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With the global recession of 2008/09 having apparently now run its natural course, telecom operators appear to have escaped the worst of its effects, as consumer spending on telecom products and services has remained fairly resilient during the period. Nevertheless, operators are being faced with new challenges in the aftermath of the downturn.

Firstly, operators facing increasing pressure on Average Revenue per User (ARPU) with the commoditisation of basic voice services are being forced to re-think conventional business models and look for new revenue streams.

Decline in ARPU driven by increasing commoditisation of voice services

Secondly, the mobile Value Added Services (VAS) ecosystem has undergone a transformation with Apple’s launch of an application store. Online players are strengthening their ability to target mobile users directly by launching application platforms. Companies like Apple, Google and Nokia are creating full ecosystems around their operating systems and gaining a larger share of the profit pool. Operators are being forced to review their degree of involvement across the content value chain, lest they become “dumb pipes”. Large multinational and even national operators are likely to struggle to pursue an innovation mandate comparable to the high-tech giants that have a larger scale. These developments are likely to impact an operator’s ownership of the consumer as the role of the operator in service delivery gradually diminishes.

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Source: Value Partners analysis, Informa Global Mobile voice and data market 2009

Evolution of global ARPU (voice, data, total) ($) Voice ARPUData ARPU

-5%

+4%

-3%

09-15 CAGR

forecast

208,8180,6

159,6 147,9 140,3 133,3 127,1 121,3 114,8

47,1

46,3

45,746,9 48,9 50,9 53,1 55,4 57,6

255,9

226,8

205,3194,8 189,3 184,2 180,2 176,7 171,5

2007 2008 2009 2010 2011 2012 2013 2014 2015

Repositioning for the future: strategies adopted by the regional winners

Zoran Vasiljev Partner

Gareth Pereira Manager

Faced with declining voice revenues and an intensely competitive VAS landscape, telecom operators are being challenged to re-think conventional business models and look for new sources of value. Leading Mobile Network Operators (MNOs) are already positioning their businesses for long-term health and sustainability. Apart from making structural adjustments to the business, some of the winning strategies include: “compete/collaborative” approaches to enhance presence across the content value chain, establishing lean operations and embarking on selective mergers and acquisitions.

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Larger players are evolving full ecosystems around their OS

Thirdly, having vast network coverage is no longer being seen as a differentiator for MNOs. Moreover, given the funding constraints, new operators are seeing value in deploying “CAPEX light” infrastructure models while incumbents are looking to optimise the returns on their network assets.

Fourthly, operators are being forced to review their profit and loss account rigorously in order to explore new opportunities for cost savings and to mitigate business risks.

Lastly, increased competition in the home market is making it imperative for incumbent operators to consider selective mergers and acquisitions. Global operators are also reviewing their portfolio of assets and exiting unprofitable geographies.

Global and regional trends suggest that operators are adopting distinctive strategies to cope with the changed environment. Some of the adaptive responses by MNOs are listed below.

Making structural adjustments to the business, aimed at long-term health and sustainability

MNOs are making organisational changes in order to ensure greater flexibility and responsiveness to the changing business environment.

In India, a regional operator with a largely voice-centric offer has made several fundamental changes to its business strategy, aimed at positioning itself more effectively for the highly competitive market environment (13+ MNOs). Firstly, faced with rapidly eroding voice ARPU, the operator has launched a revamped VAS offer targeting the growing segment of mobile broadband and social networking users, which is still underpenetrated.

In addition, recognizing that network coverage no longer represents a source of differentiation, the MNO sold its pan-India tower portfolio to an independent tower company, preferring to deploy passive network sharing on an aggressive basis. The funds generated from the sale of tower assets will most likely be used to invest in a possible 3G licence in the ongoing auction, as well as in the operator’s national expansion plans.

In Russia, the operators’ response to a highly penetrated SIM market is to invest heavily in own-branded retail stores as a key tool to improve customer retention and secure a greater lifetime value from its customers. Leading operators like Vimpelcom, MTS and MegaFon have increased the footprint of their own branded stores and also acquired stakes in leading independent retailers.

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Source: Value Partners analysis, Morgan Stanley

• Established players in the mobile market, including Apple, Google, Nokia and Blackberry continue to develop attractive ecosystemsto gain a larger share of end users and their mobile spend

• Players’ ecosystems have evolved based on their established areas of strength. For instance, Apple’s eco-system is strongly rooted in its iTunes service (previously a music service), which has now evolved to provide access to apps, movies, music, podcasts, etc. on mobile devices

Apple ecosystem: evolved from iTunes music service

Google ecosystem: based on Google’s cloud apps and services

Nokia ecosystem: based on specialist services (maps), music and apps

Successful ecosystems can help mobile players gain a larger

share of the profit pool

Eco-system

Greater number of

applications, choice

Attract developer

interest

Drive user interest, device

purchases, downloads

Better economics for

developers

Eco-system

Greater number of

applications, choice

Attract developer

interest

Drive user interest, device

purchases, downloads

Better economics for

developers

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Adopting new business models to increase their presence across the content value chain

MNOs are increasingly recognising the importance of defending their position in the content area of the value chain. Larger operators like Vodafone (UK), AT&T (USA) and even Airtel (India) have launched their own proprietary app stores. However, global handset manufacturers such as Apple, Nokia and RIM hold the edge over even the largest operators in terms of scale. The recent entry of high-tech giants like Google and Microsoft further heightens the competition.

In response, MNOs are choosing the following positioning strategies:

• Open network access• Tiered network access• Owned platforms

In an open network access model, the MNO offers network access but has a limited role to play in either content development or in provisioning/billing of external applications. There is a revenue upside from increased usage of data services, but significant control of the content value chain is passed over to online players and third party developers. The MNO however, fails to fully realise the content revenue potential.

In a tiered network access strategy, MNOs offer multi-tier access plans, based on the customer usage profile. The plans could be segmented according to the nature of services used (e.g. basic plans for mobile internet browsing versus premium subscription for bandwidth-intensive applications). The MNO partners with online players in introducing services that are better integrated with its own customer segments and its VAS strategy.

Here, the MNO has a more active role to play in managing VAS, by handling issues related to handset integration and billing, and consequently sharing revenues with the online player. The MNO no doubt experiences some loss of control over the customer service delivery experience, but this is partly compensated by an up-lift of access and content revenues.

The owned platform model represents a hybrid approach. Operators not only forge partnerships with third-party content developers, but also offer their own portals to consumers. Operators provide billing and hosting platforms for third-party applications and content, thereby gaining rich insights into the nature of applications that are most popular amongst the customer base. Operators are likely to see significant revenue uplift from this strategy, while continuing to play a leadership role in innovation within the content ecosystem.

Smaller operators would do well to adopt a collaborative approach (i.e. form part of the 24 carrier groups which constitute the Wholesale Applications Community) in order to defend their VAS positioning. In parallel, operators can continue to retain a significant role in the mobile application value chain as “billing/service enablers” by adopting an “owned platform” strategy. The “owned platform” strategy would require additional investments, but would be imperative for operators looking to retain control over the content value chain. Eventually, operators could look to develop regional alliances to fund local content (e.g. Arabic), leveraging the distinctive insights garnered through their position as service enablers.

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Possible strategies adopted by smaller operators to defend their position in the content value chain

Another strategy being adopted by operators is to look at new business models at the convergence between the banking sector and telecommunications. In markets where the penetration of mobile services has already surpassed that of banking services, operators are leveraging this distinct advantage to offer mobile payment services as a cost-effective means to carry out peer-to-peer fund transfers and generate additional revenue streams. In fact, a robust M-payment offering is emerging as a key success factor for MNOs in several African markets.

Safaricom, which launched M-Pesa, the world’s first mobile money transfer service, owes a large part of its success in the Kenya market (i.e. close to 80% market share) to its stranglehold over M-payment, in a country with limited banking facilities.

Creating lean operations and effective asset utilisation

MNOs are rigorously evaluating their CAPEX and OPEX decisions and deploying cost-effective operational models. While outsourcing has been practised quite effectively in the telecom sector with regard to IT services for several years, another area which is seeing an increased presence of third-party service providers is the handset distribution value chain.

Operators that followed the “integrated reseller” model for handset distribution are considering the adoption of new partnering models (i.e. with logistics service providers or distributors), aimed at reducing operational complexity and minimising inventory risk, while still offering an appealing handset range in their outlets. A growing number of operators are seeing merit in such collaborative arrangements (see Exhibit below). Telstra, for example, was able to achieve savings of $170 million in the first year of its partnership with Brightstar.

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• Greatest opportunity for operators who are yet to launch app stores is as billing enablers

• In exchange for offering their customers the ease of access granted by carrier billing, operators can retain a significant role in the mobile application value chain

• Internationally, the importance of scale has been underlined by the banding together of 24 of the world's leading carrier groups (announced Feb 2010), dubbed the Wholesale Applications Community, to rival Apple's Appstore

+

Collaboration with other operators Billing enabler

• Approach app store owners in order to agree a revenue share model in exchange for enabling app billing

• Initially could look to collaborate with the 24 operators• Eventually could look to fund local content jointly with other

operators in the region, recognising the trend towards applications aimed at the iPhone and Android devices

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Example of deals between telecom operators and logistics service providers

Embarking on selective mergers and acquisitions

Operators with strong balance sheets are leveraging their cash flow position to make selective investments in emerging markets. Faced with a highly saturated home market (as in the case of Etisalat) or increasing price competition, which has resulted in eroding ARPU (as in the case of Bharti Airtel), operators have looked increasingly outside their home turf. Etisalat’s recent acquisition of a stake in a new operator in India and of Millicom’s assets in Sri Lanka is motivated by the need to look for growth opportunities outside core markets. Bharti’s acquisition of Zain’s assets in Africa is aimed at extracting value through the deployment of Airtel’s highly successful low-cost operating model in these markets

Conclusion

Even before the dust settles after the economic downturn, telecom operators are being faced with new realities which are likely to impact their future survival and growth. Never before has the telecom landscape been as challenging as it is today. MNOs are confronted with new competitors (e.g. internet brands, handset manufacturers) encroaching on what has been traditionally their own turf.

The commoditisation of basic telco services and of the network is placing increased pressure on traditional revenue models. The evolving scenario is seeing distinct adaptive responses by telcos across the value chain. The future winners in the sector are likely to be those that mould their business strategies to match the changed environment, adopting “compete/collaborative” responses where relevant.

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• Support for the definition/customisation of the portfolio• Assessment of the handsets life cycle• Negotiations/procurement • Inventory management • Exclusive distribution (retail sales and return logistics)• Shop handset operation management• Real-time management of the sales performance (by product and PoS)

• Return logistics• Development of tools and infrastructure for

handset distribution

• Management of the online business sales operations

• Stock management• Packaging/customisation• PoS order fulfilment (EDI)• Delivery to dealers, distributors and end customers

• Online master dealer: enabling online activation of AT&T services for Brightpoint clients (e.g. Nokia USA)

• Qualified as authorised distributor of Verizon to allocate handsets to the dealers

• Automation of the activation process Actify Solution:•Order fulfilment•E-business•Handset distribution

• Management of the online consumer sales operations

AustráliaN. ZelandiaAlemanha

EUA

EUA

EUA

Australia

Partnership scope

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About Value Partners

Value Partners telecommunications practice draws on over 200 professionals worldwide and assists 13 of the top 20 telecoms operators in Europe, Asia, Middle East and Latin America, as well as a number of smaller and start up operations in our markets. Over the last 15 years, we have delivered real benefits for our clients, building on our deep industry insights into the key issues for the sector.

Founded in 1993, Value Partners is a global management consulting firm that works with multinational corporations and high-potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness. It comprises two

sister companies: Value Partners Management Consulting and Value Team IT Consulting & Solutions.

With 14 offices across Europe, Asia, South America and MENA, Value Partners expertise spans corporate strategy and financial business planning, cost transformation and organizational development, commercial planning, technology decisions, and change management. Its 3,100 professionals, from 25 nations, combine a methodological approach and analytical framework with a hands-on attitude and practical industry experience developed in an executive capacity within their sectors of focus: media, telecoms and IT, luxury goods, financial services, energy, manufacturing and hi-tech.

For more information on the issues raised in this note please contact zoran.vasiljev@valuepartners.com, gareth.pereira@valuepartners.com or one of our offices below.

Find all the contacts details on www.valuepartners.com

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