KSA's MVNO opportunity

MVNOs: Key commercial and legal questions answered
Saudi Arabia's operators are preparing to host MVNOs.
Saudi Arabia's operators are preparing to host MVNOs.

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Raza Rizvi, a lawyer at Simmons & Simmons, looks at some of the fundamentals of an MVNO and some key commercial and legal questions that will lie at the heart of KSA’s MVNO program.

There is significant flexibility in the commercial and operational model of an MVNO, driven mainly by the specific objectives of the parties. There is no optimum model for an MVNO – the best model depends on the specific market, the specific consumer profiles and trends in that market, the objectives of the MNO and the relevant MVNO as well as a host of other factors.

What is the best model for an MVNO?

The most well-known MVNO model is a business with a recognised consumer brand leveraging its brand into mobile communications. For example, in the UK, Virgin started selling services on what was then called One 2 One’s network (owned by Deutsche Telekom) – Virgin Mobile had an aggressive and successful cross-marketing campaign which leveraged off the numerous companies within the Virgin group. A number of MVNOs have positioned themselves to appeal to specific target customer groups such as cost-sensitive customers who do not require any value added service elements. For example, in Oman, FRiENDi set out to target the expatriate blue-collar worker community.

Nawras, in Oman, was the first MNO in the Middle East to make its network available to MVNOs and FRiENDi has been a pioneer from which lessons can be learnt; however, the Middle East comprises a wide range of telecoms markets, each of which have different fundamentals and present challenges to the successful implementation of an MVNO program.

What are the key fundamentals of the Saudi mobile market?

There are three licenced MNOs. STC was the incumbent and the monopoly was broken in 2005 when Mobily was granted its licence. The third licencee, Zain Saudi Arabia, paid $6.1bn for its licence and has initially struggled with the competition, principally because the mobile penetration rate was already relatively high by the time it entered the market in 2007. According to the Saudi telecoms regulator (CITC), mobile penetration reached 195% by mid-2011 and at the end of the first quarter of 2012, there were 54.3 million mobile-phone subscribers. Saudi has the highest MTR (around $0.07) in the GCC.

4G LTE network deployment and other major telecoms infrastructure projects have been costly for Saudi MNOs but, despite some inevitable margin erosion that will come from an MVNO arrangement, the MNOs will be interested in booking wholesale revenues which can then be used to focus on higher ARPU segments.
The Saudi mobile market is potentially very attractively poised for MVNOs.

What are the key features of the Saudi MVNO consultation paper?

The recent MVNO consultation paper published by CITC sets out a compelling argument for the introduction of MVNOs in Saudi Arabia. The consultation paper raised (and sought comment on) various CITC suggestions, including:

• as part of a staged implementation, CITC will issue up to three 10-year MVNO licences;

• each of the current three MNOs will be expected to reach an agreement with one of the three MVNO licencees;

• although there will be flexibility on the part of an MVNO to chose a business model, to achieve the aim of better customer care, a pure resale model will not be permitted and therefore the MVNOs must be based on the (i) basic, (ii) enhanced or (iii) infrastructure-based models;

• the MVNOs must not be majority owned by the MNO;

• although the terms between the MNO and the MVNO will be largely left for open commercial negotiation, CITC maintains that regulatory oversight shall be necessary as well as adherence to a set of draft MVNO guidelines. The results of the consultation paper have not yet been published.

What role will CITC play in the discussions between the MVNOs and the MNOs?

There has been some debate about the active role to be played by CITC in facilitating MVNOs beyond the initial licencing phase. From a regional perspective, the light regulatory touch seen in Oman seems to have been a good approach but Saudi Arabia is a much bigger market. Although one option is to leave the MNOs and MVNOs to commercially negotiate their terms, the consultation paper reserves CITC’s right to be an active participant in such negotiations - a role which may pose a challenge for CITC to consistently be seen as a neutral and positive influence in the negotiation process.

CITC’s role in the MVNOs’ business is also an area of some uncertainty. The MVNOs are likely to have a wide operational role in business which, when controlled by the MNO, was regulated by CITC. As a result, a high level of regulatory supervision can be expected. The MVNO’s remit is likely to extend to setting its own tariffs (against the backdrop of the wholesale tariffs it pays to the MNO), managing billing and account authentication, owning its subscriber database, and controlling customer service, distribution and marketing. A healthy relationship and continued dialogue between the MNOs, the MVNOs and CITC will be critical to the successful implementation of a Saudi MVNO program.

What are the likely major commercial and legal issues between a potential MVNO in Saudi and the Saudi MNO?

The key areas sticking points during negotiations are likely to include the following:

• Pricing: The MVNO will want to be able to set its own pricing structures. CITC will have a role to play to ensure that the MNO does not directly or indirectly try to dictate the MVNO price offering.

• Branding: This is often an issue where leveraging a well known consumer brand is at the heart of the MVNO business plan. The stakeholders will need specific advice on brand protection and development in Saudi Arabia.

• Term/exclusivity/minimum commitment: These issues are at the heart of the commercial deal. The MVNO should try to retain the ability to move to a different MNO or at least use this possibility as leverage when terms are renegotiated and/or extended.

• Promoted services: Contractual provisions will apply in respect of the specific services that the MVNO is able to provide and promote. If MVNOs are allowed to offer both broadband and international calling products, the MNOs will face greater risk of margin erosion but this could be commercially addressed in the agreed wholesale rates.

• Customer services and billing: The MVNO agreement will document who will be responsible for customer services and billing. CITC anticipates that the MVNOs in KSA will play a significant part in the improvement of customer services and therefore a key area of discussion between the MVNO and the MNO will relate to how information is passed between the respective systems and how customer service issues are ticketed and resolved.

• Handset procurement: The arrangements in place for dealing with the procurement of handsets will ultimately vary depending on the nature of the relationship with the MNO. Based on CITC’s consultation paper, the MVNOs in KSA are likely to have independent arrangements with handset manufacturers.

It remains to be seen what CITC will release by way of its results following the consultation process. It also remains to be seen what the true appetite is for participation in the Saudi MVNO program, at this stage there is little more than rumour about tentative approaches being made to MNOs.

In any event, there are plenty of difficult issues that must be carefully managed to ensure that potential Saudi MVNO collaborations are successful. The size and demographics associated with the Middle East, and Saudi Arabia in particular, means that the evolution of the Saudi MVNO program will remain a topic of significant regional interest.

 

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