Vodafone journeyman

Last December, Vodafone scored a number of firsts by being awarded a mobile licence in Qatar. Vodafone became the first European operator to win a mobile licence in the Gulf, and the opportunity stands out as the first greenfield investment Vodafone has undertaken since acquiring a licence in Egypt ten years ago. In an exclusive interview, Vodafone Qatar CEO, Grahame Maher explains why this prospect is set to change how Vodafone does business in the region, and how success in Qatar will be exported across the region

Grahame Maher, CEO Vodafone Qatar

Every significant operator in the Gulf had expressed an interest in the second mobile licence in Qatar, and its award to a consortium comprising Vodafone and the Qatar Foundation last December came as something of a surprise to onlookers. Qatar’s telecoms regulator, ictQatar, did not do itself any favours by reviewing the final stages of the bid process behind closed doors and not publicising the amount of the winning consortium’s pledge for some time after the winner was announced.

That said, victory for Vodafone in Qatar represents a significant milestone, not just in the history of the global communications provider, but also for the GCC region. Having failed in a number of other attempts to break into the Gulf, most recently in its unsuccessful bid for the third mobile licence in Saudi Arabia, Vodafone modified the way in which it approached bidding processes in this part of the world, formulating a way to minimise any potential incongruence between itself and the prospect of operating successfully in the Qatari telecoms market. At the same time the operator maximised the value of the marketing and technical experience it would bring to the market.

Partnering with the Qatar Foundation, an organisation led by the Emir’s wife, and a vehicle for the development of human capital in Qatar was a prudent move on Vodafone’s part, the result of which helped deliver the consortium the licence in competition to regional darlings such as Zain and Etisalat.

While the Qatar Foundation may be a charitable organisation, the fee charged for the second mobile licence is decidedly not. At a cost of QAR7.716 billion (US$2.12 billion) for a concession in a market with 1.4 million inhabitants and a mobile penetration rate well in excess of 100 per cent, Qatar’s second mobile licence is pricey.

To put the amount paid for the greenfield licence in Qatar into proper context, it represents almost 70 per cent of the EGP16.7 billion (US$3.11 billion) Etisalat paid for the third mobile licence in Egypt in 2006. Egypt being a country with a population of 80 million and a mobile penetration rate of approximately 22 per cent at the time of Etisalat’s market launch in May 2007.

For a seasoned tactical player like Vodafone, the Qatar opportunity was always likely to fit into a larger scheme of things given the amount paid for it, and those various pieces of the puzzle appear to be purposely starting to be put in place.

“This (the Qatar licence) is an interesting and important development for the Vodafone Group,” states Grahame Maher, the easy-going Australian national who was selected to become Vodafone Qatar’s first CEO.

Maher is an experienced early-stage manager of a series of Vodafone operations, having worked as CEO for the global company in the Czech Republic, Sweden, Australia and New Zealand. “This opportunity is quite unique for a number of reasons including the fact it is the first start-up for Vodafone in 10 years, the last one being in Egypt,” Maher says.

Vodafone has been meticulous in constructing a global brand that offers subscribers across the planet a type of guarantee of service and technical excellence, in much the same way that HSBC purports to be, ‘the world’s local bank’. It is this same guarantee that the UK-headquartered company is looking to expand into the Gulf and wider Middle East region, with the Qatar operation standing as the building block to this regional assault.

Prior to his departure in July, outgoing Vodafone Group CEO Arun Sarin had become ever more vocal in his championing of the company’s reinvigorated interest in emerging markets. He had successfully tied off deals in India and Turkey, and while still frustrated in South Africa with respect to gaining the management control required to rebrand Vodacom to Vodafone, Vodafone under Sarin was clearly demonstrating where it saw the plumpest near-term opportunities.

In order to successfully achieve its emerging market vision, Vodafone Group has been more open to the adaptation of it business strategy, making concessions it may have not have contemplated in the past. In Qatar for example, an initial public offering of Vodafone Qatar is scheduled to take place before the end of November, which would result in Vodafone’s equity participation in the consortium being reduced to just 23 per cent, while Qatar Foundation will hold a 22 per cent stake, government institutions 15 per cent, and 40 per cent will be offered to Qatari nationals on the Doha Securities Market.

“After the IPO we are going to be more of a Qatari company than Qtel,” quips Maher, referring to the fact that 77 per cent of the operator’s shares will be in the hands of Qataris at the time of launch. “We are going to be a minority shareholder with management control, and this arrangement was necessary in order for us to achieve our first step in the Gulf. This is the next level of Vodafone’s partnership model, which offers us management control and the ability to brand the operation.”

Maher acknowledges that without a local partner, Vodafone would likely have been strategically locked out of Qatar, like it has been from other markets in the Gulf, but feels comfortable with the relationship that has been established, and is confident of formulating an effective market entry strategy.

Qatar is a small country in terms of the size of its addressable market, though the investment opportunity is boosted significantly by the country’s strong economic output and socio-economic fundamentals. Average revenue per mobile user amounted to almost US$64 per subscriber per month in 2006. The compound annual growth rate of Qtel’s domestic mobile revenues between the years 2001 and 2006 amounted to a staggering 42 per cent, and with government sources estimating that Qatar’s population is set to grow significantly by 2015, up from 888,000 in 2005 and 1.45 million this year, prospects for the establishment of a decent subscriber base aside from users snatched from Qtel appears a realistic prospect for Vodafone.

“I believe on an operational basis, Vodafone Qatar will do well,” comments a Dubai based equity research analyst who requested not to be named. “If you look at the other second entrants in the Gulf, such as Nawras in Bahrain, Mobily in Saudi Arabia, and du in the UAE, they have all been able to garner more than 30 per cent market share, and in some cases close to 45 per cent.

They have also all been on course to become profitable on an EBIT level within two years or so, and I don’t see why Vodafone Qatar would be any different,” he adds. Maher is not revealing too much about the growth and market share forecasts the consortium worked with in order to formulate its business and market entry strategy. Some of this information is likely to be detailed in the IPO prospectus in the coming weeks, though Maher is willing to go on the record as saying he believes the projections for the nascent mobile operator remain encouraging.

“I’m comfortable with the level of competition I forecast will exist upon our entry and thereafter,” Maher asserts. “Qtel is a good business and has done well, and while I know every new entrant says this about the market it is preparing to enter, I honestly do believe competition will be good for the entire market in Qatar.”

Vodafone will look to focus on providing, “a world of difference”, according to Maher, which will include the offer of comparable technology and network performance, but the operator also plans to introduce innovitave bundled packages, differentiating itself in the area of customer service.

The official introduction of Apple’s iPhone into the Qatari market will be one such point of differentiation, with Maher confirming Vodafone Qatar intends to offer the device at the time of launch. Over its first weekend of introduction in the middle of July, 500,000 3G iPhones were estimated to have been sold globally, highlighting the pent-up demand that exists for the device. Qatar’s demographics, counting 75 per cent of the population aged between 16-64 years, fits nicely into the sweet spot of potential iPhone purchasers.

“We will deliver a fully converged service,” Maher promises, as the operator plans to launch services without having to resort to roaming on the incumbent Qtel’s mobile network. It is also envisaged that Qatar’s small geographic size will permit Vodafone Qatar to come to market with close to 100 per cent population coverage.

While the new entrant intends to cover the whole country directly, Maher does recognise scope for cooperation with Qtel in the area of network sharing, specifically the sharing of towers. The licensee is yet to confirm its choice of network supplier, but Maher says the process of selecting sites is well underway and public confirmation of the network suppliers is understood to be imminent.

“We are required to launch by March 2009, and given that we were only officially awarded the licence on June 29, it is going to be a challenge. However, it is a realistic target, and I remain bullish that we can achieve it,” Maher contends. The licence conditions offer the two mobile operators an exclusivity period lasting five years as well as permission for Vodafone to operate its own international gateway – a concession the licensee intends to take full advantage of as a fulcrum in the development of its international business in the region.

“Zain has done a good job of copying the Vodafone Passport programme, which offers subscribers the same tariff while roaming on networks other than their home network while travelling,” says Maher. “We are working on a similar solution tailored for the GCC, and will utilise our extensive knowledge to make it successful.”

Thus it appears that in many ways Qatar will develop to represent a beach head for Vodafone’s assault into the Gulf and wider region. Domestically though, the new entrant faces a mammoth task in gaining traction in a market that is competently serviced by Qtel.

Approximately 20 per cent of Qtel’s one million plus mobile users are contract subscribers, the majority of whom are no doubt corporate users with long-established relations with the incumbent player. Qtel has driven Internet penetration to above 50 per cent of households, with broadband connections installed in over 30 per cent of all households.

A controlled introduction of 3G services throughout 2006 and 2007 resulted in Qtel reporting what it believes to be the operation of one of the most loaded 3G networks in the world on a per-subscriber basis, with as much as 25 per cent of the operator’s total traffic in 2007 going over its 3G network.

In the same vein as other incumbent operators facing the looming threat of competition, Qtel has taken a fresh look at the manner in which it interacts with its subscriber base. Segmentation programmes have become apparent, and the operator has identified the youth market as one that holds great potential for Qtel’s expanding suite of value added services.

“We have been preparing for the entry of competition for years,” stated Nasser Marafih, CEO of Qtel last year, as the process to award a second mobile licence gained pace. “We launched a programme within the telco called Q-Turn in 2002 that is aimed at improving our service offerings across mobile, data and fixed products,” he added.

And while Maher implies Vodafone Qatar will enter the market with the aim of appealing to subscribers from all tiers, he does acknowledge that typically the consumer market is often the more accessible to a new entrant early on.

“We will obviously be targeting the consumer market from the start, but we also have plans to appeal to business users, primarily small and medium size businesses with offerings such as virtual private networks and BlackBerrys,” Maher reveals.

Mobile number portability has been mandated in Qatar though Maher is not all that confident that it will be in place at the time of launch. Vodafone Group’s ‘Live’ mobile portal will be given an outing in Qatar and will form a large part of the operator’s proposition, according to Maher. He believes the content delivered in the market will evolve to suit the domestic circumstances like has happened in other markets where Vodafone Live has been introduced.

Whilst handset manufacturer-turned- mobile services company, Nokia continues to develop and push its Ovi content portal, Maher, despite Vodafone Group having signed a deal to work with Ovi, believes the establishment of that sort of relationship with the end user essentially remains the domain of the service operator to manage.

“We are in the customer relationship business, that’s what we do,” says Maher. “So in a way that is where Nokia is our competition.”

Qatar’s telecoms sector is set to become an increasingly cluttered place, with attention set to quickly shift to the award of a second fixed line operator later this year or early next. While this development is likely to have a more significant impact on Qtel’s activities than on Vodafone Qatar’s, it remains noteworthy that another entrant represents potential revenues that might have been received by one of two communications providers, may now potentially be lost to a third. It will also raise consumers’ awareness of choice and value-for-money propositions, making the differentiation effort all the more essential.

It is clear that the Qatari telecoms market is ready for a new dynamic, what remains to be seen is how effectively Vodafone can translate in-country success to a wider, regional audience. As Maher familiarises himself with the regional dynamics, it will become abundantly clear just how much fortune favours the brave in this part of the world.