Faced with declining voice revenues and an intensely competitive VAS landscape, telecom operators are being challenged to re-think conventional business models and look for new sources of value. Leading Mobile Network Operators (MNOs) are already positioning their businesses for long-term health and sustainability. Apart from making structural adjustments to the business, some of the winning strategies include: “compete/collaborative” approaches to enhance presence across the content value chain, establishing lean operations and embarking on selective mergers and acquisitions. By Zoran Vasiljev, partner, and Gareth Pereira, manager, of Value Partners Dubai.

1. PERSPECTIVE
Repositioning for the future: strategies adopted
by the regional winners
Faced with declining voice revenues and an intensely competitive VAS landscape,
Zoran Vasiljev telecom operators are being challenged to re-think conventional business models
Partner and look for new sources of value. Leading Mobile Network Operators (MNOs) are
already positioning their businesses for long-term health and sustainability. Apart from
Gareth Pereira making structural adjustments to the business, some of the winning strategies include:
Manager “compete/collaborative” approaches to enhance presence across the content value chain,
establishing lean operations and embarking on selective mergers and acquisitions.
With the global recession of 2008/09 having apparently now run its natural course, telecom operators appear to
have escaped the worst of its effects, as consumer spending on telecom products and services has remained fairly
resilient during the period. Nevertheless, operators are being faced with new challenges in the aftermath of the
downturn.
Firstly, operators facing increasing pressure on Average Revenue per User (ARPU) with the commoditisation of
basic voice services are being forced to re-think conventional business models and look for new revenue streams.
Decline in ARPU driven by increasing commoditisation of voice services
Evolution of global ARPU (voice, data, total) ($) Voice ARPU
Data ARPU
09-15
CAGR
255,9 forecast
226,8
47,1
205,3
46,3 194,8 189,3 184,2 180,2 176,7
45,7 171,5 -3%
46,9
48,9
50,9 53,1 55,4 57,6 +4%
208,8
180,6
159,6 147,9 140,3 133,3 127,1 121,3 114,8 -5%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Value Partners analysis, Informa Global Mobile voice and data market 2009
Secondly, the mobile Value Added Services (VAS) ecosystem has undergone a transformation with Apple’s launch
of an application store. Online players are strengthening their ability to target mobile users directly by launching
application platforms. Companies like Apple, Google and Nokia are creating full ecosystems around their operating
systems and gaining a larger share of the profit pool. Operators are being forced to review their degree of
involvement across the content value chain, lest they become “dumb pipes”. Large multinational and even national
operators are likely to struggle to pursue an innovation mandate comparable to the high-tech giants that have a
larger scale. These developments are likely to impact an operator’s ownership of the consumer as the role of the
operator in service delivery gradually diminishes.
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2. PERSPECTIVE
Larger players are evolving full ecosystems around their OS
• Established players in
the mobile market,
Apple including Apple, Google,
ecosystem: Nokia and Blackberry
evolved from continue to develop
iTunes music attractive ecosystems
service to gain a larger share of
end users and their
Attract Greater mobile spend
developer number of
interest applications, • Players’ ecosystems
Google choice have evolved based on
ecosystem: their established areas
Eco-
based on system of strength. For
Google’s instance, Apple’s eco-
cloud apps Better Drive user system is strongly
economics for
and services developers
interest, device
rooted in its iTunes
purchases,
downloads service (previously a
music service), which
Nokia
has now evolved to
ecosystem:
provide access to apps,
based on
movies, music,
specialist Successful ecosystems can help
mobile players gain a larger podcasts, etc. on mobile
services share of the profit pool devices
(maps), music
and apps
Source: Value Partners analysis, Morgan Stanley
Thirdly, having vast network coverage is no longer being seen as a differentiator for MNOs. Moreover, given
the funding constraints, new operators are seeing value in deploying “CAPEX light” infrastructure models while
incumbents are looking to optimise the returns on their network assets.
Fourthly, operators are being forced to review their profit and loss account rigorously in order to explore new
opportunities for cost savings and to mitigate business risks.
Lastly, increased competition in the home market is making it imperative for incumbent operators to consider
selective mergers and acquisitions. Global operators are also reviewing their portfolio of assets and exiting
unprofitable geographies.
Global and regional trends suggest that operators are adopting distinctive strategies to cope with the changed
environment. Some of the adaptive responses by MNOs are listed below.
Making structural adjustments to the business, aimed at long-term health and sustainability
MNOs are making organisational changes in order to ensure greater flexibility and responsiveness to the changing
business environment.
In India, a regional operator with a largely voice-centric offer has made several fundamental changes to its business
strategy, aimed at positioning itself more effectively for the highly competitive market environment (13+ MNOs).
Firstly, faced with rapidly eroding voice ARPU, the operator has launched a revamped VAS offer targeting the
growing segment of mobile broadband and social networking users, which is still underpenetrated.
In addition, recognizing that network coverage no longer represents a source of differentiation, the MNO sold its
pan-India tower portfolio to an independent tower company, preferring to deploy passive network sharing on an
aggressive basis. The funds generated from the sale of tower assets will most likely be used to invest in a possible
3G licence in the ongoing auction, as well as in the operator’s national expansion plans.
In Russia, the operators’ response to a highly penetrated SIM market is to invest heavily in own-branded retail
stores as a key tool to improve customer retention and secure a greater lifetime value from its customers. Leading
operators like Vimpelcom, MTS and MegaFon have increased the footprint of their own branded stores and also
acquired stakes in leading independent retailers.
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3. PERSPECTIVE
Adopting new business models to increase their presence across the content value chain
MNOs are increasingly recognising the importance of defending their position in the content area of the value
chain. Larger operators like Vodafone (UK), AT&T (USA) and even Airtel (India) have launched their own proprietary
app stores. However, global handset manufacturers such as Apple, Nokia and RIM hold the edge over even the
largest operators in terms of scale. The recent entry of high-tech giants like Google and Microsoft further heightens
the competition.
In response, MNOs are choosing the following positioning strategies:
• Open network access
• Tiered network access
• Owned platforms
In an open network access model, the MNO offers network access but has a limited role to play in either content
development or in provisioning/billing of external applications. There is a revenue upside from increased usage
of data services, but significant control of the content value chain is passed over to online players and third party
developers. The MNO however, fails to fully realise the content revenue potential.
In a tiered network access strategy, MNOs offer multi-tier access plans, based on the customer usage profile. The
plans could be segmented according to the nature of services used (e.g. basic plans for mobile internet browsing
versus premium subscription for bandwidth-intensive applications). The MNO partners with online players in
introducing services that are better integrated with its own customer segments and its VAS strategy.
Here, the MNO has a more active role to play in managing VAS, by handling issues related to handset integration
and billing, and consequently sharing revenues with the online player. The MNO no doubt experiences some loss
of control over the customer service delivery experience, but this is partly compensated by an up-lift of access and
content revenues.
The owned platform model represents a hybrid approach. Operators not only forge partnerships with third-party
content developers, but also offer their own portals to consumers. Operators provide billing and hosting platforms
for third-party applications and content, thereby gaining rich insights into the nature of applications that are most
popular amongst the customer base. Operators are likely to see significant revenue uplift from this strategy, while
continuing to play a leadership role in innovation within the content ecosystem.
Smaller operators would do well to adopt a collaborative approach (i.e. form part of the 24 carrier groups which
constitute the Wholesale Applications Community) in order to defend their VAS positioning. In parallel, operators
can continue to retain a significant role in the mobile application value chain as “billing/service enablers” by
adopting an “owned platform” strategy. The “owned platform” strategy would require additional investments, but
would be imperative for operators looking to retain control over the content value chain. Eventually, operators
could look to develop regional alliances to fund local content (e.g. Arabic), leveraging the distinctive insights
garnered through their position as service enablers.
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4. PERSPECTIVE
Possible strategies adopted by smaller operators to defend their position in the content value chain
Collaboration with other operators Billing enabler
• Internationally, the importance of scale has been underlined
by the banding together of 24 of the world's leading carrier
groups (announced Feb 2010), dubbed the Wholesale
Applications Community, to rival Apple's Appstore
• Greatest opportunity for operators
who are yet to launch app stores is
+ as billing enablers
• In exchange for offering their
customers the ease of access
granted by carrier billing, operators
can retain a significant role in the
mobile application value chain
• Initially could look to collaborate with the 24 operators • Approach app store owners in order to
• Eventually could look to fund local content jointly with other agree a revenue share model in
operators in the region, recognising the trend towards applications exchange for enabling app billing
aimed at the iPhone and Android devices
Another strategy being adopted by operators is to look at new business models at the convergence between the
banking sector and telecommunications. In markets where the penetration of mobile services has already surpassed
that of banking services, operators are leveraging this distinct advantage to offer mobile payment services as a
cost-effective means to carry out peer-to-peer fund transfers and generate additional revenue streams. In fact, a
robust M-payment offering is emerging as a key success factor for MNOs in several African markets.
Safaricom, which launched M-Pesa, the world’s first mobile money transfer service, owes a large part of its success
in the Kenya market (i.e. close to 80% market share) to its stranglehold over M-payment, in a country with limited
banking facilities.
Creating lean operations and effective asset utilisation
MNOs are rigorously evaluating their CAPEX and OPEX decisions and deploying cost-effective operational models.
While outsourcing has been practised quite effectively in the telecom sector with regard to IT services for several
years, another area which is seeing an increased presence of third-party service providers is the handset distribution
value chain.
Operators that followed the “integrated reseller” model for handset distribution are considering the adoption of new
partnering models (i.e. with logistics service providers or distributors), aimed at reducing operational complexity
and minimising inventory risk, while still offering an appealing handset range in their outlets. A growing number of
operators are seeing merit in such collaborative arrangements (see Exhibit below). Telstra, for example, was able to
achieve savings of $170 million in the first year of its partnership with Brightstar.
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5. PERSPECTIVE
Example of deals between telecom operators and logistics service providers
Partnership scope
EUA
• Stock management
• Packaging/customisation
• PoS order fulfilment (EDI)
• Return logistics
• Delivery to dealers, distributors and end customers
Austrália • Development of tools and infrastructure for
N. Zelandia
Alemanha
handset distribution
• Online master dealer: enabling online activation of AT&T services for Brightpoint clients (e.g. Nokia USA)
EUA
• Qualified as authorised distributor of Verizon to allocate handsets to the dealers
EUA Actify Solution:
• Automation of the activation process •Order fulfilment
•E-business
• Support for the definition/customisation of the portfolio •Handset distribution
• Assessment of the handsets life cycle
Australia
• Negotiations/procurement
• Inventory management
• Exclusive distribution (retail sales and return logistics)
• Shop handset operation management
• Real-time management of the sales performance (by product and PoS)
• Management of the online consumer sales operations
• Management of the online business sales operations
Embarking on selective mergers and acquisitions
Operators with strong balance sheets are leveraging their cash flow position to make selective investments
in emerging markets. Faced with a highly saturated home market (as in the case of Etisalat) or increasing price
competition, which has resulted in eroding ARPU (as in the case of Bharti Airtel), operators have looked increasingly
outside their home turf.
Etisalat’s recent acquisition of a stake in a new operator in India and of Millicom’s assets in Sri Lanka is motivated
by the need to look for growth opportunities outside core markets. Bharti’s acquisition of Zain’s assets in Africa is
aimed at extracting value through the deployment of Airtel’s highly successful low-cost operating model in these
markets
Conclusion
Even before the dust settles after the economic downturn, telecom operators are being faced with new realities
which are likely to impact their future survival and growth. Never before has the telecom landscape been as
challenging as it is today. MNOs are confronted with new competitors (e.g. internet brands, handset manufacturers)
encroaching on what has been traditionally their own turf.
The commoditisation of basic telco services and of the network is placing increased pressure on traditional revenue
models. The evolving scenario is seeing distinct adaptive responses by telcos across the value chain. The future
winners in the sector are likely to be those that mould their business strategies to match the changed environment,
adopting “compete/collaborative” responses where relevant.
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6. About Value Partners
Value Partners telecommunications sister companies: Value Partners For more information on the issues
practice draws on over 200 Management Consulting and Value raised in this note please contact
professionals worldwide and Team IT Consulting & Solutions. zoran.vasiljev@valuepartners.com,
assists 13 of the top 20 telecoms gareth.pereira@valuepartners.com
operators in Europe, Asia, Middle With 14 offices across Europe, or one of our offices below.
East and Latin America, as well as Asia, South America and
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