In search of growth

Network operators are being advised to seek organic means to growth as opposed to acquisitive inorganic ways, given the limited motivations and appetite for such transactions. However, with network operator Q1 results typically showing a pattern of flat top-line growth and declining profitability, a serious issue arises as to what exactly network operators need to do in internally in order to boost their growth prospects

As the telecom sector in the Middle East matures, network operators are struggling to keep growing their revenues at the double-digit rates of the past

As Comm. profiled in last month’s issue, adjusting for one-off financial activities during the period, many of the region’s network providers suffered the similar challenges in Q111 with respect to slowed revenue growth and negative pressure being exerted on net profit. Etisalat, for example, reported a two per cent rise in revenue year-on-year, with Zain reporting a one per cent rise and STC a four per cent increase. Conversely, Qtel reported a 33 per cent decline in profit year-on-year for the period, Batelco a 9.4 per cent decline, Etisalat 10 per cent decline, and STC an 11 per cent decline.

What these results highlight is the fact that as the telecom sector in the Middle East matures, network operators are struggling to keep growing their revenues at the double-digit rates of the past. The pent-up demand for access to data has been fuelling massive investment in infrastructure since the launch of 3G services six years ago, though network operators continue to grapple with ways in which they will directly benefit from investment aside from charging for access.

“I don’t think there is a single answer to how operators will look to push up revenues from the broadband opportunity beyond what is charged for access,” said Ross Cormack, CEO of Oman telco Nawras. “The answer does lie in segmenting customers, providing them services and applications they actually want, understanding their requirements; and to a large degree I think network operators are already doing this.”

STC International’s CEO, Ghassan Hasbani is of the opinion that the segmentation efforts that network operators are currently undertaking need to be extended even further in order to maximise on the broadband opportunity.

“There needs to be behavioural segmentation taking place,” Hasbani says. “Given the rise in social media and user-generated content, there needs to be an emphasis and differentiation based on communities rather than segments,” he added.

In its own right STC is looking to increase its participation in the services and applications that are driving broadband demand. In 2009 a company called Intigral was established by STC in partnership with All Asia Networks, and Saudi Research and Marketing Group, with the aim of enhancing the digital experience of consumers irrespective of their access channel.

Thus Intigral is looking to act as a hub between telecom companies, media content producers, and end-users, in an attempt to simplify the complex digital media landscape.

“There is a mega-convergence drive comprising of broadband and mobility, multimedia content and electronic transactions,” Hasbani said. “There are forecast to be 1.5 trillion instances of session activations in 2014, but here remains pressure on pricing and ARPU, and herein lies the situation that needs to be rectified.”

Analysts have forecast that ARPU in the Middle East is set to decline by five per cent per year going forward, though STC Group CEO Saud Al Dauweesh believes there are a number of strategies network operators can implement in order to mitigate this decline.

“Network operators need to restructure business models into flexible ones,” Al Dauweesh said. “We also need to invest in our areas of growth as an industry and take a long-term view to these investments. Lastly, policymakers and regulators need to shift to be in line with the industry,” he added.

On a wider economic outlook, Al Dauweesh believes the financial crisis of late 2008 onwards came in the midst of a positive long-term economic cycle, and was merely a ‘blip’ in an otherwise positive growth cycle. Mergers and acquisition (M&A) activity across sectors, however, continues to be at a fraction of what it once was prior to the crisis.

News agency Reuters estimates there was US$192 billion worth of M&A activity transacted in the telecom sector globally in 2005. This number fell to US$52 billion in 2009, and US$50 billion in 2010, and while there appears to be a recovery prima facie, M&A activity is unlikely to rebound to its previous highs any time soon.

Until May 2011, global M&A activity in the telecom sector for the year to date amounted to US$70 billion, but when the US$39 billion T-Mobile USA/AT&T Wireless transaction in the US is removed from the overall total, the number falls to just US$31 billion, which is in line with the leaner last couple of months.

“I am not all that optimistic that M&A activity in telecom is bouncing back,” said Simon Holden, managing director, global co-head of telecom, Goldman Sachs International. “I believe this year we shall see more of the same in terms of slow uptake in deal, with a result that organic developments are coming more into focus,” he added.

Looking to the future, STC International’s Hasbani believes the key players that are going to shape the telecom industry will include the strategy think-tanks and consultants; the telcos themselves; financiers; and policymakers/regulators. The glaring omission of third-party participants within the key players identified by Hasbani as shaping the future telecom industry – be they content providers, financial services institutions, or healthcare outfits – is perhaps the very reason telcos can expect to continue struggling to raise their organic growth prospects.