Virgin territory

With virtual networks in the Middle East just launching, CommsMEA looks at the opportunities in Africa and speaks with the CEO of Virgin Mobile about some of the trials of running an MVNO

Tags: South AfricaVirgin Mobile - South Africa
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Virgin territory
By  George Bevir Published  May 4, 2009 Communications Middle East & Africa Logo

The most important aspect of running a successful virtual network is a tight focus, according to Virgin Mobile South Africa CEO Steve Bailey. He has just presided over a shift in the operator's priorities that has seen Africa's only MVNO turn its back on the prepaid market in favour of more lucrative postpaid customers. It is a tactic that he says is starting to pay off.

"We've increased our postpaid connections significantly, and we're taking about 10% of the growth in the South African market on postpaid," he says. "At the moment, that's up from about 2%. It was about 70/30 in favour of prepaid and we've turned that around to be the same split in favour of postpaid."

The upturn in fortune must be a welcome relief for joint-owners Virgin and South African operator and wholesale partner Cell C. The South African arm of Virgin Mobile, which launched in 2006, has yet to turn a profit and has been eclipsed by the performance of some of its global cousins. Virgin Mobile South Africa recently shed 40% of its workforce, reducing the headcount to 250 staff.

Bailey says the cuts were a direct consequence of the refocus and not "general redundancies", but reducing the wage bill in such a significant way should help towards balancing the books.

Despite Virgin Mobile's tribulations in one of the more buoyant markets in Africa, analysts and industry experts agree that the continent could hold more promise for virtual operators than the Middle East. Rogier Van Driessche of Delta Partners says that he would not be surprised if during the next 12 months operators in Africa reach out to MVNOs and ask them to play a role in their markets - which he says will be completely different from the attitude that some of the operators in the Middle East have taken.

"If you take a good look at the Middle East, the fundamental landscape hasn't changed a lot in the last 18-24 months," he says. "But when the first domino falls in Africa things will move a lot quicker than they will in the Middle East."

He says that even though subscriber growth in many African markets is still strong, some operators are finding it hard to continue growing. "Some of the operators in that kind of situation could be looking for alternative revenue streams in wholesale revenue. The bottom line is that it's going to be more minutes."

Target market

A report on the potential for MVNOs in Africa by research firm mmC Group claims that virtual networks in Africa need between 200,000 and 400,000 subscribers in order to break even. A lot will depend on the average revenue per user (ARPU), but it claims that falling below this threshold will have severe implications for an MVNO. Virgin Mobile South Africa scrapes into their lower boundary with 200,000 users.

"If you look at Virgin's subscriber numbers it can be a bit misleading," says Bailey. "The subscriber base is improving in quality, in that it is becoming more and more proportionately a postpaid base," he says.

Bailey won't be drawn on the targets he has set for increasing the APRU of a Virgin Mobile user, but amassing a subscriber base of higher spending contract customers should help to push it upwards and above the average of other operators in South Africa.

A forecast by analysis firm Research and Markets estimates that by 2010 MTN will have ARPU of $19. The contrast with Cell C's projected ARPU of $13.74 gives further insight into the reasons behind the renewed focus at Virgin Mobile.

"Obviously I would like to see that increase in growth translate into a profitable business. It's fine to have subscribers, but you need to make sure they make money as well. I'm sure they will, but given we have increased connections only in the last four or five months we are looking with interest to see what quality of those subscribers are and their ARPUs, but initial indications are good," Bailey says.

Regional focus

Although Virgin Mobile may have taken a while to identify its target market, South Africa is ranked alongside Morocco, Algeria, Tunisia, Egypt and Ghana as one of the "high potential markets" by analysts at mmC Group.

Bailey says that he has is aware of a lot of interest from companies that are looking at the opportunities across Africa. But for the time being it seems as though the Virgin Mobile brand will not be exported to other countries in the continent. A spokeswoman for the group said that while Virgin Mobile is open to opportunities that fit with its business requirements and are of "significant scale" nothing was currently being worked on in the African region.

Specifically it is this area of the Maghreb that holds the most interest for Van Driessche, who says MVNO activity in Africa will take place somewhere between Egypt and Morocco. Dubai-based MVNO Friendi, which launched the first MVNO in Oman at the start of this month, has long held ambitions to expand operations across North Africa.

In January this year Friendi opened an office in Casablanca, Morocco and appointed a VP for business development for Africa and the Mediterranean and to help examine the potential of markets further away from its Dubai HQ. As well as North Africa, Friendi has acknowledged the potential that exists in sub-Saharan Africa.

Van Driessche describes competition in the Middle East as "benign" and he says that the business case for the two or three players in each market is still positive.

"GDPs and ARPUs are a lot higher so profitability per client is a lot higher and competition is less, so it's easier to make a living," he explains. "Obviously, if you are making a relatively decent living then the arrival of MVNOs is perceived by most operators, at least at first glance, as something that is potentially disruptive to their business case.

"But it is far less comfortable in Africa, and it is far more competitive. Margins are margins per minute, and the average revenues per subscriber are a lot lower which means you need much more market share to make a minimum amount of margin that allows you to pay back some of the fixed investments that have been made."

It is the third and fourth placed operators, and not the regional behemoths that analysts say will be most suited to the niche targeting capabilities of MVNOs.

Carlos Valdecantos, founding partner of mmC Group, says that the "huge acquisition effort" over the past two years in Africa from the likes of Zain, MTN, Orascom and Qtel and France Telecom and Vodafone means that their priorities will be to consolidate their own operations and create synergies before even considering striking wholesale deals. "It is going to be extremely difficult for the big operators to be receptive to open up their model to third parties," Valdecantos explains.

Virgin Mobile South Africa's wholesale agreement is with its 50% shareholder Cell C, which is third in terms of market share with a 13% stake in the market, behind market leader Vodacom, (which claims a 53% market share) and MTN (34% share).

Not all MVNOs have such a close relationship with their wholesale partner, but Bailey believes that the MNO needs to have a strong interest in the fortunes of any firm that uses its network and a belief that it can help it increase its total share of the mobile market.

Regulator's role

Talk to the CEO of a nascent mobile operator and before long the conversation will inevitably turn to the role of the regulator, and in particular, the inadequacies of the regulator in creating an environment that helps new entrants join the fray. Bailey feels that the regulator in South Africa needs to adjust interconnection fees, the charges operators have to pay one another to connect to their network. As the smallest operator Virgin Mobile makes more calls to rival networks than it receives. Consequently, the charges it has to pay outnumber those it receives.

Bailey describes South Africa's interconnect rates as "very high" and he would like to see a system of asymmetric rates introduced, which he says would help to stimulate the market and to allow new entrants to compete.

"One of the key reasons that we had to pull out of prepaid is that we can't compete with the current interconnect rates," he says. "We can only compete in very small segments and we have to be very focused. If you want to bring real competition into the market the regulator should introduce asymmetric interconnects. I don't know why they haven't done it. Competition and low prices in South Africa are the choice of our regulator."

The Ministry of Communications has indicated that changes to interconnection charges could be on the horizon with a review of the structure of interconnectivity rates due to take place that it hopes will "reduce the cost to communicate". But Bailey does not expect asymmetric charges to be introduced and he suspects that charges will be lowered across the board.

"That will bring better price competition, but it won't necessarily bring better competition because the regime is still not good for new entrants if they are paying the same rates."

Mobile number portability is another incentive that regulators can champion to help new operators. It was introduced to South Africa in 2006, but Bailey is concerned that the incumbents are still not doing all they can to make the process as smooth as it should be.

"There is a high technical failure rate on ports in South Africa, and I wonder if the incumbent operators are doing everything they can to improve the situation. I think that's an issue," he says.

The incumbents also charge their customers a cancellation fee for early termination of their contracts, which Bailey considers a major obstacle to attracting customers to his network. It is not a practice that Virgin Mobile indulges in, as it would go against the customer service-centric ethos of the company.

Putting customer service at the top of the agenda is a tactic that has proved successful for Virgin's UK operation, where it has amassed in excess of four million customers, giving it a market share of around 6%. In respected customer service surveys it regularly beats the four network operators, and users have even been fooled into thinking it has a better quality network than its host operator T-Mobile.

The South African operation also places a premium on customer service, and Bailey highlights looking after users as one of the key areas that needs to be addressed in order for an MVNO to do well. But he acknowledges that putting the customer first - and not putting obstacles in the way of them leaving - could put the network at a disadvantage when other operators don't adopt the same policy.

He says that in addition to a customer's outstanding contract commitments it can cost them up to R1000 (US$110) to sever ties with their operator, and he would like to see cancellation fees scrapped.

Although Bailey has his gripes about the regulator in South Africa, Van Driessche feels that the more laid back approach of African regulators in general compared with their Middle Eastern counterparts could be key in accelerating progress in the continent. "I think in general African regulators are going to be very open to the idea and are going to follow the sort of soft hand guidance to MVNOs rather than a very strict regulatory approach."

He expects regulators to try to facilitate the arrival of MVNOs to the market and he says that if there is willingness on the host operator's side that the regulators will not interfere. There was less willingness in the Middle East, which meant more regulation was required.

Niklas Nielsen, the CEO of Renna, the second licensed reseller in Oman with a wholesale deal says that his company is also in talks with operators in Africa and he believes areas of the continent could overtake the Middle East.

"The regulatory situation is slightly different to what it is in the Middle East," says Niklas Nielsen. "In some areas it is less regulated. That has some opportunities, but it also places some uncertainty on how to go about. But compared to a typical network operator the MVNO model does not require a lot of upfront investment.

There's not a lot of capex involved and much of the opex is pretty much easy to control. So the risk for an investor is less than if you were paying a couple of hundred million for a licence and then committing to a roll out.

"If you are an investor looking to invest in a GSM operator you might think twice because you are not certain that two or three years down the road your licence might get revoked. This, I think, paves the way for MVNOs," he says.

For those that do choose to follow Virgin Mobile into the virtual network space in Africa, Bailey has some words of advice. "We're finding that the lesson for an MVNO is that you need to focus very carefully on a specific segment and if you do that, even in a market like South Africa where a lot of regulation is against you, you can find your niche," Bailey says.

With other MVNOs in the region sizing up the market, Bailey must hope they have not found their focus too late.

MVNOs in the Middle East

Friendi Mobile, which struck a wholesale deal with Oman Mobile in November last year, launched in Oman at the end of April.

It will target the country's migrant workforce, many of whom make international calls to friends and family who live abroad.

Friendi Mobile says it will offer the lowest price for a Sim card in Oman at OR2 ($5.19), along with the lowest price recharge card at 500 BZ.

The second MVNO to have a wholesale agreement with Oman Mobile, Renna, is expected to launch "within a few days" of its rival Friendi.

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