May 2009

The Delta Perspective

Delta Partners takes a look at

mobile broadband potential

in MEA and assesses

challenges for both mobile

and fixed operators

Mobile Broadband in MEA:Promises opportunity but not a smooth ride

Authors Joao Sousa - partner: js@deltapartnersgroup.comStephen Clements - senior associate: sc@deltapartnersgroup.comAdil Dilmen - associate: ad@deltapartnersgroup.comDelta Partners Intelligence Unit

Introduction

The unprecedented take-off of the

mobile sector across the world has

been one of the most note-worthy

milestones in telecommunications

history. With the passage of time,

operators have witnessed a migration

of PSTN voice traffic towards mobile

networks. The segment has emerged as

a crucial revenue generator of telecom

services worldwide, capturing a sizeable

portion of basic voice and data traffic

of households and enterprises. As in

the rest of the world, the dominance of

mobility is seen in the MEA region too,

particularly in the emerging markets

of Africa. At the end of 2007, the

ratio of broadband, fixed and mobile

penetrations stood at 1:4:22 and

1:18:160 in Middle East and Africa

respectively. Owing to the strength of

mobility, broadband over this medium is

expected to register explosive growth,

catapulting to new heights of high-

speed demand.

Key hIghlIghtS

The mobile broadband opportunity •

in MEA is expected to reach

USD5.9 billion by the end of 2011;

comprising nearly 70% of the overall

broadband market

Combined broadband subscriber base •

expected to reach 57 million, with 72%

of the base over mobile platforms

Both the Middle East and Africa •

display similar mobile broadband value

opportunity sizes; Africa has potential

for 24 million subscribers, the Middle

East has around 17 million subscribers

Long term mobile broadband ARPU •

is expected to be between USD10-

15 driven by new submarine cable

developments

2

In this paper, we explore the broadband

opportunity in the MEA region, outline

the external threats and internal

challenges faced by operators, and

detail the overall value proposition.

Significant growth potential exists

with a 3-year mobile broadband

opportunity valued at around USD5.9

billion, with Middle East contributing

USD3.0 billion and Africa USD2.9

billion. The opportunity size will

EXHIBIT 1: Comparative service penetration in Africa, Middle East and EU-25 nations

1 Includes Bahrain, KSA, Kuwait, Oman, Qatar, UAE, Israel, Lebanon and LibyaSource: ITU; IDC; World Cellular Information Service (WCIS); Delta Partner analysis

Source: European Commission, Eurobarometer – E-Communications Household Survey, June 2008

depend on:

Rollout speed of 3G networks or •

EDGE by the leading players

Reduction in mobile broadband •

price driven by competition and

decrease in cost of connectivity,

both internationally (completion of

existing submarine cable projects in

the region) and national core network

costs (driven by fiber deployments).

EXHIBIT 2: % of Households with only mobile connections in EU nations

3

The ‘Fixed-Mobile’ Substitution (FMS)

The evolution, or rather revolution of the mobile sector has led to far greater choices for communications than the previous one of traditional PSTN voice

The strategy on the part of fixed and

mobile operators has been aimed

towards displacing each other as the

preferred provider. Whilst the early

trends of mobile uptake indicated

an apparent complimentary use to

the fixed line, mobile operators have

steadily become substitutive and

succeeded in eating into the share

of fixed line markets. Consequently,

the share of ‘mobile-only’ households

has been rising, whilst the number of

households with at least one fixed line

has continued to decline. For instance,

at the end of December 2007 about

24% of the households in the EU-27

nations had opted for ‘mobile access

only’, as the FMS syndrome has been

more pronounced in countries with

less developed fixed networks such as

Czech Republic, Finland and Hungary.

In a bid to outdo the mobile

revolution, fixed players have

chosen to ‘bundle’ a bouquet of

communication services in order to

meet the collective TV, voice and data

requirements, especially those of high

and middle class households. Though,

this aided in mitigating the rate of line

deactivation to some extent, mobile

players have been quick to retaliate

by bundling mobile broadband and

rolling out alternate technologies such

as WiMAX.

Several market and socio-demographic

factors have further fuelled the Fixed-

Mobile Substitution (FMS). Some of

these are:

Reduced differential between fixed •

versus mobile in tariffs and services

Mobile operators leverage upon a •

range of price-plans across both

prepaid and postpaid platforms,

as fixed operators continue to

be ‘locked’ to their legacy line

rental-model

The gap between fixed and mobile •

broadband provisioning has been

trending downwards with the

roll-out of 3.5G networks and

‘unlimited consumption’ offers

Rising numbers of ‘single-dweller’ •

households , leading to mobile

phones occupying the position of the

household communication device

Proliferation of a mobile workforce •

and the practice of businesses

encouraging mobile contacts as

reference points for clients

4

Mobile dominance in MEA – Opportunity and DriversIn the Middle East, and especially Africa, the fixed networks are far less developed than in Europe, representing a mobile broadband opportunity of close to USD6 billion in revenues and USD8-12 billion in shareholder value

For instance, in Ghana and Saudi

Arabia, mobile operators constitute

nearly 95% and 80% of the market

revenues respectively. To date, operators

in the region have been riding the

volume game, focusing on maximizing

subscriber additions. However, as

penetration levels continue to increase

and reach near saturation in Middle

East and 37% in Africa at the end of

2008, operators will need to explore

new avenues for revenue growth.

Mobile operators view data services as

a growth driver that is indispensible to

their expansion. The intrinsic need for

creating inroads into the broadband

play together with the dominance of

mobile operators in the telecom market,

will fuel the insurgence of mobile

broadband in MEA.

With over 500 million mobile subscribers

in MEA at the end of 2008, the region

has been one of the fastest growing

across the world over the past years,

witnessing mobile overtake fixed line

connections in the early 2000s. The

prohibitive costs of wiring the region

versus the favorable economics of

wireless technologies is expected to add

to the mobile voice and data bonanza.

Several of the regional titans have

already begun to recognize this and use

both ‘convergence and substitution’

measures to market a variety of offers,

initially targeting the high ARPU

business customers. These include

promoting phones that support fixed-

wireless access technologies in an SME

context, while encouraging high-speed

wireless internet based on USB modems

EXHIBIT 3: Broadband market potential – subscribers and revenues

Source: Delta Partners analysis

5

and wireless routers.

Owing to their dominance, mobile

operators are well positioned to tap

into the broadband opportunity

capitalizing on the fixed networks lack

of scale and competition. In the long

term, the promise of the next wave of

mobile growth is likely to depend on

how soon subscribers latch on to the

data bandwagon. The data opportunity

in the mobile world stems from two

major sources. The first leads from the

usage of internet access to meet with

basic fixed internet needs, the second

generated from within the mobile

ecosystem. The former includes the

likes of browsing, e-mails etc., the latter

including m-payment, services driven

by operators’ portal, location-based

applications, gaming, TV, etc.

Despite the presence of this opportunity,

operators face technical and economic

challenges. As they depend on data

services to stabilize ARPU, the explosion

in traffic and associated rise in costs can

threaten QoS. In addition, the increase

in data service revenues does not always

compensate for the increase in traffic

levels on the network. Hence, the key

question that plagues operators is how

to optimize cost-to-serve, led by the

extent of network development with

respect to the rising data traffic.

According to Delta Partners estimates,

the total broadband market in MEA is

expected to grow at a CAGR of 51% in

revenue terms between 2008 and 2011,

reaching USD8.6 billion at the end of

the period with a subscriber base of 57

million, coupled with a geographic split

of 47% and 53% between Middle East

and Africa respectively. Additionally,

the dominance of the mobile market

is estimated to control a majority of

the households and small business

enterprises broadband market with

41 million subscribers and mobile

broadband revenues of USD5.9 billion

across MEA at the end of 2011. The

surge in innovative product offerings

has the ability to translate into a

EXHIBIT 4: Services-suite aimed at capturing the broadband opportunity

Source: Websites

shareholder value in the range of USD8-

12 billion in the next couple of years

(Middle East:Africa representing 70:30

of this value).

Typically the regional titans, such as

Orascom, MTN, ZAIN, Etisalat, and

more recently Vodafone, plus other

established leaders in individual

markets, are better suited to address

the traditional ‘fixed’ telecom demands

of high-speed networks. As illustrated

in Exhibit 4 above, these include voice

and data service offerings across SMEs,

homes and public internet cafes/

payphones using mobile infrastructure.

In order to be able to successfully drive

profits based on a broadband play,

operators would need to align their

operating model, and gain access to

backbone and international connectivity

at competitive costs. Furthermore, for

markets where the regional titans do

not have a presence, existing fixed and

tier-II mobile operators have a chance

to enhance their value proposition in

broadband play.

6

EXHIBIT 5: Skype and its implications to the telco community

Source: Delta Partners analysis

Potential Roadblocks to Success

The ‘IP’ Syndrome

The first set of concerns with the advent

of competition is typically related to

tariffs, as operators meet with cut

throat pricing amongst their peer

group. However, the threat today has

transitioned beyond mere tariff wars

and spread to newer frontiers of IP

traffic. The advent of cheap VoIP calls

with improving QoS, has led to the

jettisoning of legacy circuit switched

networks, corroding the core service

offering of fixed and mobile play and

making the future of voice revenues

unclear. Additionally, VoIP providers

have further intensified their attack,

by offering freebies such as unlimited

international calls to select countries as

Mobile broadband enables increased value, and retention of high value clients but requires significant investments, and opens the door to VoIP

part of their basic subscription packages.

Currently, Skype is already the second

largest operator in terms of subscribers

in the world, with more than 370 million

subscribers and revenues of USD143

million at the end of Q3 2008.

In response to the VoIP threat, mobile

players are seen creating service offerings

such as the Video over IP solutions

to try to combat the Skype migration

– Vodafone for instance is already

deploying some offerings in Europe.

Fixed players on the other hand are

being increasingly pushed into catering

to the needs of corporate and large

business entities. Additionally, they are

hopeful of regulatory support to enable

7

investments in FTTH across major cities,

the underlying objective being to deliver

broadband speeds that are unmatched

by mobile operators, thus creating

successful FTTH monopolies.

Perils of Rollout Overestimation

An evolution from traditional mobile

player to that of an integrated /

convergent one, calls for a revised

business model and organizational

revamp. The roadmap that lies ahead

is not simplistic as operators face key

challenges of meeting high-speed

connectivity expectations, with a range

of technical, commercial and financial

issues. To be able to successfully address

the opportunity, operators require access

to international capacity at competitive

costs, and significant investments in

both access and core networks. The

commercial challenges to be dealt

with include devising innovative ways

to address the ‘utopian’ high-speed

expectation. The financial challenge is

a basic one in some MEA markets. Even

the leading players are not realizing

results in line with the cost of capital

and the broadband rollout requires

significant capital. Furthermore, as the

broadband subscriber base rises, and the

popularity of IP voice, Instant Messaging

(IM) and video calls increase, the threat

to existing voice capacity, continues to

grow.

Thus, the key to success lies in

striking the right balance between

profitability and value creation, whilst

preventing data from cannibalizing

voice revenues. In the Middle East,

current regulatory conditions tend

to block VoIP services, maintaining

attractive conditions for local players

to push broadband development

without having to be overly concerned

about cannibalization of voice

revenue from the growth of VoIP.

However, freely available software

has made it possible, even under

such circumstances, to access VoIP

services despite regulatory restrictions,

demonstrating the risk they pose to

the operator.

EXHIBIT 6: Roll-out challenges faced by mobile players

Source: Delta Partners analysis

8

EXHIBIT 7: Broadband potential across markets with top 2 operators offering broadband services

1 Only Middle East and African countries, considering the full potential of the countries where the operator has equity stake; Etisalat includes Iran2 Vodafone includes Vodacom countries as wellSource: Delta Partners analysis

Key Success Factors – Realizing the Prospect

Such a transformation is needed to

enable them to address the opportunity

profitably and meet key broadband

development requirements. In our

opinion, the factors that play a decisive

role in creating a sustainable opportunity

include the following:

Access to International Connectivity

at Competitive Costs

Presently, 1GB of international •

connectivity in Africa ranges between

USD15 to USD30 depending on

the country and service quality.

This translates into very high priced

broadband service offerings

To improve upon the current scenario, •

some mobile players are known to

be investing in and also leading the

development of submarine cables in

the region

In order to address the broadband opportunity, mobile operators need to first align their operating models with business objectives

efficient, low Cost Core and

Backbone

Improve control of network •

coverage, capacity and technology

to manage service quality and costs

Make an informed and judicious •

decision on the mix between

coverage and capacity in urban

versus rural areas

Due to the lack of fiber in MEA, •

players such as MTN and Zain are

deploying fiber to fulfill backbone

requirements, and in some cases

metropolitan rings

Explore tower sharing and rural •

roaming to reduce cost of network

Improve economies of Devices /

CPes Supply

Currently, the operators’ cost of •

a 3G data card / USB modem is

9

EXHIBIT 8: Positioning methodology for the regional mobile players

1 The condition required are cumulative as we move from left to right scenariosSource: Delta Partners analysis

higher (in excess of USD50) than

the consumer price in Europe

Dedicated Sales Channel and

Customer Support

Sales and support towards data •

connections is far more complex

than traditional pre-paid voice

services

Operators need to rethink the •

number and role of ‘Owned-shops’,

devising a tailored channel strategy

(e.g. IT agents as telecom sellers),

designing distributor role and

agreements, and defining the mix

of sales agents (outsourced versus

direct representatives)

Enhance customer care structure •

and dimensioning in terms of direct

support to users, sales agents and

corporate clients

enhance Customer development and

design retention programs

Educate clients in order to rapidly •

rollout offers and protect high value

clients

Improve value proposition for high •

value business and residential

customers. In Africa, this segment

represents between 10-20% of

subs and 50-60% of revenues

Organizational transformation

Revamping the ‘Go-to-Market’ •

strategy

Partnering with other entities of the •

value chain (e.g. ICT services) and

taking advantage of broadband play

(e.g. through vendor partnerships and

/ or infrastructure sharing)

Regional giants such as MTN, Zain,

Vodafone (Vodacom), Orascom, and

Orange are well positioned to lead

mobile broadband development across

the MEA region. MTN currently leads

this potential due to presence in the

high-potential markets of Iran, Nigeria

and South Africa. Exhibit 7 highlights

broadband penetration as % of

population and potential number of

mobile broadband subscribers.

Having said that, the estimates are

likely to be impacted by regional

developments such as new license

awards in Iran (awarded to Etisalat),

a potential new license in Tunisia and

privatization of operators in Libya,

Algeria, and Mozambique. Considering

the backdrop of the current economic

environment, and the related difficulty

in obtaining debt and cash, operators

such as Etisalat, STC (leveraging its

strong home market) and Zain have

an opportunity to lead the charge

of players in capturing the mobile

broadband space.

Striking the Right Balance

In our opinion, the leading regional

players can occupy one of the four

highlighted positions in the broadband

ecosystem. These are segregated based

on the operators’ range of services,

positioning and its individual objectives.

The Pure mobile play helps capture •

part of the potential but does not

hold a leadership position in the

market

The Broadband player requires •

significant investment in radio

technology (3.5G and WiMAX,

depending on the country / city

potential) plus access to backbone

and international connectivity.

For instance, MTN appears to be

adopting this position with its

investments in submarine cables,

fiber backbone, 3G and WiMAX

licenses. On the other hand,

Vodafone (Vodacom) is likely to

leverage their expertise in mobile

broadband from Europe

Broadband and ICT play is more •

10

aligned to countries with a strong

corporate / business segment.

Pursuing a focus on this segment

requires the mobile operator to

acquire additional complimentary

assets and competences. For instance,

in South Africa, MTN and Vodacom

(Vodafone) seem to be following

this path, while in UAE, Etisalat

is leveraging its’ fixed and mobile

business to exploit market potential

Lastly, selective triple / quad play, is •

best suited for leading players with

larger geographical footprint, and in

more robust economies comprising

high value residential concentration.

Another option is the ICT and/or TV

play combination, which requires a

significant transformation of existing

organizational and operational

structures of the operator (refer Delta

Partners paper on ICT Managed

Service dated October 2008). Telecom

references in these services include BT

Global Services and T-Systems which

The situation and challenges for the

fixed players in MEA regions vary

considerably across nations. Exhibit

9 illustrates the threat, wherein the

countries with favorable conditions

in terms of submarine cable links and

presence of major leading mobile

players will present significant challenges

to fixed players’ profitability. Some

countries present favorable competitive,

regulatory, and ownership conditions for

the fixed players, allowing time for them

to significantly improve their broadband

portfolio and positioning. Such countries

include Angola, and Libya.

Three key future models for the fixed

incumbent would be as follows:

european Incumbent Path• – This

includes a focus on broadband and

data services plus integrated fixed

and mobile offers. In some countries

such as the leading GCC nations

and South Africa, the stage of fixed

Fixed Line Operators –Rethinking the Business Model

After having detailed the mobile broadband opportunity, the obvious question left to be answered is what lies ahead for the fixed players in the MEA region

network development plus density

of high value consumer and business

clients enables fixed players to pursue

a growth path within broadband and

data services. In addition, most of the

fixed incumbents in those countries

include a mobile operation that can

be leveraged to develop a cohesive

value proposition. In South Africa for

instance, Telkom, after the sale of

their stake in Vodacom to Vodafone,

clearly needs to rollout a mobile

offer, merely to try and sustain their

position in their home market

Competitive Mobile African Path•

– This model would entail the sale

of the business to a leading MEA

mobile player within the next few

years. In most African countries the

local fixed network is significantly

underdeveloped and lacks quality,

often with a significant number

of mobile players contributing to

mobile domination of the market. In

such countries the potential of fixed

broadband is very limited, with the

FMS trend further increasing the risk

to fixed operators. In cases where

the fixed player owns or is part of a

group with mobile operations, the

situation is less critical. The popularity

of privatizations of incumbents is

expected to increase significantly

over the next two to three years,

coinciding with the time it will take

for the African submarine cable

developments and for fiber to be

laid out in most countries enabling a

strong broadband push

the government Path• – In this

scenario, operators exploit the

monopoly/ duopoly scenarios

to substantially increase the

value of fixed business and drive

broadband before full liberalization.

Governments in countries like

have struggled to translate a growing

business segment into adequate

shareholder returns. The minimum ICT

play is likely to include connectivity

services charged on real service level,

data centre, security and email services.

This offer presents strong opportunity

in many countries, generating carrier

revenues and building loyalty of

corporate clients, whilst deviating

from the legacy tariffs and monthly

fee structure of broadband offers into

integrated solutions.

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EXHIBIT 10: State of fixed network liberalization in (selective) MEA countries

Source: Delta Partners analysis

EXHIBIT 9: Mobile broadband potential per country

1 Low is less than 2.25% penetration, medium is between 2.25% and 4.5% penetration and high is more than 4.5% penetration2 MTN, Zain, Vodacom/fone, Orascom, Orange, EtisalatSource: Delta Partners analysis

Angola and Mozambique can still

have a major role to play in the

development of the state telecom

assets, and take advantage of

market control to generate value

before competition is introduced.

However, these governments

need to ensure their telecom

assets control significant access

to international connectivity at

competitive costs, deploy a state of

the art IP backbone network linking

key cities, deploy fiber rings and

drive broadband.

ConclusionIt is clear that mobile broadband represents significant

potential for leading players in the MEA region. While,

the sheer growth potential makes it difficult for players

to disregard the opportunity, the strategy employed

would determine the dominant players and potential

impact on the shareholders’ value. Operators would

need to navigate the unique set of obstacles and

challenges intelligently, such as, government mindset

that largely focus on the telecom revenues’ contribution

to national budgets.

The more forward looking (liberal) Governments will

strike a balance between long and short-term objectives

- in ensuring there is sufficient opportunity to develop

a strong national telecoms infrastructure (a key driver

in sustained economic growth), with the funds derived

from revenues contributed by operators. Fixed players

contemplating on entering the race will need to identify

whether the opportunity is within their sights and if

so, deploy a clear entry strategy. In conclusion, while

mobile broadband holds great promise for the region’s

telecom landscape, market dynamics will eventually

determine the market leaders and the potential value

realized. It is certainly an exciting time for the regional

telecoms market.

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Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology

(TMT) sector in high growth markets, with more than 130 professionals operating across the Middle East, Africa and South East Asia

from its offices in UAE, South Africa and Bahrain, and through its three highly synergetic business lines:

Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than

50 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them

address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity: As a fund manager, Delta Partners manages a $80M private equity fund, targeting investment opportunities in the

TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Group’s unique TMT industry

expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis,

and support to portfolio companies.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several telecom transactions in the

region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region,

either to the seller or buyer side of the transaction. Delta Partners actively leverages its close link to Delta Partners’ private equity arm

to access the investor community as well as top-level financial talent.

At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to

services, combining strategic advice and hands-on pragmatic approach.

Copyright © 2009 Delta Partners FZ-LLC. All rights reserved.