The Future of MobileTelecommunicationsNew Operating Strategies for a New World

In This Report

1 Introduction

Radical Change in the Mobile Telecoms Industry

7 Operators’ Marketing Strategies

Defining the Real Value of Customers

11 The Network Revolution

Reinventing Mobile Networks for 100 Times More Traffic

14 T he Network Equipment Battle

Cutting Costs and Winning Market Share in the Transition to 4G and Services

17 Stark Choices for Device Makers in a World

Alive With Apps

20 Make or Break Years Ahead for India’s

Mobile Operators

Four Challenges and Four Ways Forward

23 Mobile Services In the Middle East

and Africa

The End of Easy Growth Is Near

The Future of MobileTelecommunicationsNew Operating Strategies for a New World

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Radical Change in the

Mobile Telecoms IndustryAs the leader board in the PRTM-Mobile World analysis demonstrates, signifi cant changes in the telecoms pecking order have occurred between 2003 and 2009 (Figures 1 and 2). These changes are evidence of an industry where the game can change radically; where price points, penetration levels, and usage levels can shift into completely new gears; where tipping points are easily missed; and where new players can quickly overtake yesterday’s leaders. This is not a new phenom-enon. Since its inception, the mobile industry has grown in spurts, then slowed down, and then funda-mentally reinvented its operating model to attack new markets. During these periods of reinvention, fortunes have been made and new empires created.

We are on the verge of a major reinvention period now. Ready to make the shift to a world of mass market usage of the mobile Internet, we are ushering in the “mobile lifestyle.” But this world is not tenable with the operating models and business paradigms of today. The race is on to reinvent the mobile operator so that it can serve the new world—and the blueprint is coming into focus. The development of networks that can carry 10–100 times today’s volumes (without a signifi cant increase in operating cost) will require major capital investment, driving massive consolidation that will leave only two or three networks per country. A funda-mentally different relationship with the customer will leave both operator and customer better off, largely eliminating fruitless acquisition and churn and simpli-fying both offers and operations.

Ameet Shah

DirectorPRTM

John Tysoe

Managing DirectorThe Mobile World

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RADICAL CHANGE IN THE MOBILE TELECOMS INDUSTRY: WHAT THE TABLES TELL US

As the leader boards from 2003 to 2008/2009 indicate (Figures 1 and 2), companies with the right operating model have won the backing of inves-tors to expand through M&A and through organic growth. Here are the key trends:

Spectacular performance of Telefónica and Telenor.

If Vodafone was the European operator to build a

global empire in the years leading up to 2003, the past fi ve years have belonged to Telefónica and Telenor. In 2003, Telefónica’s $13 billion in revenues and No. 11 position was solid, but not spectacular. By 2008, it had catapulted to $52 billion in revenues and the global No. 3 position through audacious M&A, such as the acquisition of O2. Trusted by

2003 RANKINGS SUBS 2009 RANKINGS SUBS

1 China Mobile 142 1 China Mobile 493

2 Vodafone 117 2 Vodafone 346

3 China Unicom 81 3 América Móvil 178

4 T-Mobile/DT 61 4 Telefónica 154

5 Orange/FT 56 5 T-Mobile/DT 150

6 NTT DOCOMO 45 6 China Unicom 140

7 América Móvil 41 7 Orange/FT 126

8 Verizon Wireless 38 8 Orascom/WIND 108

9Telecom Italia Mobile

35 9 Telenor 104

10 Telefónica 31 10 MTN 103

11 AT&T Mobility 24 11 Bharti 102

12 Cingular 23 12 MTS 100

13 Turkcell 21 13 Verizon Wireless 88

14 Vivo 21 14Reliance Communications

80

15 O2 20 15 AT&T Mobility 80

16 Vivendi 20 16 Telkomsel 76

17 Sprint PCS 19 17Telecom Italia Mobile

73

18 MTS 19 18 Zain 70

19 SK Telecom 18 19 Turkcell 68

20 KDDI 16 20 VimpelCom 64

21 KPN 14 21 NTT DOCOMO 55

22 Nextel 13 22 Axiata 55

23 WIND 13 23 BSNL 54

24 TeliaSonera 12 24 Qtel 51

25 Telenor 11 25 Sprint Nextel 49

26 VimpelCom 11 26 Vivo 47

27 Hutchison 3 11 27 MegaFon 45

28 KT Freetel 10 28 IDEA 43

29 Vodacom 10 29 Vodacom 41

30 PLDT 10 30 China Telecom 39

2003 RANKINGS $BN 2008 RANKINGS $BN

1 Vodafone 58.3 1 China Mobile 60.16

2 NTT DOCOMO 35.7 2 Vodafone 59.60

3 T-Mobile/DT 28.6 3 Telefónica 51.56

4 Verizon Wireless 22.5 4 T-Mobile/DT 50.16

5 Orange/FT 20.6 5 AT&T Mobility 49.34

6 China Mobile 19.1 6 Verizon Wireless 49.33

7 KDDI 17.1 7 Orange/FT 41.55

8 AT&T Mobility 15.7 8 NTT DOCOMO 37.38

9Telecom Italia Mobile

15.1 9 Sprint Nextel 30.43

10 Cingular 14.1 10 KDDI 30.08

11 Telefónica 13.1 11 América Móvil 25.08

12 Sprint PCS 12.7 12Telecom Italia Mobile

19.21

13 Nextel 10.8 13 Vivendi 14.40

14 Vivendi 9.5 14 SoftBank Mobile 13.86

15 SK Telecom 8.7 15 Orascom/WIND 12.29

16 América Móvil 7.5 16 Telenor 11.28

17 KPN 6.2 17 MTN 10.51

18 O2 7.1 18 MTS 10.18

19 STC 4.7 19 SK Telecom 10.19

20 TeliaSonera 4.1 20 VimpelCom 10.13

21 Bouygues Télécom 4.1 21 KPN 9.89

22 Vivo 3.8 22 China Unicom 9.52

23 MTN 3.6 23 Vivo 9.43

24 KT Freetel 3.6 24 STC 8.40

25 Telenor 2.7 25 Bouygues Télécom 7.15

26 Belgacom Mobile 2.7 26 MegaFon 7.05

27 Telstra 2.7 27 Turkcell 6.86

28 USC 2.5 28 TeliaSonera 6.27

29 Turkcell 2.5 29 Bharti 5.46

30 MTS 2.5 30 Rogers Wireless 5.18

Figure 1Mobile Leader Board by Subscribers (in millions)*

*Controlled operations only

Figure 2Mobile Leader Board by Revenues (in billions)*

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investors to manage mobile operators in both developed and developing countries, Telefónica has also established a presence in most Latin American countries. In 2003, Telenor had less than $3 billion in revenues (placing it at No. 25), but has since grown to $11 billion and has risen to the No. 16 position. Telenor’s great insight was to see that it could grow rapidly in emerging markets with the right operating model.

Emergence of operators from Russia, the Middle

East, Africa, and Latin America. Note the rapid rise (in subscribers) of América Móvil (approximately 180 million), Orascom/WIND (more than 100 million), MTN (more than 100 million), MTS (100 million), Zain (70 million), VimpelCom (64 million), and Qtel (51 million). The rise of operators from emerging markets is testament to two factors: the rapid growth in their domestic markets and their drive to play in multiple markets. But, as their existing markets start to mature, it is not yet clear that these companies will be able to revamp their operating models and sustain continued growth—and avoid being taken over.

Consolidation of the U.S. marketplace. AT&T has seen its position grow stronger with the acquisition of Cingular and other medium-sized players, and Verizon has preserved its already-strong position. With robust and well-established home bases, the two American giants will have to choose where to pursue growth: whether to further deepen their participation in the U.S. by converging their mobile operations with their fi xed operations—introducing TV and femtocells and readdressing the internet sector—or whether to reawaken their international aspirations. They will be test cases for the choice between global scale in mobile or domestic consoli-dation and convergence.

Growth and importance of China and India.

China Mobile has secured the No. 1 spot, ahead of Vodafone, in both tables, trebling its revenues and almost hitting 500 million subscribers. Mean-while, Bharti (more than 100 million), Reliance (80 million), and BSNL (54 million) have led the Indian operators in terms of subscribers. The Indian opera-tors have demonstrated that they can make healthy

profi ts, charging as little as one cent per minute for voice calls, and, for that reason alone, are likely to win the backing of investors in the forthcoming emerging market consolidation.

Stasis at Vodafone. Vodafone’s revenues have barely grown since 2003, when its $58 billion of sales was about double that of its closest European peer, Deutsche Telekom’s T-Mobile unit. To make up for the loss of its Japanese operation, Vodafone has spent the past fi ve years with a tentative expansion into emerging markets. If anyone had the chance to create a truly global footprint and establish an unas-sailable lead, it was Vodafone. But, after the stock market’s weighing in on the company’s expensive acquisition spree, the disappointment of 3G, and the lack of European integration, CEO Arun Sarin took steps to slow expansion, tighten capital disci-pline, and improve cash fl ow. Although operational and capital discipline are critical, Vodafone has allowed Telefónica, T-Mobile/DT, and Orange/FT to dramatically reduce its formidable revenue lead and scale advantage.

Domestic focus of NTT DOCOMO, SK Telecom,

and KT Freetel. Once the shining light for the future of mobile, these three operators could have used their expertise to establish global footprints. In 2003, with $36 billion in revenues, DOCOMO was the second largest mobile operator globally—and the most successful in establishing new revenues from data services. But, by 2008, DOCOMO’s revenues had risen only to $38 billion, causing the company to drop to the No. 8 position in the global table. Similarly, SK Telecom and KT Freetel were pioneers in the development of data services, but have experienced slow growth because of their domestic focus.

Steady slippage from global leadership of the

European second tier. Telecom Italia Mobile, KPN, O2, Belgacom Mobile, Portugal Telecom (except for Vivo), OTE (Greece), and Telekom Austria have all slipped down the leader board or have been acquired. Some will remain domestic champions for now, but are likely to be absorbed into global groups as consolidation slowly works its way through the market over the next fi ve years.

WHAT THE TABLES TELL US (CONT’D)

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Necessity: The Mother of Reinvention

The mobile industry has a remarkable ability to shed its old skin and reinvent itself—extending its scope and applicability into vast new territories. In the early days, when mobile phones were an expensive luxury for top professionals and businessmen, 100 million subscribers would have been an achievement. Then, as mobile services were being reinvented as a consumer phenomenon for developed economies, attaining one billion customers became feasible. After that, mobile services were again reinvented as “fi rst generation” telephony for the emerging economies—fi ve billion subscribers are now well within reach.

The whole cycle has started all over again with data. Initially, this seemed like a wild idea, despite the success of text. Now that the BlackBerry, the iPhone, and dongles have gained traction, the idea doesn’t seem so wild after all.

The battle between “optimists (bulls)” and “pessimists (bears)” has been evident throughout this history. Vodafone’s belief in the future of mass market mobile services in developed countries helped establish a world-leading position when others were cautious. But Vodafone was slow off the mark in emerging economies, and new players fi lled the void. América Móvil, Telefónica, Bharti, China Mobile, Etisalat, MTN, Orascom/WIND, and others created new empires in the emerging economies (see tables and sidebar), while the likes of Airtouch Communica-tions sold out.

But there is more than just a belief in the future of mobile that underpins this expansion: It is recogni-tion of the importance of revamping the operating model. The growth of mobility is not preordained. Opening up the mass consumer market demanded a fundamentally different approach from targeting the original high-end business market. It required steady reductions in tariffs, a belief in scale, the introduction of bundles and prepay, and the creation of real consumer brands. Going one step further and opening up the emerging markets required yet another huge leap to an operating model that gener-ates more than 50 percent EBITDA margins on prices of one cent per minute and ARPUs of below fi ve dollars. At each point, extending the old model would have been unprofi table and risky. But belief in the

potential of the new market, combined with recogni-tion of the need for a new operating model, made all the difference.

The Next Tipping Point

The “optimists” believe in the vast potential for mobility—and they are right. Subscriptions continue to rise and, with machine-to-machine connections, more than 200 percent penetration and 10 to 15 billion “users” in the next 10 years is conceivable. Data subscriptions and usage are rocketing. Considered extremely high only three years ago, monthly usage of 1GB on a data subscription would now be viewed as extremely low. There’s no turning back this tide. In the next fi ve years, several billion more subscriptions and vast take-up of mobile data—both in users and in usage—is pretty well a given.

But the “pessimists” are also right. Keep giving the customer “more and more for less and less,” and the industry will go bankrupt, they state. Providing fi ve times as many voice minutes and 100 times the data traffi c for the same ARPU or less is surely unten-able because it will drive enormous CapEx levels and massive losses. But, if the current operating model is extended to a world of heavy data usage and falling prices, that’s what will happen.

The optimist-pessimist battle boils down to one question: What operating model will enable compa-nies to make healthy profi ts in a world of rapidly-rising traffi c and fl at prices? The mobile operators that fi gure this out will be the winners in the next wave of consolidation. Their exceptional fi nancial results will persuade investors to back them in the multi-billion dollar M&A game. Companies that persist in the old operating model won’t have the capital to make acquisitions: They will be acquired.

What does an operating model that can make money in a world of “more and more for less and less” look like? Five elements will be key:

Fewer physical networks, few managed by opera-

tors. A basic feature of the old vertically-integrated operator model does not work any longer. Run the economics of the huge increase in volume (10 to 100 percent) into the costing models for a standalone network and there is no prospect of delivering it to

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the cost and CapEx levels required to make a return on that investment. But pool the cell towers and sites among several operators and most developed markets will not require many new sites at all. Pool the fi eld forces across the operators and there may be enough fi eld engineers. Pool the backhaul, or jointly invest in fi ber, and the total cost of backhaul will be manageable. Build and share a large enough transport network and costs will be manageable. Further rationalize the plethora of tools, service layer systems, and methods, and the whole oper-ating model may begin to work. There will be major regulatory issues, since many of today’s regulatory frameworks are built on the premise of four or fi ve competing mobile networks. But the economics are inescapable. The operator of tomorrow will likely not have its own network. This operator will remain a service provider, but not a network operator in the most literal sense of the term.

A radical overhaul of marketing. Most mobile operators are still following lavish marketing strate-gies originating from the days when the industry was in land grab mode. In most developed coun-tries today, however, nearly everyone has at least one mobile connection. So it’s time to look closely at marketing’s return on investment rather than simply pursuing net subscriber growth at all costs. Instead of rolling out discounted tariff plans that tend to attract low-value, promiscuous customers, mobile operators need to focus on maximizing their share of high-value, loyal customers. Rather than “carpet bombing” the market—including current subscribers—with advertising for new products, operators should focus on developing a productive dialogue with existing customers to satisfy their needs and desires. Operators must also consider simplifying their extraordinarily complex tariff plans, which can generate a large number of calls to customer services and alienate customers. These changes won’t be easy to make, but they will be worth the effort. By becoming much more customer-centric, mobile operators will be able to cut costs and sell more data services. As a result, they will be able to increase the ARPU they earn from the many customers who feel ignored or alienated by opera-tors’ existing approach to marketing and customer service. The operators with the most loyal customers

will be best-positioned to survive and prosper as the markets consolidate.

A selective approach to services. For many years, no point of view has commanded greater consensus in mobile than the belief that being a dumb pipe represents “hell” and ownership of services represents “heaven”—and, in that heaven, operators would have new revenues from customers for mobile Internet services as well as from the bold new horizon of brokering advertising. However, after many years and billions of dollars of unsuc-cessful attempts, Apple has achieved more in one year than the mobile industry achieved in a decade. The market has fi nally cracked and three industries are training their guns on these opportunities: the operators that have not given up by any means; the handset vendors led by Apple; and the big Internet players, led by Google.

There is no way of predicting what will happen, but some things are clear. First, it is a big player’s game, not one for the hundreds of small operators out there. Second, any strategy must be selective, targeting specifi c sectors of the services market rather than trying to tackle the whole. Operators in developing countries will typically have much greater scope than those in the U.S. or other developed coun-tries where Google, Facebook, and other Internet players are already well established. Finally, for the large set of services that are not operator-provided, companies will have to fi nd a role that adds value. Some are trying to become distributors. Others are trying to become smart pipes—selling guaranteed quality of service, location data, or customer relation-ship management (CRM) information within the constraints imposed by privacy and net neutrality regulations. The real question for operators is not how to win in services—they cannot as a general rule—but what their role in services will be and how much it’s worth.

Winning the global M&A game. For a company with the right operating model, there is huge oppor-tunity on the M&A front. There will be a great deal of intra-market consolidation, with a new set of global operators extending their empires. The Indian opera-tors are already active on the international stage, looking to extend their one cent/minute model to

6 |

other developing countries, particularly Africa. The Chinese are also clear candidates, given their size and success in China. The Americans have proven especially successful in extracting the benefi ts of intra-market consolidation and in using large service bundles to maintain high ARPUs and cash fl ows. With this consolidation largely complete, they will want to expand overseas. Companies that do not know the formula for the right operating model will lose out in the acquisition battles.

Tariff simplicity. Simplicity will be a key battle-ground for the next fi ve years. Today’s world makes voice—a very simple service—highly complex, with multiple offerings, renewal terms, handset choices, roaming charges, and so on. This complexity was designed to maximize ARPU from a low volume, high-value service, and squeeze every drop of revenue from a scarce asset. It’s impossible to scale these complex tariff models to service proliferation (email, Internet services, community applications, etc.); business model proliferation (different charging and billing paradigms); and technology/platform prolifera-tion. Simplifying tariffs will be critical for driving a high-volume, diverse-service business.

Some industry experts legitimately fear that tariff simplicity is a fast route to commoditization.

It’s important to keep in mind, however, that simpli-fi ed tariffs would promote the sale of a much broader bundle of services, and would help maintain and grow overall revenues. Take iPhones, for example. Although they are typically sold with a relatively simple tariff plan, they have raised the ARPUs gener-ated by individual customers without accelerating the commoditization of voice services.

Think this view is radical? Then look again at the leader boards. They show an industry that is extremely dynamic. The list of leaders is changing rapidly, with major shifts in power to operators from emerging markets and a few European operators that have succeeded in the southern hemisphere. Mobile telecoms is the ultimate capitalist industry. Opera-tors that create value can establish fortunes, attract billions in capital, acquire their peers, and overthrow the old nobility. Then, with one false move, they themselves can become part of the past. At the heart of this Olympian contest are the sense of destiny about an expansive future, and the innovation in operating models that enable each new revolution. Do you have what it takes?

The Mobile World Database is the source for all the data used in this report. In all cases, the subscriber numbers and fi nancial information is taken from the fi nancial reports of the individual mobile operators and translated into U.S. dollars at the relevant period-end rate. In each case, we have use a conventional consolidation approach, only counting the revenues and subscribers from mobile operations for which the operator has majority control.

Note, that we have decided that neither Telefónica nor Portugal Telecom has actual control of Vivo in Brazil and have, as a result, stripped out Vivo’s 45 or so million subscribers from both.

The Mobile World is an information services company focused exclusively on the mobile telecommunications sector. Our fl agship service, The Mobile World Database, is fi rmly established as the world’s most accurate, detailed, and accountable source of mobile market intelligence. The information we provide is relied upon by many of the world’s top companies and our team of expert analysts is widely respected across the mobile world.

METHODOLOGY ABOUT THE MOBILE WORLD

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As things stand, new customers generally get better deals than existing customers. Even the customers who bring in only incremental profi ts often get better deals than loyal customers who spend a lot. Many mobile operators are running hard just to stand still—and incurring steep customer acquisition costs along the way. For their part, customers feel unsatisfi ed, as they have been condi-tioned to shop for the best deal rather than to form relationships with their mobile service providers.

It is time for operators to focus on the value of customers, not their numbers. In addition to promoting new products and services, operators need to engage in productive dialogue with customers while striving to make their tariff plans simpler and more customer-friendly. By becoming more customer-centric in their approach, mobile opera-tors should be able to reduce their costs and raise the ARPU they earn from many customer segments—particularly from data services.

There are three root causes that explain why most operators are still pursing outdated marketing strategies:

Volume Bias

A culture shaped by the success formula of the past (when the name of the game was to achieve rapid growth in the customer base) has generated a bias towards volume trading (as opposed to value maximization). This volume bias has very clear manifestations, such as:

■ “Subscriber market share.” This is still the main key performance indicator by which many opera-tors and market analysts assess performance. But strategies designed to boost market share often do not maximize EBITDA.

■ “Trading of averages.” This is based on the accounting metric [net adds = gross adds minus disconnections] as opposed to [net value added = gross value added minus disconnected value]. A focus on adds and disconnections means that valuable customer segments remain unrecog-nized, hidden in the soup of averages.

Operators’ Marketing Strategies

Defining the Real Value of Customers In most developed countries, mobile operators are still pursuing marketing and customer service strategies that seem to belong to a bygone age. Now that mobile connections are ubiquitous in the mature economies, these strategies need a radical overhaul. Mobile operators should stop spending lavishly to attract new customers. Their efforts serve only to encourage many subscribers to “churn” from one provider to another in order to take advantage of the latest discount.

Carlo Gagliardi and Robert Winterschladen

8 |

■ “Playing the acquisition game.” This translates into giving new customers better deals and eliminating offer-driven discounts after the fi rst few months (as opposed to increasing the value offered to customers as their tenure increases). Playing the acquisition game means that opera-tors end up burning through marketing capital to replace disloyal deal-hunting customers with other customers just like them.

Push-Marketing Bias

Throughout the 20th century, “marketing” as a discipline and a way of thinking revolved around “the product.” The customer often appeared only as a faceless bundle of socio-demographic averages that marketers used to try to guess at customer needs. As a result, the outcome was a defi nite one-way product push where the concepts of “customer relevance” and “customer dialogue” held little importance. A product-centric approach may work well when a company is rushing into a young market where speed of acquiring market share is everything. Even in markets with very high penetration, many opera-tors still develop lots of new tariffs and engage in other kinds of product-driven direct marketing, all without seeking meaningful input from customers.

Tariff Complexity Bias

Most operators have launched hundreds, and often thousands, of tariffs. We see three main reasons for this:

■ “Bias towards pricing, promotion, and trading.”

Under pressure, operators’ chief marketing offi -cers and their teams do what they do best: They devise “better” products (i.e., new tariffs) that they use to try to woo new customers.

■ “Bias against fl at top rates.” Almost all operators have grown up in a world where mobile usage is metered. Most view the prospect of unmetered tariffs (other than for preventing abuse) as some-thing that would destroy value and destabilize their enterprises.

■ “Bias for complexity.” In many markets, operators seem to go out of their way to give customers plenty of choice. Is this because they

need some customers to fund handset subsidies and the costs of acquiring other customers? This would explain why plans to simplify the tariff portfolio for new and existing customers are always hard to implement—and are soft on value. It could be argued that tariff complexity is being used as a smoke screen to extract more money from some customers.

It is time to fi nd a better way. In essence, opera-tors must make three key changes to the ways they interact with customers:

Shift from volume trading to value trading—

and start managing existing customers rather than

trying to acquire new ones. Instead of pouring their marketing dollars into designing attractive offers to tempt consumers to leave rivals, mobile operators need to devote more resources to looking after their best customers and locking in their loyalty. Because of customer inertia and the hassle of changing operators, it should require far fewer marketing dollars to retain a customer than to acquire a new one. Dollars spent on retention, rather than acquisi-tion, will typically yield a higher return on invest-ment, particularly if targeted at the right subscribers. Rather than seeking net subscriber additions across the market, operators should work to increase their share of the most valuable customers—those happy to pay a premium for a good, transparent, and hassle-free service. At the same time, operators and their shareholders should shift their emphasis to measuring value rather than volume. This means, for example, measuring market share by revenue, not by subscriber numbers, and measuring the return on investment of every dollar spent on acquiring, retaining, and developing customers. In fact, ROI should be the main criterion for prioritizing all spending related to these customer investments.

Opt for customer-centric dialogue instead of

pushing products. Operators need to change their product-centric organizational structures to struc-tures centered on the customer. Instead of separate teams and budgets allocated to customer acquisi-tion, retention, and in-life, companies should deploy teams focused on specifi c customer segments, each with a marketing budget that is intended to hike the operator’s share of value of that segment while

| 9

being allocated on the basis of ROI. O2, for example, now provides its call center agents with software that generates a single view of each customer. This approach facilitates more relevant conversations with customers about their needs.

Move from complex offerings to simpler offer-

ings. Complexity has many disadvantages: alien-ated customers, excessive billing-related calls, high administration costs, and a disproportionate amount of resources spent on designing and implementing new tariff plans. Customers rebelled when opera-tors rolled out complex mobile Internet service plans (charging by the kilobyte with different rates for different tariff plans); they simply didn’t use the service. Operators responded by introducing simple fl at-rate data plans, such as those available with the iPhone and BlackBerries, which helped mobile Internet usage take off. The success of fl at-rate data tariffs at the high end of the market shows how simplicity enables the sale of a much broader bundle of services and helps maintain and grow overall reve-nues. Now operators need to consider simplifying their tariff plans across their markets and across all

of their services, including voice and text. Of course, they will still need to offer different tariff plans to various customer segments, but these plans should be simple and easy to understand.

What Stops Operators From Being Customer-Centric?

Some operators are beginning to make these shifts, but progress is typically slow. There are good reasons for that. First, there is a risk of some short-term fi nancial pain, which is never easy to stomach in an already weak economy. Second, the shifts outlined above will often require new thinking within operators’ marketing functions. Many of the mobile sector’s most accomplished marketers built a track record during the land-grab for customers and may be reluctant to abandon the approach that previously served them so well.

Moreover, the shift from complex to simple tariff options will probably meet considerable internal resistance because many incumbent operators instinc-tively equate simplicity with commoditization. The introduction of simpler, more transparent tariffs will likely lead to many customers spending less on voice

By becoming more customer-centric in their approach, mobile operators should be able to reduce their costs and raise the ARPU they earn from many customer segments—particularly from data services.

10 |

and text services because they will fi nd it easier to comparison shop. But absorbing this fi nancial burden in order to improve relationships with customers is easier to justify, if you consider that voice and text revenues will drop as market entrants, such as Hutchison 3 in the UK, use simplicity to gain market share. Furthermore, simpler tariff plans will prob-ably persuade many customers to begin using mobile Internet and other new services for the fi rst time, which will boost data revenues.

Mobile operators that are trying to cut costs may have no choice but to radically rethink their marketing operations. Having trimmed most of the fat from their network and IT budgets, they now need to take a close look at the ROI deliv-ered by their marketing budgets. It simply isn’t in their interests to spend so much to “carpet bomb” the market for new customers. And it isn’t in consumers’ interests to spend so much time switching from operator to operator.

In the short term, spending less time pursuing new customers will leave more time for funding organizational changes, while freeing up money for customer retention. And a shift to simpler tariffs will make it easier to sell new data services; it will also lower operators’ costs by reducing the number of calls to customer services and the number of times that internal systems and processes have to be adapted for complex new tariff plans.

In the medium term, operators with the most loyal customers will be best equipped to survive the inevitable competitive shakeout. As competition inten-sifi es, it will be those that have good relationships with their customers that will be able to grow market share and mitigate inevitable commoditization.

In short, now is the time for mobile operators to start crafting new marketing strategies. It will take time to do this; it will call for new systems, processes, and people, so operators need to start thinking and acting in these ways immediately. If they are careful, operators can become more customer-centric without hastening the commoditization of voice and text services. Offering high-spending customers simple, easily understood tariffs and excellent customer service will result in greater loyalty and help mitigate competition that is rooted only in price differences. Simple, transparent tariffs will help operators sell more data plans. Companies also need to prepare for the possibility of sudden change in the wider market. Right now, the incentives for small operators to drive highly disruptive “all-you-can-eat” or fl at-top pack-ages are growing. It is only a matter of time until these packages are implemented.

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This challenge will require nothing short of a revolution in the network side of the mobile phone business. In fi ve to seven years, there will likely be no more than three mobile networks per country. They will be shared networks, with most operators no longer managing their own infrastructure. Opera-tors will have begun to ration bandwidth by quality of service rather than by volume. And copper wires and mobile networks will compete directly for customers’ communications budgets as the global telecoms busi-ness fi nally stops growing in absolute revenue terms.

Mobile traffi c volumes are exploding, propelled by soaring sales of smartphones, the proliferation of easy-to-use apps, and the growth of mobile broadband networks. But prices are not exactly fl ying high, and mobile operators’ revenue growth is modest at best.

How will mobile service providers cope? They will have to move to a form of usage-based pricing in data by enforcing the fair usage clauses that most operators already have in their contracts. Operators will seek to charge upstream to Web sites that are heavy generators of traffi c, such as YouTube—subject to the outcome of the debate about net neutrality. They will also introduce segmented tariff plans, which will enable customers with limited needs to sign up for cheaper data plans.

However, even if operators make these changes, they will have to fi nd ways to deliver between 10 to 50 times today’s traffi c volumes for a total cost of owner-ship not much greater than today’s total costs—and improve in-building coverage and data rates at the same time. The current business model is not adequate for meeting such requirements.

As operators determine their next steps, they must take into account nine fundamental changes:

Riding the 3G software curve. The huge success of DSL was driven largely by its use of the existing copper telephone network, in combination with clever electronics and software upgrades, to enhance capacity and throughput. The 3G networks of today are riding a similar curve: HSPA upgrades fi rst delivered 3.6Mbps, then 7.2Mbps and 14.4Mbps; future upgrades will eventually deliver 28.8Mbps and 56Mbps. Some of these upgrades involve the deployment of new hardware—and will cost plenty. However, many are simply software upgrades with very attractive economics—investments that will fi t existing budgets.

Using deep radio access networks (RANs). In a country like the UK, there are nearly 15,000 2G base stations per operator, providing high-quality coverage and the capacity required for voice calls.

The Network Revolution

Reinventing Mobile Networks for 100 Times More TrafficNow that demand for mobile data is exploding, mobile operators are worrying about traffi c jams. Customers aren’t willing to pay more for the extra traffi c generated by downloaded apps and shared photos. So how can operators, dealing with capital expenditure cutbacks, build networks that can carry up to 100 times today’s digital volumes—without hiking the total cost of ownership of these networks?

Ameet Shah, Greg Chiasson, PRTM; and John Cullen, Neu Mobile

12 |

By contrast, most operators (with the exception of Hutchison 3) have 50–75 percent of that number of 3G base stations, so coverage is inevitably poorer and capacity much more limited. It is most likely that 3G networks will have to double in size in the near term, and countries like Japan, which is 50 percent larger in acreage than the UK, will have more than 50,000 cells. Whether this expansion is achieved by deploying macro base stations or femtocells, the need for deep radio access networks (RANs) is now inescapable. The upshot: Operators must look at the implications of building and running such networks without increasing their operating costs.

Re-farming the 2G spectrum. Regulators in most of Europe, and in many other countries, are now contemplating re-farming 2G spectrum bands such as 800, 900, and 1,800 for 3G. This would not only provide better coverage—fi lling in holes and providing much better in-building data rates—but would also help raise the capacity of the existing spectrum by 20–30 percent. In Finland, the regulator has already facilitated re-farming. The sooner this is implemented elsewhere, the better for the industry worldwide.

Industrializing delivery by sharing sites and RANs. Although the extent of base-station site sharing varies by market, it still tends to be low in most countries. Most markets do not need many more new sites. Rather, operators need to share them much more effectively. Two operators that fully share their network of sites would not double the effective number of sites, but would come close to it. Two that share their RAN infrastructure should be able to double the available capacity per operator at oper-ating costs similar to those of today. Of course, such business benefi ts are not immediate, since networks have to be redesigned—a transition that takes time and incurs cost. But, over a fi ve-to-seven year period, shared access networks will become a large part of the overall solution.

Completing the redesign and sharing of the

transmission architecture to carry bursts of high-

volume Internet traffi c cost effectively. Conventional leased-line backhaul architectures are adequate for high-value and low-volume voice traffi c, but not for high volumes of mobile data. Transmission

networks are already a key bottleneck—and a huge impediment to the business case for data growth. These architectures will inevitably be replaced by a heavy data transmission network. In most developed countries, operators are looking at a combination of high capacity microwave and fi ber to connect their base stations to core networks. Incumbent fi xed-line operators should also provide Ethernet backhaul products to perform the same function but, in most cases, they are still pricing these services too high. If operators are sharing sites and cells, they should also share backhaul transmission to create further effi ciencies. Business cases will vary by country, but it should be possible for most mobile operators to absorb a tenfold increase in transmission traffi c for roughly today’s costs of running a network.

Outsourcing radio and transmission—and

possibly the entire network. When operators accept the need to share sites, RAN, and transmission, they are faced with relatively few choices for execution: joint ventures, such as MBNL in the UK; straight outsourcing to a vendor, which then manages shared networks on behalf of multiple operators; or some form of wholesale/domestic roaming arrange-ments where one operator runs a network on behalf of another. Whatever the decision, most operators are waking up to the fact that the actual opera-tion of most of their networks is not core to their businesses. Taking this idea to the extreme, some operators, such as Bharti in India, have outsourced the whole network. Others are likely to do the same: Welcome to the network-less network operator.

Running managed service contracts. With direct management of networks no longer a core compe-tency, operators will increasingly focus on managing networks that are outsourced to others—to vendors or joint ventures. Operators need to ask themselves a number of questions: Should we outsource the network as a whole or piecemeal (i.e., tender the fi eld sales force as an initial contract, followed by other elements)? Is it better to go with a single-managed service vendor or somehow split the contract? Should we insist on a multi-vendor network—maintaining strategic control of our equipment purchases—or are we better off entering into a partnership with one key vendor and building a solution around that vendor? What level of resources should we retain in-house

| 13

to manage the work done by the vendor? How do we manage risk?

There is no consensus on these questions, of course. Different operators have taken different approaches, and vendors in different countries have very different capabilities. However, anecdotal evidence suggests that big benefi ts go to the opera-tors that use outsourcing strategically and manage their outsourcing arrangements well—operators such as India’s Bharti and Hutchison 3 in the UK and Italy. We expect this trend to grow.

Building in Quality of Service (QoS) and priori-

tization capability. The ultimate outcome of the net neutrality debate in the U.S. and elsewhere is somewhat unpredictable. But the economics of mobile are pretty clear: Even with all the techniques for increasing capacity, congestion will be inevi-table. There are three possible responses: let average quality deteriorate; raise all prices (penalizing the low users); or develop the ability to charge either by usage or by QoS—upstream to providers of services or downstream to consumers. Usage-based pricing is very diffi cult for consumers to understand—but quality of service is intuitive. Regulation notwith-standing, the mobile industry will have to fi nd ways to make the provision of different tiers of QoS commercially viable within the next few years.

Looking to LTE—and, in some cases, to femto-

cells. All of the strategies described so far will maximize the value from the existing concept of 3G and other wide-area cellular networks. But, as data usage climbs, even these strategies will be insuf-fi cient in some areas. So most operators are looking to LTE, Wi-Fi offl oad, and femtocells as medium-term options to be used for deep capacity in-fi lls initially—and potentially for wide-area rollout later on. Currently, Verizon is the exception, considering the company is overlaying LTE on a CDMA network with the view of ultimately replacing it.

Add up these nine changes and the result is nothing short of revolution in the network side of the business. In fi ve to seven years, it is quite likely that there will be just two or three mobile networks per country. It is equally likely that usage of the world’s copper networks will start declining as traffi c moves to mobile networks and fi ber fi xed-line networks. Twenty years ago, the global telecoms network amounted to copper wires used primarily for voice services. Twenty years from now it is very likely that we will be using mobile networks and fi ber instead. The operators that can successfully make that transi-tion will be the ones to watch.

14 |

The shift toward low-price, high-volume data services means that mobile operators are demanding far more from their equipment suppliers—but are willing to pay far less. From a technology perspective, the vendors—including leaders such as Ericsson, Huawei, NSN, Alcatel-Lucent, ZTE, and Cisco—must increase the throughput of the mobile elements of operators’ networks by a factor of between fi ve and 10—halving prices at the same time.

The quest for low-cost capacity will lead to some important developments. For a start, there will be more rapid upgrades of 3G HSPA networks. We’ll also see mobile operators starting to adopt LTE (and to a lesser extent WiMAX); Verizon and NTT DOCOMO have already announced substantial programs. But 2010 will be a transition year, with

most operators conducting trials, planning migra-tions, and launching selective deployments. This activity in the radio network will be matched by more deployments of IP (increasingly fi ber) back-haul and “converged” core networks where fi xed and mobile lines share a common core network. A rapid decline in the price points of each of these elements will be critical to enable operators to balance between high volumes and low ARPU. That’s particularly true in developing markets.

As with any technology-generation change, the transition to LTE will have major implications for the equipment vendors. This year will be critical for the radio network vendors as the selection process for LTE begins in earnest. The transition from 2G to 3G led to the eventual exit and/or consolidation

The Network Equipment Battle

Cutting Costs and Winning Market Share in the Transition to 4G and ServicesMobile equipment companies are grappling with how to support the most fundamental change in network architectures since the industry’s inception. For the past 20 years, mobile has been a voice-centric, high-price service with low volumes. During that time, fi xed telecoms have made huge strides toward a low-price, high-volume, data-centric service. Yet the mobile sector is only now beginning that transition, looking to a future that requires networks that support at least 10 times today’s traffi c volumes for the same total cost of operation. The implications for network equipment makers are profound. They must be able to achieve scale quickly, provide network management services, and maintain high levels of working capital. Not all of today’s key contenders may be able to manage that juggling act.

Kayvan Shahabi and Dave Percival

| 15

of Nortel, Lucent, and Siemens from the market. Similarly, the transition to LTE will make or break some of today’s top vendors, and contract awards in 2010 will be fundamental to future success. Ericsson and Huawei look well-positioned for now, but 2010 will be a critical year for NSN, Alcatel-Lucent, and ZTE. With usage of IP and converged core growing, the vendors that boast strong fi xed-product lines—namely Alcatel-Lucent and Cisco—will have opportu-nities to gain market share.

As the vendors battle for market share in LTE/next generation networks, they face another major challenge. Mobile operators are moving to both a new network architecture and a lower-cost operating model. As the operators feel the operational strain, they are once again questioning which capabilities are core and which can be outsourced. In particular, as network sharing gains ground, operators are becoming less interested in managing their own network operations. This trend has created an enormous opportunity for managed services and

consulting as well as for traditional network installa-tion and care service areas.

The ongoing generational change also has major implications for the equipment vendors’ operating models. Here are the factors that deserve the most attention:

Cost of operations. In the future, equipment vendors’ operating models will have to support fundamentally lower price points. Gone are the days of superior but more expensive equipment from Western vendors and cheap but less capable equip-ment from Chinese vendors. Chinese players such as Huawei now deliver functionality that is easily on par with or better than that of Western vendors—at signifi cantly lower price points. This compels all surviving equipment vendors to have comparable operating cost structures across R&D, production, and the entire supply chain. Essentially, China’s equipment makers have set the bar for everyone else.

Scale and market share. Economics naturally favor the largest equipment vendors. But the fl oor for

Economics naturally favor the largest equipment vendors. But the fl oor for what constitutes economic scale is rising for the mainstream players.

16 |

what constitutes economic scale is rising for the mainstream players. In addition, the geographical differentiation between networks is diminishing: Both the GSM and CDMA network infrastructures will clearly be upgraded to the same LTE technolo-gies. This development has led to new perspectives on economies of scale, and certainty of survival is now one of the main criteria for operators making vendor selections. For NSN, Alcatel-Lucent, and ZTE, quarterly revenues and cash fl ows will be critical barometers of success.

Services and solutions. With the expansion of tower sharing, network sharing, and network outsourcing, vendors are seeing the emergence of vast but challenging new markets in solu-tions, services, and managed services. With most networks now multi-vendor by design, there is an expanding market for two or three large multi-vendor prime integrators and outsourcers. Of the large Western vendors, Ericsson is well-established in this market; NSN and Alcatel-Lucent are pursuing it aggressively. Of the large Chinese vendors, ZTE is increasingly active in this space; Huawei is targeting its solutions and services at emerging economies, but will soon be equally aggressive in developed markets. Since there isn’t room for fi ve global services compa-nies, this year will be critical for contracts in this segment of the market. The vendors that establish a substantial base and manage it profi tably will build sustainable scale. In the long term, the size of the services market could well exceed that of the market for equipment.

Capital and cash fl ow. Collectively, managed service offerings and mergers and acquisitions can help equipment vendors achieve scale rela-tively quickly. But those avenues demand capital and strong cash fl ow generated by low-cost opera-tions. Huawei and ZTE, the new low-cost entrants to the market, are pursuing both avenues as part of their competitive push. Consequently, the chief fi nancial offi cers of Western equipment vendors must prioritize their companies’ ready access to working capital.

The pressure is on for equipment vendors. They are going through a transformation that is even more wrenching than that experienced by mobile operators. Flung into head-to-head competition by the acceleration of mobile-fi xed convergence, vendors are competing for early 4G contract awards and the fast-growing services and solutions market. Smart cost management, a push to capture market share and build scale, and the development of an attractive and cost-effective portfolio of services and solutions will separate the winners from the also-rans. Ready access to capital and close attention to cash fl ow will be critical for success in this high-pressure market.

| 17

Three years ago, the world of mobile devices and services looked completely different. Wireless Internet browsing was possible, but it was anything but an engaging experience. Mainstream voice and text markets dominated. Although Research In Motion (RIM) had bravely unlocked the mobile e-mail marketplace with the BlackBerry, there was no mystery about who led the market for handheld devices. Nokia was consolidating its lead; Samsung and LG were building strong market share; and Motorola and Sony Ericsson were growing steadily from fi rm market bases.

Three years later, the market has been turned on its head. With the debut of Apple’s iPhone and its store of easily downloadable applications (apps), the new market rules have snapped into focus. The expansion of 3G networks, the development of agile, powerful smartphones, and the rapid proliferation

of a huge array of alluring, low-priced, easily obtain-able apps has converged to defi ne a new mobile lifestyle for consumers—and to create a new engine of profi tability and growth. Casualties are apparent already. Motorola and Sony Ericsson have suffered major shocks; their market shares have plummeted and their survival is far from guaranteed. Mean-while, Nokia has maintained its share of volume, but certainly not its share of revenues and value.

The latest devices are effectively extensions of the personal computing world. Apple, very familiar with that world, has struck the fi rst blow. But the winning operating model for device makers and service providers has not been decided.

Apple and RIM represent one operating model: the delivery of a superior customer experience through an attractive device that runs native software

Stark Choices for Device Makers in a World Alive With AppsAlmost a decade after 3G licenses were issued, the technology is fi nally delivering on its promise. We are on the verge of mass-market adoption of mobile data services. But so far device manufacturers like Apple—rather than the mobile operators—have pulled out ahead and taken a large chunk of the available data-service revenues.

Other companies have joined the race. Google, with its Android operating system, is following a more open Web-centric approach. And the traditional handset manufacturers, led by Nokia, are trying to hold onto their position. Victory in this four-way battle between philosophies, strategies, and operating models will lead to an “ecosystem” market that could be worth hundreds of billions of dollars. In 2010, the fi ght will begin in earnest.

Rodger Howell and Dave Percival

18 |

and applications sustained by a proprietary tech-nology “ecosystem.” Their end-to-end control of the market—hardware, applications, operating systems, and delivery channels—enables the delivery of a fi nely tuned customer experience. And Apple’s mobi-lization of widespread networks of apps developers helps give them enormous momentum. The big ques-tion is whether Apple and RIM can remain vertically integrated, or whether they should, as Microsoft did in the PC market, license their operating systems and leverage the competencies of a worldwide industry of device designers and manufacturers. Although both of these leading device makers have established substantial niche market positions and robust plat-forms for growth, it is by no means clear that their models will enable the huge jump from “premium niche” to “market dominant.” The operating model that has made them successful thus far cannot sustain such success without some major changes.

At the other end of the spectrum lies Google, which represents the “Internet” operating model. Google’s preference is to make the Web the ultimate source of innovation and development rather than proprietary ecosystems. Its Android operating system is the standard bearer for this Web-centric approach. Open source and free, Android may enable Google to fully merge fi xed and mobile access to the Internet and to place itself at the center of a much larger data services ecosystem.

Then there are the traditional handset manu-facturers that are suffering because of a classic innovation disruption. Their business—competing largely on device designs and brand—has been undermined by a new business model where value lies in content, ease of access to apps, and a wide data services ecosystem. Although there is still a huge conventional business in making and selling handsets, average prices in that business are falling as the market reaches a saturation point and as more and more consumers migrate to smartphones. The traditional handset makers will push hard for scale, put huge pressure on costs, outsource more chip production, and further open up operating systems. However, there are really only three mainstream traditional vendors left, and two niche players. That list may well shrink further.

At the top end of the market, the traditional handset manufacturers—Nokia, Samsung, LG, Sony Ericsson, and Motorola—have only a few choices. They can continue to compete only in the traditional handset business. They can try to go head-to-head with Apple and RIM using their own proprietary systems. Or they can latch on to Google’s Android ecosystem. Nokia is trying to blaze its own trail and create a new ecosystem around the Symbian oper-ating system and Nokia’s Ovi portfolio of services. But its relatively light presence in the fi xed Internet space may hinder this effort, particularly in the developed markets where Google and Apple are at their strongest. The choices for the others are even tougher: Motorola and Sony Ericsson will be faced with diffi cult decisions in 2010—there also will be real debate within LG and Samsung.

For device manufacturers in a world increasingly focused on software and services, these are the new operating model imperatives:

Content really is king. The new mobile data oper-ating models are successful because they make avail-able a rich suite of content and services through an excellent user experience. It is the package of device plus applications that wins over customers, rather than the device itself. The winning formula is to have a few key applications (RIM with e-mail, Apple with music, etc.) and a high-performance, easy-to-work-with operating system on which developers can build more and more compelling apps. There-after, the major push is to win the backing of the ecosystem—the developer community—or to join a winning ecosystem. Also on the list of key success factors: innovation, growth through acquisition, part-nering, deal-making, marketing, dedicated “skunk works” and incubators, open sourcing, and the kinds of nimble operating models that are common in start-ups.

Scale in ecosystems is crucial. Today, participa-tion in a data services ecosystem is a prerequisite for competing in the smartphone business. Tomorrow, having the largest ecosystem will be the key to success as the business scales. At most, there will be room for three major ecosystems, with Apple, Google, Microsoft, RIM, and Nokia in the thick of the fi ght. Big questions include: Should Apple and

| 19

RIM continue to play the vertical integration game? Should they license their operating systems and build their businesses around their core operating system and applications suites? If they continue down the former path, can either one achieve and retain market shares above 30 percent? The general understanding in the computing and communica-tions sectors has been that proprietary players have been the innovators while open-systems companies have mastered scale. Does this no longer apply?

Hardware cost and scale matter all the more.

Target costing and pricing are fundamental in the traditional handset business, but these factors are increasingly important in the smartphone segment as well. The consequence: Hardware makers must develop new operating models, and soon. The new models will involve relentless cost reduction, port-folio management, complexity reduction, low-cost country development, outsourcing of chip manufac-ture, and very high volume manufacturing runs (at least at the platform layer).

The mobile device industry is going through a wrenching time. We will soon see the decline of some long-time mobile-phone champions as well as the rise of new industry leaders. At that point, we will see those new leaders challenged again and again until the data services market and ecosystem become mature.

20 |

Make or Break Years Ahead for India’s Mobile Operators

Four Challenges and Four Ways ForwardIn recent years, India has become a powerhouse in mobile—the role model for any mobile phone operator looking to provide low-cost services. India boasts the world’s lowest call rates—just one cent per minute—yet its operators have scored some of the highest profi t margins and fastest growth rates in the world.

However, 2009 posed big challenges for Indian operators. Slowing market growth collided with a crowded fi eld of players, sparking a vicious price war. For the fi rst time, market revenues dropped quarter over quarter and price elasticity fell below unity. In other words, the losses in revenues from tariff reductions exceeded the revenue gains from higher usage and new subscriber uptake. Indian operators’ share prices took a hammering; by mid-January 2010, market leader Bharti was down 35 percent against its 52-week high, while Reliance shares fell 51 percent and IDEA was down by 36 percent, compared to the preceding year’s high.

Rajesh Patnaik, Narendra Soorabathula, and Ameet Shah

| 21

These recent drops in revenue—and in share price—will likely cause lasting grief for some of India’s mobile operators. But they will drive some structural changes that may well set new global stan-dards of excellence for the provision of mobile phone services. Four changes will pose big challenges:

Prices at one cent/minute and revenues fl at-

tening. The price of voice calls has already fallen to one cent/minute, which is half what the lowest-price tariffs cost in 2008. As a result, there is a danger that India’s mobile market could see negative growth, despite the introduction of 3G and faster data services and in spite of record net additions of subscribers (including 16 million in October 2009 alone). This would represent a huge structural change in the market. Operators should not look to new data services for salvation: A lack of spectrum, even after the issuance of 3G licenses, and the high cost of 3G handsets means that data services are likely to be slow to grow in many parts of the country.

New subscribers likely in rural areas. Continued growth in the number of new subscribers will be crucial going forward. However, these days most subscribers are likely to be in rural areas where each customer generates signifi cantly lower ARPU fi gures

and where the costs of network development and distribution are far higher than in most urban and semi-urban areas. If one cent/minute rates have been challenging in attractive urban areas, they could be downright impractical in rural areas.

Capital spending surge needed for 3G rollout. Talk about bad timing: Just when prices and revenues are under pressure, the debut of 3G in India will require a major rollout program and a fresh surge of capital spending. Operators’ returns on investment will be challenged and, for the fi rst time, investors will seri-ously question their choice of investment vehicles. Although there is little doubt that the market leaders will be able to justify the CapEx required to build 3G networks in India’s urban areas, it is clear that not everyone will be able to achieve an attractive return on capital on 3G.

Cost of CDMA transition. There are additional cost pressures for mobile operators that currently use both of the 2G technologies (CDMA and GSM). They must pay to maintain both platforms while managing the transition of networks, handsets, and customers from one platform to another. Whether they choose fast or slow migration, the transition will mean a signifi cant cost burden and tough manage-

Revenue leadership and major improvements in effi ciency are now becoming the keys to long-term survival for India’s mobile operators. Now they need to think beyond incremental change and start planning step changes and structural adjustment.

22 |

ment challenges for the operators involved. This will be especially diffi cult in a market with scarce spec-trum and continued needs for major build-outs.

Revenue leadership and major improvements in effi ciency are now becoming the keys to long-term survival for India’s mobile operators. Now they need to think beyond incremental change and start plan-ning step changes and structural adjustment. Four specifi cs deserve their attention. Mobile operators should:

Expect a time of signifi cant tension and hyper-

competition. As the market moves to consolidate to three or four operators per license circle—a far cry from today’s six-plus players in each circle—operators should also expect a spate of merger-and-acquisition deals.

Plan for a “data centric” business. 3G and data revenues will be fundamental, and India’s opera-tors need to unlock low-cost data in much the same way that they unlocked low-cost voice services. Few mobile business leaders in India dare to believe that data revenues can come close to matching voice reve-nues—it certainly has not been achieved anywhere else in the world, aside from Japan. Yet there is latent demand for broadband data services and alternatives to poor fi xed lines for consumers in India eager to access the Web. If enough 3G spectrum is eventually released, India’s broadband market offers the same kinds of margin and growth opportunities that voice did a decade ago.

Drive step-changes in operational and capital effi -

ciency. This will accelerate structural change, such as full network sharing in rural areas, greater use of domestic roaming agreements, and the consolidation of affi liates in some areas.

Plan for the signifi cant transition from aggressive

customer acquisition to a more balanced approach. This approach should give equal weight to reten-tion and customer development (see “Operators’ Marketing Strategies: Defi ning the Real Value of Customers”). India’s telecoms regulators are intro-ducing mobile number portability, but with the highest-margin and most loyal customers already taken, raids on other operators’ customers are inevitable. Customer churn is bound to increase, and soon India’s operators will face the same challenges as their counterparts in the West: retaining the best customers, building deeper customer relationships, increasing ARPU, and targeting marketing invest-ments for the best yield.

As they make these moves, India’s mobile opera-tors cannot afford to make errors in execution. They must manage their network rollouts, marketing strategies, and change programs fl awlessly. Those that survive the testing years to come will fi nd that they have become part of a fundamentally different industry—one with fewer operators using markedly more effi cient operating strategies and business models. Who will be the primary benefi ciary in all of this? The consumer in Chennai or Udaipur or Goa or Bangalore. But, if India’s operators get it right, they may also be setting the worldwide standard for low-cost provision of data services.

| 23

Despite the realities for the current mobile market leaders in the Middle East and Africa, these regions continue to represent the world’s last major growth play for traditional voice and text services. The evidence is apparent in Bharti and Reliance’s interest in Africa’s MTN, in Essar’s buyout of the Warid prop-erties in Uganda, in Vodafone’s steady increase in control at Vodacom, in Vivendi and others’ reported interest in Zain, and in Orange’s desire to boost its stake in Egypt’s Mobinil, among many other moves in the making.

The largest Middle Eastern and African groups in this environment have a choice to make. They can continue with their expansion strategies to try to build a truly multinational or global presence—or they can join forces with the largest global players. These decisions will have to be made soon; the big decisions are very likely to be made in 2010. Here are the factors that will determine which decisions work out best:

The need for a substantially lower-cost operating

model—for home markets and international opera-

tions. There is still plenty of work to do to optimize

cost structures, establish mature processes and systems, and build a cadre of experienced managers. The next 10 years will be less about bets on growth and more about an operator’s ability to optimize and prove out core operations in order to deliver steady profi ts and reliable cash fl ow in tough markets. The operators that can deliver these results with confi dence—across a multinational footprint—are those that will be able to pay the control premiums required to make acquisitions and extract value from their new subsidiaries. This is why the Indian opera-tors have been so active and so many Western opera-tors have largely been absent. Africa is a solid bet for the players that already have the low-cost operational model needed to successfully compete in the region.

Continued innovation in network sharing and

outsourcing—an area of focus for international opera-

tions. Network sharing and managed services offer the biggest opportunity to optimize CapEx and costs and to boost margins. But most operators have yet to embrace network sharing, primarily because they still worry about control, governance, and trust—the same issues around maturity of processes, systems,

Mobile Services In the Middle East and Africa

The End of Easy Growth Is NearThe past decade has been a time of great success for the leading mobile operators in the Middle East and Africa. Growing revenues and strong cash fl ow in domestic markets have generated signifi cant demand as well as benign competition. The leading operators have used their cash and the ready availability of private capital to build regional mobile empires. Today, there are seven powerful multinational operators: Etisalat, Orascom, Qtel, STC, Zain in the Middle East, and MTN and Millicom in Africa. Between them, they have more than 300 million subscribers.

Mike Hamilton, Ameet Shah, and Mohamed Kande

24 |

and organization that hinder internal effi ciency. Yet the economics of network sharing and outsourcing are overwhelming, and acceleration of such initia-tives is likely in 2010.

Mobile broadband and services in home markets.

3G and associated data services offer big opportuni-ties in the regions’ more affl uent markets—mostly the Arab oil states. Rolling out 3G networks and selling data connections will be straightforward, but there will be challenges in doing so profi tably—as there will be for almost all operators around the world. The widespread adoption of 3G and data glob-ally will further raise the standards for performance and profi tability.

Customer-centric differentiation in home markets.

Brand, customer intimacy, loyalty, and service will all become important differentiators as the markets in the Middle East and Africa mature. Operators will need to understand the drivers of customer loyalty and manage customer segments based on these drivers. This means greater focus on direct person-alized marketing and customer service, systems integration, and multi-channel capability. Middle Eastern operators have an enormous opportunity in this area because their policies and procedures are not geared toward customer acquisition like those of Western operators, and the competitive dynamics in their markets are not as aggressive. These operators have the opportunity to establish a better balance between acquisition and retention earlier in the market cycle—and to set the basis for a more rational industry approach.

Middle Eastern operators are at a crossroads. In their home markets, they are coming to the end of the era of strong growth in voice and text services; their future will be about growth in broadband and data services and about delivering the best customer experience. By contrast, success in Africa will mean aggressive cost management and network sharing and achieving profi table growth with tariffs under pressure. In both regions, there will be a sharp shift from an entrepreneurial growth environment to one based on operational excellence; this will place the burden squarely on business leaders who can produce near-term operational performance and results, quickly establish more mature processes and systems, develop a deeper cadre of professional managers, and demonstrate the ability to institu-tionalize best practices and deploy them across diverse operations.

The Middle Eastern or African operators that master these challenges will be well positioned on a global basis. It is likely that at least two of the multi-nationals now based in this region will retreat or sell out completely, while at least one will seek to tie up with a global player. Expect the landscape to look very different by the end of 2010.

Since 1976, PRTM has created a competitive advantage for its clients by changing the way companies operate. PRTM’s management consultants work with senior executives to develop and implement innovative operational strategies that deliver breakthrough results. The fi rm is a leader in operational strategy, supply chain, product development, and customer value management. PRTM has 19 offi ces worldwide and serves major industry and global public sectors.

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