MVNO - A new Horizon for Saudi Telecom Sector May 2014

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1 MVNO (Mobile Virtual Network Operators) The all new headline story in the Saudi Telecom industry is the introduction of MVNO s (Mobile Virtual network Operators). Two new MVNOs (Jawraa Lebara, Virgin Mobile) are all set to enter the market during the year. The third MVNO Axiom telecom was also supposed to enter the market on Zain s network, however due to failure in submission of mandatory documents, the authorities (Communication and Information Technology Commission) have not approved their license. In this paper we look at the general idea behind an MVNO, and the impact they will have on the current landscape of Saudi telecom market. The first question that arises for us is: What is an MVNO? A Mobile Virtual Network Operator or in short an MVNO, is a mobile service provider that does not have its own infrastructure, but operates through existing networks of the existing players in the market. A MVNO purchases minutes at a wholesale rate from the existing network operator and sells it at a retail rate under its banner. Simply putting it an MVNO is a reseller of an MNO (Mobile Network Operator). An MVNO is actually a customer of an MNO rather than a competitor. An MVNO can typically set its own pricing following agreed-upon rates with its contracted MNO. MVNO- Infrastructure MNO Access Network Core Network Application Platform Operator Subscriber Billing Management CRM Branding Distribution Sales Reseller Service Operator Full MVNO (Mobile Virtual Network Operators) Mobile Network Operators (MNO) MVNE (Mobile Virtual Network Enabler) Source: CitiWireless Figure 1. Thisd-party mobile service providers can operate in on of three ways, possibly using a MVNE to support them. Source: CitiWireless How do they Operate? MVNOs are dependent on the MNOs to provide the network infrastructure. Due to the lack of control over the infrastructure, the operational strategy determines the success and failure of a MVNO. According to Deloitte, there are four operational strategies that the companies can follow. Price Mass Market Model 1 Focus on mass market, make prices a core competency, and keep pursuing excellent user experience Model 3 Rely on the rich experience in telecom operation and the fixed customer base to expand into MVNO markets Model 2 Focus on market segments/niche markets, make breakthrough content/specific products and strive to meet the core demands of target customers. Model 4 Focus on market segments/niche market and achieve differentiation through product prices Market segments Experience Source: Deloitte Consulting Team Senior Talha Nazar t.nazar@aljaziracapital. Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa Sultan Al Kadi s.alkadi@aljaziracapital.com.sa 1

2 MVNO as Percent of All Wireless Subscribers MVNO - A new Horizon for Saudi Global Dynamics There are more than 1200 MVNOs all across the globe, out of which the highest concentration is seen in the European region, followed by Asia Pacific. In the Western and North American region, the most developed in terms of MVNOs, the market share has reached almost 10%, which is much higher than the global average which is around the 3%- 4% mark. MVNO s regional distribution Latin America 197 Middle East & Africa 174 North America 43 CIS/EU 61 Asia Pacific 9 Europe 723 Deloitte Historical Market Share 10% MVNO Share of Wireless Market, % 8% 7% 6% 5% 4% 3% 2% 1% 0% W.Europe and America Rest of World Global Average Source: Telegeography, Mobile-virtual-network GCC MVNOs The only country in the GCC with a proper penetration of MVNOs is Oman. The Omani telecommunication authority TRA awarded five Class II licenses in 2008 with the stipulation that they were to become MVNOs. Although only two, Friendi and Renna Mobile, appear to have gained any traction in the market. The penetration level in 2012 for MVNOs dropped to 10.7% from 12.4% in 2011, primarily due to the closure of one of the MVNO. Total subscriber base in 2012 for MVNOs in Oman stood at 575,193 customers. Jordan also issued a MVNO Oman Market Share of MVNO 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Oman Mobile Nawras MVNO Source: Telecommunication Regulatory Authority license which was taken up by Fendi Group in However any further step were not taken in the region until Saudi Arabia issued 3 new licenses in Market Share 100.0% 6.0% 10.0% 12.4% 10.9% 46.9% 46.9% 43.7% 40.2% 40.7% 53.1% 47.1% 46.3% 47.4% 48.4% 2

3 TMVNO strategy- A Saudi Perspective The three MVNO Operators that are looking to setup shop in Saudi Arabia are Jawraa Lebara, Virgin Mobile, and Axion Telecom. For us to understand their strategy, it is mandatory for us to look at their past strategies to gain traction in the respective markets. Jawaraa Lebara Lebara s business model can be described as a low-cost international mobile service. The company provides Pay-As -You -Go (Prepaid) SIM cards, targeting the international community and expatriate workers in the country. The company s operation are limited to the western European region and Australia, providing its services to countries like Denmark, France, Netherlands, Germany, Norway, Spain Switzerland and the United Kingdom. Given the company s strategy, Lebara fits into the model four presented in the matrix on the first page. Where the company looks to target a particular segment with competitive pricing. Saudi perspective... Lebara is launching its services in Saudi Arabia through the network of Etihad Etisalat Company (Mobily). Saudi Arabia has the fourth largest expatriate population of 9.2 mn 1 in the world, out of which 86% are earning below SAR 2000/month 2, pricing of the packages play a major role for such individuals. Lebara we believe will take advantage of such statistics, as its business strategy fit perfectly into the demographics of the kingdom. How it impacts Mobily and the telecom market?!? We believe the introduction of Lebara will act as an extension to Mobily s strategy. As Mobily s penetration in expatriate population is high, due to the company s efforts to increase its penetration in the market. However for Zain, which has relied heavily on cheap call rates in order to attract budget subscribers, will find it difficult to compete with Lebara, due to the solid infrastructure of Mobily supporting the company. However, how Lebara will impact STC will be a bit tricky to understand, as STC does have a an expatriate customer base, which can mean a tough competition for STC. SWOT ANALYSIS- of the MVNO (Lebara and Mobily) Strengths Lebara will have access to Mobily strong infrastructure. For Mobily this will mean additional revenue source. Lebara has strong MVNO experience. Weaknesses Lack of control over the network infrastructure, The calling rates in Saudi Arabia are controlled by the authority, which leaves little room for competing on calling rates Opportunities An opportunity for Mobily to increase its customer base. A strong expatriate population. Threats Competition from other operator as Virgin and Axiom telecom is also looking to enter the market. Dilution of the calling rates, however the rate are controlled by the authority. High Mobile Penetration of 170%

4 Virgin Mobile Virgin Mobile is one of the leading MVNO s in the world. Virgin Mobile branded communication service is currently available in Australia, Canada, Chile, Columbia, France, India, Poland, South Africa, Mexico, United Kingdom and USA. Virgin target market is the youth, broadly defined as individuals between the ages of fifteen to thirty years. The strategy of the company is to target this market and retain its customer base through cheap pricing and a content rich environment, something that today s youth demand. In our view the company s strategy fits into Model one of the Matrix. Saudi perspective... Saudi Arabia has a large youth population as almost 50% 4 of its population is below twenty five years, which fits beautifully into Virgins strategy. We believe due to the highly saturated market, the company will find it difficult to attract subscriber base. However given the low market share of MVNOs, Virgin mobiles will find a sweet spot in this content hungry youth population, to extend its business, and consolidate its position in the Saudi market. How it impacts STC and the telecom market? Virgin mobile is looking to enter the Saudi market on the platform of STC s (Saudi Telecom Company) network. The company like all other MVNOs will buy minutes in bulk from STC and resell under their banner. STC on the other hand will have the opportunity to increase its customer base and find further penetration in the youth population. We believe with the introduction of Virgin, the landscape of the telecom industry will see a shift since Virgins customer-centric strategy will shift the market space and company might just be able to find space in a saturated market. As customer service has always been a burning issue for the subscribers. If Virgin somehow is able change the customer service culture, it will create a major shift in the industry, and benefit STC in expanding its customer base indirectly. SWOT ANALYSIS- of the MVNO (Virgin Mobile and STC) Strengths Virgin mobile will have access to STC strong infrastructure. For STC this will mean additional revenue source. Virgin mobile has strong MVNO experience. Weaknesses Lack of control over the network infrastructure. The calling rates in Saudi Arabia are controlled by the regulator, which leaves little room for competing on calling rates Opportunities Threats An opportunity for STC to further consolidate its position in the Competition from other operator as Lebara/Mobily youth market. Dilution of the calling rates, however the rate are controlled by 50% of Saudi population is below the age of 25. the authority. High Mobile Penetration. 4 Central Department of Statistics and Information 4

5 Porter s Five Forces Analysis Porter s five forces model provides a simple perspective for analyzing and assessing the competitive strength and position of a corporation. The model can be used to analyze the industry context in which the firm operates. The Porter Five Forces model is a simple yet an effective tool for understanding where the strength of the business lies. Bargaining Power of Buyers Threat of New Entrants Barriers to Entry Brand Equity Economies of Product differences Switching Cost Capital requirement Absolute cost Industry Profitability Threat of New Entrants Buyers concentration Dependency on distribution channels Buyer switching cost Information availability Force down prices Substitute products Price Sensitivity of Buyer Differential advantage Bargaining Power of Suppliers Competitive Rivalry Bargaining Power of Buyers Bargaining Power of Suppliers Supplier switching cost relative to firm switching cost Impact of inputs on cost or differentiation Substitute inputs Strength of distribution channel Supplier concentration Threat of Substitutes Threats of Substitutes Buyer propensity to substitute Relative Price Performance of substitute Buyer switching cost Production differentiation Ease of substitution Substandard Products Quality Depreciation Competitive Rivalry Sustainable competitive advantage through innovation Competition between online and offline companies Level of advertising expense Powerful competitive strategy Firm concentration ratio 5

6 MVNO according to the Porters Five Forces Model Threat of New Entrants: Medium to Low The telecommunication industry in Saudi Arabia is tightly controlled by the CITC (Communication and Information Technology Commission). Therefore for any new player to come into the market it will need the ministries approval, which could be a relatively long and bureaucratic process. In order to remain competitive, a MVNO has to have a minimum subscriber base to breakeven in this highly-penetrated market (penetration levels are above 170%). Due to the high capital-intensive nature of the industry, new MNO will find it difficult to become competitive compared to the existing players. However, MVNO s can still penetrate the market as capital requirement is low. Threats of Substitutes: Medium The threat of substitutes in our view for the telecom industry is medium, as there are other services in Saudi Arabia that can provide voice and data services, albeit indirectly. Although Application such as Whats app and Skype can be treated a substitutes for voice and data, however usage of these services are entirely dependent on data availability which in turn means a revenue opportunity for telecom operators. Bargaining Power of Customers: High As more telecom operators enter the market be it an MNO or an MVNO, the bargaining power of the local customers increases along, especially since basic call and data service are treated as commodities. Given the uniformity of services, the customer tends to look for cheaper price options. For MVNOs to remain competitive, they need to retain high-quality customer service and competitive pricing policies, which will always be a challenge to their margins. Bargaining Power of Suppliers: High For MVNOs, supply side is controlled by the MNO, meaning MVNOs have very little control over the network and the pricing of the minutes. The whole sale rates for the minutes and data are decided by the MNO. In time of peak hours, the MNO s can allocate high bandwidth to its own network which can result in weak reception for MVNO clients. Talented human capital in MVNO field are scarce in Saudi Arabia, which give them negotiation power. Rivalry among Competitors: High With high penetration levels (+170%) in the telecom industry, the competition amongst its players is very intense. For the company to attract customers, they have to offer cheap attractive bundles, which can result in lower ARPU (Average Revenue per Unit). Conclusion Based on the above information and our analysis of the sector, we believe that MVNOs will face a challenging environment to succeed in the competitive Saudi telecom market. However, saying that, we do not intend to downplay the role that MVNOs in the kingdom. For an MVNO to be successful in Saudi Arabia, its focus should be on filling the gaps such as customer service, enhanced data bundling, and innovative solutions to niche groups of society. The Saudi market is currently controlled by two major players, STC and Mobily. If the integration between the MVNO and MNO is smooth, we believe MNO can treat the MVNO as an extension of its services, which will give it greater leverage to compete in the market. The other scenario is for an MVNO to become a replacement of MNO, which will create cultural clash and eventually could collapse the agreement between the two parties. At the micro level, we believe Mobily s alliance with Lebara will give the earlier an opportunity to consolidate its position among the expatriate population in Saudi Arabia, given that the 86% of expat population is earning below SAR 2000/ month, for whom competitive calling rates is essential. However, what remains to be seen is how the CITC will go about the calling rates. On the other hand, the alliance of STC and Virgin mobiles is equally interesting. Our analysis shows that Virgin and STC could build a successful partnership if Virgin fill the gap for STC in terms of attracting more youth and expatriates to their customer base. Furthermore, STC could benefit significantly from Virgin s experience in enhancing their customer services. Virgin would provide these synergies to STC while benefiting from the wide access and large customer base of STC to manage their profitability margins. Zain is expected to suffer from the above developments, as its MVNO license is still facing headwinds with the regulator. 6

7 RESEARCH DIVISION AGM - Head of Research Abdullah Alawi a.alawi@aljaziracapital.com.sa Senior Talha Nazar t.nazar@aljaziracapital.com.sa Senior Syed Taimure Akhtar s.akhtar@aljaziracapital.com.sa Saleh Al-Quati s.alquati@aljaziracapital.com.sa Sultan Al Kadi s.alkadi@aljaziracapital.com.sa Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General manager - brokerage services and sales Ala a Al-Yousef a.yousef@aljaziracapital.com.sa AGM-Head of Sales And Investment Centers Central Region Sultan Ibrahim AL-Mutawa s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa lalmutawa@aljaziracapital.com.sa AGM-Head of Qassim & Eastern Province Abdullah Al-Rahit aalrahit@aljaziracapital.com.sa AGM- Head of Western and Southern Region Investment Centers & ADC Brokerage Abdullah Q. 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