Industry Thought Leadership

2018: The Middle East Telecom IndustryAdvan-ces into the Digital Era

February, 2018
Tarek El Zein

Strategy& Middle East (formerly Booz & Company), part of the PwC network

In the coming year, the Middle East telecom industry must press ahead with digital transformation. Although the Middle East telecom market has reached its peak, and is even contracting in some countries, regional operators are positioned to reverse this trend in 2018 with four key strategies. They must accelerate the building of digital capabilities, scale-up their adjacency ventures through acquisition, push forward efficiency programs, and advance in building partnerships with their regulators.

The dynamics in the regional telecom market throughout 2017 have been challenging. The market is saturated. Mobile penetration has reached 120%. Along with the economic slowdown and reduction in the expatriate population, the growth in mobile subscribers has reached its lowest ever rate, just 1% year-on-year in 2016 compared to around 6% in 2014.

The only remaining avenue for growth within the current business is the ever-growing thirst to consume content via the Internet, with operators fighting for market share in aggressive price wars. However, the market is also more open. Some regulators have liberalized access to Internet services such as WhatsApp Voice, accelerating customer substitution of apps for operator-run voice services. This has contributed to cutting blended average revenue per user (ARPU) by approximately 25% since 2014, slowing the revenue growth in large telecom groups to an aggregate 1% year-on-year. Similarly, cash margins have declined to around 16% in 2017 from 25% in 2014, putting strain on the economics for further investments. Middle East operators remain among the most profitable globally, with earnings before interest, taxes, depreciation, and amortization (EBITDA) margins at 37% versus 30% globally. Still, these are below the 41% achieved in 2014, and dropping.

Operators must not simply accept this reality. Four responses are essential and expected in 2018.

First, accelerate digital transformation. Operators should transform their core business by building a new value proposition and capabilities to differentiate their offering. Successful digital transformations have already enabled telecom operators throughout the world to boost customer loyalty and cost efficiencies.

Regional operators will focus on fundamentally revamping the entire customer journey of their core business. Initiatives will include innovative and simple telecom value propositions, pricing models that engage the customer, and highly capable chatbots (software which talks live with customers). In tandem, they need new pricing models based on data and usage.

Second, pursue focused adjacency acquisitions. Operators will follow the trend in other regions and seek revenue streams through acquisitions in adjacent and new industries. For example, Verizon acquired Yahoo! for $4.5 billion and Orange purchased a 65% stake in Groupama Banque in France to launch a digital-only bank. Operators will seek opportunities in the growing information and communications technologies sector and look at innovative small and medium-sized technology players in the region and globally. There are limited opportunities available for scale-based expansions—when an operator buys another operator. Instead, we expect scope investments designed to expand the offerings and capabilities of existing operations. Precursors of significant investments to come include the establishment of STC’s $500 million technology fund in 2017 and the company’s purchase of 10% of ride hailing service Careem for $100 million. Other examples include Zain Group’s investment in iflix to launch a regional internet TV service and Etisalat’s setting up of a digital arm to expand into the Internet of Things (connected devices and sensors) and other digital services.

Regional operators have some catching up to do. They have contributed a little over 1% of the total activity in mergers and acquisitions by telecom operators globally. Moreover, less than 2% of regional investments to date have focused on scope expansions, versus 35% on a global scale since 2010.

Third, keep getting fit. Enabling digital will lead to cost reduction, as will a simplification of offerings, and an improvement in sales channels operations. Operators must also accelerate efficiency programs so they can finance network investment in 5G (the next faster, higher capacity wireless standard) planned for 2020. In Europe, operators have formed large procurement joint ventures to control costs. Although such alliances are still far off in the region, operators will likely form their own subsidiary tower companies to achieve significant efficiencies.

Fourth, build partnerships with regulators. This means allowing demand and supply to regulate the market rather than an anticipatory approach that limits investments and market development. Operators need permission to expand into adjacent and new industries such as mobile payments, healthcare, and drone operations. A dialogue with regulators can ensure a healthy investment environment and engage outside Internet players to make a commitment to Middle East markets. Government levies on the sector should encourage operators to invest, contribute to economic growth, and advance national development goals.

Telecom operators have reached a crossroads. Rather than endure an inevitable shrinking of the market, they have the opportunity to pursue far-reaching strategies and build a path towards a promising future.