Middle East is a late adopter of MVNOs but the expected developments in KSA might stand out as an international case study.
Early this year, Communication and Information Technology Commission (CITC) launched a public consultation on the licensing process for Mobile Virtual Network Operators (MVNO), officially igniting the process to issue three new mobile licenses in Saudi Arabia.
While the MVNO concept has been widely adopted in the European market with over 500 active MVNOs, the success stories in Middle East are far and in between. Oman has some degree of success in the region, with FRiENDi Mobile and Renna Mobile successfully capturing 11% of the market share. In contrast, Qatar’s MVNO scene has been severely hindered by regulatory constraints, prompting mobile operators to take legal actions against the regulatory authority, ictQATAR.
As such, the MVNO process in Saudi Arabia is being closely followed, not only for the relevance of the market but also for the innovative licensing rules proposed by CITC. Contrary to common market practices, the number of MVNO operators is restricted to three. Each Mobile Network Operator (MNO) is only allowed to host one MVNO and each MVNO applicant is required to partner with an established international MVNO with significant expertise as a pre-requisite for a preliminary agreement with a MNO. Since there are less than a dozen of international MVNOs that meet current CITC’s criteria, the implicit selection process when setting up consortiums warrants that successful bidders will have strong financial and operational support from both local and international shareholders. Evidently, this process is quite unique in a global context.
With this set of MVNO licensing conditions, CITC balances two critical objectives within the purview of any Telecom Regulatory Authority (TRA), that is the promotion of healthy market competition with issuance of new licenses, and the need to establish a robust regulatory framework for mobile operators that encourages long term investment in areas such as mobile broadband networks.
However, Saudi Arabia is already highly penetrated with 54.5 million subscribers, raising challenges to the success potential for MVNOs, which should be addressed by CITC and considered by Saudi investors planning to invest in MVNOs.
Back in 2009, during the fixed services market liberalisation process, CITC also issued three fixed telecom licenses to new players with support from international telecom operators. However, only Etihad Atheeb Telecom (Go) is currently active in the market, since Optical Communications Co. (Verizon of USA) and Saudi Integrated Telecom Co. (PCCW of Hong Kong) never launched commercial operations.
Research shows that regulatory authorities can have a significant impact on the MVNO development. Even in Europe where the MVNOs are abundant, the concept shows varying degrees of success from market to market, with some countries (e.g., Belgium, Germany, Denmark, Norway) taking advantage of MVNO-friendly regulatory policies.
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The degree of success hinges on the national regulators. National regulators can leverage on mechanisms such as mobile number portability (MNP) and mobile termination rates (MTR) to lower the entry barriers for new operators. The regulations on interconnection fees are essential for MVNOs to enter the market with confidence. Evidently, some TRAs provide clear support towards the development of MVNOs with the definition of transfer prices or the support on negotiations with MNOs.
The purpose of these regulatory actions has been to increase competition in the mobile communications market and thus accelerate the development of new services, technical innovation and customer experience, which is a stated CITC’s objective for the introduction of MVNOs in Saudi Arabia.
On the investment side, any potential Saudi investor should realise that, while MVNOs represent an opening to access the mobile growth opportunity, the risk and upside are radically different from investing in a traditional MNO. While the traditional approach would require investing more than US$ 1,5 billion in a mobile network to cover Saudi Arabia, the invested capital in a MVNO should be far less.
A MVNO is a business with a low operating leverage – gross margins are smaller when compared with traditional MNOs but so are investment outlay and fixed costs – making it possible to reach break-even with considerably less subscribers. This asset-light strategy limits the capital at risk, but also the absolute financial upside of the business. This is the theory that may be challenged in the case of Saudi Arabia. Regulation and license requirements, size of the country, diversity and scale of operation will require significant investments on platforms (e.g., CRM and billing systems) and operations (e.g., call centres, distribution); being able to properly scale and align the investments with the operating model will be crucial to ensure the adequate levels of return to the investors. Considering this investment profile, some investors might decide to leverage on the Saudi MVNO as the platform for a regional strategy expanding the concept in the MENA region.
Significant migrant populations exist in the Middle East, in some cases, outnumbering the nationals (e.g. UAE). Saudi Arabia is a relevant case where migrants represent 30% of the population. As such, we should expect some MVNOs to launch ethnic-based propositions in Saudi Arabia, exploring the asymmetries in roaming, as well as other services such as international remittance.
Since market innovation is also related with the diversity of players’ positioning, Saudi Arabia might end up with too many applicants for an ethnic MVNO, in which case CITC should consider the lessening of the criteria for international MVNO partner, opening the Saudi market to diversified players.
Existing mobile operators must take into account these developments in their strategies. MVNOs are dynamic and innovative players that will redefine the range of products and services, innovate the distribution model and heighten overall customer experience. STC, Mobily and Zain will need to keep pushing themselves to higher levels of customer satisfaction and operational efficiency. All in all, customers in the Saudi market will be the main benefactor.
Considering all the dimensions, the introduction of MVNOs in the Kingdom of Saudi Arabia might stand out as an interesting regional case study, not only for the supportive decisions of CITC to drive the process, but also from the fact that it might represent the birth of a new relevant player in the region.
Josep Que is a partner at Delta Partners.