Why haven't MVNOs taken off in the Middle East?

Over the last decade, MVNOs have become part-and-parcel to the telecoms market of practically every developed country in the world.

They were first introduced by regulatory authorities to drive much-needed competition in countries where early-entrant mobile network operators (MNOs) were considered to hold significant, and unhealthy, market power.

The concept is that the MVNO, unlike the MNO, does not own the radio spectrum or wireless network infrastructure over which the service is provided to customers. Instead, it enters an agreement with an MNO to obtain bulk access at wholesale rates, and then sets its own retail prices and attracts its own customers.

For the first time, it provided a very time-efficient and cost-effective route for companies to enter telecoms markets, as they are not faced with the burden of building out the necessary infrastructure.

Whilst MVNOs were being forced into some markets for the benefit of the customers, other MNOs simply saw a chance to make some easy money by selling excess capacity that would otherwise not be used.

As word spread on this opportunity, so did the numbers. There are now over 600 operating around the world, with the United States, Europe and Australia particularly brimming with them.

However, in the Middle East, MVNOs have yet to prosper. Oman and Jordan remain the only two markets to have issued licences. Oman leads the pack with six operational MVNOs, whilst Jordan has one.

Additionally, transcontinental Turkey has one MVNO, as well as seven "pre-MVNOs", which are MNO sub-brands that do not require an MVNO licence. Saudi and Qatari regulators have rebuffed similar attempts by MNOs in their own markets, but Saudi is finally expected to issue three MVNO licences in the third quarter of this year.

Even in the Middle East markets where MVNOs have been introduced, the majority act as "discount" operators, according to Claes Hagel, Vice President, Head of Communication Services, Ericsson MEA.

"They are often targeting ethnic market segments and offering specialised services, often in the migrants' home language, typically offering lower rates for international calls to and from home countries," Hagel says.

"Some of the active discount types of MVNOs are targeting niche markets like university or municipality employees, sports clubs, the banking and insurance sector, or a fixed operator offering mobile services. There are multiple types of MVNOs in general, typically focusing on specific, untapped segments in the market and offering specialised services to the chosen market segment."

MVNOs are yet to take off in the Middle East because the region's telecoms markets have remained tightly regulated and largely driven by incumbent operators, according to Anurag Verma, Telecom Operations and Managed Services Lead, Smartworld.

"Despite this, we are currently witnessing rapid changes in the industry and expect more countries opening up to these innovations and changes soon," Verma says.

Hagel attributes the lack of Middle East MVNOs to the fact that most of the region's telco markets are still growing.

From the MNO's perspective, Hagel says, a common driver for being open to hosting MVNO operations is the promise of new revenue to combat market saturation and decelerated sales growth.

But considering this is not a problem for many Middle East telcos, which continue to prosper, the trend has not caught on.

"In the majority of Middle East countries, the market is still growing, so the MNOs are not yet motivated to open up for hosting MVNOs, which results in MVNO regulatory framework not being ready," Hagel says.

However, he adds, the trend is changing. "The Middle East represents a new growth area for MVNO operations, and the MVNO regulatory framework is already being finalised in the Kingdom of Saudi Arabia and Egypt, while some signs of regulatory activities can be seen in Sudan and Lebanon."

Until the uptake of MVNOs do catch on in the Middle East, the big loser remains the customer.

MVNOs are typically very lean in organisational set-up and are therefore able to offer cheaper rates, which subsequently drives down prices across the whole market for customers.

"This lean set-up enables an MVNO to offer new services faster to the market, which is very much tied to the ability of an MVNO to be independent from an MNO and able to offer differentiated services to the end user," Hagel says.

Furthermore, MVNOs can uniquely position themselves to cater to specific customer segments that standalone MNOs may not reach out to, according to Izhar Ahmad, Director, External Relations, Samena Telecommunications Council.

"MVNOs often offer attractive services such as games, music, applications, movies and other entertainment-based, value-added services," Ahmad says. "In essence, MVNOs are being known for effectively segmenting the markets by offering customised services to specific communities, expatriates, a specific area, a certain age group, and other demographics-based segments."

Such segments are typically perceived by MNOs as too small to be addressed directly, adds Amr Goussous, Principal, Booz & Company. "An example would be having call-centre agents that speak the language of a specific ethnic expatriate community."

Ahmad refers to a general perception that, because the MENA region is very large, with various operators having already made large investments on enhancing network scale and capacity, there is a lot of room to make use of the available network capacity.

"Arguably, MVNOs can help make better use of such capacity," he says. "Furthermore, most countries in the region currently do not have MVNOs, which in itself is an indicator of opportunity for MVNOs.

"Essentially, MVNOs can thrive in the Middle East by developing marketing strategies and service offerings that resonate with a limited and well-defined slice of the telecoms market."

However, MVNOs acting as a strong catalyst for healthy competition can only happen under the right licensing and wholesale pricing frameworks.

"Alternatively, MVNOs will find it very difficult to sustain a viable cost structure and could become very disruptive by irrationally undercutting prices in the market," Goussous says. "This could lead to value destruction and impede the ability of operators to continue investing."

Ahmad agrees, saying that MVNOs will only succeed in this region if certain regulatory support mechanisms, and an enabling environment, are created.

"Additionally, for MVNOs to succeed, they need to avoid over-segmentation of the market, keep a strong "prepaid" customer base where applicable, and maintain closeness with MNO-owned sub-brands," he adds.

Should this happen, MVNOs with special branding and positioning will continue to attract users and further increase the already high mobile penetration rates Middle East countries are posting, Verma says.

Hagel believes the hard-to-sustain infrastructure spending for mobile broadband, along with network sharing scenarios, will begin to lure Middle East MNOs to the model over time.

When that happens, he expects the MVNOs to take 10 to 15 percent of the market share, which reflects the global figure and what has already happened in Oman.

Adel Belcaid, Principal, Booz & Company, adds that a number of Middle Eastern markets exhibit favourable conditions for the introduction of service-based competition.

"Markets are saturated, competition on the mobile side is limited to two or three players, and they have attractive demographics for micro-segmentation," he explains. "Moreover, with increased demand for digital services and ubiquity of access, business models for MVNOs beyond just mobile services could become viable.

"However, MVNO prevalence will remain largely dependent on the appetite of regulators to introduce competition to their markets."

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