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Telecommunications
High-Growth Markets
RECALL No7
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5RECALL No 7 – High-Growth Markets
Contents01 High-Growth Trends: Seven Agenda Toppers for Telecoms Managers 7
02 Broadbang! Building Bandwidth in High-Growth Mobile Markets 13
03 Low End, High Yield: Bringing Mobile to the Masses 21
04 Banking on Mobility: Transactions, Technology, and High-Growth Markets 27
05 Mandating Growth: Regulating Emerging Markets 33
06 Righting What’s Wrong: Fixing Emerging Market Mobile Pricing 39
07 Paid in Full: Improving Telco Collections Performance 45
08 The Silver Lining: Downcycle-Driven Opportunities for Emerging Markets 51
09 Sub-Saharan Success: Zain’s “Wonderful World” Just Got Bigger 57
Appendix
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7RECALL No 7 – High-Growth Markets
High-Growth Trends: Seven Agenda Toppers for Telecoms Managers
01 High-Growth Trends: Seven AgendaToppers for Telecoms Managers
Mobile network operators in high-growth markets
contend with a set of challenges and opportunities very
different from those of their developed market
counterparts. These unique dynamics mean that top
management “to do” lists in Swaziland are quite
different from those in Switzerland.
The priorities of telco top managers in high-growth
markets differ significantly f rom those of their counter-
parts in more developed countries. The absence of
fixed-line infrastructure, the preeminence of prepaid
subscribers, and the evolution of innovative business
models all play unique roles in shaping these differences.
Furthermore, emerging market players can earn
outsized profits; based on ARPU (average revenue per
user) levels as low as USD 5, some operators captureEBITDA margins in excess of 50 or 60 percent. McKinsey’s
long-standing work with telcos in emerging markets
reveals seven major themes that head the agendas of most
top executives in these high-growth markets.
Managing or cash
Of course, in the current economic climate, managing
for cash has naturally become the most urgent concern
in all markets. However, there are several important
nuances when it comes to emerging markets: first of all,
there is still growth. For example, in Asia, while the
IMF lowered its growth expectations by 2 to 3 percent
during 2008, the base case still remains above 4
percent per year. More recently, decreases in fuel and
food prices helped unlock consumer spend, at least
in urban areas. Second, in general, telecoms players in
high-growth markets approach the downcycle with a
relatively stronger debt position as compared to their
counterparts in more developed markets (Exhibits 1
and 2). While wide variances exist at the company level,
depending on its leverage, we expect operators to
focus on several opportunities.
Manage risks. Successful operators will likely revise
plans to make sure that they can weather worst-case
scenarios, assess the strength of key distributors (which
in prepaid are at the crux of everyday sales and often
have weaker credit positions than large operators), and
tighten cash leakages such as price and collection.
Improve the conditions of operations. One lever is the
renegotiation of the spectrum, license fees, or theconditions of deployment (3G coverage, for example).
In many countries, regulators or governments
levied heavy duties on spectrum to take their “share” of
the telecoms bonanza. For smaller players, this
may be unsustainable; many are renegotiating this in
exchange for sustained investment, competitive
industry structure, contribution to GDP growth, and taxes.
More classical optimization, like outsourcing and
tower sharing, can also be considered as levers.
Consider consolidation. In many countries, such as India
with more than 12 operators and Indonesia with more
than 10, the debate over consolidation is open. Players in
these markets sti ll have to invest major amounts of
capital to gain coverage, and achieving a positive outcome
for all is often questioned. This of course also stirs the
interest of both emerging and developed market players
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8
High-growth players are entering the downcycle with significantly stronger
portfolios …01
to expand internationally into Afr ica, Southeast Asia
(Vietnam), and the Middle East, in the hope of benefiting
from reduced valuation and fewer buyers.
Consider adjacent industry acquisitions. In the same
spirit of consolidation, healthier players in high-growth
markets also see the opportunity to shape adjacent
industries: buying players such as music labels or instant
messaging sites or acquiring banking licenses to
expand into mobile money.
Growing revenues through marketing
Given the fixed-asset nature of the industry, enhancing
revenues is an evergreen priority for telcos. What is
new is the transition of many high-growth markets to a
more mature stage of development (typically when
penetration passes 20 to 40 percent). At this point, more
sophisticated sales and marketing techniques are
necessary to increase the top line. Pricing, distribution,
marketing spend effect iveness, and Customer
Lifecycle Management are the major focuses of top
management efforts.
The distinction between visible and invisible pricing.
Pricing initiatives are ways to quickly improve a
telco’s top-line results by 3 to 6 percent. Sophisticated
pricing activities include managing the visible and invisible
elements of prices in a scientif ic manner. Two pricing
elements – on-net voice tariffs and top-up validity, i.e.,
the amount of time top-up minutes are valid for use –
are examples of the visible/invisible difference. Customers
closely watch on-net voice tariffs, but top-up validity
(while just as important from an economic perspect ive)
elicits far less consumer reaction. Shortening the
validity per iod for low top-up denominations enables
telcos to increase revenues without losing subscribers.Telcos can also employ conjoint research (similar to the
type conducted by the consumer goods industry) to
analyze customer trade-offs and determine the optimal
portfolio of brands and promotions.
Distribution management by micro-markets. A telco’s
market share may appear stable from a distance; in
reality, however, a more granular measurement may
reveal that its market share varies significantly from
city to city (up to 30 percent). As a result, telcos should
manage retail distribution channels from a lower
“altitude.”
To do so, managers should first segment retailers by
micro-market, which reveals their potential to increase
sales and allows the setting of targets and the continual
assessment of performance. They could leverage
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9RECALL No 7 – High-Growth Markets
High-Growth Trends: Seven Agenda Toppers for Telecoms Managers
electronic top-up (i.e., over-the-air recharge) as a fantastic
tool to gather information. Territory development
and demand stimulation efforts – such as mystery shop-
ping, sales competitions, or localized promotions –
will then need to be deployed in hundreds of micro-markets
to enhance market share (please refer to “Seeing the
Forest and the Trees: Micro-Market Channel Management”
in Marketing RECALL No5 for more on this topic).
Marketing spend effectiveness. Industry leaders thatremain successf ul during downcycles tend to refocus –
not cut – their marketing spend. In fact, industry
leaders actually spend significantly more on advertising
and SG&A (selling, general, and administrative)
costs in comparison with their less successful
competitors.
The key is to focus spending in the right areas (e.g.,
customer segments, product areas, shopper purchase
tracking, or media channels) and include tactics for
managing advertising agency relationships in the
marketing strategy. In our experience, the potential
exists to reduce (or redeploy more efficiently) marketing
spend by between 5 and 15 percent.
Customer Lifecycle Management (CLM).Telcos should
adopt a disciplined, heavily interactive approach
to personalized marketing. Maturing markets require
sophisticated CLM strategies, especially in the hard-to-
define prepaid segment. One size does not fit all, and
if a telco offers the same promotion across the board,
it will most likely see a mixed effect, increasing
revenues for certain groups, while lowering them (along
with customer satisfaction) for others. For example,
subscribers who do not use SMS would likely view a free
SMS reward as little more than irritating spam, but
might prefer loyalty points for topping up. For heavy SMSusers, on the other hand, a music download promotion
could stimulate alternative revenue sources.
Regulation: Think like a marketer
In both high-growth and developed markets, regulation
management is the first value lever, and the value at
stake can often equal 10 to 20 percent of a telco’s annual
revenues. What is specif ic to high-growth markets is
a focus on wireless, a major government focus on the
digital div ide and the development of rural areas,
and a wide variation of spectrum and license fees. As a
result, to strike the optimal balance between economics
and sustained investment, emerging market telco
leaders should aim to achieve the same levels of sophis-
tication in this field as they do in marketing, with two
main areas of focus:
… than their counterparts in developed markets02
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11RECALL No 7 – High-Growth Markets
High-Growth Trends: Seven Agenda Toppers for Telecoms Managers
this demand. The ARPU of “non-voice, non-SMS” data
service is now reaching 10 percent of total average
revenues per subscriber and should grow to 20 percent
over the next few years.
Social networking. As is the case everywhere, considerable
interest is bubbling up around social networking in
high-growth markets, with a special focus on mobile
phone “only.” Given the large echo this kind of connectiv ity generates, the interest is especially high
among the younger consumer generations. Software
platforms and handset compatibility remain huge hurdles
that must be overcome if this phenomenon is to become
truly widespread.
Mobile money. Given the limited reach of banking
systems in these markets, mobile money is of special
interest. From peer-to-peer remittance to payments to
full-fledged banking, mobile money is well publicized
(e.g., M-PESA in Kenya, Smart Money in the
Philippines) and being developed in many markets,
where the industry is addressing the major hurdles
of regulation and customer education.
Mobile music. Many players are exploring the
possibility of becoming distributors of full-track music.
Companies are closely monitoring examples such as
China Mobile, and industry players are slowly working
out key issues such as DRM (digital rights management),
catalog rights, and handset compatibility.
Mobile advertising. Finally, many in the industry see
advertising as the largest revenue pool beyond
connectivit y. However, models are unproven, and it
currently remains mostly in the experimental
phase. The key areas of activity include partnering with
ad network companies, profiling the customer base,
and setting up dedicated sales forces.
The undiminished importance o talent
Last but not least, the “penthouse” of the telco top
manager’s agenda should be reserved for the search for
the best talent to drive the above initiatives. The
talent shortage is particularly acute in these emerging
markets. In response, the most sophisticated players
have implemented leadership engines to ensure the
development of their next generation of leaders.
* * *
The operators in high-growth markets with the most
success wil l be the ones looking to capture immediate
growth in voice and SMS, to hone the tools and
techniques for maturing areas, and to invest in advanced
data products. By giving priority to a defined set of
initiatives, top managers in the telecoms industry in
emerging markets can place their organizations in
positions to significantly reduce their costs and realize
large gains in earnings. The following articles explore
most of these issues in greater depth.
Nimal Manuel
is a Principal in McKinsey’s Kuala
Lumpur office.
Noppamas Masakee
is an Engagement Manager in McKinsey’s
Bangkok office.
André Levisse
is a Principal in McKinsey’s Singapore
office.
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13RECALL No 7 – High-Growth Markets
Broadbang! Building Bandwidth in High-Growth Mobile Markets
With mobile broadband about to explode in high-growth
markets, operators must now position themselves to
capture as much of the value as possible. But are industry
players really ready to deliver all of what their customers
are after?
The challenges involved in spreading 3G throughout
rapidly growing economies differ markedly from those
experienced by mobile network operators (MNOs) in
developed markets. Unlike their counterparts, MNOs
doing business in high-growth markets are required
to effectively manage a broad spectrum of customers.
To be successful in doing this, they will need to over-
come a number of unique hurdles that range from low
income levels to low broadband awareness as they
sort through the multitudes of technology options. But
the effort is clearly worth it – emerging market broad- band will represent a USD 60 billion opportunity by
2011, when more than 200 million new customers
enter the market.
Understanding customers
Operators can start to manage this customer range by
fully understanding the nature of demand for wireless
broadband in the market. First, it is important to clearly
differentiate between PC-based and handset-based
data traffic, as the nature of demand and adoption
bottlenecks wil l differ between the two. In fact, a large
portion of new emerging market wireless broadband
growth is directly linked to PC-based demand, since
alternative wired infrastructure is often underdeveloped
and wireless technologies are unlocking latent PC
broadband connectivity demand.
Also, operators can benefit from thinking in terms
of segments, often based on a combination of customer
profile and geographic environment that determines
the cost to serve (Exhibit 1). The spectrum of broadband
customers in emerging markets ranges from the
high-end aff luent to low-end aspirers, with a growing
“middle class” (those on the lowest economic rungs
typically can afford neither traditional mobile nor
wireless broadband service). Within the high-end segment
(typically 5 to 15 percent of an emerging market’s
population and concentrated in large urban areas), demand
characteristics look similar to those of developed markets.
For example, in the longer term, it is expected that
these customers will adopt high-speed fixed broadband,
developed by incumbents or fiber attackers in the
leading cities. The fast-growing middle segment, typically
constituting 40 to 60 percent of the population, is wherethe action is. Middle-segment households already enjoy
significant levels of mobile penetration (80 to over
100 percent) as well as rapid PC uptake, followed by broad-
band growth. These customers provide an interesting
pool for mobile broadband and typically represent the
battleground between mobile and fixed. For the low-end
segment, usually found in rural areas, wireless broad-
band may be the only economically viable access option.
Finally, managers require a sure way to assess the
current status of an emerging economy’s mobile broadband
market. By examining affordability and analyzing
barriers across the “adoption funnel,” marketers can
define the addressable market (i.e., the share of population
that can economically afford broadband at entry level
cost) and then break it down to understand PC penetration,
broadband adoption, and their own operator’s share.
02 Broadbang! Building Bandwidth inHigh-Growth Mobile Markets
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14
The adoption funnel shows that the bottlenecks in and
barriers to broadband adoption often vary by country
and customer segment. For example, in Eastern Europe,
the main adoption bottleneck is low PC penetration,
while affordabilit y is no longer a problem. In Brazi l,
affordability remains the main issue, while in Russia,
the adoption of broadband by existing PC users is the issue.
In some of the least developed emerging countries,
such as Nigeria, affordability and low PC penetration both
heavily constrain market performance.
Once marketers identify the key bottlenecks, they are
able to address them directly. They can overcome
affordability issues, for example, by preparing low-cost
entry plans, partially subsidizing equipment, or
enabling new payment plans such as monthly installments.
Marketers can also boost awareness through strengthened
market support and communication campaigns;
and increase broadband attractiveness by intensifying
partnerships with content developers and financing
the creation of local content.
Key trends in mobile broadband
The direction of wireless broadband development greatly
depends upon the exact market contexts that exist
in various cities and regions. In high-end urban areas,
for example, wireless broadband cannot compete
head-on with the aggressive rollout of fiber infrastructure.
Wireline attackers in Moscow have covered over
700,000 households with fiber in just two years, using
innovative rollout approaches. As a result of this rapid
coverage, wireless broadband competes only for “on the
move” customers.
In some markets, wireless broadband is becoming the
dominant solution, leaving fixed-line behind. South Africa is seeing wireless data services beginning to take
over the broadband arena, capturing nearly 60 percent
of the market in early 2008. Mobile operator Vodacom
began aggressively rolling out its 3G network and was
followed by others. As a result, from 2004 to 2008, the
local incumbent telco has seen its broadband share
drop from 91 to 42 percent, as the market grew from a
few thousand to about one million mobile subscribers.
In other markets, wireless broadband competes head-on
with fixed. Poland’s mobile players are pushing out
independent providers and putting the incumbent under
pressure. Mobile players have increased their broad-
band share from about 5 percent in 2005 to over 20 percent
two years later via aggressive marketing campaigns.
Market research there shows that the vast majority of
wireless broadband subscriptions are for home and
Different market realities exist in terms of customer demand and potential
broadband adoption01
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15RECALL No 7 – High-Growth Markets
Broadbang! Building Bandwidth in High-Growth Mobile Markets
office usage as a substitute for fixed broadband. Other
wireless technologies are also competing for this
market. While WiMAX gets the majority of media coverage,
the most successful non-3G wireless deployment
is the WiFi-based solution that has become the leading
broadband access technology in the Czech Republic,
ahead of DSL.
In the least developed markets, several barriers limit
mobile data usage, such as lower household incomelevels and nonexistent PC penetration. Other hurdles
include limited data services promotions and a
lack of GPRS (i.e., 2.5G) handsets. Nonetheless, some
operators have managed to grow data revenue by
concentrating on their 2.5G networks. These companies
realize they must focus on reducing the key barriers
and bottlenecks in order to monetize their existing 2.5G
infrastructure before they begin to invest in next-
generation networks.
In some markets, such as Malaysia, regulators attempt
to influence the direction of market development in
holistic ways, seeing things differently than regulators
in the developed world. For instance, there are huge
variations in population size and mobile broadband
coverage, and lower household income levels severely
inhibit uptake. As a result, these regulators seek
to establish an approach to regulatory policies that is
mindful of these factors in order to achieve maximum
possible broadband rollout speed and coverage,
while considering the entire spectrum of potential
technologies.
Optimizing 3G network investments andstimulating demand
Countries without developed fixed-line infrastructurecan make up for their “copper” shortfall via the quick
rollout of 3G, thus positioning wireless as the primary
access technology. However, to succeed, operators
should maintain tight control of their economics. McKinsey
experience shows that 3G profitability has a very
concrete set of drivers. In a case example, one operator
found that its 3G economics were extremely sensitive
to two factors – success in selling data cards at given price
points and efficiency of the organization’s capex –
which were highly inf luenced by the smart management
of network capacity (Exhibit 2).
This sensitivity raises three key questions regarding 3G
wireless broadband deployment:
What game to play. This choice can be viewed in terms
of two factors – whether a countr y has obsolete or
3G profitability depends on a number of drivers02
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16
modern fixed-line broadband infrastructure and whether
it has low or high broadband development (in terms
of affordability, PC penetration, etc.). These factors allow
managers to ultimately identify three main strategic
positions. The first, high (or growing) market development
but obsolete fixed broadband infrastructure, positions
mobile broadband as a primary access technology. In this
case, operators should push mobile 3G PC cards and
modems as a primary broadband service, which is the
case in South Africa.
In markets with modern fixed infrastructure and high
market development, two options emerge. In the f irst,
mobile PC cards compete with fixed-line as the primary
broadband service, as is the case in Poland. In the
second, mobile broadband is a complementary connection
to fixed-line service, as in the Czech Republic. When
a market has obsolete fixed infrastructure and low market
development, such as in Tanzania, operators can focus
on a handset-based broadband strategy that targets the
medium/low mass market along with a wireless PC
card strategy for businesses and premium-segment
consumers.
Whatever the strategic option, first movers tend to
capture competitive advantages, but they must achieve
critical network coverage in order to see strong
Usage caps can reverse the decline in profitability03
subscriber take-up rates. In addition, an operator’s
ultimate mobile broadband market share depends
on the competitive context of both mobile and fixed
offerings. For example, while mobile broadband
continues to outpace f ixed service in Poland, operators
have been unable to maintain their price premiums
compared to ADSL. In the Czech Republic, however,
where mobile complements f ixed broadband, players
maintain a sizeable price premium.
How to deploy the network. Experience suggests that by
taking a granular approach to network rollouts, MNOs
can combine 3G technology with their 2.5G initiatives to
optimize both capex and future economics. When
modeling a 3G rollout plan, the “fixed-like” component
of demand is more relevant than it is with traditional
mobile voice services. Thus, efficient network design
requires a new approach and a new set of skills. One
operator found that the best approach involves a rollout
featuring a mix of full 3G, 3G/2.5G, and 2.5G-only
coverage, resulting in a balance of costs and potential
revenue over time. MNOs can also employ low-frequency
spectrum to achieve rapid coverage at initia lly lower
capex levels. By deploying 3G at 850 MHz, Australia’s
Telstra gained a dominant position in the 3G market
in just three years. The availability of this spectrum
along with the expected “digital dividend” from the
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demise of analog TV will have a substantial impact on
MNO economics.
Managers should recognize that their success in driv ing
dynamic increases in data use can have a negative
impact on the network’s quality of service (QoS), costs,
and profitability. Fueled by unlimited data plans,
data traffic continues to grow rapidly, forcing operators
to upgrade their networks. Consequently, data capacity bottlenecks in network backhaul and access areas can
cause QoS to deteriorate, requiring additional capex
investments that put profits at risk or significantly
compromise customer experience. One company facing
this issue used a cost-efficient spectrum management
approach to improve its network capacity, which ranged
from deploying additional spectrum in 2.5 GHz and
800 MHz to spectrum refarming (i.e., clearing frequencies
from low- to high-value applications).
How to manage offers, pricing, and sales. Broadband
pricing also requires a new approach from MNOs. As
opposed to voice, data traffic can quickly require variable
capex to meet demand, handsets don’t factor into
PC-based solutions, and the traditional advantage of
“on net” disappears.
This has broad implications for the offering. For example,
the economic risks of flat-rate plans are very significant.
Wireless broadband offers should avoid full flat-rate
solutions and, instead, at the very least include usage
caps beyond which pricing switches to a metered
“per kilobyte” mode (Exhibit 3).
Such a strategy enables operators to protect their network economics from subscribers with heavy bandwidth
usage profiles. This solution raises another interesting
question regarding how MNOs might deal with
consumption above the initial cap. Limiting download
speeds instead of pricing per kilobyte has proven to
reduce the risk of alienating customers in the short term,
avoiding unexpected large bills from the operator.
In constructing offers, operators should tailor their
product and pricing designs to fit the needs of specific
customer segments in order to balance attempts to
stimulate demand against profitability targets. This
process begins with a robust market segmentation
that identifies significant customer clusters (“mobility
and coverage seekers,” “price-sensit ive light users,”
etc.). Managers can also develop simulations of key
offerings and focus on creating a portfolio of offersthat generates the highest possible marginal EBITDA
levels by working to understand the price elasticity
of individual products by segment.
One Eastern European market experienced explosive
mobile broadband growth, but operators nonetheless
maintained their price premium over DSL service through
intelligent bundling (fixed-mobile or laptop data),
minimizing head-on competition with DSL. These latter
laptop/data bundles – while proving exceptionally
effective in luring subscribers, as is the case in many
markets – can pose risks if not managed well. One
operator launched such a deal with great initial fanfare,
only to be compelled to discontinue it weeks later
due to unworkable economics.
* * *
Mobile broadband has a bright future in emerging markets
when operators focus on managing their unique
customer segments and establish programs to address
the challenges these markets present in terms of
affordability, PC penetration, and awareness. Operators
can also choose the right competitive game to play, work
to deploy their networks effect ively, and commercialize wireless broadband using smart pricing and bundling
approaches. Experience-based approaches for overcoming
these challenges already exist that can help operators
in the pursuit of large-scale broadband penetration around
the world.
17RECALL No 7 – High-Growth Markets
Broadbang! Building Bandwidth in High-Growth Mobile Markets
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18
Lukasz Dobrowolski
is an Associate Principal in McKinsey’s
Warsaw office.
Jindrich Fremuth
is an Engagement Manager in McKinsey’s
Prague office.
Nicolas Borges
is a Director in McKinsey’s Madrid office.
Daniel Boniecki
is a Principal in McKinsey’s Warsaw office.
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21RECALL No 7 – High-Growth Markets
Low End, High Yield: Bringing Mobile to the Masses
Four out of five people in emerging markets live in areas
covered by mobile networks, but less than half currently
subscribe due to an inability to afford a handset that
can cost up to 30 times their daily wage. Removing this
barrier would open up a massive new segment for
profitable growth.
Serving the low-end segment can be a big deal in many
parts of Asia, Africa, and South America. Operators
that step out of their business comfort zones to seed their
markets with low-cost handsets are already seeing
returns that, to date, far outweigh any risks. According
to the World Bank, more than half of the people in
today’s emerging markets – close to three billion – live
on less than USD 2 per day. With a typical mobile
ARPU (average revenue per user) of USD 3 to 8 per month,
this segment represents a large slice of potential wireless demand in emerging markets. However, the
majority of this potential remains unreachable,
with mobile penetration typically ranging from only 7
to 40 percent, depending upon geography (Exhibit 1).
This trend continues despite the fact that network
coverage is no longer the main bottleneck to joining the
mobile world in these markets.
Handset prices are key to adoption
With handset prices starting at USD 35 to 60, it’s not
surprising that the phone’s cost presents the main
barrier to adoption for the low-income segment (Exhibit
2). In contrast, airtime affordability is a minor
concern, and in terms of demand, only a few people say
they don’t need a mobile phone. Nonetheless, most
operators focus on tailoring their price plans, marketing
messages, and distribution strategies to the low-end
segment, leaving handset provisioning to manufacturers,
local importers, distributors, and traders. Operators –
specifically those offering services under the GSM
standard, where SIM cards and handsets are typically
uncoupled – often make the argument that handset
marketing and distribution are not their core business
and that the risk of obsolete stock or failure to recover
handset subsidies outweighs the low value these prepaid
customers offer, but this is not necessarily the case.
One African operator found that it could profitably
accelerate adoption by marketing low-cost handsets to
its low-end customers. By reducing the street price of
basic handsets, this company was able to substantially
increase mobile penetration and acquire millions of
additional customers.
McKinsey research shows that in most African countries
the retail prices of basic handsets start at USD 35 in
large cities and quickly rise to as much as USD 60 in more
rural areas, as local distributors and shops set their
own prices and margins. Furthermore, the much-talked-
about USD 20 refurbished or secondhand phones
find few purchasers, as low-income customers shun the
risk of buying a faulty phone. To them, this cost is very
high, and – in an environment where service guarantees
and skilled repair technicians are uncommon – the device
simply has to work. Experience suggests that three factors
drive the retail prices of basic handsets, and it is within
mobile operators’ power to influence each one of them.
Reach of the distribution network. Handset manufac-
turers typically work with national or regional distribution
03 Low End, High Yield:Bringing Mobile to the Masses
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22
partners that focus on large cities (where distribution
is easier) and depend upon local traders to move products
in rural areas. Manufacturers exert little control in
these rural areas and, as a result, traders and shops set
their own prices and margins – often selling handsets
for twice the city price.
McKinsey found that an operator can easily remove
existing price premiums in these regions by marketing
and distributing a homogeneous offer through its owndistribution network/partners. The combination of
promoting the offer (e.g., via radio or posters) and selling
handsets in selected shops usually has the effect of
driving the retail prices of all handsets in rural areas
down to urban-market levels.
Import taxes. The cost of importing handsets – just from
a tax perspective – can reach 35 percent, dramatically
hindering mobile adoption. Because operators already
pay hefty amounts of tax on mobile revenue, they
are excellently posit ioned to argue for the economic and
(even) tax benefits of reducing import taxes on
handsets. While subject to the specific context, we found
regulatory authorities in emerging markets quite
receptive to the idea of adjusting their legislation in
this regard as part of a broader effort to close the
“digital divide.”
Value proposition and subsidy level. Research indicates
that a handset price level of USD 15 to 25 would unlock
demand in most of the targeted segments. It was also
discovered that everyt hing not related to voice/SMS
capability, robustness, battery life, or brand endorsement
can be dropped. Adjusting to these feature requirements
would minimize the need for handset subsidies, which
might still be required in minor form in certain regions.
McKinsey has also determined that even with a monthly
ARPU of less than USD 10, the payback time of such aprice drop would typically be under three months.
Driving low-end penetration
To get the maximum value from pushing ultra low-cost
handsets (ULCHs) in emerging markets, operators
can launch the following initiatives in an integrated
approach:
Source firsthand, USD 20 handsets if not currently
available in-market. While branded handsets are
preferred – part icularly by young, brand-conscious
aspiring customers – they can be too costly. As an
alternative, several Asian manufacturers have chosen
to offer minimally specified white-label handsets that
provide acceptable quality levels. Indian mobile
operators have been adept in sourcing entry level devices
Mobile penetration ranges from 7 to 40% in many emerging markets01
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23RECALL No 7 – High-Growth Markets
Low End, High Yield: Bringing Mobile to the Masses
from, for example, Chinese manufacturers, but this is
not yet widely practiced across Middle Eastern or African
markets. While orders of these handsets need to reach
an initial minimum amount, volume-related discounts
beyond this threshold tend to be small, since manu-
facturers readily pass on the scale discounts they achieve
by bundling demand across multiple operators.
Develop a marketing and distribution approach for
ULCHs. Depending upon the existing distributionlandscape, operators may need to leverage their own
channels in order to market and distribute these
handsets. To ensure price compliance (and to avoid
having subsidies end up in the pockets of traders,
distributors, or shopkeepers), operators should focus
primarily on trusted indirect channels as their
preferred choices; these typically include operator-
owned stores and top distributors. This trusted
set can be complemented with occasion-specific sales
measures (e.g., around sports events or other social
gatherings) or operator sales vans that sell at local markets
and events.
Set subsidy levels and monitor payback times.
Handsets represent very high costs for mobile operators
compared to SIM or scratch cards. Obsolete phone
stock, along with ineffective subsidies, can put a sizeable
hole in an operator’s EBITDA. As a prevention measure,
companies should monitor four key profitability drivers:
Cost per handset/SIM sold, including the handset
subsidy, incremental marketing and distribution cost,
and the cost of bundled airtime
Activation rates or the percentage of handsets/SIMs
sold that are activated at customer level and that
consume more than the bundled airt ime (to mitigatefraud within one channel)
Incremental revenue for activated SIMs, which
includes outgoing traffic and a share of the incoming
traffic (i.e., the portion of traffic that would not
have occurred if this low-end customer had not been
activated)
Contribution margin from incremental revenue.
Managers can calculate payback time using the above
profitability drivers. Operators should typically set
subsidy levels to drive penetration, but keep the payback
time within a three- to six-month range.
Encourage usage and prevent seasonal churn. Once
an operator sells the handset and SIM to a low- income
Handset cost is the main barrier for the low-income segment02
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24
customer, persuading him or her to use it becomes
the primary goal. First, bundling the package with free
airt ime is a must. Second, operators can drive
micro-segment campaigns through SMS or via local
sales outlets to stimulate recharging and continued
usage. Third, operators can encourage usage by providing
additional airtime on a more periodic basis via
“above-the-line” offerings, e.g., a credit for incoming calls.
Finally, this segment is prone to high “seasonal”churn levels because customers go through long periods
with very little income (e.g., outside of the harvest
season). Bridging these periods enables operators to
capture customer mobile spend during the “richer”
period. Again, providing low levels of credit to maintain
activity can help here.
* * *
Operators can boost mobile penetration in emerging
markets by ensuring the affordability and availability
of basic handsets. This may require sourcing, subsidizing,
and marketing both in urban and rural areas, which
operators typically consider risky and distracting from
the core business. Achieving the next wave of mobile
penetration, however, is their core business, and the lack of handset affordability is a key barrier that must be
overcome.
Pär Edin
is a Principal in McKinsey’s Stockholm
office.
Zakir Gaibi
is a Principal in McKinsey’s Dubai office.
Martijn Allessie
is an Associate Principal in McKinsey’s
Amsterdam office.
Fabian Blank
is an Associate Principal in McKinsey’s
Berlin office.
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Mobile communication technology has transformed
daily life, simplifying routine tasks for customers
while creating value for operators. In high-growth
markets, a significant part of this value may lie
at the intersection of mobile telecommunications and
banking.
The benefit of mobile communication to society is huge –
according to a McKinsey study, mobile communication
and its auxiliary industries contribute to 0.7 percent of
India’s GDP and 3.8 percent of China’s. Beyond this,
the mobile industry is already starting to change a very
basic aspect of our everyday life – the way we handle
money. Cash may be king, but in large emerging markets,
it impedes financial efficiency: sending money home
requires paying high fees, getting personal loans or making
deposits demands 100 kilometers of sweaty travel,running a small shop in a remote area means hiding cash
under the mattress, and paying salaries sometimes
requires secur ing weekly cash transfers in unsafe or
corrupt environments.
Owing to a couple of major pioneers in the Philippines –
Smart Communications in 2001 and Globe in 2002 – as
well as MTN in South Afr ica in 2003, mobile
communication towers and electromagnetic waves have
brought banking services to handsets. At the same
time, operators are able to net a handsome share of
revenue and enjoy a more loyal subscriber base.
With the potential to bring banking services even closer
to customers and, indeed, to unbanked customers,
the nascent mobile banking industry has demonstrated
that money can be mobile. The mobile phone is
capable of performing a full range of activities, including
transferring money; paying for utilities and bus fares;
purchasing at vending machines and shops; providing
banking services, such as deposits at service centers
instead of just banks; and providing enterprise ser vices
(Exhibit 1).
A customer perspective
On Sunday morning, a Filipino maid hands cash to a
remittance clerk in a shopping mall near her home in
Singapore. Her e-money wallet on her mobile telephone
network (no transfer information is stored in the
handset itself ) is credited. Minutes later, she sends USD
5 to her younger brother at Ateneo de Manila University
for his birthday and USD 100 to her parents in North
Luzon – an amount they receive from her on a monthly
basis. They each receive a text message notify ingthem of the transaction and instantly gain access to the
money, which they can then redeem at a local reseller
store (30,000 existing to date) or at an ATM. They can
also pay for goods or utility bills, transfer money to
others, or load airtime onto their phones.
Mobile’s unique role in high-growth markets
While some of these mobile banking applications have
been widely discussed over the last decade, for
developed markets – mainly focused on micro-payments –
high-growth markets have distinct interests:
Little need for payment alternatives. Cash as primary
payment method is very practical in economies
where labor is cheap and waiting t ime is not an issue.
sales excellence in contact centers (Exhibit 1).
04 Banking on Mobility: Transactions,Technology, and High-Growth Markets
RECALL No 7 – High-Growth Markets
Banking on Mobility: Transactions, Technology, and High-Growth Markets
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Enterprise service fees. These could be on the order of
a magnitude of 0.1 to 1.0 percent of salary cost for
enterprise payroll or supply chain management.
Commerce and advertising. Although estimates at
this stage would be speculative, there is great potential in
bringing commerce and advertising to mobile.
Security. Governments often see additional benefits fromthe safety aspect of digitized cash and the social impact of
bringing banking services to the unbanked.
Creating the ecosystem
Many electronic money experiments in developed markets
have been stopped, such as Visa Cash in the United
States and Mondex in the United Kingdom (both in 1998).
There are, however, four main hurdles to creating such
an ecosystem in emerging markets.
Achieving regulatory balance. The concerns of regulators
range from preventing money laundering to managing
the money supply. Many concerns are genuine, for example,
those around the proper due diligence of loan seekers.
However, many impediments to mobile commerce exist
because regulators have not yet created the right set of
rules to make mobile commerce work. For example, there
is no clear demarcation between what kinds of phone
connections are permissible (prepaid or postpaid). There
are insufficient financial limits on mobile banking
transfers between bank accounts and a lack of know-
your-customer norms for mobile banking. Given
that mobile banking is on the frontier of innovation in two
critical industries, regulators are even more risk-averse.
It thus becomes imperative that companies proactively
shape their regulatory environments, helping regulators
understand how mobile banking operates and its impact
on public policy. Regulatory challenges range from
macro-issues – such as control over money supply – to the
operating detail of authorizing non-bank agents to
take deposits to projecting liquidity ratios. The creation
of mobile money, for example, reduces the amount
of cash in the economy while formalizing transactions
that would have otherwise been unrecorded in cash
economies. Regulators must also look to modify regulations
without compromising their original purpose. For
example, a strict proof of identity is needed to transfer
money through banks. However, if transact ion
amounts are very small – say, only USD 5 – then identity
verification could be relaxed. The Philippines
provides a good example of a stable yet flexible regulatory
environment. Its central bank works closely with
the operators of Smart Money and G-Cash to establish
appropriate regulations, allowing healthy growth
of mobile money.
Choosing a model. Mobile money sits at the intersection
of banking and mobile telecommunications, requiring
expertise in both fields. There are two models that can be used to exploit this opportunity: telco-led mobile
money requires a telco to obtain a banking license or
special mobile money license and fully own the
customer transaction details and operations. Clearing
would be undertaken by the telco. Telco-enabled
mobile money uses the telco as a channel for a bank,
which takes or keeps ownership of customer accounts
and is responsible for the marketing and sale of
mobile banking products. Of course, combinations of
these two models, such as which financial services
are offered in Model 1 and how many banks are enabled
in Model 2, are possible. McKinsey believes there is
no overwhelmingly superior solution and the outcome
will be highly dependent upon the aspirations of the
players.
Selecting the best technology.In emerging markets, due
to the reduced focus on vending machine payments,
the SIM card offers the most appropriate security. Loaded
with an application, it not only stores encrypted
data, but can also encrypt communication to and from
the network-based wallet. The other important
technology is the communication interface. A simple and
intuitive interface is essential to minimize user
difficulties. SMS, with which data can be encrypted beforetransmission, offers the best blend of simplicity and
security for markets with highly literate populations. In
countries where literacy is less widespread, such as
South Africa and Zambia, an intuitive, menu-based
interface may be a better choice.
Educating the market. A great deal of education is
necessary to ensure that customers place their faith and
money in the technology and adopt mobile banking.
During the launch of iMobile – a phone platform for mobile
banking – the Indian bank ICICI sent its customers
SMS alerts and WAP links to detailed information on
installation and use, together with an animated
online demo. Experience has shown that the journey
should start with receiving money through mobile
phones. Thus, players’ attention should focus on appli-
cations such as salary payments via mobile phone or
RECALL No 7 – High-Growth Markets
Banking on Mobility: Transactions, Technology, and High-Growth Markets
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30
domestic and foreign remittances. Spending or outflow
then becomes natural.
* * *
With all of its direct benefits and positive social values,
mobile money may be growing faster in high-growth
markets than electronic cash in developed markets. The
opportunity to radically transform money and bring
new benefits to consumers may be at hand. Transformation
will require the alignment of an ecosystem in each
country among banks, regulators, telcos, and device
manufacturers. Whi le not a simple task, it may be less
diff icult than the task of shaping the new form of
communication that telcos have undergone over the last
15 years. A pioneering spirit from operators and
financial institutions is required, but the technology and
the customers are already there!
Noppamas Masakee
is an Engagement Manager in McKinsey’s
Bangkok office.
John Rubio
is an Engagement Manager in McKinsey’s
London office.
Nimal Manuel
is a Principal in McKinsey’s Kuala Lumpur
office.
André Levisse
is a Principal in McKinsey’s Singapore
office.
Jia Jih Chai
is an Associate in McKinsey’s Singapore
office. [email protected]
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33
Emerging markets are the rising favorites of operators
with a taste for double-digit grow th. Sustaining
growth at these levels, however, will require substantial
future investments, which wil l only be possible if
operators work in close cooperation with regulators to
design policy frameworks that match the realities
of high-growth markets.
With mobile penetration rates rising by more than 30
percent annually from 2003 to 2007 and broadband
increasing by more than 50 percent per year during the
same period, high-growth markets – at first glance –
appear to offer telecoms players the chance to revisit
the glory days of developed market expansion. Despite
strong growth, emerging market penetration levels
lag far behind those in mature markets, and operators
still need to make massive investments in order toclose the gaps. For example, the public telecoms per
capita investment for OECD members from 1997
to 2005 averaged USD 135, while the emerging markets
as a group spent about USD 55. In order to reach
OECD investment levels, these emerging markets will
require additional annual investments of about USD
250 to 400 billion.
In addition to low investment levels, high-growth markets
are also characterized by a bias toward mobile, the
sector with the most growth. Mobile revenues grew at
around 10 percent annually from 2003 to 2007,
while fixed-sector revenues declined by 8 percent per year
during the same period of t ime. For instance, in
terms of infrastructure, between 2001 and 2007, mobile
investments in one Latin American country nearly
doubled, but fixed-line spending dropped by half. The
fixed telecoms market’s investment decline creates
an extra chal lenge for operators attempting to develop
next-generation fixed infrastructure.
Finding the cash to make either mobile or f ixed-line
investments could be a challenge for many operators in
high-growth markets due to the substantially lower
average revenue per user (ARPU) levels they see compared
to more advanced telecoms markets.
For example, while monthly broadband ARPU in developed
markets averaged USD 40 in 2007, emerging markets
in the Asia/Pacific region generated only an average of
USD 12 and operators in the Central and Eastern
European (CEE) nations received about USD 18. Likewise,
monthly mobile ARPU for operators in developed
nations averaged USD 45, while Asia/Pacific high-growthmarkets generated just USD 8 per user. In the CEE, the
average was USD 11.
As a result, in most emerging markets, the industry
will probably not generate the cash needed to increase
investment levels. Taking Chile as an example, a
McKinsey analysis shows that although the industry
requires infrastructure investments of USD 3 to 4
billion, the best-case scenario is that it will generate just
USD 1.1 billion in cash available for investments.
Reaching connectivity targets would require approximately
ten years of incumbent fixed cash flow in Chile.
Operators facing this investment challenge need to work
with emerging market policy makers in order to adopt
an appropriate regulatory framework – one that is specific
to their circumstances and encourages the industry
to continue its healthy development.
05 Mandating Growth:Regulating Emerging Markets
RECALL No 7 – High-Growth Markets
Mandating Growth: Regulating Emerging Markets
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Developed market regulations won’t ft
Given this significant investment challenge, McKinsey
asserts that operators should collaborate with
policy makers to avoid importing regulations from more
developed countries that will hamper – not help –
high-growth markets. That’s because these countries
differ fundamentally from developed economies in
several ways.
First, these markets typically feature a rapid pace of
market liberalization. But “fast forwarding” the
rules that regulators have applied in developed markets
robs emerging market incumbents of the transition
time needed to prepare for liberalization, unnecessarily
exposing them to competition. For example, many
high-growth markets reduced their fixed interconnection
rates much faster than did their European counter-
parts (i.e., in 15 months instead of 4 to 5 years) and thus
missed the opportunity to properly increase their
fixed-line access fees.
Second, the high revenue concentrationseen in emerging
markets that accompanies high-income concentrations
can encourage cherry-picking behavior from new
competitors in terms of both customers and geographies.
This increases incumbents’ exposure to the effects
of changes in regulation in their most profitable
markets. One incumbent realized that more than half
of its long-distance revenue came from the top 10
percent of its subscriber l ines (Exhibit 1). Once market
liberalization occurred, the incumbent experienced
a revenue decline of more than 45 percent, as alternative
operators began to target these lucrative customers.
Third, the emerging market’s low retail prices reducethe room for obtaining an acceptable rate of return on
investment. Unlike in European markets, where
the fixed-to-fixed retai l-to-wholesale call charge ratios
range over six times higher, high-growth markets
offer little room for “European style” wholesale regulation.
Beyond simply not generating enough revenue to
cover needed investments, the significantly lower prices
in emerging markets mean few opportunities for
wholesale pricing regulatory intervention.
Finally, an emerging market’s low fixed network quality
levels increase the need for larger investments.
Telephone faults in high-income countries typically
average about 6 per 1,000 main lines per year,
while low-income countries can see annual rates as high
as 60 per 1,000 main lines.
High revenue concentration in one customer subset can lead to sharp,
post-liberalization decline01
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35RECALL No 7 – High-Growth Markets
Mandating Growth: Regulating Emerging Markets
Each emerging market group requires its own regulatory alternative02
Adopting regulations that work
In order to fashion mandates that address the realities
on the ground, regulators need to first establish how
many different types of markets exist. McKinsey’s
research points to three distinct groupings within
the larger set of emerging markets. Each of these wi ll
likely require its own unique regulatory approach
(Exhibit 2).
Group 1 consists of emerging markets characterized by a
per capita GDP below USD 5,000 (all per capita GDP
levels are in purchasing power parity – PPP – terms) and
low fixed and mobile service penetration. Group 1 markets
need to focus on providing incentives for investments
in the sector focused on ensuring voice access by
increasing mobile penetration via universal coverage
obligations. Once voice access approaches the 50
percent level, policy makers should also focus on fixed
networks in order to promote broadband penetration.
Group 2 markets consist of transition economies with
high mobile penetration levels and a GDP per capita
that ranges from USD 5,000 to 20,000. These countries
should focus on boosting broadband penetration and
on planting the seeds of regulatory measures to increase
competition levels in the mobile sector. Regulators
can promote broadband penetration by encouraging
investments in f ixed networks, particularly the
provision of fiber broadband in selected areas.
Group 3 countries are mobile leaders with high income
levels (i.e., GDP per capita of USD 20,000 or more).
They feature very high mobile and moderately high fixed-
line penetration. Countr ies in this group should focus
on increasing broadband penetration while establishing
fair competition between mobile and fixed players. They should also promote lower prices and quick adaptation
of new and innovative services.
Regulators can consider innovative solutions focused on
three key levers to support emerging market infra-
structure development. The first lever involves regulatory
wholesale obligations – how the market maintains open
networks while also achieving revenue and profitability
targets. The second focuses on regulatory pricing
concessions – options such as pricing relief or guaranteed
return on investment schemes. And finally, government
support can play a major role – the availability of creative
mixes of funding and nonfinancial mechanisms and
how industry players can use them. Markets may require
a combination of these levers to reach the desired levels
of connectivity and ensure competition and consumer
choice.
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36
Israel offers yet another example of the effectiveness
of a custom-tailored regulatory policy. In 2001,
Israeli household broadband penetration
(at 2 percent) lagged behind that of other nations
(e.g., 49 percent in South Korea). Therefore, thegovernment established a committee to assess the
best way to foster the broadband market without
hurting consumers or the industry. Taking into account
the country’s specific characteristics (e.g., small
size with concentrated population, two parallel
countrywide networks, and alternative fiber-based
networks), the committee recommended that
regulators halt plans to introduce local loop unbundling.
As a result, broadband coverage jumped nearly 75
percent between 2001 and 2007, while prices declined
by more than 15 percent during the same period.
Tailored Solutions: Regulatory Success
in Malaysia and Israel
Malaysia provides a great example of an original
regulatory solution; one customized specifically to
meet the country’s needs. Engaging all three levers,
Malaysia developed a three-tiered approach for
deploying broadband. It first covered major economicareas, such as Kuala Lumpur, with high-speed
broadband (HSBB) and broadband to the general
population (BBGP). Next, it covered general public
areas using BBGP, thus encouraging competition
among wireless technologies such as 3G and WiMAX
as well as fixed-line options. Third, in rural areas,
it established “public hot spots” in places such as
schools. These access areas featured BBGP as a
first step in closing the country’s digital gap. With the
policy in place, the country plans to take broadband
penetration from 18 to 50 percent in just two years.
* * *
High-growth markets differ from developed economies
in fundamental ways, which is why it makes little
sense to impose detailed regulations from one reality
into another. Instead, countries that custom-tailor
their regulatory policies in ways that support customer
choice and protect the industry structure often achieve
much greater success in encouraging infrastr ucture
investments and development.
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RECALL No 7 – High-Growth Markets
Mandating Growth: Regulating Emerging Markets 37
Mehmet Guvendi
is a Principal in McKinsey’s Istanbul office.
Sergio Sandoval
is a Strategy Practice Expert in McKinsey’s
Brussels office.
Luis Enriquez
is a Principal in McKinsey’s Brussels [email protected]
Ilke Bigan
is a Principal in McKinsey’s Istanbul [email protected]
Ashish Sharma
is an Engagement Manager in McKinsey’s
Singapore office.
Oleg Timchenko
is an Associate Principal in McKinsey’s
Moscow office.
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Pricing excellence in emerging markets requires an
approach that balances macroeconomic factors and
competitive intensity with evolving customer preferences.
Operators often leave money on the table by assuming
that a one-size-fits-all solution exists.
Achieving pricing excellence in emerging markets is
a unique challenge, given the high subscriber growth,
lower customer sophistication level, and evolving
regulations. Mobile network operators (MNOs) in
emerging markets are quickly learning that speed of
execution is often more important than analytical
sophistication when designing price plans to capture a
share of the increasing subscriber base. Most
operators continue developing oversimplified price
structures to drive adoption, which is understandable,
given the significant growth observed in severalemerging markets – as high as one million subscribers
a month.
However, what some operators tend to miss is the
opportunity to shape customer preferences, which is
available in emerging markets and allows operators
to not only capture their fair share of growth, but to do
so more profitably. Compared to those in developed
markets, customers in emerging markets are just barely
exposed to sophisticated price plans and bundles
(in many countries, more than 90 percent of subscribers
are on a single price plan). Operators can leverage this
characteristic of emerging markets to shape preferences
and develop first-order behavioral segmentation that
protects their subscribers from competitive attacks and
captures a higher share of wallet (even dominant
operators have wallet shares of less than 60 percent among
their own customers). This is extremely important in
emerging markets due to more rotational churn (e.g.,
temporary SIM usage due to hyper-promotions, expired
validity due to affordability) than in most mature
markets, predominantly driven by the prepaid nature
of the market. Furthermore, large operators are often
caught in a price war with new entrants trying to retain
market share that can be partially avoided by focusing
on stabilizing the interconnection price.
Emerging markets are dierent
Efficient emerging market pricing makes the most of
the trade-off between average revenue per user (ARPU)
and market penetration. Ideally, in order to maximize
revenue, both wil l rise in tandem. For a given aff luence,
if service penetration grows rapidly but ARPU doesn’t,issues could include declining pricing levels or network
limitations. When the opposite occurs (high ARPU,
low penetration), issues might include distribution
limitations or saturation of the high-income segment.
Likewise, when a market exhibits both low ARPU and
low penetration, it requires the introduction of low cost-
to-serve models.
In assessing the differences across emerging markets,
McKinsey developed a segmentation based upon ARPU,
penetration, and GDP per capita levels. From this, six
market-type clusters were identified (Exhibit 1), two of
which will be examined here. “Aff luent savers” have
ARPU levels below USD 35, penetration rates above 50
percent, and GDP per capita levels that exceed USD
5,000. The “aspiring adopters” segment, on the other
hand, features ARPU levels above USD 35, penetration
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rates below 50 percent, and per capita GDP below USD
5,000.
Each market segment will require a unique solution to
capture the most revenue possible. For example, MNOs
can selectively increase prices for affluent savers, since
ARPU is largely dependent upon price and penetration
remains unaffected by it (Exhibit 2). However, any
pricing moves need to take the competitive context into
consideration as well. While dominant operatorsshould focus on retention as they increase prices, they
can minimize customer dissatisfaction if the first-
order behavioral segmentation is in place. For operators
with low market share, raising invisible prices is a
much more pragmatic approach to improving revenue
performance.
On the other hand, MNOs in certain aspiring adopter
markets can lower the minimum cost of ownership
and prices, if needed, to drive penetration. McKinsey’s
analysis shows, for instance, that lowering prices for
high-priced aspiring adopters can increase penetration
without hurting ARPU (Exhibit 3). Options to lower
prices include employing flat-rate pricing, lowering prices
for certain call types, and offering deep “friends and
family” discounts. While all boost penetration, they also
help shape customer preferences and, hence, develop
behavioral segments that can be further targeted in the
future.
Two cases of note show where MNOs successfully leveraged
their market characterist ics to improve revenue
performance. One incumbent operator in an affluent
saver market increased its ARPU by 10 percent by
developing four new price plans that effect ively raised
prices by 12 percent. And, an operator hoping to boost
its penetration in an aspiring adopter market increasedits number of gross subscriber additions by more
than 50 percent, while also increasing ARPU by 6 percent.
Its success was driven by the introduction of three
new segmented pricing plans, including a “per second”
plan targeted at low-income groups, which was
expensive for high-ARPU subscribers to switch into.
Operators can boost penetration and ARPU bypricing right
Experience in emerging markets shows that MNOs
can increase both market penetration and ARPU
performance by focusing on customer behaviors and
perceptions regarding different pricing models.
Unlike mature markets, in which new price plans are
launched only after months of design and testing,
emerging markets demand deployment in weeks. Quickly
Emerging markets fall into 6 actionable clusters01
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understanding revenue trends of the existing base (plus
competition where possible) and rapid market testing
allow MNOs to not miss out on the 50 to 100 percent annual
growth seen recently.
Analyzing revenue performance can bring out insights
regarding customer behavior. Low adoption, high
churn, or traffic sharing across multiple SIMs are typical
drivers of low-revenue performance. The following
is a sample of other performance drivers that operatorscan address.
Brands matter, and pricing is not necessarily the (only) fix.
In markets with very low penetration (e.g., certain
Afr ican markets), adoption and churn can be driven by
customers’ perceptions of an MNO’s market or
technology leadership – not necessarily its price leader-
ship. Imagine a market with 10 percent penetration
and customers with USD 5 ARPU wanting to be associated
with the MNO providing 3G service. Driv ing
appropriate communication is often the key. One operator
rebranded an existing price plan for the youth segment
and saw ARPU rise above 10 percent in that segment.
Branding matters to all segments.
Growth may be hiding value share loss. One operator
proudly posted stunning quarter-over-quarter results
in subscriber growth and attributed its ARPU decline to
higher penetration rates. What the operator failed to
realize until very late was that its oldest and most valuable
customers were gradually reducing their usage and
eventually leaving the MNO. The leading performance
indicators of customer “cohort” or “vintage” can often
provide MNOs a better perspective than lagging indicators,
such as churn.
Wallet share is an enormous untapped opportunity.Even the most capable of MNOs seems to only achieve 50
to 60 percent of wallet share among its high-ARPU
customers (dual-simming rates in excess of 40 percent
are not uncommon in many markets). Understanding
the needs of these customers (e.g., international call rates,
quality of international ca lls, off-net rates) can be
instrumental in designing plans to secure the most valuable
segments in the market.
Elasticity varies dramatically across segments.While
most MNOs are tempted to lower prices to match those
of competitors, they should know that elasticity
is often signif icantly below 1 for most active customers.
Dropping prices can be accretive, provided substantial
new customers sign up as subscribers and inactive
customers become active. In certain segments (rural,
for instance), elasticity figures substantially greater
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than 1 have been observed. Misjudging segment-specific
pricing needs can be catastrophic. To avoid this, some
operators have deployed real-time pricing tools to take
advantage of differences in elasticity across segments.
Comprehending revenue performance drivers provides
ample indication of the price preferences in the market
that can be further recognized by testing for price aware-
ness. This often highlights a wide gap between real
and perceived prices, with most customers overestimatingprices. MNOs can overcome such perceptions by
heavily advertising headline discounts, e.g., very low
on-net, off-peak rates. Also, the perception of high
prices can lead to opportunities to raise prices, as one
Middle Eastern operator learned. By changing the
billing pulse, the company raised its prices for national
calls by over 12 percent without sacrificing usage.
In some emerging markets, customers can be highly
sensitive to a few price levers. Developing a clear
picture of these preferences can help prevent the launch
of price plans with low success potential. Significant
sensitivity to subscription fees in one market was seen
to the extent that a price plan with a subscription fee
but much cheaper call rates performed very poorly (a
take rate ten times lower) compared to another price
plan without a subscription fee, but with higher call rates.
MNOs can leverage their revenue performance and
price preference understanding to develop new price
plans that can help drive penetration, boost ARPU,
or both (in some cases). However, MNOs should avoid
ARPU-boosting efforts that attempt to capture
elasticity benefits by dropping prices across all market
segments. As noted, elasticity varies significantly
across segments, and dropping prices across all segments
creates a risk of nullifying elasticity benefits from
super-elastic segments by losing ARPU in nonelasticsegments.
Most MNOs can develop new price plans within eight to
ten weeks by rapidly building on customer insights
with survey data. However, prior to launching any new
price plans, operators should be sure to test them
with customers and refine them accordingly to maximize
their impact. Of course, this may not be possible in all
markets due to the risk of being copied and preemptively
launched. Additionally, several major price plan failures
have occurred due to poor network exper ience (e.g., no
capacity to handle customer surge) and poor marketing
execution (e.g., limited awareness, poor distribution).
McKinsey has developed a number of guiding principles
that can help MNOs interested in designing effective
price plans for emerging markets. First, abandon any
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43RECALL No 7 – High-Growth Markets
Righting What’s Wrong: Fixing Emerging Market Mobile Pricing
one-size-fits-all thinking because the needs of high-
ARPU customers are very different from those of low-ARPU
(in some markets very low) customers. Keep things
simple, introducing no more than four or five price plans
to avoid customer confusion. Make price plan headline
rates attractive, perhaps by designing plans that have the
lowest possible headline rate but not necessarily the
lowest monthly costs to the customer. Operators should
also avoid triggering price wars unless absolutely necessary and ensure the lowest on-net rates with a
balanced off-net rate. And finally, balance the
clubbing offer, since exploiting deltas between on-/off-
net tariffs can worsen price penetration, as customers
perceive these tariffs as more expensive.
* * *
MNOs in emerging markets need to understand the
unique likes, dislikes, and preferences of their subscribers
in order to drive penetration and capture the highest
ARPU rates possible. And, while emerging markets may seem like different planets from a pricing perspective,
operators can achieve success by pursuing a proven
methodology.
Zakir Gaibi
is a Principal in McKinsey’s Dubai office.
Martijn Allessie
is an Associate Principal in McKinsey’s
Amsterdam office.
Sanjeev Kohli
is an Engagement Manager in McKinsey’s
Dubai office.
Salman Ahmad
is a Principal in McKinsey’s Dubai office.
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Getting telecoms customers to “pay up” on past-due
accounts can really pay off for emerging market players
dealing with high default levels. Best-in-class
collections practices can help telcos in emerging markets
achieve significant reductions in losses.
Telcos in emerging markets have a large and growing
number of low-income customers. The profile of
this segment is typical ly one of financial instability,
relatively low education levels, tenuous employment,
growing levels of high household debt, and customer
debts accumulated across dif ferent institutions.
Companies can help ensure that these customers pay
their bills by establishing a more effective collections
process, which can quickly deliver significant value.
In working with telecoms players, McKinsey has developedpractical approaches and tools that rapidly and
significantly impact bottom-line collections performance
by enabling emerging market telcos to capture a 15
to 30 percent net loss reduction. Typically, many companies
that employ these approaches also retain half of the
customers they normally would have lost using prior
methods, having a significant positive impact on churn.
Collections is becoming increasingly important for
customer retention and, ultimately, bottom-line impact.
The current economic situation makes it even more
critical. During any crisis, default levels tend to increase,
but at the same time, retaining these customers is key.
This creates the need for companies to optimize and take
full advantage of collections opportunities.
Telcos can pursue three specif ic initiatives to reduce
their gross collections losses: reduce exposure to high-risk
customers in the active portfolio by using risk models
and adjusting the product offering accordingly as well
as by developing pre-delinquency actions; reduce
losses from delinquent customers by increasing contact
rates with the right-party person and developing
sophistication to increase conversion of contact into a pay-
ment; and increase net recoveries from contractual
write-offs by introducing advanced management
techniques for external agencies focused on transparency,
peer pressure, and compensation based on relative
performance.
Reduce exposure to high-risk customers
Telcos need to identify and actively manage high-risk customers (Exhibit 1). Typically, around 10 to 20 percent
of customers can account for about 80 to 90 percent of
total losses. Once these customers are identified, telcos
can develop product offerings according to risk profi le.
For example, they can offer high-risk customers highly
controlled lines (e.g., prepaid or limited expenditure
postpaid), while lower-risk customers would receive more
traditional products and the offer of additional
products in an effort to increase average revenue per user
(ARPU).
It is also advantageous to pursue pre-delinquency
measures. For example, telcos may find that their billing
process inadvertently encourages “first payment
default” (FPD), resulting from an accumulated initial
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bill. In some situations, depending upon the date of
initial subscription and billing cycle, users may receive
an invoice for more than one cycle or more than one
month of consumption. This can create a mismatch of
capacity and ability to pay. Hence, these customers
start their relationship with a provider based upon an
inability to reconcile the first bill (Exhibit 2). Depending
on the date of initial subscription and billing cycle,
customers may not receive invoices for more than one
cycle. This hinders consumer usage education andcapacity to pay a first accumulated bill.
Streamlining the billing cycle drastically reduces the
number of FPDs, thus lowering delinquency rates. For
example, McKinsey’s observations of several collections
processes indicate that the average number of days for
first bill can be reduced by up to 25 percent, resulting in
the first bill generating a 1 to 2 percent reduction of total
losses.
Reduce losses rom delinquent customers
Managers can use two primary approaches in this step.
The first one is to increase the rate of contact with the
right-party person. Research by McKinsey shows that
significant write-offs were never contacted, while
the more contact a telco had with its client, the lower the
loss. In other words, a greater probability exists that
a debtor will pay his or her debt if contacted. A number
of actions can be pursued to help increase the contact
rate. For instance, telcos can facilitate inbound contact
and establish high service levels, develop an outbound
contact strategy that includes standardizing the contact
level, revise collections letters by introducing marketing
and sales concepts, and introduce low-cost channels (e.g.,
automated phone warnings and SMS).
McKinsey has piloted the strategy of sending automated
voice and SMS warnings to the delinquent customer
base – with significant impact (3 to 6 percent reduction
in losses). The use of these tools has been even more
successful when applied at critical times (Exhibit 3). In
addition to automated communications, telcos can
also impose partia l and total service suspensions to
encourage payment in ways that minimize customer
churn.
The second approach to reducing losses from delinquent
customers is to increase promises to pay and promises
kept once the customer has been contacted. Developing
distinct collections strategies based on collections-specific
segmentation is key to maximizing recovery and
minimizing operational costs. McKinsey suggests that
telcos segment and develop specific models for
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47
delinquent customers. These collections-oriented
techniques enable telcos to gain an in-depth under-
standing that allows them to take the r ight actions
regarding the target delinquent customer groups. To
boost predictive power, telcos can combine clustering
models (e.g., to determine the collections approach
and strategy to each segment), self-cure models (e.g.,
to predict the probability of a customer to voluntarily
pay without contact and, hence, optimize capacity), and
risk models (e.g., to predict the probability of acustomer to write off the contract once delinquent and,
hence, focus contact). Doing so enables telcos to
define the most effective contact strategies.
The collections timing, approach, channels, and intensity
can differ significantly based on the segment under
review. At one end of the spectrum, lower-risk, high-value
customers have a fundamental retention approach.
The idea is to understand and accommodate a potential
short-term financial issue, guaranteeing reinstatement
capabilities. For this segment, contact can be less intense,
an even friendlier approach might be used, and
lower-cost channels could be prioritized. Client rupture
is the last resource.
At the other end of the spectrum, higher-risk, lower-value
customers may require a much more intense, hands-on
approach, which may include significantly higher
contact levels, more demanding letters, and the proactive
use of reinstatement products. This approach can
deliver large, quick results in the range of 30 to 40 percent.
In this manner, one telco in particular captured a 30
percent reduction in net losses (USD 65 million) just
within the first year of implementation.
Increase net recovery rom contract write-os
Typically, a high-delinquency portfolio is assigned to
third-par ty collections agencies that receive
compensation in proportion to the total volume they
collect. While agencies have an incentive to ask for
as large a share of the total portfolio as possible, they
have both an already committed capacity with other
companies and an available capacity – in many situations,
lower than that which is necessary. Agencies then
select the most attractive accounts in their allotment,
working via a “skimming” process. Therefore, unless
telcos careful ly manage portfolio allocation, a large
proportion will remain untouched.
One effective approach to collections requires companies
to completely rethink their monitoring, portfolio
allocation, and compensation schemes. By tracking
batches, managers can expose significant differences in
The billing process may encourage the so-called first payment
default02
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third-party agency performance. Applying this process
can highlight the distinction between agencies that
simply skim accounts and those that deliver the best
results.
High-performance monitoring and incentive systems
include (a) introduction of batch tracking – monitor-
ing batches of accounts allocated to each agency over
time and comparing the true performance of distinct
agencies, (b) reassignment of accounts based on agency performance, and (c) creation of targets for collections
agencies based on customer batches and improved
monitoring. This approach has proven to increase by 10
to 20 percent the recovery performance of high-
delinquency portfolios.
* * *
Telcos in emerging markets will either become more
systematically aggressive in going after collections
or face the growing dead weight of late payments and
write-offs. The key is to collect the delinquent payments
without churning the higher-risk customers. Thesteps described here can help telcos boost collections
and assess default risk among customers quickly and
completely.
Applying certain collections methods at critical times can yield
a 3 to 6 percent reduction in total losses03
Paulo Fernandes
is a Principal in McKinsey’s São Paulo
office.
Sami Foguel
is an Associate Principal in McKinsey’s
São Paulo office.
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51RECALL No 7 – High-Growth Markets
The Silver Lining: Downcycle-Driven Opportunities for Emerging Markets
Despite the global credit crunch and downward spiraling
financial markets, telecoms operators in emerging
markets have something to be bullish about.
Globally, the downcycle puts pressure on the telecoms
industry in two ways: First, attracting and retaining
customers is likely to become harder, as overall acquisition
rates slow and competition for each new customer
increases. Second, most operators will find less available
capital, and that which is available will come at a higher
cost. However, unlike the automotive and retail
sectors, where the credit crunch and recession are causing
deep distress, the telecoms industry will likely
experience milder effects. Historically, the correlation
between revenue growth and overall GDP growth
has not been as strong in telecoms as it is in many other
industries. Moreover, telecoms businesses havelower ongoing fixed costs compared to companies in
many other sectors. As a result, most players are
not at risk of outright financial distress. However, the
credit crunch wi ll probably impact the industry
significantly, changing the balance of power between
larger and smaller players and between players
in Asia and other markets.
Within the telecoms world, emerging market operators
enjoy more robust market positions than their
counterparts in more developed markets for a number
of reasons. In general – a nd with some notable
exceptions – they operate in markets that have more
attractive structures and, as a result, achieve
higher sustained profitability. On average, operators
in Asia earn free cash f low margins – indicated
here by (EBITDA - capex)/revenues – of nearly 20 percent,
driven both by higher EBITDA margins and lower capex
per revenue unit. In the Middle East/Afr ica region,
free cash f low margins exceed 20 percent, as they do in
Latin America and Eastern Europe. By way of
comparison, margins in the US and Western Europe are
about 11 and 12 percent, respectively. Furthermore,
the leading operators in emerging markets have typically
taken on significantly less debt than those in
developed markets. Average net debt over EBITDA is just
0.4 in Asia, 0.7 in Eastern Europe, and 1.4 in the
Middle East and Africa, while in North America it averages
1.9 and in Western Europe 2.4. Operators in emerging
markets can leverage their unique positions to not only
further shield themselves against the downcycle,
but, in some cases, even emerge with the upper hand.
However, far from monolithic, emerging markets dif fergreatly in terms of structure and profitabil ity.
For example, China’s three operators generate a collective
USD 14.5 billion in free cash f low per year. The
group also includes small but extremely profitable markets
that have yet to liberalize ful ly, such as Qatar.
Operators in such markets enjoy significant home country
advantages. At the other end, markets like Indonesia
encourage massive infrastructure-based competition.
Indonesia now has eleven operators, many of them
subscale and loss-making.
Dealing with three downcycle trends
While many emerging market operators may find a safe
harbor of sorts from the recession, they are not
completely immune. A downcycle will affect their
businesses in a variety of ways. The following three
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trends will present significant challenges – and
opportunities.
First trend. Radically increased uncertainty, diminished
planning visibility, and the risk of distress for critical
partners are hallmarks of a downcycle and will increase
the need for both f lexibility and a greater emphasis on
risk management.
A recession limits telecoms operators’ planning visibility in the short and medium term in many ways. This
presents significant challenges in an industry that
requires high upfront capital commitments, making it
more difficult to embark with confidence on big
projects such as new network builds. For example,
operators are likely to find it increasingly difficult
to predict pricing and uptake rates in their markets due
to the uncertainty that surrounds the possible
depth of the recession. Furthermore, in less mature
markets where market share is stil l up for grabs,
there is a greater risk that operators might use the context
to steal share from other players and, in doing so,
spark destabilizing price wars.
Critical industry partners are also likely to experience
distress. Upstream vendors, for instance, will likely
face significant pressure, as the industry cuts network
equipment budgets. Likewise, distribution channels,
which in most markets face razor-thin profit
margins, may go out of business. This presents risks for
those, typically smaller operators whose sales
rely more on third-party distr ibutors.
Operators should use this new context to find
opportunities to reshape the telecoms value chain, as
players and partners in adjacent industries and
markets come under financial stress. Operators withhealthy balance sheets could, for example, pursue
acquisitions in complementary sectors such as retail.
They could also seek partnerships, joint ventures,
or the outright acquisition of distressed businesses (for
example, in the Internet, content, or payment
arenas) to accelerate the pace and quality of innovation
and widen their scope of products and services.
Second trend. Sound balance sheets and strong cash
flow generation will shift financial power toward
Asia’s emerging markets, with large operators in these
markets on track to emerge as potential global
consolidators.
As the downcycle plays out, the leading emerging players
will be able to accumulate far more M&A “firepower”
than their counterparts in developed markets (Exhibit 1).
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53RECALL No 7 – High-Growth Markets
The Silver Lining: Downcycle-Driven Opportunities for Emerging Markets
Our modeling indicates that the leading Asian telcos –
the ones that benefit f rom a combination of huge
customer bases, high profitability, and lower debt levels –
will accumulate the bulk of this f irepower.
On the other hand, telecoms players in the Middle East/
Africa region, Latin America, and Eastern Europe
will not accumulate enough cash to compete with these
Asian players under any conceivable outcome.
Similarly, over the shorter to medium term, the less
profitable and more leveraged operators in Western
Europe and North America will likely use their cash to
service existing obligations. Thus, should they
choose to use it, Asian operators are presented with
a window of opportunity over their counterparts in
Western Europe and North America in which they may
be able to execute M&A, while facing less competition
for the acquisition target.
Third trend. As the capital deployed in the industry
drops, a rapid reconfiguration of industry structures is
probable, with smaller players in more fragmented
markets becoming increasingly unviable. As a result,
regulators will likely be more willing to shift their
emphasis from encouraging infrastructure to pushing
service-based competition.
The credit crunch has significantly reduced the overall
amount of capital deployed in the telecoms industry,
while making that which is available more expensive.
Overall, we estimate that in the last quarter of 2008,
new debt capital raised by operators in Asia fell by about
35 percent from a run rate of approximately USD 1.9
billion per month to around USD 1.2 billion per month.
While the market still seems will ing to lend to larger,
more established players, smaller telcos and attackers
will probably find accessing capital more and morechallenging. Under these new conditions, some smaller
operators, despite being able to capture subscribers and
achieve cash flow break even, will remain below economic
breakeven – i.e., the point at which they return enough
free cash f low to pay the carrying cost of their invested
capital (equity plus debt) at the going market rate of
return. This would render them unlikely ever to create
value for their investors. For instance in Indonesia, one
of the most crowded telecoms markets, we estimate
that to achieve economic breakeven, the average small
operator’s subscriber requirement will rise from about
6.4 million subscribers in 2007 to over 10 million in 2010,
due to both rising capital costs and a price war that is
driving down ARPU (average revenue per user).
As a consequence of these trends, small attackers in
all markets will almost certainly experience distress.
Increased pricing pressure and rising capital costs likely to make smaller
operators less viable02
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These players have historically based their business
plans on vendor-financed networks and cherry-picking
strategies, assuming more limited price competition.
Both of these factors have changed, raising the required
critical mass needed for a company to attain minimum
economic scale (Exhibit 2).
Larger, multi-country operators should consider
rethinking their ownership of smaller attackers. Andthe smaller companies themselves will likely need to
seek a way out, either through in-market consolidation
or a change in their business models away from
fixed assets. There are signs of this a lready, as industry
consolidation moves have begun. For example, after
years of fighting for share, the two smaller operators in
Australia – Vodafone and Hutchison – recently agreed
to merge their businesses to create a 6 million subscriber
entity with about a 25 percent market share. Similarly,
Oi, the fourth largest mobile operator in Brazil , acquired
the leading wireline operator, Brasil Telecom, creating
a national champion. We see this trend accelerating in the
more fragmented markets: Hong Kong, Indonesia, Sri
Lanka, Thailand, and perhaps even India and Japan.
On top of the potential in-market consolidation of operators
in their traditional form, the reduction of available
capital will likely encourage industry participants to
rethink the way they have operated. Some of the
players have gone one step further than just planning for
it. Etisalat in Abu Dhabi, for example, has recently
signed a 15-year agreement with Reliance Infratel for the
sharing of passive infrastructure such as towers,
repeaters, shelters, and generators.
Critically, regulatory authorities, which act as the gate-
keepers of industry structure, will probably face an
increasingly diff icult balancing act. The new conditions
mean that they must take greater care to ensure
that the goals of promoting competition and uptake are
appropriately balanced against the growing need to
ensure player viability and overall industry stability.
As a result, the terms of regulatory debate in many markets
will likely shift away from encouraging competition-
based infrastructure (i.e., lots of operators) to promoting
shared infrastructure (e.g., network frequencies, towers,
and backhaul) and more service-based competition.
These changes could lead some telecoms players to refocus
on different core business propositions, develop new
capabilities, and compete with a greater emphasis
on differentiation through service innovation. In any case,
taking a proactive stance on regulatory management
will yield significant dividends.
The CEO’s new priorities
Any recession creates winners and losers. The outcome
of this one will probably favor the larger operators,
who can use the context to both consolidate their marketpositions and potentially take advantage of their cash
flows to make game-changing moves. Smaller players
and attackers across all markets are likely to be
challenged. For CEOs and management, there are a few
no-regrets moves that every player should consider to
improve flexibility and strengthen their core operations
by getting back to basics. Operators need to focus
on de-risking critical projects, building f lexibility into
their plans, and developing stronger risk management
skills.
First, managers should stress-test plans and capabilities
against a broad range of potential market scenarios.
Key risks going forward will likely be market-related, e.g.,
price shocks, as well as f inance-related, including
rising inf lation and currency f luctuations, which may
impact operators with vendor contracts in foreign
currencies. Second, all operators need to take a hard
look at their core and non-core operating expenses
and explore solutions such as simplifying products or
reducing the number of operational platforms. Now
is also the time to redouble efforts focused on traditional
good practices to strengthen the core, particularly in
areas like revenue assurance, churn management, and
capex optimization.
Other no-regrets moves depend upon context and starting
position. Specifically the leading larger operators
have three sources of opportunity: they can work to
reshape regulations, they can explore game-changing
acquisitions in markets, and they have overseas
expansion opportunities. For these players, there are no
regrets in investing in regulatory management and
attempting to improve market structures in their home
markets. The context presents a unique opportunit y
to work actively with the regulators to shape a more stable
and sustainable industry outcome. The stakeholders
involved are open to such a dialogue now more than ever.
Larger operators might also use the context to explore
game-changing downstream acquisitions. The oppor-
tunities presented here could be particularly rich. In
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55RECALL No 7 – High-Growth Markets
The Silver Lining: Downcycle-Driven Opportunities for Emerging Markets
addition to consolidation of smaller players, as discussed
earlier, attractive assets in adjacent spaces – retai l,
content, Internet, and media to name a few – could become
available and will probably prove to be attractive targets.
Finally, larger players might carefully consider
the opportunities presented by geographical footprint
expansion. Historically, many leading global
players have enlarged their footprints during downcycles. With the firepower advantage these leading players
now enjoy, this may be a unique window of opportunity.
However, the record on value creation in situations
like this is mixed, and such moves require a careful balance
of risk and reward.
Smaller players and attackers in more fragmented
markets, however, are at risk. Managers here should
consolidate their markets either directly or via
infrastructure sharing to change the rules of their game.
Multi-country operators who own such players
should take a fresh look at their entire portfolios, with
a special focus on their smaller investments and
an eye toward either reshaping their businesses, exiting,
or consolidating. Due to the benefits of improved
market conduct and reduced capital that results, such
initiatives – when available – represent by far the
most valuable inorganic move any player can make.
* * *
While the current economic situation has deeply affected
many industries and countries, strong telecoms
operators in emerging markets might see more promise
than panic as the downcycle plays out. Managers
who realize that the rules of the game have changed
fundamentally and make a commitment to working
their way through the three key implications presented
here will have the best chance of getting through
this recession successfully.
Carl Harris
is an Associate Principal in McKinsey’s
Singapore office.
Alberto Menegazzi
is an Engagement Manager in McKinsey’s
Dubai office.
John Tiefel
is a Director in McKinsey’s Dubai office.
Fredrik Lind
is a Principal in McKinsey’s Singapore
office.
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In a bold new expansion beyond its Middle East borders,
Zain acquired African mobile telecoms leader Celtel
International B.V. The move in 2005 underscored Zain’s
ambition of becoming an international tele-
communications services provider. In 2008, all Celtel
operations were rebranded under the Zain banner.
The transformation coincided with the linking of the
world’s first border-less mobile service. Zain’s One
Network is the first mobile network to seamlessly span
two continents.
Chris Gabriel was named CEO of Zain Africa in December
2007. In this capacity, he oversees all 15 operations,
serving 41 million active customers. McKinsey had the
opportunity to meet with Mr. Gabriel and get his
perspective on Zain Africa’s success, the role of telecom-
munications in emerging markets, and the future of mobile in the region.
McKINSEY: What would you say has been the primary
source of growth for Zain?
CHRIS GABRIEL: Most of the growth, the organic growth,
in Africa comes from further penetration – providing
relevant and affordable services to the people of Africa.
There is still enormous growth potential despite the
sentiment that the African market is saturated. The
average penetration level across Africa is only 25
percent. There is also a growing demand for data services
in metropolitan areas and the youth population is
demanding content.
McKINSEY: Do you have a sense of where this
misperception comes from?
CHRIS GABRIEL: Many come to this conclusion
because they’re assuming that growth stops at 100 percent.
If you look at the more mature markets, however,
growth has in fact exceeded 100 percent – 120, 140
percent in some of the more mature global markets.
Most of the penetration to date in Africa has been in the
metropolitan areas. Operators shied away from rural
markets, but there’s a great opportunit y there. If you’re
going to chase growth, however, you need to adapt
your business models and ask yourself questions like
“How can we optimize distribution?” or “How can
we streamline operations?” The Zain Ultra Low-Cost
Handset Initiative has proven enormously successful
in driving rural penetration.
McKINSEY: What exactly does this urban-rural
penetration divide mean for you as an operator inemerging markets?
CHRIS GABRIEL: Well, it’s about understanding the
varying needs of the consumer while, at the same time,
reducing operating costs. Customers in rural areas
don’t want elaborate products because their telecom-
munications needs aren’t that complex. On the cost
side, we need to explore alternative energy sources so
that we can put base stations in areas with limited
or no coverage. Using wind and solar power or hybrid
energy allows us to deliver these services in ways
that are profitable for us and still affordable for rural
customers. In urban areas, on the other hand, the
demand for more sophisticated products is there.
McKINSEY: As you push forward, are you concerned
about the effect of new entrants on the market?
09 Sub-Saharan Success: Zain’s“Wonderful World” Just Got Bigger
An Interview with Zain Africa CEO Chris Gabriel
RECALL No 7 – High-Growth Markets
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CHRIS GABRIEL: At Zain, we welcome rational
competition. Rational competition serves to grow the
market. We have indeed observed a rise in the number
of new entrants following the issuance of more licenses
by regulators across most markets. We are maintaining
our momentum – growing our market share and
aiming to be number one in all markets in which we
operate. Most new entrants attempt to compete on
price in order to rapidly grow market share – such anapproach is unsustainable. It only serves to shrink
the market and reduce the funds available for future
growth and investment. At Zain, we compete on
customer experience, coverage, and quality of service –
leveraging the world-first Zain One Network advantage.
McKINSEY: If these price-cutting tactics are
unsustainable, what do you envision happening in the
market?
CHRIS GABRIEL: In my view, you’ll see consolidation
across the Afr ican region. The mid-tier players will
be eaten up, and, as a result, you’ll see the emergence
of about three or four very significant players. At the
smaller end, you’ll see more content providers and niche
players emerging – servicing the larger players.
McKINSEY: Do you have a strategy for dealing
with markets in East Africa where there are already
multiple operators competing for customers?
CHRIS GABRIEL: Zain’s ambition is to be one of the top
ten global mobile operators by 2011, serving 110 million
customers. Our focus isn’t on our competitors; nor do we
aim to compete on price. At Zain, we focus on providingrelevant, affordable services to our customers, thereby
growing our market share and generating a return for
our stakeholders. We have a high-qualit y, unified One
Network and extensive coverage. We also offer unique
products and services to the various market segments.
Furthermore, we’re conducting a commercial pilot in
Kenya for Mobile Money Transfer and M-Commerce. In
a nutshell, it’s about quality, coverage, and a relevant
set of affordable products and services to the people in
Africa we serve.
McKINSEY: Is Zain unique in taking mobile banking to
the market?
CHRIS GABRIEL: There are already some offerings
on the market, but we are leveraging our One Network
service not only to provide banking, but also small
transactional services. Known as ZAP, our M-Commerce
offering will revolutionize the market.
McKINSEY: Looking beyond Africa, in particular to
emerging markets as a whole, how do you explain places
like India and Pakistan, where prices are extremely
low compared to those in Afr ica?
CHRIS GABRIEL: Well, they’re different markets. Africastill requires a significant level of investment, and
we want to generate a sustainable cash flow to fund that
investment. There are a lot of areas that haven’t been
penetrated. The demand is there, so we need to tailor our
product and service offerings in ways that allow us to
capitalize on that demand. It’s up to us to make sure that
our business model is optimized to generate the returns
that enable further investment – pricing is only one part
of that equation.
McKINSEY: How do you deal with the politica l unrest
that is often a marker of emerging countries?
CHRIS GABRIEL: Well, with risk comes opportunit y.
We manage and mitigate the risks and leverage the
opportunities. Security risks mean that a lot of operators
will not do business in certain markets. We’ve taken
some bold decisions, which have been questioned by
our competitors. We’ve also had to work closely with
the governments of the countries in which we operate,
demonstrating to regulators how we bring value to
their countries, through employment, taxation and,
more importantly, through our extensive Corporate
Social Responsibility Program, which is primarily focused
on improving health and education for the people of Africa.
McKINSEY: Is corporate social responsibility important
for success in the emerging market, especially in your
region?
CHRIS GABRIEL: For me, it fits perfectly with our brand
values. We’re passionate about people – the people are
our future. I am thinking particularly of some very remote
villages where schools lack proper facilities – class-
rooms, desks, and text books for example. Zain has donated
millions of dollars toward brand-new school buildings,
desks, and text books in many of the geographies in
which we operate. In addition to transforming peoples’
lives, which is the primary purpose of our Corporate
Social Responsibility Program, such donations have a
profound impact on the way people relate to the
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59
brand – to Zain. The resulting loyalty is just phenomenal.
My view of the world is that corporate social
responsibility is a key component of business. It’s part
of our philosophy – development is part of what
Africa needs; and it’s part of creating a way for service
penetration and growing the market.
McKINSEY: Can you share any concrete examples of
just how the connectivity Zain provides is transforminglives?
CHRIS GABRIEL: I have heaps of stories that I can share
with you – how long have we got to talk? I went back to
the remote village of Dertu, Kenya, three months after
we had introduced service to see how things were
going. The village elder ran up to me, threw his arms
around me, and said, “I now know how much a bull
costs in Garissa!” Now, Garissa is a village about a hundred
kilometers away from Dertu. Historically, in the
marketplace, if he’d wanted to sell or buy a camel, he had
to walk for two days to get to a market, only to find
that there were no buyers or the price wasn’t right. He
would then need to walk to the next market and tr y
again. Now, in just thirty seconds, using his mobile phone,
he can contact all the markets and negotiate the optimal
price – he then only has to make one trip!
McKINSEY: How else can connectiv ity be helpful?
CHRIS GABRIEL: This same elder also told me about a
lady in the village who was experiencing complications
during childbir th. With one mobile phone call they
were able to bring in help and save both the mother and
the child. In the same village, a boy had been bitten by a snake, and they were able to call in and get the anti-
venom to save his life. When people go out looking
for water in times of drought, they can cal l back to the
vil lage and say exactly where it is. The stories go on
and on. The simple things that we all take for granted are
things they’d never experienced before. Their lives
have been transformed as a result of mobile telephony!
McKINSEY: From a portfolio perspective, are there
markets, like Sierra Leone, you would consider getting
out of because they’re so small even by African
standards?
CHRIS GABRIEL: Zain is not about getting out of markets,
we’re about getting into new markets and achieving
the objectives we have set for 2011. We address the issue
of small market size by regionaliz ing a lot of the
back-office functions and optimizing our cost to serve.
We achieve economies of scale by leveraging our
fifteen African operations and our seven Middle East
operations – so realizing broad-level synergies
helps us profitably serve markets of all sizes.
McKINSEY: Is innovation as important to success in
Africa as it is in developed markets, like Australia and
Europe?
CHRIS GABRIEL: Innovation comes in many forms,
not just technical or product innovation but in people,
business models, processes, systems, and pricing.
Technology is important, but the fundamental focus
that will enable you to achieve success is a focus on
the customer. A lot of players are caught up in talking
2.75G and 3.5G and WiMAX; all great technologies,
but what is important to the customer is the abilit y to
make calls and use relevant, affordable services – not
the technical details.
McKINSEY: One of the areas I imagine you have been
innovative in is in attract ing talent. What is the secret
of your success in get ting people to move to Chad, for
example?
CHRIS GABRIEL: Well, what I’ve found is that there’s a
lot of talent, a lot of potential, and a lot of passion within
Africa. Historically, the African hierarchy has been
very, very top-down, and I’m not about that at all. When
I visit an operation, I walk around with the people
there; ask them what they’re doing; shake their hands;
talk to them; encourage them the right way – encourage
them quietly. We’re finding a lot of talent, a lot of passion,and I’m about unleashing that talent and giving the
younger people of Africa a lot more opportunity and a
chance to prove themselves in roles that would normally
be considered beyond them.
McKINSEY: How specifically does Zain benefit?
CHRIS GABRIEL: We’re focusing our recruitment on
young people, and a swathe of our recruitment will be
from fresh university graduates. On that basis, we get
young local people who are hungry and innovative and
know what the markets demand, rather than bringing in
dinosaurs of the industry who have been performing in
other more mature or saturated markets and think that
their way is the only way. Our emphasis is on leadership,
on people’s ability to embrace the Zain brand and the
Zain values. Furthermore, our human resource policies
RECALL No 7 – High-Growth Markets
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60
also focus on leadership – rotating high-potential and
high-performance team members across multiple geo-
graphies – creating our own brand of international leader.
McKINSEY: Considering expansion, are there particular
markets you’re pursuing?
CHRIS GABRIEL: Zain Group’s CEO, Dr. Saad Al Barrak,
is on record as saying that Zain’s primary focus forexpansion will remain the Middle East and Africa, at
least until 2011, after which time we might consider
Asia. In the Middle East and Africa, our primar y focus
is on acquiring existing operations. We do look at
greenf ield licenses; however, we like to limit the number
of greenfield operations at any one time so as not to
dilute our management focus.
McKINSEY: Many believe that operators interested in
entering Africa have to bribe their way to licenses. What
has your experience been?
CHRIS GABRIEL: Zain’s ethics, values, and standards
preclude us from getting involved in any such activity,
so if bribery seems to be the only path to obtaining the
license, we will simply walk away. In fact, we have
walked away from situations where that has been the
expectation.
McKINSEY: You said that in the long term you think
there’l l be some consolidation. Does this present any
market share issues for Zain over the next two or three
years?
CHRIS GABRIEL: I guess the prospect of consolidationfor us means optimizing our business model so that
we can continue on our growth path. I also expect that
the quality we offer wil l serve us well through these
changes. It’s about having innovative products but also
about stimulating demand by being both relevant
and affordable. Even very simple voice can create demand,
all the way through to full video, data, and broadband
services. But as I’ve said before, we see challenges like this
as opportunities, and we won’t shy away from them.
We’re not fearf ul of the competition. We’ll work
very closely with regulators to demonstrate the value
Zain brings to their country in terms of GDP growth,
employment, and productivity. Regarding our market
share, the markets will grow and we intend to benumber one in all the markets in which we operate. We’ll
continue to grow our market share sensibly and grow
our returns accordingly.
McKINSEY: How do you think the current economic
situation is going to affect Afr ica?
CHRIS GABRIEL: I think we’re already seeing some
impact. There are concerns about inflation and currency
devaluation. We’ve seen some governments cutting
their budgets, and we’ve also seen some opportunistic
behavior. The economy moves in cycles, and thus there
will no doubt be a medium- and long-term upside.
McKINSEY: What would be your advice to bright, young
individuals interested in telecommunications in Africa?
CHRIS GABRIEL: Look us up! There’s a wonderful
world of mobile in the reg ion, and at Zain, we are about
making history. We have considerable historical
milestones under our belt, and we wil l continue to make
waves in the sector. The future is very exciting,
and we encourage innovative young leaders to join our
organization. We see no boundaries. With passion
we can exceed even our own expectations.
* * *
Mr. Gabriel was interviewed by Zakir Gaibi, a Principal
in McKinsey’s Dubai office.
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RECALL No 7 – High-Growth Markets
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RECALL No 7 – High-Growth Markets
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