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The Delta Perspective

May 2009

Mobile Broadband in MEA:


Promises opportunity but
not a smooth ride
Authors Joao Sousa - partner: js@deltapartnersgroup.com
Stephen Clements - senior associate: sc@deltapartnersgroup.com
Adil Dilmen - associate: ad@deltapartnersgroup.com
Delta Partners Intelligence Unit

Delta Partners takes a look at


mobile broadband potential
in MEA and assesses
challenges for both mobile
and fixed operators

Introduction
The unprecedented take-off of the
mobile sector across the world has
been one of the most note-worthy Key highlights
milestones in telecommunications
history. With the passage of time, • The mobile broadband opportunity
operators have witnessed a migration in MEA is expected to reach
of PSTN voice traffic towards mobile USD5.9 billion by the end of 2011;
networks. The segment has emerged as comprising nearly 70% of the overall
a crucial revenue generator of telecom broadband market
services worldwide, capturing a sizeable
• Combined broadband subscriber base
portion of basic voice and data traffic
expected to reach 57 million, with 72%
of households and enterprises. As in
of the base over mobile platforms
the rest of the world, the dominance of
mobility is seen in the MEA region too, • Both the Middle East and Africa
particularly in the emerging markets display similar mobile broadband value
of Africa. At the end of 2007, the opportunity sizes; Africa has potential
ratio of broadband, fixed and mobile for 24 million subscribers, the Middle
penetrations stood at 1:4:22 and East has around 17 million subscribers
1:18:160 in Middle East and Africa
• Long term mobile broadband ARPU
respectively. Owing to the strength of
is expected to be between USD10-
mobility, broadband over this medium is
15 driven by new submarine cable
expected to register explosive growth,
developments
catapulting to new heights of high-
speed demand.
In this paper, we explore the broadband depend on:
opportunity in the MEA region, outline • Rollout speed of 3G networks or
the external threats and internal EDGE by the leading players
challenges faced by operators, and
detail the overall value proposition. • Reduction in mobile broadband
price driven by competition and
Significant growth potential exists decrease in cost of connectivity,
with a 3-year mobile broadband both internationally (completion of
opportunity valued at around USD5.9 existing submarine cable projects in
billion, with Middle East contributing the region) and national core network
USD3.0 billion and Africa USD2.9 costs (driven by fiber deployments).
billion. The opportunity size will

EXHIBIT 1: Comparative service penetration in Africa, Middle East and EU-25 nations

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Includes Bahrain, KSA, Kuwait, Oman, Qatar, UAE, Israel, Lebanon and Libya
Source: ITU; IDC; World Cellular Information Service (WCIS); Delta Partner analysis

EXHIBIT 2: % of Households with only mobile connections in EU nations

Source: European Commission, Eurobarometer – E-Communications Household Survey, June 2008

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The ‘Fixed-Mobile’
Substitution (FMS)
The evolution, or rather revolution of the
mobile sector has led to far greater choices for
communications than the previous one of traditional
PSTN voice

The strategy on the part of fixed and Mobile Substitution (FMS). Some of
mobile operators has been aimed these are:
towards displacing each other as the • Reduced differential between fixed
preferred provider. Whilst the early versus mobile in tariffs and services
trends of mobile uptake indicated
an apparent complimentary use to • Mobile operators leverage upon a
the fixed line, mobile operators have range of price-plans across both
steadily become substitutive and prepaid and postpaid platforms,
succeeded in eating into the share as fixed operators continue to
of fixed line markets. Consequently, be ‘locked’ to their legacy line
the share of ‘mobile-only’ households rental-model
has been rising, whilst the number of
households with at least one fixed line • The gap between fixed and mobile
has continued to decline. For instance, broadband provisioning has been
at the end of December 2007 about trending downwards with the
24% of the households in the EU-27 roll-out of 3.5G networks and
nations had opted for ‘mobile access ‘unlimited consumption’ offers
only’, as the FMS syndrome has been
more pronounced in countries with • Rising numbers of ‘single-dweller’
less developed fixed networks such as households , leading to mobile
Czech Republic, Finland and Hungary. phones occupying the position of the
household communication device
In a bid to outdo the mobile
revolution, fixed players have • Proliferation of a mobile workforce
chosen to ‘bundle’ a bouquet of and the practice of businesses
communication services in order to encouraging mobile contacts as
meet the collective TV, voice and data reference points for clients
requirements, especially those of high
and middle class households. Though,
this aided in mitigating the rate of line
deactivation to some extent, mobile
players have been quick to retaliate
by bundling mobile broadband and
rolling out alternate technologies such
as WiMAX.

Several market and socio-demographic


factors have further fuelled the Fixed-

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Mobile dominance in MEA
– Opportunity and Drivers
In the Middle East, and especially Africa, the fixed
networks are far less developed than in Europe,
representing a mobile broadband opportunity of
close to USD6 billion in revenues and USD8-12 billion
in shareholder value

For instance, in Ghana and Saudi With over 500 million mobile subscribers
Arabia, mobile operators constitute in MEA at the end of 2008, the region
nearly 95% and 80% of the market has been one of the fastest growing
revenues respectively. To date, operators across the world over the past years,
in the region have been riding the witnessing mobile overtake fixed line
volume game, focusing on maximizing connections in the early 2000s. The
subscriber additions. However, as prohibitive costs of wiring the region
penetration levels continue to increase versus the favorable economics of
and reach near saturation in Middle wireless technologies is expected to add
East and 37% in Africa at the end of to the mobile voice and data bonanza.
2008, operators will need to explore Several of the regional titans have
new avenues for revenue growth. already begun to recognize this and use
Mobile operators view data services as both ‘convergence and substitution’
a growth driver that is indispensible to measures to market a variety of offers,
their expansion. The intrinsic need for initially targeting the high ARPU
creating inroads into the broadband business customers. These include
play together with the dominance of promoting phones that support fixed-
mobile operators in the telecom market, wireless access technologies in an SME
will fuel the insurgence of mobile context, while encouraging high-speed
broadband in MEA. wireless internet based on USB modems

EXHIBIT 3: Broadband market potential – subscribers and revenues

Source: Delta Partners analysis

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EXHIBIT 4: Services-suite aimed at capturing the broadband opportunity

Source: Websites

and wireless routers. threaten QoS. In addition, the increase shareholder value in the range of USD8-
in data service revenues does not always 12 billion in the next couple of years
Owing to their dominance, mobile compensate for the increase in traffic (Middle East:Africa representing 70:30
operators are well positioned to tap levels on the network. Hence, the key of this value).
into the broadband opportunity question that plagues operators is how
capitalizing on the fixed networks lack to optimize cost-to-serve, led by the Typically the regional titans, such as
of scale and competition. In the long extent of network development with Orascom, MTN, ZAIN, Etisalat, and
term, the promise of the next wave of respect to the rising data traffic. more recently Vodafone, plus other
mobile growth is likely to depend on established leaders in individual
how soon subscribers latch on to the According to Delta Partners estimates, markets, are better suited to address
data bandwagon. The data opportunity the total broadband market in MEA is the traditional ‘fixed’ telecom demands
in the mobile world stems from two expected to grow at a CAGR of 51% in of high-speed networks. As illustrated
major sources. The first leads from the revenue terms between 2008 and 2011, in Exhibit 4 above, these include voice
usage of internet access to meet with reaching USD8.6 billion at the end of and data service offerings across SMEs,
basic fixed internet needs, the second the period with a subscriber base of 57 homes and public internet cafes/
generated from within the mobile million, coupled with a geographic split payphones using mobile infrastructure.
ecosystem. The former includes the of 47% and 53% between Middle East In order to be able to successfully drive
likes of browsing, e-mails etc., the latter and Africa respectively. Additionally, profits based on a broadband play,
including m-payment, services driven the dominance of the mobile market operators would need to align their
by operators’ portal, location-based is estimated to control a majority of operating model, and gain access to
applications, gaming, TV, etc. the households and small business backbone and international connectivity
enterprises broadband market with at competitive costs. Furthermore, for
Despite the presence of this opportunity, 41 million subscribers and mobile markets where the regional titans do
operators face technical and economic broadband revenues of USD5.9 billion not have a presence, existing fixed and
challenges. As they depend on data across MEA at the end of 2011. The tier-II mobile operators have a chance
services to stabilize ARPU, the explosion surge in innovative product offerings to enhance their value proposition in
in traffic and associated rise in costs can has the ability to translate into a broadband play.

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Potential Roadblocks to
Success
Mobile broadband enables increased value, and
retention of high value clients but requires significant
investments, and opens the door to VoIP

The ‘IP’ Syndrome part of their basic subscription packages.


The first set of concerns with the advent Currently, Skype is already the second
of competition is typically related to largest operator in terms of subscribers
tariffs, as operators meet with cut in the world, with more than 370 million
throat pricing amongst their peer subscribers and revenues of USD143
group. However, the threat today has million at the end of Q3 2008.
transitioned beyond mere tariff wars
and spread to newer frontiers of IP In response to the VoIP threat, mobile
traffic. The advent of cheap VoIP calls players are seen creating service offerings
with improving QoS, has led to the such as the Video over IP solutions
jettisoning of legacy circuit switched to try to combat the Skype migration
networks, corroding the core service – Vodafone for instance is already
offering of fixed and mobile play and deploying some offerings in Europe.
making the future of voice revenues Fixed players on the other hand are
unclear. Additionally, VoIP providers being increasingly pushed into catering
have further intensified their attack, to the needs of corporate and large
by offering freebies such as unlimited business entities. Additionally, they are
international calls to select countries as hopeful of regulatory support to enable

EXHIBIT 5: Skype and its implications to the telco community

Source: Delta Partners analysis

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EXHIBIT 6: Roll-out challenges faced by mobile players

Source: Delta Partners analysis

investments in FTTH across major cities, results in line with the cost of capital
the underlying objective being to deliver and the broadband rollout requires
broadband speeds that are unmatched significant capital. Furthermore, as the
by mobile operators, thus creating broadband subscriber base rises, and the
successful FTTH monopolies. popularity of IP voice, Instant Messaging
(IM) and video calls increase, the threat
Perils of Rollout Overestimation to existing voice capacity, continues to
An evolution from traditional mobile grow.
player to that of an integrated /
convergent one, calls for a revised Thus, the key to success lies in
business model and organizational striking the right balance between
revamp. The roadmap that lies ahead profitability and value creation, whilst
is not simplistic as operators face key preventing data from cannibalizing
challenges of meeting high-speed voice revenues. In the Middle East,
connectivity expectations, with a range current regulatory conditions tend
of technical, commercial and financial to block VoIP services, maintaining
issues. To be able to successfully address attractive conditions for local players
the opportunity, operators require access to push broadband development
to international capacity at competitive without having to be overly concerned
costs, and significant investments in about cannibalization of voice
both access and core networks. The revenue from the growth of VoIP.
commercial challenges to be dealt However, freely available software
with include devising innovative ways has made it possible, even under
to address the ‘utopian’ high-speed such circumstances, to access VoIP
expectation. The financial challenge is services despite regulatory restrictions,
a basic one in some MEA markets. Even demonstrating the risk they pose to
the leading players are not realizing the operator.

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Key Success Factors –
Realizing the Prospect
In order to address the broadband opportunity, mobile
operators need to first align their operating models
with business objectives

Such a transformation is needed to Efficient, Low Cost Core and


enable them to address the opportunity Backbone
profitably and meet key broadband • Improve control of network
development requirements. In our coverage, capacity and technology
opinion, the factors that play a decisive to manage service quality and costs
role in creating a sustainable opportunity • Make an informed and judicious
include the following: decision on the mix between
coverage and capacity in urban
Access to International Connectivity versus rural areas
at Competitive Costs • Due to the lack of fiber in MEA,
• Presently, 1GB of international players such as MTN and Zain are
connectivity in Africa ranges between deploying fiber to fulfill backbone
USD15 to USD30 depending on requirements, and in some cases
the country and service quality. metropolitan rings
This translates into very high priced • Explore tower sharing and rural
broadband service offerings roaming to reduce cost of network
• To improve upon the current scenario,
some mobile players are known to Improve Economies of Devices /
be investing in and also leading the CPEs Supply
development of submarine cables in • Currently, the operators’ cost of
the region a 3G data card / USB modem is

EXHIBIT 7: Broadband potential across markets with top 2 operators offering broadband services

1
Only Middle East and African countries, considering the full potential of the countries where the operator has equity stake; Etisalat includes Iran
2
Vodafone includes Vodacom countries as well
Source: Delta Partners analysis

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EXHIBIT 8: Positioning methodology for the regional mobile players

1
The condition required are cumulative as we move from left to right scenarios
Source: Delta Partners analysis

higher (in excess of USD50) than Organizational transformation strong home market) and Zain have
the consumer price in Europe • Revamping the ‘Go-to-Market’ an opportunity to lead the charge
strategy of players in capturing the mobile
Dedicated Sales Channel and • Partnering with other entities of the broadband space.
Customer Support value chain (e.g. ICT services) and
• Sales and support towards data taking advantage of broadband play Striking the Right Balance
connections is far more complex (e.g. through vendor partnerships and In our opinion, the leading regional
than traditional pre-paid voice / or infrastructure sharing) players can occupy one of the four
services highlighted positions in the broadband
• Operators need to rethink the Regional giants such as MTN, Zain, ecosystem. These are segregated based
number and role of ‘Owned-shops’, Vodafone (Vodacom), Orascom, and on the operators’ range of services,
devising a tailored channel strategy Orange are well positioned to lead positioning and its individual objectives.
(e.g. IT agents as telecom sellers), mobile broadband development across
designing distributor role and the MEA region. MTN currently leads • The Pure mobile play helps capture
agreements, and defining the mix this potential due to presence in the part of the potential but does not
of sales agents (outsourced versus high-potential markets of Iran, Nigeria hold a leadership position in the
direct representatives) and South Africa. Exhibit 7 highlights market
• Enhance customer care structure broadband penetration as % of • The Broadband player requires
and dimensioning in terms of direct population and potential number of significant investment in radio
support to users, sales agents and mobile broadband subscribers. technology (3.5G and WiMAX,
corporate clients depending on the country / city
Having said that, the estimates are potential) plus access to backbone
Enhance Customer development and likely to be impacted by regional and international connectivity.
design retention programs developments such as new license For instance, MTN appears to be
• Educate clients in order to rapidly awards in Iran (awarded to Etisalat), adopting this position with its
rollout offers and protect high value a potential new license in Tunisia and investments in submarine cables,
clients privatization of operators in Libya, fiber backbone, 3G and WiMAX
• Improve value proposition for high Algeria, and Mozambique. Considering licenses. On the other hand,
value business and residential the backdrop of the current economic Vodafone (Vodacom) is likely to
customers. In Africa, this segment environment, and the related difficulty leverage their expertise in mobile
represents between 10-20% of in obtaining debt and cash, operators broadband from Europe
subs and 50-60% of revenues such as Etisalat, STC (leveraging its • Broadband and ICT play is more

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aligned to countries with a strong larger geographical footprint, and in have struggled to translate a growing
corporate / business segment. more robust economies comprising business segment into adequate
Pursuing a focus on this segment high value residential concentration. shareholder returns. The minimum ICT
requires the mobile operator to play is likely to include connectivity
acquire additional complimentary Another option is the ICT and/or TV services charged on real service level,
assets and competences. For instance, play combination, which requires a data centre, security and email services.
in South Africa, MTN and Vodacom significant transformation of existing This offer presents strong opportunity
(Vodafone) seem to be following organizational and operational in many countries, generating carrier
this path, while in UAE, Etisalat structures of the operator (refer Delta revenues and building loyalty of
is leveraging its’ fixed and mobile Partners paper on ICT Managed corporate clients, whilst deviating
business to exploit market potential Service dated October 2008). Telecom from the legacy tariffs and monthly
• Lastly, selective triple / quad play, is references in these services include BT fee structure of broadband offers into
best suited for leading players with Global Services and T-Systems which integrated solutions.

Fixed Line Operators –


Rethinking the Business Model
After having detailed the mobile broadband opportunity, the obvious question
left to be answered is what lies ahead for the fixed players in the MEA region

The situation and challenges for the network development plus density mobile domination of the market. In
fixed players in MEA regions vary of high value consumer and business such countries the potential of fixed
considerably across nations. Exhibit clients enables fixed players to pursue broadband is very limited, with the
9 illustrates the threat, wherein the a growth path within broadband and FMS trend further increasing the risk
countries with favorable conditions data services. In addition, most of the to fixed operators. In cases where
in terms of submarine cable links and fixed incumbents in those countries the fixed player owns or is part of a
presence of major leading mobile include a mobile operation that can group with mobile operations, the
players will present significant challenges be leveraged to develop a cohesive situation is less critical. The popularity
to fixed players’ profitability. Some value proposition. In South Africa for of privatizations of incumbents is
countries present favorable competitive, instance, Telkom, after the sale of expected to increase significantly
regulatory, and ownership conditions for their stake in Vodacom to Vodafone, over the next two to three years,
the fixed players, allowing time for them clearly needs to rollout a mobile coinciding with the time it will take
to significantly improve their broadband offer, merely to try and sustain their for the African submarine cable
portfolio and positioning. Such countries position in their home market developments and for fiber to be
include Angola, and Libya. laid out in most countries enabling a
• Competitive Mobile African Path strong broadband push
Three key future models for the fixed – This model would entail the sale
incumbent would be as follows: of the business to a leading MEA • The Government Path – In this
• European Incumbent Path – This mobile player within the next few scenario, operators exploit the
includes a focus on broadband and years. In most African countries the monopoly/ duopoly scenarios
data services plus integrated fixed local fixed network is significantly to substantially increase the
and mobile offers. In some countries underdeveloped and lacks quality, value of fixed business and drive
such as the leading GCC nations often with a significant number broadband before full liberalization.
and South Africa, the stage of fixed of mobile players contributing to Governments in countries like

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EXHIBIT 9: Mobile broadband potential per country

1
Low is less than 2.25% penetration, medium is between 2.25% and 4.5% penetration and high is more than 4.5% penetration
2
MTN, Zain, Vodacom/fone, Orascom, Orange, Etisalat
Source: Delta Partners analysis

Angola and Mozambique can still


EXHIBIT 10: State of fixed network liberalization in (selective) MEA countries
have a major role to play in the
development of the state telecom
assets, and take advantage of
market control to generate value
before competition is introduced.
However, these governments
need to ensure their telecom
assets control significant access
to international connectivity at
competitive costs, deploy a state of
the art IP backbone network linking
key cities, deploy fiber rings and
drive broadband.

Source: Delta Partners analysis

Conclusion
It is clear that mobile broadband represents significant - in ensuring there is sufficient opportunity to develop
potential for leading players in the MEA region. While, a strong national telecoms infrastructure (a key driver
the sheer growth potential makes it difficult for players in sustained economic growth), with the funds derived
to disregard the opportunity, the strategy employed from revenues contributed by operators. Fixed players
would determine the dominant players and potential contemplating on entering the race will need to identify
impact on the shareholders’ value. Operators would whether the opportunity is within their sights and if
need to navigate the unique set of obstacles and so, deploy a clear entry strategy. In conclusion, while
challenges intelligently, such as, government mindset mobile broadband holds great promise for the region’s
that largely focus on the telecom revenues’ contribution telecom landscape, market dynamics will eventually
to national budgets. determine the market leaders and the potential value
realized. It is certainly an exciting time for the regional
The more forward looking (liberal) Governments will telecoms market.
strike a balance between long and short-term objectives

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Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology

(TMT) sector in high growth markets, with more than 130 professionals operating across the Middle East, Africa and South East Asia

from its offices in UAE, South Africa and Bahrain, and through its three highly synergetic business lines:

Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than

50 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them

address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity: As a fund manager, Delta Partners manages a $80M private equity fund, targeting investment opportunities in the

TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Group’s unique TMT industry

expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis,

and support to portfolio companies.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several telecom transactions in the

region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region,

either to the seller or buyer side of the transaction. Delta Partners actively leverages its close link to Delta Partners’ private equity arm

to access the investor community as well as top-level financial talent.

At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to

services, combining strategic advice and hands-on pragmatic approach.

Copyright © 2009 Delta Partners FZ-LLC. All rights reserved.


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