Roland Berger: Telco operators must utilise blind spots

16 July 2015 Consultancy.uk

The telecom operators market is difficult to enter, with high capital costs and stiff competition from incumbents. There are ‘white spots’ however, spaces to which already established players are blind and in which a competitor may be able to generate considerable value for underserved customers, whether rural or on low income. By correctly leveraging the market potential, new entrants can still make their mark, capture market share and generate considerable EBITDA from merely two years of operation.

Market entry
Entering into a new market can be difficult, especially markets in which initial capital costs require a healthy EBITDA (earnings before interest, taxes, depreciation, and amortisation) figure to be successful. The mobile telecom operators market is one such market. Recent Roland Berger Strategy Consultants research finds that new operators that fail to achieve 10-15% market share also have difficulty in gaining an EBITDA margins of around 20%, which is needed to meet CAPEX (capital expenditures) investments costs, interest payments and tax.

This difficulty can be seen back in the number. The analysis shows that in the mobile telco market, where mobile use has reached 80% of penetration, by the time a third entrant enters, the average market share after three years is only 16%. Although individual variation exists, with a range between 42% and 1% in the markets analysed.

Correlation between market share and EBITDA for 150 3-player markets

Key levers for entry
New entrants into the market can make inroads however. According to the consulting firm, a number of considerations may provide new telcos with success. Consultancy.uk provides a summary:

One area in which new entrants may be able to ‘out compete’ the competition is network capital efficiency. Entrants taking a holistic approach, accounting for both technical and commercial aspects, are the most successful. This can help operators become more selective and cost effective in both maintenance and technology roll-outs. Increased network sharing, for instance, could allow operators to focus their technology investments on core areas, whilst transforming other capital investments into operational expenditures.

A further method for increasing market share comes from the introduction of new product combinations into a market that targets a particular under-served segment. Possible strategies include emphasis on online/non-physical distribution together with a simple and aggressively priced product portfolio.

Another way in is by identifying markets in which regulatory conditions are not excessively punitive to new entrants, due to for instance, spectrum allocation, unfavourable roaming agreements and/or mobile termination rates (MTR). According to the consultancy, without such regulatory support, late entrants are likely to face great difficulty becoming attractive to customers while securing adequate profits.

Success in France

Successfully moved up
While entry is considered difficult in many markets, Roland Berger does note a number of success stories, including in France, Mozambique and Kuwait.

In France, Free Mobile managed to claw its way to almost 20% market share against three incumbents over a two year period. The company, a subsidiary of Iliad Group, used a simple product portfolio, aggressive prices, and online channels. Leveraging its fixed broadband services (present in the market well before the launch of mobile operations) the company could push aggressive pricing for its mobile offering even further. This aggressiveness was further facilitated by asymmetric MTRs.

Success in Mozambique

In Mozambique, Movitel Mozambique climbed from existence to 35% share over a period of two years, decimating the dominant position of Mozambique Celular. The company, a subsidiary of the Vietnamese telecom group Viettel, approached the market by being customer service directed. In addition, it invested heavily in the rural population, creating a rural network and actively going door-to-door to acquire 80% of the rural market.

In Kuwait, Viva Kuwait, which is partially owned by Saudi telco incumbent STC, launched in 2008 in the face of stiff competition from Zain and Ooredoo. The company quickly differentiated itself through identifying underserved segments in the market and launched mobile broadband packages together with other innovative plans. Realising the importance of data, the company focused on rapid deployment and upgrading of its 3G sites. On the back of its competitive data- mobile offerings, Viva was able to achieve success both with subscriber numbers and substantial improvements in financial performance. In 2014, revenues were up 31% and EBITDA up 72% compared to 2013.

Success in Kuwait

Commenting on the research, Santiago Castillo, Principal of Roland Berger Middle East, remarks: “There is no 'one size fits all' for becoming a successful challenger, but the strongest performers tend to focus their efforts on capital/cost effectiveness, accentuated differentiation of products and services compared to the competition, and ensuring a regulatory framework that makes it possible for them to compete effectively.”

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