Challenges and trends in the GCC telecom industry

Undoubtedly, GCC telecom operators are faced with tremendous challenges in 2013. A.T. Kearney expects GCC operators to refine their pricing, retention, and customer experience approach; make digital diversification a top-priority; re-assess and actively manage their portfolio of operators; and, lastly, transform their operating models to the changed industry dynamics

Rob van Dale, principal at A.T. Kearney Middle East, has 10 years international consulting experience and is a member of A.T. Kearney’s Communications, Media, and Technology Practice in the Middle East

Pricing, retention, and customer experience have to be redefined. While GCC telecom operators will profit from the increased demand for their data services, it is only part of the story. In fact, it is estimated that data produce 90 per cent or more of traffic volume on their networks, but only 10 per cent of revenue[1].

With the demand for (mobile) data potentially insatiable, operators can only manage to reap some benefits by offering usage-based data pricing and packages, focusing on customer segmentation, tiered services based on customer life-time value, and premium ‘out of bundle’ services rather than continue with unlimited flat-rate data plans. Operators can for example introduce "smart" plans by integrating voice and data bundles and linking them to devices. In the USA, Verizon has already launched a data centric “Share Everything’ plan offering unlimited voice minutes, unlimited text and shareable data that can be used across up to 10 devices. Other US operators offer similar packages.

To compete effectively, telcos will need to extract more value from the tremendous amount of customer data they hold. They could use this data to gain valuable insights and offer more personalised services. These data assets are generally not yet fully-analysed and leveraged by GCC operators.

The success of telecom companies’ digital diversification during 2013 will determine their long-term profitability. Diversification from traditional telecom services to tap into the opportunities that the super-fast (mobile) networks offer are critical in order to receive attractive returns on the expensive networks and to defend against OTT-players. Although some of these services have been around for a few years, operators have to actively offer value added services (VAS) such as M-Health, M-Education, and M-Banking. They will need to offer high quality voice solutions to limit the impact of eroding revenues and profitability from voice-over-Internet Protocol (VoIP) players such as Skype.

One way of doing this is by offering their own VoIP solutions, for example as part of a data package.

To fight the decrease in SMS usage, operators need to consider offering enhanced functionalities in the instant messaging (IM) domain such as multi-user conversations, sharing of pictures, and status updates, by either partnering or entering alliances with other players, or by offering their own platforms.

Third-party application stores such as Apple’s and Google’s have completely taken over operators’ portals and revenues from mobile application downloads are set to surge from US$8.4 billion in 2009 to US$23.6 billion in 2014, with operators capturing only a fragment of that value[2]. Application stores offer tremendous potential for revenue sharing relationships between operators and third parties. Operators’ capabilities in billing, marketing and distribution make them potentially good retailers and attractive partners.

Operators will need to also invest more in machine-to-machine (M2M) communication, which is expected to be a major growth market. The right partnerships to bundle connectivity with high value products (for example e-readers, cameras, laptops, cars) is critical.

Lastly, operators will increasingly need to enter the nascent, fast-growing cloud services market, which is opening up opportunities in consumer and enterprise businesses. Because the cloud market is relatively new, this is the optimum time for telecom operators to begin to capitalise on the opportunity with the right value propositions, the right technology and go-to-market partnerships. A good example is Orange’s partnership with VCE (The Virtual Computing Environment Company, formed by Cisco, VMware and EMC²). Orange delivers a broad range of cloud-based services while managing and owning customers as the single point of contact. We expect GCC operators to play a more prominent role in this space.

GCC operators have started to realise the digital opportunities. Etisalat, for example, established earlier this year a new unit specifically focusing on developing the group’s digital strategy.

Groups’ portfolios of operators need to be re-assessed and actively managed. This trend has already started in 2010 when Zain sold its African operations to Bharti Airtel. It was followed by the failed attempts of Batelco and Kingdom Holding to buy Zain KSA and of Etisalat to buy Zain’s other Middle East operations in 2011. More recently, Etisalat divested its Indonesian operator. Given the performance of certain operators in GCC groups’ portfolios, selective divestments are expected, especially in countries with low average revenues per user (ARPU) and with more than four mobile operators.

However, some of the GCC players will continue pursuing larger scale in their effort to become global players. For example, earlier this year both Qtel and Etisalat indicated their interest in buying Vivendi’s 53 per cent stake in Maroc Telecom, which is Morocco’s biggest telecom operator. Africa still remains the region with the most positive telecom growth outlook, although several markets are characterised by low ARPU, high costs, and a relatively large number of operators. Some of these operators are owned by smaller regional telecom groups or investors, often with GCC or North African roots such as Warid Telecom (Abu Dhabi), Bintel (Bahrain), and LAP Green (Libya). It is not unlikely that in the near future, these groups will want to divest some of their African operations. But this time, unlike the wave of acquisitions around six years ago, GCC groups will not buy at all cost.

Telecom operating models will be changed to adapt to the new realities. In order to cope with the increasing network complexity, investment requirements, and the financial expectations of shareholders, GCC operators will continue to improve their balance sheets by off-loading assets and adopt a more asset-light model in line with developments in Asia, Europe and North America. More managed services outsourcing deals of core activities like network operations and maintenance are therefore expected as well as selling assets like towers to specialised tower companies.

Smaller GCC operators have already started to do so, such as Du in the UAE that announced in 2012 to have entered a major five-year network managed services agreement with Huawei. Operators will benefit from the scale and expertise of these third parties and be able to shift away from the traditional network and infrastructure focus to critical topics such as pricing, retention, customer experience, and digital diversification.

In summary, the GCC telecom industry continues to be a highly dynamic sector and GCC operators are faced with considerable challenges in 2013 and beyond. Operators that act now will ensure they remain relevant and maintain healthy growth and margins.

[1] Nomura

[2] Pyramid Research