With competition becoming an integral part of the Middle East telecom market, Delta Partners' Victor Font assesses the level of competition and how regional Telcos are squaring up for the fight.
The past few years has seen a sea change in the way the telecommunications sector operates in Middle East markets, with most countries in the region opening the sector up to competition.
With various competitive models being deployed in the region, Victor Font, managing partner at Delta Partners, a management consulting and investing firm focused on telecommunications in emerging markets, assesses the level competition in the market, and how effective it is likely to be.
How do you view the level of competition in Middle East telecom markets?
If the incumbents are good enough, and fast and flexible enough to react to a competitor’s move on the pricing front, the competitor will have a hard time to differentiate through price because it is very easy to implement price cuts.
When you are looking at the sector you need to clearly differentiate between the fixed line or broadband markets and the mobile markets, in the sense that in the Middle East region competition has mainly been driven through mobile licenses and in an area where there are differences between markets, quality of infrastructure lags behind some of the more advanced markets.
Governments have seen the business model and profitability attached to the business model itself.
They have seen its potential and that is why you have seen some of the licences being issued by competitive bids and auctions in order to maximise the price being paid.
When looking at competition we see several markets where competitors have done well and where incumbents have somehow either struggled or have had a hard time against newcomers, although at the end of the day you can probably differentiate between the large incumbents that probably hold a licence and assets, versus those that only compete in the mobile space.
Which incumbents have done well, in your opinion?
The large incumbents that have integrated offers, fixed and mobile, have been able to defend their positions in a better way than the operators that only hold mobile assets, and therefore you have the cases of Etisalat, Qtel, STC - those players have a strong position in the market even though competition has been put in place, especially on the mobile side of the business, they are able to defend their position in a quite solid way.
Those that have done this in a better way have has an advantage with certain segments of the market that require not only mobile voice services but also data and fixed line as a whole, and they managed to retain customers and reduce the number that jump to a competitor.
On the other side of the fence, what are the key factors that have allowed some new competitors to succeed in winning business from incumbents? Key sources of sustainable differentiation come on the products and services front.
New products and services offered by new companies are typically very similar and in this industry it is difficult to achieve differentiation though services because you can be the first one to introduce a given service to a new market, but your competitor will be able to do the same quite rapidly.
Therefore, sources of sustainable differentiation are typically sales and distribution being able to deploy a successful sales and distribution network with an extensive and differentiated retail network.
Branding is also important, because the traditional incumbents have typically been associated with technology related brands, quite old fashioned and we see new competitors coming in especially in some markets with a more consumer type of approach.
And then there is the question of pricing. Is it a source of competitive advantage?
The issue in the UAE is that given the fact that the two incumbents, Etisalat and du, are controlled by the government, the liberalisation process is following a more careful and controlled process.
In some markets the answer will be yes - when you look at the markets like Jordan, the third player Umniah managed to establish a successful position and drove market growth as well as basically a decrease in the incumbent's market share, because they went for a very aggressive pricing approach.
How should an incumbent react to this?
If the incumbents are good enough, and fast and flexible enough to react to a competitor move on the pricing front, the competitor will have a hard time to differentiate through price because it is very easy to implement price cuts.
The problem here is that incumbents sometimes hesitate to follow - since they have the largest customer bases, they fear the impact that this may have in their financials will be difficult to recover, but the ones that have done best are those that understand that not moving is worse than moving and that they need to see how they can create perception of affordability in the market place while maintaining the average price level as high as possible.
Will fixed line also become MORE competitive?
That's the key challenge and especially in markets where the government is very much interested in driving economic growth and ensuring that they bridge the gap with a more developed one.
That is something that governments should see as a priority because obviously the development of broadband - ensuring that the penetration of internet and data services increases as much as possible - is something that will drive economic growth and help breach the digital gap.
It is also something that governments and regulators should set as a priority, although for the time being this is not happening, although when looking at mobile telecom markets, maturity of most of the markets across the region is quite relevant because you see penetration rates reaching even higher levels than the most developed markets in the world.
On the fixed line and broadband markets, there is a lot to be done, which at the same time is a big opportunity for new players, investors and for people that want to take advantage of business opportunities.
How do you see moves by regional governments to promote competition?
In terms of number of competitors, and key regulations being put in place, Jordan and Bahrain are probably the most advanced. Then you would have markets like Kuwait, Oman and the UAE in second position. Saudi Arabia, as the biggest market, would fall between the frontrunners - Jordan and Bahrain - and the second group.
Do you think the UAE and others will follow in the footsteps of Jordan?
Well for sure, this is something that will end up happening because it is a key requirement to guarantee that the development of the industry reaches the levels that are required, which results in benefits for the country and the population, society and also the population at large.
The issue in the UAE is that given the fact that the two incumbents, Etislata and du, are controlled by the government, the liberalisation process is following a more careful and controlled process.
If you look at the results being yielded and the fact that both Etisalat and du have always taken a consumer and end-user oriented approach, it sets the UAE as a case study worldwide on how a monopoly or duopoly can drive growth and development of the industry without the need to open the doors to an increased number of competitors, as we are used to seeing in many other markets around the world.
How is the competition implemented in Jordan and Bahrain?
It is different in that Bahrain and Jordan have followed a more traditional type of approach in the sense that an independent regulator was set up, and a liberalisation process was established. The first sector that was going to be liberalised in both cases was the mobile sector, and a second mobile licence was offered in a competitive bid.
All of this did not happen in the UAE. There was also a regulator set up but the second licence was awarded without the need of a competitive and open bid and was awarded to du, which is controlled mainly by the government. Du was awarded a fixed licence as well as a mobile licence, which makes the UAE case different.
Which method do you think is best?
I wouldn't say there is a best or a worst way, in the sense that it depends on the approach, attitude and performance of the incumbents.
Etisalat has been able, in a monopolistic type environment, to drive the development of the industry and adjust itself to the demands and needs of the end user that basically proves there is a scenario in which limited competition in a limited competition environment can still bring development.
However those are more exceptions to the rule. If I had to select the best approach in order that the industry develops and the end user benefits from that development, a more open type of approach where competition is forced would typically be preferred.