The convergence game

Parvaiz Ahsan, managing director of LHS, assesses how convergence fits into the next five years for Gulf operators.

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By  Parvaiz Ahsan Published  May 5, 2009

Parvaiz Ahsan, managing director of LHS, assesses how convergence fits into the next five years for Gulf operators.

Operators in the Gulf region are in an ideal situation to strengthen their market positions throughout the MEA region by taking advantage of the untapped potential offered by convergent solutions. The last five years have demonstrated the ability of operators in the Gulf Cooperation Council states (GCC) to reach beyond their own borders into new markets.

However, as the number of M&A opportunities dwindle, and as the current economic condition limits financing options, these same operators must now consider how they can build on their investments to take them to the next level. Relying on rigid legacy systems is not the answer for GCC operators who have crafted a reputation for embracing cutting-edge technology.

GCC operators can be commended for their expansion into many riskier, lower-ARPU countries into which Western operators were hesitant to move. Yet this first round of success will be short-lived without the appropriate strategic planning to prepare them for the long term.

Currently available convergence solutions offer network synergy benefits to the operator as well as ease-of-use advantages to the end-customer. The focus of this article will be on the latter of these two points: What tangible value can an operator deliver to the end-customer through convergence? For example, what can be gained by offering the flexibility to switch seamlessly between payment methods or devices?

The first prerequisite for operators is to have one system in place which is capable of rating in real time. Furthermore, there must be a way to provide the end customer a single view and a single bill that covers all of the services used, whether on fixed or mobile devices. Fortunately, the GCC operators are in a position to fully harness the advantages of convergence both in their developed home markets and in lower-ARPU foreign markets - where, thanks to acquisitions made over the last few years, they have established a sound foothold.

Over the past decade, GCC operators have followed a relatively simple but successful formula: first to develop a strong share with steady, high ARPU levels in their home market; then, from this solid financial springboard, they have leveraged their understanding of the MEA region's cultural and political conditions to gain entry into new markets.

GCC operators can be commended for their expansion into many riskier, lower-ARPU countries into which Western operators were hesitant to move. Yet this first round of success will be short-lived without the appropriate strategic planning to prepare them for the long term.

The last five years have seen impressive growth across the MEA region. The question certainly being asked now is: How do operators properly plan for the next five years? What will the market look like? GCC operators should prepare for markets characterised by new license auctions, increased presence from Western operators, and the potential for disruptive market forces, either through new technologies or through new rules. From an operational perspective, the operator needs to determine whether it has the necessary IT systems in place to carry out its plans.

GCC home markets

The flexibility and breadth of a convergent offering makes it a strong potential fit into both mature and developing markets. Because a convergent solution can be implemented in a stepwise manner, such a transition is much more feasible. The next part of this discussion examines the home markets of the GCC operators to show how convergence fits into that model.

The GCC countries are recognised globally as being at the technological forefront of modern business. As a result, the region has developed and attracted sophisticated users who are willing and able to spend for top-of-the-line communication services; indeed, these users make up the majority of the market.

For exactly this reason, the potential for a competitor or new market entrant, i.e. an MVNO or satellite operator, to win over a portion of this market is a scenario which requires prompt action to prepare for a changing future - for example, one with increased focus on the continual unification of the three devices most important to the user: mobile phone, computer and television.

In this case, the catalyst for convergence is the desire to offer bundles and cross-service discounts with one point of contact and a single invoice for all these packages. Both "du" in the UAE and Orange Jordan stand out as operators in the region who have taken this important first step in bringing both fixed and mobile customers under the same customer care and billing umbrella.

On the longer-term horizon, operators should consider how to offer simplicity and convenience to improve the overall customer experience. The ability to switch seamlessly between these three devices through blended service offerings and the option to pay for these services - whether in real-time or post-paid format - will provide value to the customer and drive revenue growth.

The truth is that many of the billing systems currently in use are outdated and will not be able to support these innovative models. Operationally, it makes little sense to maintain multiple, service-specific systems that are bound to restrict the operator down the road.

The emerging African market

GCC operators have been very effective at moving into the African market, where the business environment differed significantly from the one to which they were accustomed. While all GCC operators have expanded outside their borders, Zain in Kuwait and Etisalat of the UAE have shown potential to become leaders in the African market. 17 of Zain's 24 operations are located in Africa, and Etisalat is now operating in nine different African countries.

Both operators have executed on clearly defined strategies, demonstrated an understanding of the political environments and shown a notable appetite for risk - which is now paying off.

This part of the world relies on a completely different set of technological requirements than those discussed above. It is hard to imagine that content-based value added services, multi-play bundles, and the like would be relevant to nations with single digit ARPU levels. However, operators working in these regions are certainly conducting the same level of thorough customer segment analysis and forecast planning in order to best prepare for the next five years. The argument for convergence deserves to be included in this process.

Most operators investing in Africa have spent a considerable amount of capital in improving the network technology of the prepaid portion of the market. Such investments are completely justified considering prepaid services generally account for well over 95% of the subscriber volume. With ARPU levels in the low single digits, why focus anywhere else? Within this question lies the first mistake: The "flaw of averages" is very present when looking at ARPU. Take, for example, Safaricom in Kenya, whose blended ARPU in mid-2008 stood at $8.26.

Such a figure hides the fact that the postpaid segment, although comprising less than 1% of the subscriber base, contributes to 5.6% of the total revenue. Therefore, the customers in this segment, who are often business users, warrant having their demands addressed. With competition increasing, who wants to be left with millions of low-ARPU users while rivals are servicing the small, highly profitable micro-segment?

The added benefit brought by a new billing system to address this portion of the market is that the operator will also be able to offer increased payment flexibility to all its customers through, for example, "business hybrid" accounts that can switch between post- and prepaid rating, depending on the time of day. Furthermore, upgrading the billing system gives the operator a smaller-scale entry point for a truly convergent system that eventually makes all customers accessible through one system.

The final point to be made is that predicting the future is never an easy task. No one can say with complete accuracy what will be happening in the African mobile market tomorrow. There are countless variables to consider! Even more, the creativity currently being demonstrated by users is something that no operator can foresee.

For example, Zain's Celtel Kenya "One4All" plan was developed only after it was discovered that certain users were offering a sort of mobile payphone service to other individuals who did not have mobile phones: These mobile payphone providers were renting their personal phones on a per minute basis, using a stopwatch to keep track of the time. Operators have to be ready to respond with the proper technology when end-users act as sources of innovation. A vast amount of "captured innovation" could be released as convergence allows the grey area between pre- and postpaid services to open.

Parvaiz Ahsan is based in the UAE office of LHS Group, a company specialising in billing and customer care solutions.

3028 days ago
Aly-Khan Satchu

Dear Parvaiz, Africa whilst in many regards behind the curve a few years ago is past its inflexion point and embarked on IT convergence with the rest of the world. The speed is breath taking and as if it were on steroids and the surge has real legs. The Mobile Phone is ubiquitious and the communication tool of choice. In fact, there is very little competition. The pipe in its current ARPU does not account for the exponential growth curve because the low base effect is veiling the story. In many regards, SSA is a laboratory. The Mobile Phone will be the tool through which to deliver the Mobile Internet and the MPESA product has already confirmed the arrival of the mobile wallet and how. It is a remarkable and disjunctive moment. Safaricom has proven a fierce competitor just look at Zain's segmented numbers for 2008 - Kenya segment. I believe SSA Mobile telephony is deeply undervalued and Investors are going to find that this is a very sweet spot indeed. Should you wish to track Safaricom Level 1 prices [the price was badly gutted by the ignominious exit of fast money which mauled the price and the Frontier markets asset class as a whole]; you can on my site www.rich.co.ke. There is also an Audio of the CEO Mr. Michael Joseph on Rich Radio at the time of the IPO and he tells a compelling story. Safaricom recently introduced a 50.00 shilling [70 US cents] credit top up facility. Its a synthetic currency and interest rates are 10% over a short time span. This is an example of outstanding innovation and Investors have priced these new income streams at zero and have overly focussed on declining voice revenues. That was the super growth curve. It is not now. The business has inflected. I think Zain have a remarkable opportunity to leverage cross border SSA money flows because I think there foot print is perfectly aligned with this nascent but explosive growth curve. best wishes Aly-Khan Satchu www.rich.co.ke

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