2011: Year ahead

“The entry of Bharti is a game changer in Africa,” Hasbani says. “It will encourage further consolidation and will bring new rules to the game in Africa. There will be a new type of competition.

“If Bharti’s experience is translated into the African market it will bring lots of cost management expertise, innovation and further competition, which will trigger further competition.”

It is a trend that Sallaba also recognises. He says that smaller operators, particularly in Africa, face the problem of high opex compounded by an infrastructure sharing market that remains in its infancy.

He adds that a further challenge facing many mid-sized players is a lack of access to international finance for reasons including inadequate structure or governance, or simply that they are unlisted. This allows them to be squeezed by larger players that do not face these constraints, Sallaba says.

In this light, consolidation is the natural consequence, with larger players “cementing their competitive positions” by combining assets and resources with smaller players. But Sallaba adds that larger players will also be forced to weigh up carefully the pros and cons of staging acquisitions in 2011.

“Highly leveraged balance sheets with often significant debt and other liabilities, coupled with political risk and often difficult operating environments remain key deterrents,” he says.

“The pros and cons will always be weighed up on a case-by-case basis.”

Hasbani has a stark warning for single-country operators that are unable to expand the scale or scope of their operations. These operators will find it increasingly difficult to compete with their bigger counterparts, he says. “If they do not invest in growing scope or in being part of a bigger operation, they will find difficulties in cost management. That is why I see a lot of consolidation happening in the next couple of years to reduce the number of single operators.”

Private investors depart

Hasbani says that opportunities are opening up for telcos to expand their footprint in the region, not only with new licences such as in Syria and Iraq, but also because numerous private investors are exiting the region’s telecoms sector. It is a trend that he has noticed in recent months, and a pattern that he expects to continue next year.

“We are seeing an appetite for private investment groups to exit the telecom industry in the region. The reason is not that it is a bad performing sector. On the contrary, it is a good performing sector, which means that it is probably one of the few sectors that PIs can exit from and find buyers for,” he says.

“They are leaving at good premiums, at good profits, and attracting the large industry players into this field. That is a phenomenon that we have seen emerge in the last couple of years, and it is materialising in 2011, which will involve a lot of consolidation in the market.”

Hasbani thinks that it is operators that are most likely take over these stakes from the PIs.

Outsourcing challenges

Outsourcing is one way that operators can seek to cut costs and allow themselves to refocus on the core business of providing services to customers, and both Hasbani and Sallaba predict further outsourcing from the region’s telcos in the coming year.
2011 will see more “openness” to outsourcing and new business models in terms of partnerships and a reliance on other entities to manage non-core assets.

“We could also see some deals on infrastructure, even infrastructure mergers or divestitures. Already we have seen a lot of customer care and call centre outsourcing to companies within the region,” Hasbani says, adding that STC has already adopted this model in Bahrain.

“We are seeing a lot of managed services as part of major deals with vendors. Telecom vendors are making money out of managed services and we are seeing this as a growth area for them while telecom operators see this as a cost cutting area for them as well.”

He adds that the advantage of divestitures, such as South African telco Cell C’s decision to sell its cell towers to American Tower Corporation in November, is that they offer a means of freeing up cash, and effectively turn capex into opex. He expects to see an increase in this type of deal in 2011.

The global economic downturn also put a greater emphasis on cost across all industries. In the telecom sector, this has re-ignited the debate about what constitutes a core activity or asset that is ripe for outsourcing, and what does not.

Operators that view customer facing activities as being core tend to be more open to outsourcing, particularly if they operate in a high-volume, low cost environment, according to Sallaba, who points to Bharti Airtel in Africa as a prime example. Sallaba says that while network operators remain cautious of selling their cell towers, the trend has become widespread and he sees no reason why this should not continue in 2011.