AMMAN, 22 March 2004 — It is estimated that by the end of 2003, there were around 25 million mobile phone subscribers in the Arab region and the number is expected to surge to 33 million by end 2005. UAE has the highest mobile penetration rate among Arab countries of 70 percent followed by Kuwait (60 percent), Bahrain (58 percent), Qatar (45 percent), Saudi Arabia (25 percent), Jordan 23 percent, Morocco 20.5 percent and Lebanon 19 percent. The Gulf countries have a higher uptake of the mobile services in line with their high per capita income. Jordan and most of the Gulf countries appear to have reached saturation levels in terms of their addressable market.
The challenge of growth lies in both “deepening” the market, i.e. encouraging people to use their phones in more sophisticated ways beyond voice calls and simple messaging, and “broadening” the market by winning more customers, mostly those generating lower average revenues per user (ARPU), of say JD7 ($10) and below. Addressing such market segments requires serving customers who may not be profitable if judged on traditional measures. However, mobile operators in the labor exporting countries need to change their mindsets and the way they measure profitability. For example, the size of the mobile markets in Jordan, Egypt, Lebanon, Morocco and Tunisia will be under-estimated if the focus is on gross domestic product (GDP). We have to adequately account for the significant contribution that expatriates of these countries make to their respective household incomes. Gross national product which takes into account all what “nationals” produce irrespective whether they are working in the country or abroad would clearly be a better estimate. This measure would boost the market size of those countries by up to 25 percent.
Instead of making ARPU a driver for growth, operators should look at it as a performance indicator. What matters more is to compare the incremental revenues out of providing the service for new customers with the incremental costs incurred. If additional revenues exceed additional costs then provision of the service to the new customers becomes profitable. The challenge is to develop strategies that would reduce operational and capital costs. The main equipment suppliers have already developed hardware and software systems designed to enable operators to save up to half their operating and capital expenditures allowing them to service lower-spend market across large rural areas. For example, Nokia claims that its Connect GSM system will enable operators to generate profits at an ARPU level of $5 and below.
New business models could also be introduced aimed at attracting lower income subscribers. For example, lower denominated pre-paid cards that have no voice service and could only be used for SMS have proven to be a great success in the Philippines. The inexpensive cards could help attract customers’ loyalty and provide a transition service for people short of cash until they could save enough money to buy the normal pre-paid voice and SMS card. A complementary service is to provide reloading of the cards in the same low denominations electronically via SMS. This could be done through a network of retailers who use their phones to load up their customers. In the Philippines, such a retailer network reached 400,000 last year, including thousands of neighborhood stores, grocery shops, and individual agents like housewives and students. Not only would this expand the number of mobile customers, but it will also create new opportunities for mass employment in the labor exporting countries of the region.
Other industries have long made the strategic shift of serving low-revenue customers. Consumer goods manufacturers have expanded the market for shampoos, soaps and detergents, among others, by selling these products in small packages. In India for example, mini-packages costing a few US cents each made up half of the $2.4 billion sales of Unilever last year.
Deepening the market for mobile services by shifting the emphasis from penetration to usage should also enhance the profitability of mobile operators in the region. To encourage people to use their phones beyond voice calls and simple messaging requires a new business strategy where the emphasis would be on providing innovative services, superior content and entertainment applications. Multimedia messaging system (MMS) has the capacity to transform the mobile phone into a personalized audio-visual tool, capable of receiving and sending images, graphics, sound and text. One such example is for mobile users to receive Koranic verses along with audio of the verses read to them from one to five times a day based on their preferences.
Mobile entertainment applications such as games, short videos, stock market alerts, and other contents may not yet be delivering huge income to mobile operators in the region but these are promising revenue streams waiting to be developed. In addition, operators should be able to capitalize on the wireless voting phenomenon in which subscribers use text messaging to vote or decide the outcome of something (e.g. the TV show superstar). Wireless voting has a great potential as a revenue generating phenomenon.
Mobile phones and their text and multimedia messaging (SMS and MMS) have started to change the habits of mobile users. Downloading ring tones and logos had prompted the first tentative use of phone bills to pay for other small services. The next step will be to pay in the same way for internet content and other goods and services. More than a third of mobile subscribers in Japan have used their phones to buy such goods as CDs, concert tickets and karaoke songs with lyrics that bounce across the screen and there is no reason why with time this trend will not take hold in the region as well.
The way to go ahead is to form alliances among mobile operators in the region. We are seeing this happening in Europe, where nine European mobile phone operators established a continental alliance, giving their 40 million subscribers more attractive roaming tariffs on their networks and various unified services, including sending and receiving multimedia messages among independent operators, and providing corporate customers with flat rate pricing plan. By linking together, regional operators could provide their customers with an outstanding range of pan-Arab services, including rich content in Arabic far greater what each member alone can offer. Such alliances will help the smaller firms to compete more equally against the leading market players.
To conclude, mobile operators will succeed if they shift their strategy from being simply a voice channel to becoming an entertainment, as well as, transaction and distribution channel for goods and services. MMS and high speed wireless connection covering a wide area should start to generate added revenues and give mobile operators dominance over e-commerce. The region needs companies to specialize in providing content to mobile subscribers mainly the young, who constitute more than 50 percent of the population. This will allow operators to benefit also from sizable advertising revenues as they become the main channel of Internet access. The growth in the number of mobile subscribers especially those generating lower ARPU, and the higher revenue per user generated from the additional services provided should help boost profits of the region’s mobile operators in the coming few years.
(Henry T. Azzam is chief executive officer at Jordinvest.)