Do emerging market operators still exist?

By Paul Lambert

The global mobile market is typically thought to be characterized by a broad divergence between developed and developing markets, each driven by different trends and dynamics. But these trends are becoming more and more similar and, significantly, will continue to do so at an increasing rate.

This development will have a major impact on operators in developing markets, forcing them to go through the same fundamentally painful transition as operators in developed markets have, because the markets they operate in are becoming more competitive – that is to say, more mature.

It will also have a major impact on operators in developed markets. Emerging-market operating groups that have grown enough to challenge them for the most attractive M&A deals in emerging markets will compete even more aggressively in the decreasing number of markets where growth is still possible.

Emerging-market operators are already experiencing competitive pressures. For instance, Egypt’s Orascom – a quintessential emerging-market operator – saw a decline in each of the “emerging” markets it operates in – Algeria, Pakistan, Egypt, Tunisia and Bangladesh – in 2Q08. Orascom’s ARPU fell 8.3 per cent year-on-year in 2Q08, from US$7.20 to US$6.60. South Africa’s MTN Group, meanwhile, saw a 17.6 per cent year-on-year decrease in ARPU in 1H08 across its mobile operations, which span the Middle East and Africa. Similarly, Kuwait’s Zain saw ARPU declines in the majority of markets it operates in across the Middle East and Africa, amid an impressive increase in revenue.

Although these ARPU figures are much lower, on a like-for-like basis, than those for operators in developed markets – by comparison, Vodafone UK had 2Q08 ARPU of US$39 – the trend remains the same: ARPU declines as competition increases amid an increase in the number of operators in a market. This is bad news for emerging-market operators, because competition is becoming more intense.

The East African country of Uganda, which has a population of about 31 million, is a market whose recent development is typical of more-developed markets worldwide. Put simply, competition in Uganda is intensifying. The UAE’s Warid Telecom launched mobile services in January, becoming Uganda’s fourth operator. New licensee HiTS Telecom is expected to launch GSM services this year, and unified-license holder Reliance Communications could become the sixth mobile player in the coming year.

According to Informa Telecoms & Media, Warid signed up 487,500 users in its first sixth months of operation, leaving it trailing market leader MTN, with 2.8 million subs at end-June; Zain, with 1.8 million; and incumbent Uganda Telecom, with an estimated 1.3 million. Informa forecasts that the country will have a penetration of just 19.95 per cent at end-2008, rising to 23.14 per cent at end-2009.

What’s interesting is that both Zain and MTN, the only operators for whom ARPU information in Uganda is available, saw their ARPUs decrease in 1H08. Zain saw ARPU fall from US$9 in 1H07 to US$7 in 1H08, while MTN’s fell from US$11 to US$9. Despite the decrease in ARPU, Zain saw EBITA in Uganda increase a massive 242 per cent in the 12 months to end-1H08, to US$13 million.

These figures show that as voice prices decline because of competition, ARPU declines. And while subscription growth rises at a faster rate, profitability growth outpaces ARPU declines. But this only happens until voice prices reach a certain level, at which point growth in profitability begins to tail off. This curve of development is what has led operators in developed markets to pay dearly for operators in emerging markets, a path that emerging-market players have already entered.

Hundreds of markets around the world have already experienced the type of development Uganda’s mobile market has seen recently, and it is happening now, at an accelerating rate, in emerging markets worldwide.

The trend will have wide-ranging implications for emerging-market operators, which will have to look closely at how operators in developed markets have survived, noting that those that failed to successfully compete were bought by more successful players.

All of which raises the question of whether emerging-market operators still exist. The answer is yes, if “emerging market” is taken to mean an operator that sells mobile services in an underpenetrated market. But if “emerging market” is defined as an absence of competition among players principally offering mobile voice services, then the answer is surely no.

Like developed-market players, operators in emerging markets will have to ensure that they keep their high-ARPU subscribers. Although fewer in number, these customers contribute a far higher percentage of revenues than the far more numerous low-ARPU customers do. In emerging markets, that means operators will have to make increasingly enticing offers to stop them from churning to rivals, further eroding profitability.

One area in which operators in emerging markets can learn from their developed-market counterparts is in their struggle to cope with the onslaught of major brands from adjacent sectors looking to eat into their walled-garden business model. Nokia, Apple, Google, Facebook, MySpace et al are blazing a trail that is already undermining operators’ relationship with their customers, and it will be accompanied by an erosion of revenues as voice becomes increasingly commoditized.

Operators in emerging markets have the chance to learn a lesson from the experiences of developed-market operators: that only with mutually beneficial revenue-sharing deals is the take-up of new services ensured. If they do, they could increase revenues from nonvoice services at a better rate than developed-market players have.

In 2009, 3G rollout and take-up will begin in earnest in major “emerging” mobile markets, including Brazil, Russia, India and China. The future of operators in these and other markets will be decided by how well they cope with the new competitive environment. One thing’s for certain: There will be plenty of operators waiting to capitalize on their mistakes.