The global mobile market is typically thought to be characterized by a broad divergence between developed and developing markets, each driven by different trends and dynamics. But these trends are becoming more and more similar and, significantly, will continue to do so at an increasing rate.

This development will have a major impact on operators in developing markets, forcing them to go through the same fundamentally painful transition as operators in developed markets have, because the markets they operate in are becoming more competitive - that is to say, more mature.

It will also have a major impact on operators in developed markets. Emerging-market operating groups that have grown enough to challenge them for the most attractive M&A deals in emerging markets will compete even more aggressively in the decreasing number of markets where growth is still possible.

Emerging-market operators are already experiencing competitive pressures. For instance, Egypt’s Orascom - a quintessential emerging-market operator - saw a decline in each of the “emerging” markets it operates in - Algeria, Pakistan, Egypt, Tunisia and Bangladesh - in 2Q08. Orascom’s ARPU fell 8.3 per cent year-on-year in 2Q08, from US$7.20 to US$6.60. South Africa’s MTN Group, meanwhile, saw a 17.6 per cent year-on-year decrease in ARPU in 1H08 across its mobile operations, which span the Middle East and Africa. Similarly, Kuwait’s Zain saw ARPU declines in the majority of markets it operates in across the Middle East and Africa, amid an impressive increase in revenue.

Although these ARPU figures are much lower, on a like-for-like basis, than those for operators in developed markets - by comparison, Vodafone UK had 2Q08 ARPU of US$39 - the trend remains the same: ARPU declines as competition increases amid an increase in the number of operators in a market. This is bad news for emerging-market operators, because competition is becoming more intense.

The East African country of Uganda, which has a population of about 31 million, is a market whose recent development is typical of more-developed markets worldwide. Put simply, competition in Uganda is intensifying. The UAE’s Warid Telecom launched mobile services in January, becoming Uganda’s fourth operator. New licensee HiTS Telecom is expected to launch GSM services this year, and unified-license holder Reliance Communications could become the sixth mobile player in the coming year.

According to Informa Telecoms & Media, Warid signed up 487,500 users in its first sixth months of operation, leaving it trailing market leader MTN, with 2.8 million subs at end-June; Zain, with 1.8 million; and incumbent Uganda Telecom, with an estimated 1.3 million. Informa forecasts that the country will have a penetration of just 19.95 per cent at end-2008, rising to 23.14 per cent at end-2009.

What’s interesting is that both Zain and MTN, the only operators for whom ARPU information in Uganda is available, saw their ARPUs decrease in 1H08. Zain saw ARPU fall from US$9 in 1H07 to US$7 in 1H08, while MTN’s fell from US$11 to US$9. Despite the decrease in ARPU, Zain saw EBITA in Uganda increase a massive 242 per cent in the 12 months to end-1H08, to US$13 million.

These figures show that as voice prices decline because of competition, ARPU declines. And while subscription growth rises at a faster rate, profitability growth outpaces ARPU declines. But this only happens until voice prices reach a certain level, at which point growth in profitability begins to tail off. This curve of development is what has led operators in developed markets to pay dearly for operators in emerging markets, a path that emerging-market players have already entered.

Hundreds of markets around the world have already experienced the type of development Uganda’s mobile market has seen recently, and it is happening now, at an accelerating rate, in emerging markets worldwide.

The trend will have wide-ranging implications for emerging-market operators, which will have to look closely at how operators in developed markets have survived, noting that those that failed to successfully compete were bought by more successful players.

All of which raises the question of whether emerging-market operators still exist. The answer is yes, if “emerging market” is taken to mean an operator that sells mobile services in an underpenetrated market. But if “emerging market” is defined as an absence of competition among players principally offering mobile voice services, then the answer is surely no.

Like developed-market players, operators in emerging markets will have to ensure that they keep their high-ARPU subscribers. Although fewer in number, these customers contribute a far higher percentage of revenues than the far more numerous low-ARPU customers do. In emerging markets, that means operators will have to make increasingly enticing offers to stop them from churning to rivals, further eroding profitability.

One area in which operators in emerging markets can learn from their developed-market counterparts is in their struggle to cope with the onslaught of major brands from adjacent sectors looking to eat into their walled-garden business model. Nokia, Apple, Google, Facebook, MySpace et al are blazing a trail that is already undermining operators’ relationship with their customers, and it will be accompanied by an erosion of revenues as voice becomes increasingly commoditized.

Operators in emerging markets have the chance to learn a lesson from the experiences of developed-market operators: that only with mutually beneficial revenue-sharing deals is the take-up of new services ensured. If they do, they could increase revenues from nonvoice services at a better rate than developed-market players have.

In 2009, 3G rollout and take-up will begin in earnest in major “emerging” mobile markets, including Brazil, Russia, India and China. The future of operators in these and other markets will be decided by how well they cope with the new competitive environment. One thing’s for certain: There will be plenty of operators waiting to capitalize on their mistakes.

 
 
 
 
Kuwait’s Zain has realized a major achievement in redefining what it means to be a truly regional mobile operator. The recent rebranding of all its subsidiaries in Africa to Zain and, more significantly, the eradication of roaming charges between all Zain operators have done nothing less than redefine what it means to be a truly regional player.

Without question, other, more established, regional operators, such as Vodafone, France Telecom and T-Mobile International, have a lot to learn from Zain’s abolition of roaming charges. But Zain also has a lot to learn from these operators’ experiences in coping with declining ARPU levels amid intensifying competition in once-sheltered operating conditions.

Roaming and rebranding

Let’s look first at the lessons other operators can learn from Zain’s considerable recent achievements, both financial and operational.

Zain has linked its One Network service in the Middle East and Africa, meaning that its low-cost international voice and SMS roaming offering is now available on 15 country networks.

One Network is now available between Africa and the Middle East, abolishing international roaming rates for Zain subscribers in countries where Zain is present. Zain prepaid and postpaid customers can now make calls and send messages at local rates when communicating with a Zain subscriber traveling abroad in either Africa or the Middle East.

The One Network service is automatically activated when a Zain customer crosses the geographical border into one of the countries in which Zain operates, with no registration or sign-up fee required. Prepaid subscribers can also top up accounts and recharge cards bought from either their home country or an outlet in one of the 15 One Network countries.

Zain initially launched One Network under its Celtel brand in Kenya, Tanzania and Uganda, in September 2006, before extending the network to countries in Central Africa in June 2007 and to Burkina Faso, Chad, Malawi, Niger, Nigeria and Sudan in November 2007. The network was extended to Bahrain, Iraq and Jordan in April.

Compared with European operators’ efforts on voice and SMS roaming, this is nothing short of revolutionary. Zain’s European counterparts resisted calls to lower voice roaming rates and are in the process of repeating history with SMS and data roaming, with intervention by the European Commission in September looking increasingly likely.

Zain’s move has already forced other operators to react. Saudi Telecom, for instance, has said it will launch low-price roaming across a network of 30 foreign operators this month. Saudi Telecom’s Unified International Roaming service will cover most of the Middle East, Europe, Indonesia, Turkey and South Africa.

Discounts on calls in these countries will be up to 69 per cent on normal rates - still not quite the achievement of Zain, but it does price roaming services closer to cost than has traditionally been the case among European operators.

In addition to One Network, Zain rebranded all 14 Celtel operations in Africa as Zain in one clean sweep at the beginning of the month, supported by a major advertising campaign. Zain also plans to rebrand about 1 million point-of-sale outlets across the continent.

The rebranding to Zain is aimed at creating “a single, strong identity,” according to Zain Group CEO Saad Al Barrak.

Zain’s challenges

Now let’s turn to what Zain might learn from its European counterparts. Zain’s recent results are impressive reading. The operator reported strong figures for 1H08, boosted by a massive 58 per cent increase in its subscription count, which totaled 50.7 million across all its operations at end-June.

The operator had consolidated revenues of US$3.49 billion for 1H08, up 26 per cent year-on-year, while net income increased 7 per cent, to US$551 million, and EBITDA jumped 20 per cent, to US$1.3 billion.

“We have started to reap the rewards of our recent large investments, particularly in Iraq, Nigeria and Sudan, with these three countries now serving more than half of Zain’s 50 million customers, and we expect similar rewards when our operations in Saudi Arabia and Ghana commence commercial operations,” Al Barrak said.

But a closer look gives an insight into the more challenging conditions that might be awaiting the operator, ones that mirror those already experienced by operators in Europe.

Only four (Kuwait, Iraq, Jordan and Malawi) of the 19 operations Zain provided ARPU information for in its recent results saw a year-on-year increase in ARPU in 1Q08. These figures indicate that Zain has already moved from a rapid-growth phase of development to a more-stable-growth phase, just like its counterparts in Europe and other parts of the world.

What specific lessons can Zain learn from operators in mobile markets that underwent a similar development? Lessons from Europe and elsewhere show that brand is extremely important. In this area, Zain is already doing a good job, sparing no expanse in its recent rebranding exercise.

Another lesson Zain can learn from European operators is to outsource as much network maintenance as possible, enabling it to become a nimble outfit whose primary areas of focus are what really matter to end-users: the development, selection and marketing of services. This will help Zain focus on being a high-quality mobile services provider that can charge a premium for its services, compared with competitors that undercut it. To that end, its One Network offering is a great idea: It provides meaningful differentiation from rivals.

Zain should also learn from European operators and launch mobile broadband services, such as dongles and embedded modules in laptops, as soon as possible to secure the high-value segment of the market before it becomes commoditized, as has already happened in Europe. Finally, Zain’s economies of scale will also enable it to strike good deals with equipment manufacturers.

Zain is perfectly placed to be a truly modern telecoms operator - light on infrastructure and heavy on the launch of innovative and compelling services. Rivals should take note.

Take a look at our recent company profile on Zain

 
 
 
 
The recent announcement by France Telecom’s Orange that it has reduced its data-roaming tariffs demonstrates that the industry has a lot to do when it comes to addressing the perceived problem of high data-roaming costs.

Orange’s move is evidence that operators are concerned about the European Commission’s decision to continue looking closely at roaming prices. In the absence of major reductions to data-roaming tariffs, the EC is poised to mandate a reduction to them in July.

But although Orange’s cut in data-roaming costs is welcome, in that it will make such services cheaper for some Orange roamers, it fails to reduce them enough.

To head off regulation on data-roaming tariffs, operators are taking the initiative in cutting them, just as they did with voice-roaming rates before the European Commission introduced the mandated Eurotariff. The Eurotariff, which came into effect June 30, capped roaming prices at ?0.49 ($0.77) a minute for calls made within the EU by subscribers of European mobile operators.

At the same time, perhaps sensing that regulation of data- and SMS-roaming rates is inevitable, Boris Nemsic, CEO of Telekom Austria Group, said last week that “it is worrying that at a time when the long-awaited benefits of mobile data are beginning to be felt in the European marketplace, the Commission is considering more price regulation.”

Nemsic said that Austria’s market and others are functioning well without additional regulation, because when volumes go up, prices come down. In less than a year, data-roaming prices have been cut in half, Nemsic said. He said that one megabyte of data use while roaming costs ?0.42 with Mobilkom’s daily and monthly roaming packages and ?2.40 without a specific data-roaming tariff.

“Take a look at Austria today, and you’ll see the European price levels of tomorrow,” he said. “Extrapolate this price development over the next two to three years, and sending e-mails, receiving MMS or using specific data services, such as telematics or mobile navigation, when abroad will cost close to nothing.”

Operators have made some moves in the right direction and look set to reduce data roaming tariffs, but such measures will probably fall short of the scope of reductions that the EC says it wants to see. It was a similar situation that led to the introduction of the Eurotariff.

The EC reportedly wants interoperator wholesale prices for data roaming services set at ?0.35 per megabyte. They currently stand at about ?1. And it wants SMSes sent while traveling in the EU to cost ?0.12. The average in Europe is about ?0.29.

At the Mobile World Congress (MWC) in February, Viviane Reding, the EC’s telecoms commissioner, said that the EC would “take stock” of data-roaming prices July 1. “We’ll put the current SMS-roaming prices on a web site” and then “go to the European Parliament and Council of Ministers and give them an answer on what has to be done with data,” she said.

The EC “won’t be satisfied with only a few large operators [making reductions],” she added. “July 1 will be the moment of truth. Operators know perfectly well that if the movement isn’t right, the EC will be ready to regulate.”

Although the EC is most likely to regulate only SMS roaming rates in the near term, it might also address data roaming July 1, and if not, it will do so soon. So how will the EC react to the latest roaming-rate cuts from Orange and others?

Orange announced a fixed-price data-roaming tariff May 19, Travel Data Daily, under which users pay a fixed price for data roaming. The service costs Eur12-15 for 50MB of daily Internet access within the EU.

Orange is not the only operator to make reductions in data-roaming rates under close scrutiny by the EC.

Mobilkom owner Telekom Austria, which owns mobile operators in southeastern Europe, last week reduced its SMS-roaming rates another 20% in Austria, to Eur0.20 per SMS, and almost 40% at Mobiltel in Bulgaria.

On the subject of SMS roaming, Nemsic said that “when it comes to standard tariffs, we already have very competitive SMS levels today compared to national tariffs.”

Many cuts have already been made this year. For instance, at the MWC, T-Mobile unveiled a Pan-European flat-rate data offering of Eur15 a day for a laptop using any network in any EU country. Usage is capped at 50MB a day, resulting in a cost per megabyte of Eur0.30. The company says it will also launch a tariff of Eur2 per megabyte in all markets later this year.

Vodafone, meanwhile, announced a price reduction of up to 45% on its monthly data-roaming tariff, but only for European business travelers. In June, it is planning to lower the maximum charge for its monthly data-roaming bundle from Eur75 to Eur60 a month.

But these efforts, and others like them, important as they are, are unlikely to stop the EC from intervening to force operators to lower data-roaming prices.

Operators seem set on keeping data-roaming rates higher than the EC wants them, preferring instead to reap the benefits of higher prices until forced to cut them.

Meanwhile, it is only a matter of time before European regulators start to question operators about why roaming calls to and from countries outside the EU are so expensive. The European Regulator Group, which represents the regulators of both EU and non-EU European countries, says it is “monitoring the situation.” It is surely only a matter of time before the price of data roaming in the EU and roaming calls made and received outside the EU are set by the European Commission.

 
 
 
 
A large ecosystem and economies of scale alone create and sustain successful mass-market technologies. The heavy-hitters in the US technology and media industries that recently rallied behind WiMAX will be hoping they have done enough to ensure that they are on the winning side of this adage. And in Europe, Intel’s winning of a license to offer WiMAX services at 2.6GHz in Sweden, along with upcoming 2.6GHz auctions across Europe this year, should make incumbent mobile operators alert to the potential threat from new business models.

The prospects for WiMAX looked decidedly bleak at the CTIA event in March, where a convincing range of devices was noticeably absent amid funding and rollout woes for Sprint Nextel.

But the technology has since received several lifelines. Sprint Nextel announced last week that mobile WiMAX had met its criteria for commercial acceptance. And after months of on-off negotiations, Sprint Nextel and wireless ISP Clearwire recently to form a new joint venture that will combine the companies’ WiMAX assets in the US to create a nationwide network. Additional investment will be provided by three leading US cable companies - Comcast, Time Warner and Bright House - and by Intel and Google.

Having the cable operators as partners could help increase WiMAX adoption and economies of scale as the joint venture tries to exploit a small time-to-market advantage over LTE. In a conference call, Sprint CEO Dan Hesse said the rollout of WiMAX would place it “two years ahead of the competition,” meaning operators rolling out LTE.

The joint venture expects its 2.5GHz mobile WiMAX network to cover an area of the US with a population of 120-140 million by end-2010, which would enable it to serve many of the top 200 US markets.

However, Hesse also said the JV agreement doesn’t bar Sprint from investigating “other 4G options,” which could be taken to mean that Sprint might yet consider LTE as a 4G option for its CDMA network.

Sprint and Clearwire created their new WiMAX company in a bid to create a nationwide WiMAX ecosystem. The deal is valued at US$14.5 billion, based on an investment price of US$20 per share.

Sprint will pool all of its 2.5GHz spectrum and all WiMAX assets into a subsidiary of the new company, called Clearwire, of which Sprint will own 51%. Existing Clearwire shareholders will own 27% of the new company, to which Clearwire will contribute all of its 2.5GHz-spectrum assets.

Comcast will invest US$1.05 billion in the deal; Intel Capital will invest US$1 billion, in addition to its previous investments made in Clearwire; Time Warner Cable will invest US$550 million; Google will invest US$500 million; and Bright House Networks will invest US$100 million, for an aggregate total of US$3.2 billion.

The deal also sees the creation of major new wireless companies.

The new Clearwire will enter into 3G-wholesale agreements with Sprint, becoming a bundled provider of Sprint’s wireless voice and data services. Comcast, Time Warner Cable and Bright House Networks will also enter into wholesale agreements with the new Clearwire, becoming 4G providers of the new Clearwire’s mobile WiMAX service.

Sprint and Clearwire also announced commercial agreements with the strategic investors. Intel will embed WiMAX chips into its Intel Centrino 2 processor and will market the Clearwire WiMAX service with its performance notebook PCs.

Google will partner with the new Clearwire to develop Internet services, advertising services and applications for mobile WiMAX devices. In addition, Google will be the search provider and a preferred provider of other applications for the new Clearwire’s retail products.

Google will also partner with the new Clearwire on an open-Internet business protocol for mobile broadband devices. The future voice and data devices that the new Clearwire provides to its retail customers will be compatible with Google’s Android operating-system software.

Google and Intel each have options to enter into 3G and 4G wholesale agreements with Clearwire and Sprint, respectively, but have no current plans to do so.

Earlier this year, Sprint postponed the launch of its Xohm WiMAX service from April until later in the year. It is now expected to wait until the summer to launch the service, in what is being seen as another blow to the beleaguered operator’s plans to offer WiMAX services.

Sprint says that soft launches in Chicago and the Washington, DC/Baltimore area are progressing well.

For its US$500 million investment, Google earns the opportunity to help the new Clearwire develop Internet services, advertising services and applications for mobile WiMAX devices, and Google will be the operator’s search provider and a preferred provider of other applications. Google and Clearwire pledge to work on an open-Internet business protocol for mobile broadband devices, and the operator will support Google’s Android operating system in its retail voice and data products.

In a separate pact, Google will become the default provider of web- and local-search services for Sprint’s CDMA network. Sprint also intends to load several Google services, such as Google Maps for mobile, Gmail and YouTube, on some handsets and provide more-direct access to other Google services.

It’s reasonable to expect that the long-awaited “Google phone” will finally be launched as a WiMAX device, potentially with cellular chipsets included.

Mobile operators should be braced for new entrants in the wireless-broadband space that are already major brands. They will be offering a whole new business model that will bundle content with fixed-line broadband and telephony - each areas in which cellcos are traditionally weak. Cellcos’ traditional voice offerings could be left looking rather thin by comparison.

As such, the coming together of major players in the US media and telecoms sectors will, for the first time, create an alternative to the cellcos’ traditional way of doing business: tying customers in for long periods of time in return for access to a mobile voice and data network via a single device.

As far as voice is concerned, this model has been an abiding one and will prove to be difficult to dislodge, because it is simple to understand and offers a compellingly simple proposition.

But for data, the prospect might prove to be very different. Operators are only beginning to sell large amounts of data via USB dongles and embedded chipsets, each via the voice subscription model. There is a chance for Intel and other consumer-electronics companies to introduce different pricing models and severely disrupt mobile operators’ data-growth plans.

Recent events in the US and the 2.6GHz auctions in Europe this year should put incumbent cellcos on their guard to defend against the incoming wave of WiMAX-based services and business models.