MVNO - A new Horizon for Saudi
Telecom Sector
May 2014
Please read Disclaimer on the back
MVNO (Mobile Virtual Network Operators)
The all new headline story in the Saudi Telecom industry is the introduction of MVNO’s (Mobile Virtual network Operators).
Two new MVNOs (Jawraa Lebara, Virgin Mobile) are all set to enter the market during the year. The third MVNO Axiom
telecom was also supposed to enter the market on Zain’s network, however due to failure in submission of mandatory
documents, the authorities (Communication and Information Technology Commission) have not approved their license. In
this paper we look at the general idea behind an MVNO, and the impact they will have on the current landscape of Saudi
telecom market.
The first question that arises for us is:
“What is an MVNO?”
A Mobile Virtual Network Operator or in short an MVNO, is a mobile service provider that does not have its own infrastructure,
but operates through existing networks of the existing players in the market. A MVNO purchases minutes at a wholesale
rate from the existing network operator and sells it at a retail rate under its banner.
Simply putting it an MVNO is a reseller of an MNO (Mobile Network Operator). An MVNO is actually a customer of an MNO
rather than a competitor. An MVNO can typically set its own pricing following agreed-upon rates with its contracted MNO.
MVNO- Infrastructure
MNO
Access
Network
Operator
Core
Application Subscriber
Billing
Branding Distribution
Network Platform Management
Sales
CRM
Reseller
Service Operator
Full MVNO (Mobile Virtual Network Operators)
MVNE (Mobile Virtual Network Enabler)
Mobile Network
Operators (MNO)
Figure 1. Thisd-party mobile service providers can operate in on of three ways, possibly using a MVNE to support them.
Source: CitiWireless
Source: CitiWireless
“How do they Operate?”
MVNOs are dependent on the MNOs to provide the network infrastructure. Due to the lack of control over the infrastructure,
the operational strategy determines the success and failure of a MVNO. According to Deloitte, there are four operational
strategies that the companies can follow.
Model 1
Model 2
Focus on mass market, make prices a core competency, and
keep pursuing excellent user experience
Focus on market segments/niche markets, make breakthrough
content/specific products and strive to meet the core demands
of target customers.
Model 3
Model 4
Rely on the rich experience in telecom operation and the fixed
customer base to expand into MVNO markets
Focus on market segments/niche market and achieve
differentiation through product prices
Market segments
Mass Market
Price
Experience
Source: Deloitte Consulting Team
1
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Senior Analyst
Analyst
Analyst
Talha Nazar
Jassim Al-Jubran
Sultan Al Kadi
t.nazar@aljaziracapital.
j.aljabran@aljaziracapital.com.sa
s.alkadi@aljaziracapital.com.sa
MVNO - A new Horizon for Saudi
Telecom Sector
May 2014
Please read Disclaimer on the back
Global Dynamics
There are more than 1200 MVNOs all across the globe, out of which the highest concentration is seen in the European
region, followed by Asia Pacific. In the Western and North American region, the most developed in terms of MVNOs, the
market share has reached almost 10%, which is much higher than the global average which is around the 3%- 4% mark.
Historical Market Share
MVNO as Percent of All Wireless Subscribers
MVNO’s regional distribution
North America 43 Asia Pacific 9
CIS/EU 61
Latin America 197
Middle East & Africa 174
Europe 723
10%
9%
8%
MVNO Share of Wireless Market, 2003-2013
7%
6%
5%
4%
3%
2%
1%
0%
2003 2004
2005 2006 2007
Deloitte
GCC MVNOs
The only country in the GCC with a proper penetration of
and Renna Mobile, appear to have gained any traction in the
market. The penetration level in 2012 for MVNOs dropped
to 10.7% from 12.4% in 2011, primarily due to the closure of
one of the MVNO. Total subscriber base in 2012 for MVNOs in
Oman stood at 575,193 customers. Jordan also issued a MVNO
100.0%
10.0%
12.4%
10.9%
46.9%
46.9%
43.7%
40.2%
40.7%
53.1%
47.1%
46.3%
47.4%
48.4%
2011
MVNO
2012
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2008
2009
Oman Mobile
2010
Nawras
Source: Telecommunication Regulatory Authority
any further step were not taken in the region until Saudi Arabia issued 3 new licenses in 2013.
2
2013
6.0%
90.0%
license which was taken up by Fendi Group in 2010. However
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2012
Global Average
Oman Market Share of MVNO
Market Share
that they were to become MVNOs. Although only two, Friendi
2009 2010 2011
Source: Telegeography, Mobile-virtual-network
MVNOs is Oman. The Omani telecommunication authority
TRA awarded five Class II licenses in 2008 with the stipulation
2008
Rest of World
W.Europe and America
MVNO - A new Horizon for Saudi
Telecom Sector
May 2014
Please read Disclaimer on the back
TMVNO strategy- A Saudi Perspective
The three MVNO Operators that are looking to setup shop in Saudi Arabia are Jawraa Lebara, Virgin Mobile, and Axion
Telecom. For us to understand their strategy , it is mandatory for us to look at their past strategies to gain traction in the
respective markets.
Jawaraa Lebara
Lebara’s business model can be described as a low-cost international mobile service. The company provides Pay-As -You -Go
(Prepaid) SIM cards , targeting the international community and expatriate workers in the country. The company’s operation
are limited to the western European region and Australia, providing its services to countries like Denmark, France, Netherlands,
Germany, Norway, Spain Switzerland and the United Kingdom.
Given the company’s strategy, Lebara fits into the model four presented in the matrix on the first page. Where the company
looks to target a particular segment with competitive pricing.
Saudi perspective...
Lebara is launching its services in Saudi Arabia through the network of Etihad Etisalat Company (Mobily). Saudi Arabia has
the fourth largest expatriate population of 9.2 mn1 in the world, out of which 86% are earning below SAR 2000/month2,
pricing of the packages play a major role for such individuals. Lebara we believe will take advantage of such statistics, as its
business strategy fit perfectly into the demographics of the kingdom.
How it impacts Mobily and the telecom market?!?
We believe the introduction of Lebara will act as an extension to Mobily’s strategy. As Mobily’s penetration in expatriate
population is high, due to the company’s efforts to increase its penetration in the market. However for Zain, which has relied
heavily on cheap call rates in order to attract budget subscribers, will find it difficult to compete with Lebara, due to the
solid infrastructure of Mobily supporting the company.
However, how Lebara will impact STC will be a bit tricky to understand, as STC does have a an expatriate customer base,
which can mean a tough competition for STC.
SWOT ANALYSIS- of the MVNO (Lebara and Mobily)
Strengths
Weaknesses
• Lebara will have access to Mobily strong infrastructure.
• Lack of control over the network infrastructure,
• For Mobily this will mean additional revenue source.
• The calling rates in Saudi Arabia are controlled by the authority,
• Lebara has strong MVNO experience.
Opportunities
• An opportunity for Mobily to increase its customer base.
• A strong expatriate population.
which leaves little room for competing on calling rates
Threats
• Competition from other operator as Virgin and Axiom telecom
is also looking to enter the market.
• Dilution of the calling rates, however the rate are controlled
by the authority.
• High Mobile Penetration of 170% 3
1http://www.arabnews.com/news/464809
2 http://www.arabnews.com/news/467423
3 www.citc.com.sa
3
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MVNO - A new Horizon for Saudi
Telecom Sector
May 2014
Please read Disclaimer on the back
Virgin Mobile
Virgin Mobile is one of the leading MVNO’s in the world. Virgin Mobile branded communication service is currently available
in Australia, Canada, Chile, Columbia, France, India, Poland, South Africa, Mexico, United Kingdom and USA.
Virgin target market is the youth, broadly defined as individuals between the ages of fifteen to thirty years. The strategy of
the company is to target this market and retain its customer base through cheap pricing and a content rich environment,
something that today’s youth demand. In our view the company’s strategy fits into Model one of the Matrix.
Saudi perspective...
Saudi Arabia has a large youth population as almost 50%4 of its population is below twenty five years, which fits beautifully
into Virgins strategy. We believe due to the highly saturated market, the company will find it difficult to attract subscriber
base. However given the low market share of MVNOs, Virgin mobiles will find a sweet spot in this content hungry youth
population, to extend its business, and consolidate its position in the Saudi market.
How it impacts STC and the telecom market?
Virgin mobile is looking to enter the Saudi market on the platform of STC’s (Saudi Telecom Company) network. The company
like all other MVNOs will buy minutes in bulk from STC and resell under their banner. STC on the other hand will have
the opportunity to increase its customer base and find further penetration in the youth population. We believe with the
introduction of Virgin, the landscape of the telecom industry will see a shift since Virgins customer-centric strategy will shift
the market space and company might just be able to find space in a saturated market. As customer service has always been
a burning issue for the subscribers. If Virgin somehow is able change the customer service culture, it will create a major shift
in the industry, and benefit STC in expanding its customer base indirectly.
SWOT ANALYSIS- of the MVNO (Virgin Mobile and STC)
Strengths
Weaknesses
• Virgin mobile will have access to STC strong infrastructure.
• Lack of control over the network infrastructure.
• For STC this will mean additional revenue source.
• The calling rates in Saudi Arabia are controlled by the regulator,
• Virgin mobile has strong MVNO experience.
Opportunities
• An opportunity for STC to further consolidate its position in the
youth market.
• 50% of Saudi population is below the age of 25.
which leaves little room for competing on calling rates
Threats
• Competition from other operator as Lebara/Mobily
• Dilution of the calling rates, however the rate are controlled by
the authority.
• High Mobile Penetration.
4 Central Department of Statistics and Information
4
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MVNO - A new Horizon for Saudi
Telecom Sector
May 2014
Please read Disclaimer on the back
Porter’s Five Forces Analysis
Porter’s five forces model provides a simple perspective for analyzing and assessing the competitive strength and position
of a corporation. The model can be used to analyze the industry context in which the firm operates. The Porter Five Forces
model is a simple yet an effective tool for understanding where the strength of the business lies.
Bargaining Power of Buyers
• Buyers concentration
Threat of New Entrants
• Dependency on distribution
• Barriers to Entry
• Brand Equity
• Economies of Product differences
Threat of New
Entrants
• Switching Cost
channels
• Buyer switching cost
• Information availability
• Force down prices
• Capital requirement
• Substitute products
• Absolute cost
• Price Sensitivity of Buyer
• Industry Profitability
• Differential advantage
Bargaining
Power of
Suppliers
Competitive
Rivalry
Bargaining Power of Suppliers
Threats of Substitutes
• Supplier switching cost relative to
• Buyer propensity to substitute
firm switching cost
• Relative Price Performance of
• Impact of inputs on cost or
differentiation
• Substitute inputs
• Strength of distribution channel
Bargaining
Power of Buyers
substitute
Threat of
Substitutes
• Supplier concentration
• Buyer switching cost
• Production differentiation
• Ease of substitution
• Substandard Products
• Quality Depreciation
Competitive Rivalry
• Sustainable competitive advantage
through innovation
• Competition between online and
offline companies
• Level of advertising expense
• Powerful competitive strategy
• Firm concentration ratio
5
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MVNO - A new Horizon for Saudi
Telecom Sector
May 2014
Please read Disclaimer on the back
MVNO according to the Porters Five Forces Model
Threat of New Entrants: Medium to Low
• The telecommunication industry in Saudi Arabia is tightly controlled by the CITC (Communication and Information
Technology Commission). Therefore for any new player to come into the market it will need the ministries approval,
which could be a relatively long and bureaucratic process.
• In order to remain competitive, a MVNO has to have a minimum subscriber base to breakeven in this highly-penetrated
market (penetration levels are above 170%).
• Due to the high capital-intensive nature of the industry, new MNO will find it difficult to become competitive compared
to the existing players. However, MVNO’s can still penetrate the market as capital requirement is low.
Threats of Substitutes: Medium
• The threat of substitutes in our view for the telecom industry is medium, as there are other services in Saudi Arabia that
can provide voice and data services, albeit indirectly.
• Although Application such as Whats app and Skype can be treated a substitutes for voice and data, however usage
of these services are entirely dependent on data availability which in turn means a revenue opportunity for telecom
operators.
Bargaining Power of Customers: High
• As more telecom operators enter the market be it an MNO or an MVNO, the bargaining power of the local customers’
increases along, especially since basic call and data service are treated as commodities. Given the uniformity of services,
the customer tends to look for cheaper price options.
• For MVNOs to remain competitive, they need to retain high-quality customer service and competitive pricing policies,
which will always be a challenge to their margins.
Bargaining Power of Suppliers: High
• For MVNOs, supply side is controlled by the MNO, meaning MVNOs have very little control over the network and the
pricing of the minutes.
• The whole sale rates for the minutes and data are decided by the MNO.
• In time of peak hours, the MNO’s can allocate high bandwidth to its own network which can result in weak reception
for MVNO clients.
• Talented human capital in MVNO field are scarce in Saudi Arabia, which give them negotiation power.
Rivalry among Competitors: High
• With high penetration levels (+170%) in the telecom industry, the competition amongst its players is very intense.
• For the company to attract customers, they have to offer cheap attractive bundles, which can result in lower ARPU
(Average Revenue per Unit).
Conclusion
Based on the above information and our analysis of the sector, we believe that MVNOs will face a challenging environment
to succeed in the competitive Saudi telecom market. However, saying that, we do not intend to downplay the role that
MVNOs in the kingdom. For an MVNO to be successful in Saudi Arabia, its focus should be on filling the gaps such as
customer service, enhanced data bundling, and innovative solutions to niche groups of society. The Saudi market is
currently controlled by two major players, STC and Mobily. If the integration between the MVNO and MNO is smooth,
we believe MNO can treat the MVNO as an extension of its services, which will give it greater leverage to compete in
the market. The other scenario is for an MVNO to become a replacement of MNO, which will create cultural clash and
eventually could collapse the agreement between the two parties.
At the micro level, we believe Mobily’s alliance with Lebara will give the earlier an opportunity to consolidate its position
among the expatriate population in Saudi Arabia, given that the 86% of expat population is earning below SAR 2000/
month , for whom competitive calling rates is essential. However, what remains to be seen is how the CITC will go about
the calling rates.
On the other hand, the alliance of STC and Virgin mobiles is equally interesting. Our analysis shows that Virgin and STC
could build a successful partnership if Virgin fill the gap for STC in terms of attracting more youth and expatriates to their
customer base. Furthermore, STC could benefit significantly from Virgin’s experience in enhancing their customer services.
Virgin would provide these synergies to STC while benefiting from the wide access and large customer base of STC to
manage their profitability margins.
Zain is expected to suffer from the above developments, as its MVNO license is still facing headwinds with the regulator.
6
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RESEARCH DIVISION
BROKERAGE AND INVESTMENT
CENTERS DIVISION
RESEARCH
DIVISION
Senior Analyst
Analyst
Abdullah Alawi
Syed Taimure Akhtar
Sultan Al Kadi
+966 11 2256250
a.alawi@aljaziracapital.com.sa
+966 12 6618271
s.akhtar@aljaziracapital.com.sa
+966 12 6618370
s.alkadi@aljaziracapital.com.sa
Senior Analyst
Analyst
Analyst
Talha Nazar
Saleh Al-Quati
Jassim Al-Jubran
+966 12 6618603
t.nazar@aljaziracapital.com.sa
+966 12 6618253
s.alquati@aljaziracapital.com.sa
+966 11 2256248
j.aljabran@aljaziracapital.com.sa
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000
a.yousef@aljaziracapital.com.sa
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277
lalmutawa@aljaziracapital.com.sa
+966 12 6618400
a.almisbahi@aljaziracapital.com.sa
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547
aalrahit@aljaziracapital.com.sa
+966 1 225 6352
s.alJoauni@aljaziracapital.com.sa
+966 11 2256364
s.almutawa@aljaziracapital.com.sa
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TERMINOLOGY
AGM - Head of Research
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