The regulatory climate in Jordan makes it the ideal market to launch such operations but there are other conditions we will take into account before we take such decisions," he says.
Gartner's Pittet claims the business case for an MVNO in Jordan is that the market is mature but not yet saturated, with 71% penetration at the end of 2006.
"The market is open and is the first one in the ME to allow MVNOs, through regulator's decision. So there are more users to connect that may find value in a MVNO's proposition of specific pricing models or specific services," she says.
The principle is quite simple; if you can’t access the market then you cannot make money.
Al Sunaid notes how market volume and penetration play a role in the decision of where to launch MVNO services, making countries such as Saudi Arabia, Egypt and Iran potential markets for i2 to launch a virtual network.
However, he also says that less populous countries such as Bahrain, Kuwait, Oman, Qatar and Syria are likely markets in which i2 will look to launch as an MVNO.
"There are two key factors we take into consideration when taking the decision to launch as an MVNO in a given market," says Al Sunaid.
"Firstly there is the question of your brand equity and secondly there is your existing infrastructure in order to service the market. The principle is quite simple. If you can't access the market then you cannot make money.
"In Europe, many MVNOs were unable to sustain its success given its inability to access the market," he explains.
Industry pundits have speculated as to the validity of the MVNO business model given the recent difficulties experienced by such operators in developed markets such as the US, Europe and the Far East.
One high profile casualty of this trend is US titan Disney, which closed two MVNO enterprises in as many years.
The company cited distribution costs and an inability to gain traction in large-scale outlets as the principle reasons for the closures. The entertainment company also scrapped plans to launch a similar venture in the UK last year.
For Pittet, MVNO success in Europe can largely be attributed to the fact they offer low cost mobile services. One successful niche MVNO in Europe is Ay Yildiz, a sub-brand of KPN that targets the Turkish-speaking communities in Belgium and Germany, she says.
"Ay Yildiz offers cheap calls and text messaging to Turkey, with a website and customer services in Turkish.
"Other examples are MobiSub, a French MVNO on the SFR network, which addresses the North African community with low tariffs to call Algeria, Tunisia and Morocco," she adds.
Industry pundits also note that companies considering launching MVNO operations need to pay attention to the operations side of the business and appraise their support infrastructure - especially for billing, account management and content delivery - in terms of reliability and scalability.
"They should also make sure their distribution plan is wide enough to sell to the targeted audience, and that they have the partnerships to deliver products and services smoothly," says Pittet.
i2 executives remain confident of their ability to leverage the company's existing brand-equity and market reach to avoid the pitfalls of the MVNO business model.
Analysts have mooted the benefits MVNO players as lower overheads and customer service costs for incumbent operators. Al Sunaid asserts that i2's launch as an MVNO will lead to increased segmentation offering end-users increased choice and value for money as he intends to target niche market segments.
There are a few internal measures before we can make an IPO but we are looking to implement them in 2008.
"Incumbent operators have traditionally found it difficult to cater for every market segment. In this sense we can help our operator partners to tailor their services towards specific market segments," he says.
"As an MVNO player, we can also play a significant role in driving the market towards increasing levels of maturity."
Pittet agrees, adding that MVNOs offer a fresh revenue stream for hosting networks. "MVNO agreements can also offer them the chance to tap into market segments they could not address directly, for reasons such as wrong image, inadequate brand and incomplete distribution channel," she says.
"For the market overall, MVNOs boost the competition, so are beneficial to the end-user and could unlock growth."
Al Sunaid maintains that sufficient opportunities exist for i2 to distinguish itself in the market leading to improved quality of service as well as helping to moderate prices for end-users.
"Consumers will now benefit from differing content customisation that we can offer as well as the improved levels of customer service. Our stores will now become a one-stop shop for all our subscribers' telco needs," he says.
MVNOs have some ground to succeed in markets where there is still space for connection base to grow and where ARPU (average revenue per user) can be brought down without impacting their bottom line too heavily, according to Pittet.
"It is also expected to be easier for MVNOs if the existing competition is not yet too fierce," she adds.
Al Sunaid thinks this will be the case in Jordan. He predicts that i2 will build a network of some 300, 000 subscribers within three years of its MVNO operation.
The company will initially direct its Jordanian market launch towards the youth segment of the market.
"This market segment is key to the overall development of the market given the early adoption rates of modern technology among that age group," he says.
Al Sunaid also explains how the huge youth segments in Egypt, Iran and Saudi Arabia - where the median age of each country's population is 24, 26 and 21 years old respectively - make these markets a logical step for them to MVNO services into in the near future.
However, he also notes that he is keeping his mind open towards targeting different market segments where the market dynamics permit such a move.
Since re-branding from the Itsalat International moniker in late 2005, the company has expanded at a heady pace with its regional footprint now spanning 22 countries across the MEA region.
The company was lauded as the ‘fastest growing company of the year' in June this year by Arabian Business magazine having recorded a fivefold revenue increase in the last three years, according to Al Sunaid.
"In the last year we have expanded into Angola, Morocco and Sudan as well as introducing new concepts into our retail strategy with the opening of the first i2 café in Dubai," he says.
Additionally, i2 announced the acquisition of computer retailer CompuMe through a share swap deal in February 2007, making the combined entity one of the biggest providers of combined telecoms, digital electronics and IT products in the Middle East and Africa region.
i2's latest acquisition, as well as the recent buyout of Cellempower and UK GSM trading company Allied TC last year, has led i2 to announce projected revenue growth figures for 2007 at US$3.2 billion, doubling the US$1.3 billion in revenue it made in 2006.
The Saudi Arabian company also expects to shift 12 million handsets in 2007, again more than double the volume it sold the previous year, while opening an additional 150 retail outlets in the MENA region within the next three years costing an additional $35 million.
Indeed, much has been made of the company's eagerness to enter new markets and the risks this may entail but Al Sunaid points to the growing cost of market entry as a vindication of this strategy.
"We are always eager to stay ahead of the competition, you only have to look at the rising cost of entry in high volume markets such as Egypt and Saudi Arabia to see the importance of gaining early market access," contends Al Sunaid.
In keeping with this strategy the company is looking to expand further into the African subcontinent. Jihad El-Eit, i2's VP of marketing, says that the company's core competency of mobile phone distribution is at the centre of its push into new territories.
"When we enter price sensitive markets we aim to assure our retail partners of the quality of the product we are supplying them with," he says.
"Much of our time in these markets is occupied by reducing the impact of grey market traders and this often involves a lot of end-user education," he adds.
As the company moves onwards and upwards speculation continues to mount on the timing of i2's decision to make an initial public offering.
Al Sunaid says the company will seek to list itself on the Saudi Stock Exchange at some point in 3Q08 or 4Q08 and that the acquisition of an MVNO concession in Jordan has been a major milestone towards achieving this aim.
"There are a few more internal measures we have to take before we can set about making an IPO but it is something we are looking to implement in 2008," he says.