A new dawn for MVNOs in the Middle East

The desire on the part of Middle East governments to continue to generate revenue from telecoms could finally bring real opportunities for MVNOs keen to do business in the region, says Roberto Frongia of Arthur D. Little Middle EastTwo years ago there was widespread interest in the possibility of MVNO (mobile virtual network operator) business models entering the Middle East. Interest tended to focus on the superficial benefits that an MVNO can deliver: greater customer focus, more flexible customer care models, more effective distribution, environmental benefits and, of course, lower prices.

On the surface, the culturally diverse markets of the GCC
(Gulf Cooperation Council), teeming with large populations of expats generating outbound international traffic, seemed to be the ultimate playground for MVNOs. MVNOs have low costs, are able to differentiate their propositions to very specific segments and can break even on as few as 20,000 subscribers.

However, two years on, there is still no MVNO operating in the Middle East. Does this mean that the expectations were wrong? Was the opportunity misunderstood? The answer is ‘no’. The same opportunity exists today – and in 2009 the MVNO debate is set to really heat up.

What is different today?
Deregulation of the mobile telecommunications sector has evolved substantially over the last two years and has come to fruition in the last few months.
– A third operator, Zain, began operating in Saudi Arabia in August after paying US$6 billion for the licence
– Du, the UAE’s second operator, announced in early November that its losses are coming to an end and that a 30 per cent market share is within its sights
– A third mobile operator, Viva, began operating in Kuwait.
– Qtel will soon experience competition from new a Vodafone consortium

Most importantly, Oman will see its first MVNOs – Friendi and Majan Telecom (Renna) – begin operations in H109. The arrival of these first operational MVNOs in the region, will spark huge interest in telecoms circles and, in particular, amongst regulators. The region will most definitely be watching. At the same, organisations proposing new models of MVNOs are becoming increasingly vocal about their interest in the Middle East. Among the most vocal are large retailers with powerful regional distribution models, such as Axiom Telecom, which is entering discussions more intently than it did two years ago.

MVNOs as revenue-raisers?
As consumers experience the benefits of deregulation, regulators will gain deserved praise from the community in the region. However, behind the scenes, the reality in many countries is that deregulation has had a negative impact on short term revenues for governments. The arrival of new operators means payments from ICT funds fall, as do dividends on shareholdings in the incumbent operators. MVNOs may provide a new angle to this dilemma. Satisfied that infrastructure demands have largely been met by the recently granted licences, governments may be freer to consider revenues for the sake of revenues once again. MVNOs offer a way to increase revenue without sacrificing the critical dividend payments that governments receive from their incumbent operators.

UAE as an example
The UAE government takes substantial dividend payments
from its stake in Etisalat, with a royalty fee of 50 per cent of pre-tax profit. Etisalat is the second largest contributor to the UAE federal government budget after oil revenues. Further, the ICT fund of 1 per cent of gross revenues from the operators in the UAE is accumulating to around AED400 million (US$109 million).

Introducing a third operator is unlikely to stimulate further penetration, as the level in the UAE is already close to 200 per cent. In addition, any third operator would likely be a major regional player. Competitive bids could be expected from STC, Zain, Qtel or, if allowed, one of the powerful Indian network providers. Dividend payouts from the new operator would be unlikely to contribute to government revenues as they do in the case of Du and Etisalat.

The ICT fund, of course, would continue to contribute funds, however, the arrival of a third operator would spark a major price war. It is unlikely that subsequent revenue loss would be completely recovered from a corresponding increase in minutes driven by the lower prices. (Saudi Arabia, for example, experienced an 18 per cent decline in ARPU during the first three months of Zain Saudi’s operations). Furthermore, a third operator would most definitely eat into the profits of Du and Etisalat, which the government has, until now, been able to take for granted.

However, like most countries, the UAE needs to continue to be seen to be encouraging further competition. And this is where MVNOs come in. Two years ago, the infrastructure required by MVNOs was not available, and the government could generate major revenues through licence fees whilst also relying on new subscribers entering the market – even when penetration was above 100 per cent. Now, with the infrastructure established and market saturation achieved, the economic benefit of allowing more operators into the country may only be limited to the upfront revenues gained from the licence itself. Whilst
this could be very lucrative, particularly for countries like the UAE, where substantial inbound traffic drives up the licence valuation, the loss of dividends and ICT funds could quickly erode the injection of funds from the new licence fee.

MVNOs increase competition to the benefit of consumers, but also offer the government the possibility of maintaining some control over the minutes passing over the network in which it has made such a substantial investment.

A new dawn for MVNOs
The softer benefits of MVNOs, such as environmental gains from fewer masts in the air, customer intimacy benefits and retail stimulations, still exist. Over the past two years, commentators have suggested that governments have held back MVNOs because of the threat that they represent to revenues generated from the incumbent operators. Now, however, it may be precisely governments’ desire to continue to generate revenues from telecommunications that brings MVNOs to the forefront of policy thought.