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How will MVNOs change the mobile market in Saudi Arabia?

Charles Murray Partner, Consulting

The Middle East and Africa have seen few launches of mobile virtual network operators (MVNOs), but the public consultation launched by the regulator in Saudi Arabia could change all that.

MVNOs have been around for some time. They were generally first introduced by lower-tier operators that welcomed the additional traffic on their network and the investment that a third party was making in order to cause subscribers to churn away from the more-dominant operators. The overall impact has been to introduce additional competition that has driven down consumer prices and to improve service innovation – the goal of an economic regulator.

It is perhaps surprising then that the Middle East and Africa region has seen little MVNO action.1 The attempt by Vodafone and Virgin to create an MNVO or sub-brand in Qatar was stopped by the regulator, making other companies wary of launching without the backing of the regulator. Consequently, the public consultation document issued by the CITC (Saudi Arabia's telecoms regulator) will be keenly watched by the industry throughout the region.

Before we discuss the opportunities for bidders and the operators in the Saudi market, it is worth considering the highlights of the CITC's public consultation:

  • three MVNO licences are to be issued
  • each existing mobile operator (STC, Mobily and Zain) will be expected to come to an agreement with one of the new MNVOs
  • the technical model for the MVNO is open, and it will be allowed to issue its own SIMs
  • rules limit the stake that a host operator may have in its MVNO.

In order to understand the appeal of the MVNO opportunity, we should consider the fundamentals of the Saudi market. It is a large market with more than 40 million mobile subscribers and three operators enjoying good margins. Given the challenges of rolling out a network in such a large land mass (over 2 000 000km2 with a population density of 12 per km2), access to an existing network is clearly a major advantage and appears, from the outside, to be a highly desirable opportunity.

For potential MVNO operators, execution of that opportunity will be very challenging. If more than three companies are interested in becoming an MVNO, there will be competition for each existing operator. Negotiations with each operator may also be difficult: while each may be required to agree wholesale terms, it will clearly be looking for an MVNO partner that will be complementary to its existing business, rather than detrimental. MVNOs typically target a particular sector, and to ensure that its sector and propositions are aligned with the existing operator will require careful thought.

An MVNO should be considered in the light of an operator's segmentation strategy. For some segments, the operator may be able to address its needs in-house, potentially through a separate price plan or even a sub-brand. A joint venture with an appropriate partner could also be considered, following the model of Universal Music and Bouygues Telecom, or that of M6 and Orange TV in France. However, in some circumstances, a separate, independent partner should be considered. For example, an MVNO (such as Tune Talk in Malaysia) can allow a high-value operator to target low-end customers more effectively, without diluting its core brand. Conversely, more value-associated operators have used MVNOs to address the high-end of the market, including businesses (for example, Virgin Mobile on Cell C's network in South Africa and business MVNOs on Three's network in the UK). Apart from purely value-based segmentation, an MVNO can give an operator more-effective, lower-cost access to ethnic segments, religious communities and retail customers.

Nevertheless, for the existing operator, the initial reaction is often one of concern about increased competition and consequent margin erosion. A negative, but well-tried, approach to combat pressure from a regulator to increase competition is to introduce delaying tactics into the consultation process, or even changing it to be more favourable. Putting these options aside, at some point the existing operators will have to engage actively with the potential MVNO operators in order to select the best partnership to take forward.

Selection of the best MVNO partner will require an excellent understanding of the existing subscriber base, how it segments, what is the value of each segment and how competitively the segments are divided between the existing operators. This knowledge is used to frame the business case for each potential MVNO's go-to-market strategy. Add to this the need for agreement on how the MVNO will integrate technically and what will be the commercial structure of the deal (such as cost plus or retail minus) and it is plain that a lot of analysis and inter-related decisions must be undertaken.

Few markets around the world have been quite as bold as the Saudi market in helping MVNOs. It will be a complex process with many challenges and its progress will be monitored closely by many interested parties.

1 The exception is Oman, where the recent launches of MVNOs FRiENDi Mobile and Renna have been particularly successful.