Beyond network-based competition

Almost every market in the Middle East and North Africa (MENA) has at least two mobile network operators, and fixed-network markets are becoming increasingly liberalised. However, the region is idling in value-to-market development by competing facilities-based operators, and new competitive development may be reinforced by service-based operators, found a new study by Booz & Company.

Increased competition has driven market players to be more efficient, offer better services, an improved product portfolio, better pricing, better customer care, and an improved customer experience. However Booz & Co. has identified the absence of service-based competition, and describes why it ought to be introduced.

Limitations of facilities-based competition
New network-based operators may not be a feasible option to stimulate market development in some MENA countries. Investors may be reluctant to enter markets; furthermore, some regulators and local authorities limit entry due to scarce resources or adverse impacts:

Market limitations: Some markets are too small for more network-based operators; licensing a mobile virtual network operator (MVNO) is an option for improving market competitiveness. Service-based operators have lower capital requirements and can be profitable with fewer revenues and subscribers: they can encourage the entrance of smaller investors where large investments aren’t economical.

Technical limitations: Spectrum availability is an issue for facilities-based operators; unless further spectrum is available, licensing mobile network operators (MNOs) is unfeasible.

Social and environmental impacts: Network construction has adverse social and environmental impacts that may be allayed by infrastructure-sharing agreements and requirements.

Moving forward
Service-based competitors operate by relying on existing infrastructure of network operators; buying wholesale minutes, capacity, or services and tailoring and providing services to their own customers. Incumbents must recognise how to benefit from such opportunities, so regulators open the markets effectively, and investors enter them prudently.

Some regulators in the region have started facilitating service-based operators’ entry through liberalised Internet resale and local loop unbundling regulation.

Impact on the telecoms sector
Investment: Service-based competition can stimulate retail services and the use of existing networks; facilities-based incumbents are encouraged to invest in improving and upgrading infrastructure. Service-based providers usually enter the market with a level of different investments and upon success; they can start building up operations and investments.

Regulators must recognise that introducing service-based competition must be done only after effective facilities-based competition is in place.

Penetration: Competition is a major driver of improvements in penetration. Service-based competition offers an effective way of reinvigorating competition in the industry and fostering service-based competition allows dramatic increases in broadband penetration.

Economic impact: Increased investment augments sector spending, creates employment, and drives economic growth.

Impact on operators
Operators, incumbents and new entrants are all affected by service-based competition’s impact on the sector and its economics including:

Prices: Increased competition impacts prices, as operators bring in more attractive offerings. Operators’ efforts to attract and retain customers with optimised tariffs are reflective of consumer commitment. Packages targeting niche markets and improved customer service are all outcomes of improved competition.

Service usage: Mobile data services usage is indicative of how far mobile users take advantage of available services.

Subscriber acquisition: New entrants to facilities-based markets invest heavily in rolling out their networks.

Some operators may embrace service-based competitors, to stimulate traffic on their own networks and make a profit.

Service-based competition possibilities
Companies can choose from different models of service-based competition. In the fixed market, these can range from offering VoIP services or relying on simple resale, to voice operators relying on carrier pre-selection or full-fledged local loop unbundling. In the mobile market, it can range from operators relying on simple resale to full MVNOs.

The relationship between service-based operators and network operators depends on the degree of infrastructure ownership, attributable to service-based operators, and the extent of services provided by the network operator.
Service-based operators can offer services agreed with the infrastructure provider. As infrastructure access grows, the service-based operator can introduce more of its own soft infrastructure, taking greater control over offered services.

Service-based providers have no major infrastructure fixed costs, without a need to own or manage networks. Without network-management concerns, resellers have a better scope for service differentiation and customer experience improvement. They can enter the market more quickly, segment it, and target particular niches and their needs – all help improve customer experiences and additional growth.

Several global service-based competition plays have emerged over the past decade:

Low cost: The low-cost approach was introduced by fixed-voice resellers through carrier selection and carrier pre-selection, and was picked up by Internet resellers using local loop unbundling or resale through bitstream unbundling. VoIP providers noted successes across the voice market with no-frills, low-cost voice services over IP.

Brand plays: Brand plays have been successful in attracting customers to service-based competitors, especially in mobile.

Portfolio expansion: This is adopted by players looking to expand. Fixed-network operators could acquire mobile reselling licenses, while mobile network operators could similarly acquire fixed-service licences, in order to offer customers the benefits of convergence.

Brand extension: This strategy has been adopted mostly in the mobile market by retailers with strong distribution networks, for example, retailers that entered the mobile reseller business due to their established access
to customers.

Niche players: These offer targeted and tailored offerings to particular groups. Many successful niche players in fully liberalised markets have focused on the youth market.

Lessons for investors
A cautious approach to investing in the telecoms sector is warranted. Launching a successful service-based operation is no easy venture; margins are generally lower than those of facilities-based operators, and in addition to good positioning, access and branding, they require careful planning.

First movers tend to maintain market positions as the leading mobile resellers or MVNOs, regardless of the adopted strategy.

Strategic partnership. It is imperative that mobile service-based operators form appropriate partnerships with network operators. On the fixed side, it is difficult to choose partnerships, due to the incumbent’s dominance over fixed infrastructure. Dominant operators are required to offer unbundling, and access to resellers.

Distinct positioning with a clear value proposition is important for providers to distinguish themselves from competition, especially when competing for specific segments.

Powerful brands often drive the success of service-based operators, with branding closely linked to success.

Access to consumers explains the success of service-based operators, and those with massive distribution networks can drive the success of mobile ventures.

Region-wide reach is based on the cultural, linguistic, and geographic proximity of a region’s countries.

The Market potential
Introducing service-based competition can drive telecoms sector development in the region resulting in positive economic and social impacts. Service-based competition can be beneficial to national markets; increasing forecasted broadband penetration and tangible increases in mobile penetration.

The success of service-based competition is tied to the existence of facilities-based competition. Where facilities-based markets are monopolies or duopolies, regulators must work for facilities-based market liberalisation to provide a boost to sector investments, revenues, and performance.

This is an extract from a white paper compiled by Booz & Co, which delves into the role of service based competition in MENA.