A time for smart decisions

It is no secret: we are operating in turbulent markets, and the telecom sector has shown resilience in 2009, despite being not totally immune to the overall economic conditions as initially hoped. Compared to other industries, the sector has performed much better and the rate of growth in the Middle East continues to outstrip most regions in the world. Much of this resilience comes from the fact that telecom services are increasingly being seen as essential purchases. Fixed voice and broadband access services are perceived as an indispensable staple in people’s lives.

This article was contributed by Zoran Vasiljev, partner at Value Partners

Recent economic conditions have fragmented the industry, and we have seen the emergence of two tiers of operators: the large players on the one side – strongly performing operators that have managed the downturn fairly well, and the smaller players on the other – less robust performers that are struggling somewhat.

Looking back at 2009, and considering a few observations moving forward into 2010

• The Middle East telecom sector continued to grow, and in some countries the sector became one of the main engines of the country’s economy. In some markets telecom shares have increased by 70 per cent.

• In 2009 a greater emphasis was placed on migrating consumers to 3G services and on developing content to stimulate higher-ARPU among consumers. Amongst other service offerings, in the past year we have witnessed the introduction of bundled services and the arrival of the iPhone. We have witnessed increased Internet usage/revenues, roaming revenues are up, and we acknowledged that the quality of our data experience has become more important than the quality of our voice experience. In order to meet the capacity requirements driven by data usage and mobile broadband, many operators in the region are bringing forward their network investments and upgrades. This expansion in data usage is as a result of new user behaviours. We spend more time using our phones for surfing, searching, emailing, downloading, and connecting to friends on social networks, than for making voice calls.

• Last year we saw the successful launch of both the first MVNOs in the region and of additional WiMAX operators. The MENA region’s telecom industry will become more complex over the next few years, as the introduction of more MVNOs and operators’ use of WiMAX complicates the dynamics of the sector in the area. The region is still in growth mode, but the greatest opportunity is not just mobile, but also broadband, local content, and telco/media collaboration.

• Due to the credit conditions that triggered the worldwide financial crisis, it was difficult for operators to access new funding. As a result, M&A activity in the region has been prudent as compared to previous years, and we have seen a mismatch in valuation expectations in the sector. Operators had to be more selective about investments, more diligent in their evaluations, and more careful about how they estimated acquisitions. I am convinced that more activity will occur in 2010 as the pricing expectation gaps shrink.

• There is no doubt that developing markets, such as North Africa and India, present considerable opportunities for service providers wanting a share of the rapid growth in communications services. We have witnessed increased activity between the Middle East telecom sector and India. Operators from this region have ventured into India, and several Indian operators are seeking investment opportunities in the Middle East as well as in Africa.  These markets also present potential difficulties as operators need to quickly master how to serve more people with lower profit margins in places like India, Egypt and Nigeria. It will be interesting to see how these experiences and models are exported to other regions of the world, and which players will start to benefit first from the new “third world” models.

• Planning for what is coming after the downturn has already begun. As the dust of the global financial crisis settles, many telecom industry executives are wondering what their next steps should be. Their fear has been replaced by caution first, but recently we have seen that caution being replaced by optimism. Eventually, optimism should translate into laser focused, forward-looking strategies that will ensure their success in a new, more competitive landscape. Looking ahead, successful operators will be those that evaluate their position in the industry and choose their own path, while continually improving their operational effectiveness, and adding growth to their agenda at the same time. Business imperatives that must be embraced in this new reality include: improving cost structures, investing in growth, driving efficiency, and strengthening relationships with customers.

• We should also expect to see more emphasis on accelerating decision making and execution, shortened time-to-market and launch timelines, strengthening of management talent, and a renewed focus on key accounts and innovation. Smart companies will move beyond the old fashion way of thinking. This time around, making progress implies the acceptance that “normal” no longer exists, and that deep industry and business insights are required to identify and make smart, well-timed decisions. With a smart decision the journey just begins. Strategy alone will not be enough; practical execution is what will separate the new winners.