McKinsey Telecoms. RECALL No. 07, 2009 - B2B

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Telecommunications

High-Growth Markets

RECALL No7



5RECALL No 7 – High-Growth Markets

Contents01 High-Growth Trends: Seven Agenda Toppers for Telecoms Managers 7

02 Broadbang! Building Bandwidth in High-Growth Mobile Markets 13

03 Low End, High Yield: Bringing Mobile to the Masses 21

04 Banking on Mobility: Transactions, Technology, and High-Growth Markets 27

05 Mandating Growth: Regulating Emerging Markets 33

06 Righting What’s Wrong: Fixing Emerging Market Mobile Pricing 39

07 Paid in Full: Improving Telco Collections Performance 45

08 The Silver Lining: Downcycle-Driven Opportunities for Emerging Markets 51

09 Sub-Saharan Success: Zain’s “Wonderful World” Just Got Bigger 57

Appendix




High-Growth Trends: Seven Agenda Toppers for Telecoms Managers

01 High-Growth Trends: Seven AgendaToppers for Telecoms Managers

Mobile network operators in high-growth markets

contend with a set of challenges and opportunities very

different from those of their developed market

counterparts. These unique dynamics mean that top

management “to do” lists in Swaziland are quite

different from those in Switzerland.

The priorities of telco top managers in high-growth

markets differ significantly f rom those of their counter-

parts in more developed countries. The absence of

fixed-line infrastructure, the preeminence of prepaid

subscribers, and the evolution of innovative business

models all play unique roles in shaping these differences.

Furthermore, emerging market players can earn

outsized profits; based on ARPU (average revenue per

user) levels as low as USD 5, some operators captureEBITDA margins in excess of 50 or 60 percent. McKinsey’s

long-standing work with telcos in emerging markets

reveals seven major themes that head the agendas of most

top executives in these high-growth markets.

Managing or cash

Of course, in the current economic climate, managing

for cash has naturally become the most urgent concern

in all markets. However, there are several important

nuances when it comes to emerging markets: first of all,

there is still growth. For example, in Asia, while the

IMF lowered its growth expectations by 2 to 3 percent

during 2008, the base case still remains above 4

percent per year. More recently, decreases in fuel and

food prices helped unlock consumer spend, at least

in urban areas. Second, in general, telecoms players in

high-growth markets approach the downcycle with a

relatively stronger debt position as compared to their

counterparts in more developed markets (Exhibits 1

and 2). While wide variances exist at the company level,

depending on its leverage, we expect operators to

focus on several opportunities.

Manage risks. Successful operators will likely revise

plans to make sure that they can weather worst-case

scenarios, assess the strength of key distributors (which

in prepaid are at the crux of everyday sales and often

have weaker credit positions than large operators), and

tighten cash leakages such as price and collection.

Improve the conditions of operations. One lever is the

renegotiation of the spectrum, license fees, or theconditions of deployment (3G coverage, for example).

In many countries, regulators or governments

levied heavy duties on spectrum to take their “share” of

the telecoms bonanza. For smaller players, this

may be unsustainable; many are renegotiating this in

exchange for sustained investment, competitive

industry structure, contribution to GDP growth, and taxes.

More classical optimization, like outsourcing and

tower sharing, can also be considered as levers.

Consider consolidation. In many countries, such as India

with more than 12 operators and Indonesia with more

than 10, the debate over consolidation is open. Players in

these markets sti ll have to invest major amounts of

capital to gain coverage, and achieving a positive outcome

for all is often questioned. This of course also stirs the

interest of both emerging and developed market players



8

High-growth players are entering the downcycle with significantly stronger

portfolios …01

to expand internationally into Afr ica, Southeast Asia

(Vietnam), and the Middle East, in the hope of benefiting

from reduced valuation and fewer buyers.

Consider adjacent industry acquisitions. In the same

spirit of consolidation, healthier players in high-growth

markets also see the opportunity to shape adjacent

industries: buying players such as music labels or instant

messaging sites or acquiring banking licenses to

expand into mobile money.

Growing revenues through marketing

Given the fixed-asset nature of the industry, enhancing

revenues is an evergreen priority for telcos. What is

new is the transition of many high-growth markets to a

more mature stage of development (typically when

penetration passes 20 to 40 percent). At this point, more

sophisticated sales and marketing techniques are

necessary to increase the top line. Pricing, distribution,

marketing spend effect iveness, and Customer

Lifecycle Management are the major focuses of top

management efforts.

The distinction between visible and invisible pricing.

Pricing initiatives are ways to quickly improve a

telco’s top-line results by 3 to 6 percent. Sophisticated

pricing activities include managing the visible and invisible

elements of prices in a scientif ic manner. Two pricing

elements – on-net voice tariffs and top-up validity, i.e.,

the amount of time top-up minutes are valid for use –

are examples of the visible/invisible difference. Customers

closely watch on-net voice tariffs, but top-up validity

(while just as important from an economic perspect ive)

elicits far less consumer reaction. Shortening the

validity per iod for low top-up denominations enables

telcos to increase revenues without losing subscribers.Telcos can also employ conjoint research (similar to the

type conducted by the consumer goods industry) to

analyze customer trade-offs and determine the optimal

portfolio of brands and promotions.

Distribution management by micro-markets. A telco’s

market share may appear stable from a distance; in

reality, however, a more granular measurement may

reveal that its market share varies significantly from

city to city (up to 30 percent). As a result, telcos should

manage retail distribution channels from a lower

“altitude.”

To do so, managers should first segment retailers by

micro-market, which reveals their potential to increase

sales and allows the setting of targets and the continual

assessment of performance. They could leverage





electronic top-up (i.e., over-the-air recharge) as a fantastic

tool to gather information. Territory development

and demand stimulation efforts – such as mystery shop-

ping, sales competitions, or localized promotions –

will then need to be deployed in hundreds of micro-markets

to enhance market share (please refer to “Seeing the

Forest and the Trees: Micro-Market Channel Management”

in Marketing RECALL No5 for more on this topic).

Marketing spend effectiveness. Industry leaders thatremain successf ul during downcycles tend to refocus –

not cut – their marketing spend. In fact, industry

leaders actually spend significantly more on advertising

and SG&A (selling, general, and administrative)

costs in comparison with their less successful

competitors.

The key is to focus spending in the right areas (e.g.,

customer segments, product areas, shopper purchase

tracking, or media channels) and include tactics for

managing advertising agency relationships in the

marketing strategy. In our experience, the potential

exists to reduce (or redeploy more efficiently) marketing

spend by between 5 and 15 percent.

Customer Lifecycle Management (CLM).Telcos should

adopt a disciplined, heavily interactive approach

to personalized marketing. Maturing markets require

sophisticated CLM strategies, especially in the hard-to-

define prepaid segment. One size does not fit all, and

if a telco offers the same promotion across the board,

it will most likely see a mixed effect, increasing

revenues for certain groups, while lowering them (along

with customer satisfaction) for others. For example,

subscribers who do not use SMS would likely view a free

SMS reward as little more than irritating spam, but

might prefer loyalty points for topping up. For heavy SMSusers, on the other hand, a music download promotion

could stimulate alternative revenue sources.

Regulation: Think like a marketer

In both high-growth and developed markets, regulation

management is the first value lever, and the value at

stake can often equal 10 to 20 percent of a telco’s annual

revenues. What is specif ic to high-growth markets is

a focus on wireless, a major government focus on the

digital div ide and the development of rural areas,

and a wide variation of spectrum and license fees. As a

result, to strike the optimal balance between economics

and sustained investment, emerging market telco

leaders should aim to achieve the same levels of sophis-

tication in this field as they do in marketing, with two

main areas of focus:

… than their counterparts in developed markets02





this demand. The ARPU of “non-voice, non-SMS” data

service is now reaching 10 percent of total average

revenues per subscriber and should grow to 20 percent

over the next few years.

Social networking. As is the case everywhere, considerable

interest is bubbling up around social networking in

high-growth markets, with a special focus on mobile

phone “only.” Given the large echo this kind of connectiv ity generates, the interest is especially high

among the younger consumer generations. Software

platforms and handset compatibility remain huge hurdles

that must be overcome if this phenomenon is to become

truly widespread.

Mobile money. Given the limited reach of banking

systems in these markets, mobile money is of special

interest. From peer-to-peer remittance to payments to

full-fledged banking, mobile money is well publicized

(e.g., M-PESA in Kenya, Smart Money in the

Philippines) and being developed in many markets,

where the industry is addressing the major hurdles

of regulation and customer education.

Mobile music. Many players are exploring the

possibility of becoming distributors of full-track music.

Companies are closely monitoring examples such as

China Mobile, and industry players are slowly working

out key issues such as DRM (digital rights management),

catalog rights, and handset compatibility.

Mobile advertising. Finally, many in the industry see

advertising as the largest revenue pool beyond

connectivit y. However, models are unproven, and it

currently remains mostly in the experimental

phase. The key areas of activity include partnering with

ad network companies, profiling the customer base,

and setting up dedicated sales forces.

The undiminished importance o talent

Last but not least, the “penthouse” of the telco top

manager’s agenda should be reserved for the search for

the best talent to drive the above initiatives. The

talent shortage is particularly acute in these emerging

markets. In response, the most sophisticated players

have implemented leadership engines to ensure the

development of their next generation of leaders.

* * *

The operators in high-growth markets with the most

success wil l be the ones looking to capture immediate

growth in voice and SMS, to hone the tools and

techniques for maturing areas, and to invest in advanced

data products. By giving priority to a defined set of

initiatives, top managers in the telecoms industry in

emerging markets can place their organizations in

positions to significantly reduce their costs and realize

large gains in earnings. The following articles explore

most of these issues in greater depth.

Nimal Manuel

is a Principal in McKinsey’s Kuala

Lumpur office.

[email protected]

Noppamas Masakee

is an Engagement Manager in McKinsey’s

Bangkok office.

[email protected]

André Levisse

is a Principal in McKinsey’s Singapore

office.

[email protected]




Broadbang! Building Bandwidth in High-Growth Mobile Markets

With mobile broadband about to explode in high-growth

markets, operators must now position themselves to

capture as much of the value as possible. But are industry

players really ready to deliver all of what their customers

are after?

The challenges involved in spreading 3G throughout

rapidly growing economies differ markedly from those

experienced by mobile network operators (MNOs) in

developed markets. Unlike their counterparts, MNOs

doing business in high-growth markets are required

to effectively manage a broad spectrum of customers.

To be successful in doing this, they will need to over-

come a number of unique hurdles that range from low

income levels to low broadband awareness as they

sort through the multitudes of technology options. But

the effort is clearly worth it – emerging market broadband will represent a USD 60 billion opportunity by

2011, when more than 200 million new customers

enter the market.

Understanding customers

Operators can start to manage this customer range by

fully understanding the nature of demand for wireless

broadband in the market. First, it is important to clearly

differentiate between PC-based and handset-based

data traffic, as the nature of demand and adoption

bottlenecks wil l differ between the two. In fact, a large

portion of new emerging market wireless broadband

growth is directly linked to PC-based demand, since

alternative wired infrastructure is often underdeveloped

and wireless technologies are unlocking latent PC

broadband connectivity demand.

Also, operators can benefit from thinking in terms

of segments, often based on a combination of customer

profile and geographic environment that determines

the cost to serve (Exhibit 1). The spectrum of broadband

customers in emerging markets ranges from the

high-end aff luent to low-end aspirers, with a growing

“middle class” (those on the lowest economic rungs

typically can afford neither traditional mobile nor

wireless broadband service). Within the high-end segment

(typically 5 to 15 percent of an emerging market’s

population and concentrated in large urban areas), demand

characteristics look similar to those of developed markets.

For example, in the longer term, it is expected that

these customers will adopt high-speed fixed broadband,

developed by incumbents or fiber attackers in the

leading cities. The fast-growing middle segment, typically

constituting 40 to 60 percent of the population, is wherethe action is. Middle-segment households already enjoy

significant levels of mobile penetration (80 to over

100 percent) as well as rapid PC uptake, followed by broad-

band growth. These customers provide an interesting

pool for mobile broadband and typically represent the

battleground between mobile and fixed. For the low-end

segment, usually found in rural areas, wireless broad-

band may be the only economically viable access option.

Finally, managers require a sure way to assess the

current status of an emerging economy’s mobile broadband

market. By examining affordability and analyzing

barriers across the “adoption funnel,” marketers can

define the addressable market (i.e., the share of population

that can economically afford broadband at entry level

cost) and then break it down to understand PC penetration,

broadband adoption, and their own operator’s share.

02 Broadbang! Building Bandwidth inHigh-Growth Mobile Markets



14

The adoption funnel shows that the bottlenecks in and

barriers to broadband adoption often vary by country

and customer segment. For example, in Eastern Europe,

the main adoption bottleneck is low PC penetration,

while affordabilit y is no longer a problem. In Brazi l,

affordability remains the main issue, while in Russia,

the adoption of broadband by existing PC users is the issue.

In some of the least developed emerging countries,

such as Nigeria, affordability and low PC penetration both

heavily constrain market performance.

Once marketers identify the key bottlenecks, they are

able to address them directly. They can overcome

affordability issues, for example, by preparing low-cost

entry plans, partially subsidizing equipment, or

enabling new payment plans such as monthly installments.

Marketers can also boost awareness through strengthened

market support and communication campaigns;

and increase broadband attractiveness by intensifying

partnerships with content developers and financing

the creation of local content.

Key trends in mobile broadband

The direction of wireless broadband development greatly

depends upon the exact market contexts that exist

in various cities and regions. In high-end urban areas,

for example, wireless broadband cannot compete

head-on with the aggressive rollout of fiber infrastructure.

Wireline attackers in Moscow have covered over

700,000 households with fiber in just two years, using

innovative rollout approaches. As a result of this rapid

coverage, wireless broadband competes only for “on the

move” customers.

In some markets, wireless broadband is becoming the

dominant solution, leaving fixed-line behind. South Africa is seeing wireless data services beginning to take

over the broadband arena, capturing nearly 60 percent

of the market in early 2008. Mobile operator Vodacom

began aggressively rolling out its 3G network and was

followed by others. As a result, from 2004 to 2008, the

local incumbent telco has seen its broadband share

drop from 91 to 42 percent, as the market grew from a

few thousand to about one million mobile subscribers.

In other markets, wireless broadband competes head-on

with fixed. Poland’s mobile players are pushing out

independent providers and putting the incumbent under

pressure. Mobile players have increased their broad-

band share from about 5 percent in 2005 to over 20 percent

two years later via aggressive marketing campaigns.

Market research there shows that the vast majority of

wireless broadband subscriptions are for home and

Different market realities exist in terms of customer demand and potential

broadband adoption01





office usage as a substitute for fixed broadband. Other

wireless technologies are also competing for this

market. While WiMAX gets the majority of media coverage,

the most successful non-3G wireless deployment

is the WiFi-based solution that has become the leading

broadband access technology in the Czech Republic,

ahead of DSL.

In the least developed markets, several barriers limit

mobile data usage, such as lower household incomelevels and nonexistent PC penetration. Other hurdles

include limited data services promotions and a

lack of GPRS (i.e., 2.5G) handsets. Nonetheless, some

operators have managed to grow data revenue by

concentrating on their 2.5G networks. These companies

realize they must focus on reducing the key barriers

and bottlenecks in order to monetize their existing 2.5G

infrastructure before they begin to invest in next-

generation networks.

In some markets, such as Malaysia, regulators attempt

to influence the direction of market development in

holistic ways, seeing things differently than regulators

in the developed world. For instance, there are huge

variations in population size and mobile broadband

coverage, and lower household income levels severely

inhibit uptake. As a result, these regulators seek

to establish an approach to regulatory policies that is

mindful of these factors in order to achieve maximum

possible broadband rollout speed and coverage,

while considering the entire spectrum of potential

technologies.

Optimizing 3G network investments andstimulating demand

Countries without developed fixed-line infrastructurecan make up for their “copper” shortfall via the quick

rollout of 3G, thus positioning wireless as the primary

access technology. However, to succeed, operators

should maintain tight control of their economics. McKinsey

experience shows that 3G profitability has a very

concrete set of drivers. In a case example, one operator

found that its 3G economics were extremely sensitive

to two factors – success in selling data cards at given price

points and efficiency of the organization’s capex –

which were highly inf luenced by the smart management

of network capacity (Exhibit 2).

This sensitivity raises three key questions regarding 3G

wireless broadband deployment:

What game to play. This choice can be viewed in terms

of two factors – whether a countr y has obsolete or

3G profitability depends on a number of drivers02



16

modern fixed-line broadband infrastructure and whether

it has low or high broadband development (in terms

of affordability, PC penetration, etc.). These factors allow

managers to ultimately identify three main strategic

positions. The first, high (or growing) market development

but obsolete fixed broadband infrastructure, positions

mobile broadband as a primary access technology. In this

case, operators should push mobile 3G PC cards and

modems as a primary broadband service, which is the

case in South Africa.

In markets with modern fixed infrastructure and high

market development, two options emerge. In the f irst,

mobile PC cards compete with fixed-line as the primary

broadband service, as is the case in Poland. In the

second, mobile broadband is a complementary connection

to fixed-line service, as in the Czech Republic. When

a market has obsolete fixed infrastructure and low market

development, such as in Tanzania, operators can focus

on a handset-based broadband strategy that targets the

medium/low mass market along with a wireless PC

card strategy for businesses and premium-segment

consumers.

Whatever the strategic option, first movers tend to

capture competitive advantages, but they must achieve

critical network coverage in order to see strong

Usage caps can reverse the decline in profitability03

subscriber take-up rates. In addition, an operator’s

ultimate mobile broadband market share depends

on the competitive context of both mobile and fixed

offerings. For example, while mobile broadband

continues to outpace f ixed service in Poland, operators

have been unable to maintain their price premiums

compared to ADSL. In the Czech Republic, however,

where mobile complements f ixed broadband, players

maintain a sizeable price premium.

How to deploy the network. Experience suggests that by

taking a granular approach to network rollouts, MNOs

can combine 3G technology with their 2.5G initiatives to

optimize both capex and future economics. When

modeling a 3G rollout plan, the “fixed-like” component

of demand is more relevant than it is with traditional

mobile voice services. Thus, efficient network design

requires a new approach and a new set of skills. One

operator found that the best approach involves a rollout

featuring a mix of full 3G, 3G/2.5G, and 2.5G-only

coverage, resulting in a balance of costs and potential

revenue over time. MNOs can also employ low-frequency

spectrum to achieve rapid coverage at initia lly lower

capex levels. By deploying 3G at 850 MHz, Australia’s

Telstra gained a dominant position in the 3G market

in just three years. The availability of this spectrum

along with the expected “digital dividend” from the



demise of analog TV will have a substantial impact on

MNO economics.

Managers should recognize that their success in driv ing

dynamic increases in data use can have a negative

impact on the network’s quality of service (QoS), costs,

and profitability. Fueled by unlimited data plans,

data traffic continues to grow rapidly, forcing operators

to upgrade their networks. Consequently, data capacity bottlenecks in network backhaul and access areas can

cause QoS to deteriorate, requiring additional capex

investments that put profits at risk or significantly

compromise customer experience. One company facing

this issue used a cost-efficient spectrum management

approach to improve its network capacity, which ranged

from deploying additional spectrum in 2.5 GHz and

800 MHz to spectrum refarming (i.e., clearing frequencies

from low- to high-value applications).

How to manage offers, pricing, and sales. Broadband

pricing also requires a new approach from MNOs. As

opposed to voice, data traffic can quickly require variable

capex to meet demand, handsets don’t factor into

PC-based solutions, and the traditional advantage of

“on net” disappears.

This has broad implications for the offering. For example,

the economic risks of flat-rate plans are very significant.

Wireless broadband offers should avoid full flat-rate

solutions and, instead, at the very least include usage

caps beyond which pricing switches to a metered

“per kilobyte” mode (Exhibit 3).

Such a strategy enables operators to protect their network economics from subscribers with heavy bandwidth

usage profiles. This solution raises another interesting

question regarding how MNOs might deal with

consumption above the initial cap. Limiting download

speeds instead of pricing per kilobyte has proven to

reduce the risk of alienating customers in the short term,

avoiding unexpected large bills from the operator.

In constructing offers, operators should tailor their

product and pricing designs to fit the needs of specific

customer segments in order to balance attempts to

stimulate demand against profitability targets. This

process begins with a robust market segmentation

that identifies significant customer clusters (“mobility

and coverage seekers,” “price-sensit ive light users,”

etc.). Managers can also develop simulations of key

offerings and focus on creating a portfolio of offersthat generates the highest possible marginal EBITDA

levels by working to understand the price elasticity

of individual products by segment.

One Eastern European market experienced explosive

mobile broadband growth, but operators nonetheless

maintained their price premium over DSL service through

intelligent bundling (fixed-mobile or laptop data),

minimizing head-on competition with DSL. These latter

laptop/data bundles – while proving exceptionally

effective in luring subscribers, as is the case in many

markets – can pose risks if not managed well. One

operator launched such a deal with great initial fanfare,

only to be compelled to discontinue it weeks later

due to unworkable economics.

* * *

Mobile broadband has a bright future in emerging markets

when operators focus on managing their unique

customer segments and establish programs to address

the challenges these markets present in terms of

affordability, PC penetration, and awareness. Operators

can also choose the right competitive game to play, work

to deploy their networks effect ively, and commercialize wireless broadband using smart pricing and bundling

approaches. Experience-based approaches for overcoming

these challenges already exist that can help operators

in the pursuit of large-scale broadband penetration around

the world.





18

Lukasz Dobrowolski

is an Associate Principal in McKinsey’s

Warsaw office.

[email protected]

Jindrich Fremuth


Prague office.

[email protected]

Nicolas Borges

is a Director in McKinsey’s Madrid office.

[email protected]

Daniel Boniecki

is a Principal in McKinsey’s Warsaw office.

[email protected]




Low End, High Yield: Bringing Mobile to the Masses

Four out of five people in emerging markets live in areas

covered by mobile networks, but less than half currently

subscribe due to an inability to afford a handset that

can cost up to 30 times their daily wage. Removing this

barrier would open up a massive new segment for

profitable growth.

Serving the low-end segment can be a big deal in many

parts of Asia, Africa, and South America. Operators

that step out of their business comfort zones to seed their

markets with low-cost handsets are already seeing

returns that, to date, far outweigh any risks. According

to the World Bank, more than half of the people in

today’s emerging markets – close to three billion – live

on less than USD 2 per day. With a typical mobile

ARPU (average revenue per user) of USD 3 to 8 per month,

this segment represents a large slice of potential wireless demand in emerging markets. However, the

majority of this potential remains unreachable,

with mobile penetration typically ranging from only 7

to 40 percent, depending upon geography (Exhibit 1).

This trend continues despite the fact that network

coverage is no longer the main bottleneck to joining the

mobile world in these markets.

Handset prices are key to adoption

With handset prices starting at USD 35 to 60, it’s not

surprising that the phone’s cost presents the main

barrier to adoption for the low-income segment (Exhibit

2). In contrast, airtime affordability is a minor

concern, and in terms of demand, only a few people say

they don’t need a mobile phone. Nonetheless, most

operators focus on tailoring their price plans, marketing

messages, and distribution strategies to the low-end

segment, leaving handset provisioning to manufacturers,

local importers, distributors, and traders. Operators –

specifically those offering services under the GSM

standard, where SIM cards and handsets are typically

uncoupled – often make the argument that handset

marketing and distribution are not their core business

and that the risk of obsolete stock or failure to recover

handset subsidies outweighs the low value these prepaid

customers offer, but this is not necessarily the case.

One African operator found that it could profitably

accelerate adoption by marketing low-cost handsets to

its low-end customers. By reducing the street price of

basic handsets, this company was able to substantially

increase mobile penetration and acquire millions of

additional customers.

McKinsey research shows that in most African countries

the retail prices of basic handsets start at USD 35 in

large cities and quickly rise to as much as USD 60 in more

rural areas, as local distributors and shops set their

own prices and margins. Furthermore, the much-talked-

about USD 20 refurbished or secondhand phones

find few purchasers, as low-income customers shun the

risk of buying a faulty phone. To them, this cost is very

high, and – in an environment where service guarantees

and skilled repair technicians are uncommon – the device

simply has to work. Experience suggests that three factors

drive the retail prices of basic handsets, and it is within

mobile operators’ power to influence each one of them.

Reach of the distribution network. Handset manufac-

turers typically work with national or regional distribution

03 Low End, High Yield:Bringing Mobile to the Masses



22

partners that focus on large cities (where distribution

is easier) and depend upon local traders to move products

in rural areas. Manufacturers exert little control in

these rural areas and, as a result, traders and shops set

their own prices and margins – often selling handsets

for twice the city price.

McKinsey found that an operator can easily remove

existing price premiums in these regions by marketing

and distributing a homogeneous offer through its owndistribution network/partners. The combination of

promoting the offer (e.g., via radio or posters) and selling

handsets in selected shops usually has the effect of

driving the retail prices of all handsets in rural areas

down to urban-market levels.

Import taxes. The cost of importing handsets – just from

a tax perspective – can reach 35 percent, dramatically

hindering mobile adoption. Because operators already

pay hefty amounts of tax on mobile revenue, they

are excellently posit ioned to argue for the economic and

(even) tax benefits of reducing import taxes on

handsets. While subject to the specific context, we found

regulatory authorities in emerging markets quite

receptive to the idea of adjusting their legislation in

this regard as part of a broader effort to close the

“digital divide.”

Value proposition and subsidy level. Research indicates

that a handset price level of USD 15 to 25 would unlock

demand in most of the targeted segments. It was also

discovered that everyt hing not related to voice/SMS

capability, robustness, battery life, or brand endorsement

can be dropped. Adjusting to these feature requirements

would minimize the need for handset subsidies, which

might still be required in minor form in certain regions.

McKinsey has also determined that even with a monthly

ARPU of less than USD 10, the payback time of such aprice drop would typically be under three months.

Driving low-end penetration

To get the maximum value from pushing ultra low-cost

handsets (ULCHs) in emerging markets, operators

can launch the following initiatives in an integrated

approach:

Source firsthand, USD 20 handsets if not currently

available in-market. While branded handsets are

preferred – part icularly by young, brand-conscious

aspiring customers – they can be too costly. As an

alternative, several Asian manufacturers have chosen

to offer minimally specified white-label handsets that

provide acceptable quality levels. Indian mobile

operators have been adept in sourcing entry level devices

Mobile penetration ranges from 7 to 40% in many emerging markets01




Low End, High Yield: Bringing Mobile to the Masses

from, for example, Chinese manufacturers, but this is

not yet widely practiced across Middle Eastern or African

markets. While orders of these handsets need to reach

an initial minimum amount, volume-related discounts

beyond this threshold tend to be small, since manu-

facturers readily pass on the scale discounts they achieve

by bundling demand across multiple operators.

Develop a marketing and distribution approach for

ULCHs. Depending upon the existing distributionlandscape, operators may need to leverage their own

channels in order to market and distribute these

handsets. To ensure price compliance (and to avoid

having subsidies end up in the pockets of traders,

distributors, or shopkeepers), operators should focus

primarily on trusted indirect channels as their

preferred choices; these typically include operator-

owned stores and top distributors. This trusted

set can be complemented with occasion-specific sales

measures (e.g., around sports events or other social

gatherings) or operator sales vans that sell at local markets

and events.

Set subsidy levels and monitor payback times.

Handsets represent very high costs for mobile operators

compared to SIM or scratch cards. Obsolete phone

stock, along with ineffective subsidies, can put a sizeable

hole in an operator’s EBITDA. As a prevention measure,

companies should monitor four key profitability drivers:

Cost per handset/SIM sold, including the handset

subsidy, incremental marketing and distribution cost,

and the cost of bundled airtime

Activation rates or the percentage of handsets/SIMs

sold that are activated at customer level and that

consume more than the bundled airt ime (to mitigatefraud within one channel)

Incremental revenue for activated SIMs, which

includes outgoing traffic and a share of the incoming

traffic (i.e., the portion of traffic that would not

have occurred if this low-end customer had not been

activated)

Contribution margin from incremental revenue.

Managers can calculate payback time using the above

profitability drivers. Operators should typically set

subsidy levels to drive penetration, but keep the payback

time within a three- to six-month range.

Encourage usage and prevent seasonal churn. Once

an operator sells the handset and SIM to a low- income

Handset cost is the main barrier for the low-income segment02



24

customer, persuading him or her to use it becomes

the primary goal. First, bundling the package with free

airt ime is a must. Second, operators can drive

micro-segment campaigns through SMS or via local

sales outlets to stimulate recharging and continued

usage. Third, operators can encourage usage by providing

additional airtime on a more periodic basis via

“above-the-line” offerings, e.g., a credit for incoming calls.

Finally, this segment is prone to high “seasonal”churn levels because customers go through long periods

with very little income (e.g., outside of the harvest

season). Bridging these periods enables operators to

capture customer mobile spend during the “richer”

period. Again, providing low levels of credit to maintain

activity can help here.

* * *

Operators can boost mobile penetration in emerging

markets by ensuring the affordability and availability

of basic handsets. This may require sourcing, subsidizing,

and marketing both in urban and rural areas, which

operators typically consider risky and distracting from

the core business. Achieving the next wave of mobile

penetration, however, is their core business, and the lack of handset affordability is a key barrier that must be

overcome.

Pär Edin

is a Principal in McKinsey’s Stockholm

office.

[email protected]

Zakir Gaibi

is a Principal in McKinsey’s Dubai office.

[email protected]

Martijn Allessie


Amsterdam office.

[email protected]

Fabian Blank


Berlin office.

[email protected]



27

Mobile communication technology has transformed

daily life, simplifying routine tasks for customers

while creating value for operators. In high-growth

markets, a significant part of this value may lie

at the intersection of mobile telecommunications and

banking.

The benefit of mobile communication to society is huge –

according to a McKinsey study, mobile communication

and its auxiliary industries contribute to 0.7 percent of

India’s GDP and 3.8 percent of China’s. Beyond this,

the mobile industry is already starting to change a very

basic aspect of our everyday life – the way we handle

money. Cash may be king, but in large emerging markets,

it impedes financial efficiency: sending money home

requires paying high fees, getting personal loans or making

deposits demands 100 kilometers of sweaty travel,running a small shop in a remote area means hiding cash

under the mattress, and paying salaries sometimes

requires secur ing weekly cash transfers in unsafe or

corrupt environments.

Owing to a couple of major pioneers in the Philippines –

Smart Communications in 2001 and Globe in 2002 – as

well as MTN in South Afr ica in 2003, mobile

communication towers and electromagnetic waves have

brought banking services to handsets. At the same

time, operators are able to net a handsome share of

revenue and enjoy a more loyal subscriber base.

With the potential to bring banking services even closer

to customers and, indeed, to unbanked customers,

the nascent mobile banking industry has demonstrated

that money can be mobile. The mobile phone is

capable of performing a full range of activities, including

transferring money; paying for utilities and bus fares;

purchasing at vending machines and shops; providing

banking services, such as deposits at service centers

instead of just banks; and providing enterprise ser vices

(Exhibit 1).

A customer perspective

On Sunday morning, a Filipino maid hands cash to a

remittance clerk in a shopping mall near her home in

Singapore. Her e-money wallet on her mobile telephone

network (no transfer information is stored in the

handset itself ) is credited. Minutes later, she sends USD

5 to her younger brother at Ateneo de Manila University

for his birthday and USD 100 to her parents in North

Luzon – an amount they receive from her on a monthly

basis. They each receive a text message notify ingthem of the transaction and instantly gain access to the

money, which they can then redeem at a local reseller

store (30,000 existing to date) or at an ATM. They can

also pay for goods or utility bills, transfer money to

others, or load airtime onto their phones.

Mobile’s unique role in high-growth markets

While some of these mobile banking applications have

been widely discussed over the last decade, for

developed markets – mainly focused on micro-payments –

high-growth markets have distinct interests:

Little need for payment alternatives. Cash as primary

payment method is very practical in economies

where labor is cheap and waiting t ime is not an issue.

sales excellence in contact centers (Exhibit 1).

04 Banking on Mobility: Transactions,Technology, and High-Growth Markets

RECALL No 7 – High-Growth Markets

Banking on Mobility: Transactions, Technology, and High-Growth Markets



29

Enterprise service fees. These could be on the order of

a magnitude of 0.1 to 1.0 percent of salary cost for

enterprise payroll or supply chain management.

Commerce and advertising. Although estimates at

this stage would be speculative, there is great potential in

bringing commerce and advertising to mobile.

Security. Governments often see additional benefits fromthe safety aspect of digitized cash and the social impact of

bringing banking services to the unbanked.

Creating the ecosystem

Many electronic money experiments in developed markets

have been stopped, such as Visa Cash in the United

States and Mondex in the United Kingdom (both in 1998).

There are, however, four main hurdles to creating such

an ecosystem in emerging markets.

Achieving regulatory balance. The concerns of regulators

range from preventing money laundering to managing

the money supply. Many concerns are genuine, for example,

those around the proper due diligence of loan seekers.

However, many impediments to mobile commerce exist

because regulators have not yet created the right set of

rules to make mobile commerce work. For example, there

is no clear demarcation between what kinds of phone

connections are permissible (prepaid or postpaid). There

are insufficient financial limits on mobile banking

transfers between bank accounts and a lack of know-

your-customer norms for mobile banking. Given

that mobile banking is on the frontier of innovation in two

critical industries, regulators are even more risk-averse.

It thus becomes imperative that companies proactively

shape their regulatory environments, helping regulators

understand how mobile banking operates and its impact

on public policy. Regulatory challenges range from

macro-issues – such as control over money supply – to the

operating detail of authorizing non-bank agents to

take deposits to projecting liquidity ratios. The creation

of mobile money, for example, reduces the amount

of cash in the economy while formalizing transactions

that would have otherwise been unrecorded in cash

economies. Regulators must also look to modify regulations

without compromising their original purpose. For

example, a strict proof of identity is needed to transfer

money through banks. However, if transact ion

amounts are very small – say, only USD 5 – then identity

verification could be relaxed. The Philippines

provides a good example of a stable yet flexible regulatory

environment. Its central bank works closely with

the operators of Smart Money and G-Cash to establish

appropriate regulations, allowing healthy growth

of mobile money.

Choosing a model. Mobile money sits at the intersection

of banking and mobile telecommunications, requiring

expertise in both fields. There are two models that can be used to exploit this opportunity: telco-led mobile

money requires a telco to obtain a banking license or

special mobile money license and fully own the

customer transaction details and operations. Clearing

would be undertaken by the telco. Telco-enabled

mobile money uses the telco as a channel for a bank,

which takes or keeps ownership of customer accounts

and is responsible for the marketing and sale of

mobile banking products. Of course, combinations of

these two models, such as which financial services

are offered in Model 1 and how many banks are enabled

in Model 2, are possible. McKinsey believes there is

no overwhelmingly superior solution and the outcome

will be highly dependent upon the aspirations of the

players.

Selecting the best technology.In emerging markets, due

to the reduced focus on vending machine payments,

the SIM card offers the most appropriate security. Loaded

with an application, it not only stores encrypted

data, but can also encrypt communication to and from

the network-based wallet. The other important

technology is the communication interface. A simple and

intuitive interface is essential to minimize user

difficulties. SMS, with which data can be encrypted beforetransmission, offers the best blend of simplicity and

security for markets with highly literate populations. In

countries where literacy is less widespread, such as

South Africa and Zambia, an intuitive, menu-based

interface may be a better choice.

Educating the market. A great deal of education is

necessary to ensure that customers place their faith and

money in the technology and adopt mobile banking.

During the launch of iMobile – a phone platform for mobile

banking – the Indian bank ICICI sent its customers

SMS alerts and WAP links to detailed information on

installation and use, together with an animated

online demo. Experience has shown that the journey

should start with receiving money through mobile

phones. Thus, players’ attention should focus on appli-

cations such as salary payments via mobile phone or


Banking on Mobility: Transactions, Technology, and High-Growth Markets



30

domestic and foreign remittances. Spending or outflow

then becomes natural.

* * *

With all of its direct benefits and positive social values,

mobile money may be growing faster in high-growth

markets than electronic cash in developed markets. The

opportunity to radically transform money and bring

new benefits to consumers may be at hand. Transformation

will require the alignment of an ecosystem in each

country among banks, regulators, telcos, and device

manufacturers. Whi le not a simple task, it may be less

diff icult than the task of shaping the new form of

communication that telcos have undergone over the last

15 years. A pioneering spirit from operators and

financial institutions is required, but the technology and

the customers are already there!

Noppamas Masakee


Bangkok office.

[email protected]

John Rubio


London office.

[email protected]

Nimal Manuel

is a Principal in McKinsey’s Kuala Lumpur

office.

[email protected]

André Levisse


office.

[email protected]

Jia Jih Chai

is an Associate in McKinsey’s Singapore

office. [email protected]



33

Emerging markets are the rising favorites of operators

with a taste for double-digit grow th. Sustaining

growth at these levels, however, will require substantial

future investments, which wil l only be possible if

operators work in close cooperation with regulators to

design policy frameworks that match the realities

of high-growth markets.

With mobile penetration rates rising by more than 30

percent annually from 2003 to 2007 and broadband

increasing by more than 50 percent per year during the

same period, high-growth markets – at first glance –

appear to offer telecoms players the chance to revisit

the glory days of developed market expansion. Despite

strong growth, emerging market penetration levels

lag far behind those in mature markets, and operators

still need to make massive investments in order toclose the gaps. For example, the public telecoms per

capita investment for OECD members from 1997

to 2005 averaged USD 135, while the emerging markets

as a group spent about USD 55. In order to reach

OECD investment levels, these emerging markets will

require additional annual investments of about USD

250 to 400 billion.

In addition to low investment levels, high-growth markets

are also characterized by a bias toward mobile, the

sector with the most growth. Mobile revenues grew at

around 10 percent annually from 2003 to 2007,

while fixed-sector revenues declined by 8 percent per year

during the same period of t ime. For instance, in

terms of infrastructure, between 2001 and 2007, mobile

investments in one Latin American country nearly

doubled, but fixed-line spending dropped by half. The

fixed telecoms market’s investment decline creates

an extra chal lenge for operators attempting to develop

next-generation fixed infrastructure.

Finding the cash to make either mobile or f ixed-line

investments could be a challenge for many operators in

high-growth markets due to the substantially lower

average revenue per user (ARPU) levels they see compared

to more advanced telecoms markets.

For example, while monthly broadband ARPU in developed

markets averaged USD 40 in 2007, emerging markets

in the Asia/Pacific region generated only an average of

USD 12 and operators in the Central and Eastern

European (CEE) nations received about USD 18. Likewise,

monthly mobile ARPU for operators in developed

nations averaged USD 45, while Asia/Pacific high-growthmarkets generated just USD 8 per user. In the CEE, the

average was USD 11.

As a result, in most emerging markets, the industry

will probably not generate the cash needed to increase

investment levels. Taking Chile as an example, a

McKinsey analysis shows that although the industry

requires infrastructure investments of USD 3 to 4

billion, the best-case scenario is that it will generate just

USD 1.1 billion in cash available for investments.

Reaching connectivity targets would require approximately

ten years of incumbent fixed cash flow in Chile.

Operators facing this investment challenge need to work

with emerging market policy makers in order to adopt

an appropriate regulatory framework – one that is specific

to their circumstances and encourages the industry

to continue its healthy development.

05 Mandating Growth:Regulating Emerging Markets


Mandating Growth: Regulating Emerging Markets



34

Developed market regulations won’t ft

Given this significant investment challenge, McKinsey

asserts that operators should collaborate with

policy makers to avoid importing regulations from more

developed countries that will hamper – not help –

high-growth markets. That’s because these countries

differ fundamentally from developed economies in

several ways.

First, these markets typically feature a rapid pace of

market liberalization. But “fast forwarding” the

rules that regulators have applied in developed markets

robs emerging market incumbents of the transition

time needed to prepare for liberalization, unnecessarily

exposing them to competition. For example, many

high-growth markets reduced their fixed interconnection

rates much faster than did their European counter-

parts (i.e., in 15 months instead of 4 to 5 years) and thus

missed the opportunity to properly increase their

fixed-line access fees.

Second, the high revenue concentrationseen in emerging

markets that accompanies high-income concentrations

can encourage cherry-picking behavior from new

competitors in terms of both customers and geographies.

This increases incumbents’ exposure to the effects

of changes in regulation in their most profitable

markets. One incumbent realized that more than half

of its long-distance revenue came from the top 10

percent of its subscriber l ines (Exhibit 1). Once market

liberalization occurred, the incumbent experienced

a revenue decline of more than 45 percent, as alternative

operators began to target these lucrative customers.

Third, the emerging market’s low retail prices reducethe room for obtaining an acceptable rate of return on

investment. Unlike in European markets, where

the fixed-to-fixed retai l-to-wholesale call charge ratios

range over six times higher, high-growth markets

offer little room for “European style” wholesale regulation.

Beyond simply not generating enough revenue to

cover needed investments, the significantly lower prices

in emerging markets mean few opportunities for

wholesale pricing regulatory intervention.

Finally, an emerging market’s low fixed network quality

levels increase the need for larger investments.

Telephone faults in high-income countries typically

average about 6 per 1,000 main lines per year,

while low-income countries can see annual rates as high

as 60 per 1,000 main lines.

High revenue concentration in one customer subset can lead to sharp,

post-liberalization decline01




Mandating Growth: Regulating Emerging Markets

Each emerging market group requires its own regulatory alternative02

Adopting regulations that work

In order to fashion mandates that address the realities

on the ground, regulators need to first establish how

many different types of markets exist. McKinsey’s

research points to three distinct groupings within

the larger set of emerging markets. Each of these wi ll

likely require its own unique regulatory approach

(Exhibit 2).

Group 1 consists of emerging markets characterized by a

per capita GDP below USD 5,000 (all per capita GDP

levels are in purchasing power parity – PPP – terms) and

low fixed and mobile service penetration. Group 1 markets

need to focus on providing incentives for investments

in the sector focused on ensuring voice access by

increasing mobile penetration via universal coverage

obligations. Once voice access approaches the 50

percent level, policy makers should also focus on fixed

networks in order to promote broadband penetration.

Group 2 markets consist of transition economies with

high mobile penetration levels and a GDP per capita

that ranges from USD 5,000 to 20,000. These countries

should focus on boosting broadband penetration and

on planting the seeds of regulatory measures to increase

competition levels in the mobile sector. Regulators

can promote broadband penetration by encouraging

investments in f ixed networks, particularly the

provision of fiber broadband in selected areas.

Group 3 countries are mobile leaders with high income

levels (i.e., GDP per capita of USD 20,000 or more).

They feature very high mobile and moderately high fixed-

line penetration. Countr ies in this group should focus

on increasing broadband penetration while establishing

fair competition between mobile and fixed players. They should also promote lower prices and quick adaptation

of new and innovative services.

Regulators can consider innovative solutions focused on

three key levers to support emerging market infra-

structure development. The first lever involves regulatory

wholesale obligations – how the market maintains open

networks while also achieving revenue and profitability

targets. The second focuses on regulatory pricing

concessions – options such as pricing relief or guaranteed

return on investment schemes. And finally, government

support can play a major role – the availability of creative

mixes of funding and nonfinancial mechanisms and

how industry players can use them. Markets may require

a combination of these levers to reach the desired levels

of connectivity and ensure competition and consumer

choice.



36

Israel offers yet another example of the effectiveness

of a custom-tailored regulatory policy. In 2001,

Israeli household broadband penetration

(at 2 percent) lagged behind that of other nations

(e.g., 49 percent in South Korea). Therefore, thegovernment established a committee to assess the

best way to foster the broadband market without

hurting consumers or the industry. Taking into account

the country’s specific characteristics (e.g., small

size with concentrated population, two parallel

countrywide networks, and alternative fiber-based

networks), the committee recommended that

regulators halt plans to introduce local loop unbundling.

As a result, broadband coverage jumped nearly 75

percent between 2001 and 2007, while prices declined

by more than 15 percent during the same period.

Tailored Solutions: Regulatory Success

in Malaysia and Israel

Malaysia provides a great example of an original

regulatory solution; one customized specifically to

meet the country’s needs. Engaging all three levers,

Malaysia developed a three-tiered approach for

deploying broadband. It first covered major economicareas, such as Kuala Lumpur, with high-speed

broadband (HSBB) and broadband to the general

population (BBGP). Next, it covered general public

areas using BBGP, thus encouraging competition

among wireless technologies such as 3G and WiMAX

as well as fixed-line options. Third, in rural areas,

it established “public hot spots” in places such as

schools. These access areas featured BBGP as a

first step in closing the country’s digital gap. With the

policy in place, the country plans to take broadband

penetration from 18 to 50 percent in just two years.

* * *

High-growth markets differ from developed economies

in fundamental ways, which is why it makes little

sense to impose detailed regulations from one reality

into another. Instead, countries that custom-tailor

their regulatory policies in ways that support customer

choice and protect the industry structure often achieve

much greater success in encouraging infrastr ucture

investments and development.




Mandating Growth: Regulating Emerging Markets 37

Mehmet Guvendi

is a Principal in McKinsey’s Istanbul office.

[email protected]

Sergio Sandoval

is a Strategy Practice Expert in McKinsey’s

Brussels office.

[email protected]

Luis Enriquez

is a Principal in McKinsey’s Brussels [email protected]

Ilke Bigan

is a Principal in McKinsey’s Istanbul [email protected]

Ashish Sharma


Singapore office.

[email protected]

Oleg Timchenko


Moscow office.

[email protected]



39

Pricing excellence in emerging markets requires an

approach that balances macroeconomic factors and

competitive intensity with evolving customer preferences.

Operators often leave money on the table by assuming

that a one-size-fits-all solution exists.

Achieving pricing excellence in emerging markets is

a unique challenge, given the high subscriber growth,

lower customer sophistication level, and evolving

regulations. Mobile network operators (MNOs) in

emerging markets are quickly learning that speed of

execution is often more important than analytical

sophistication when designing price plans to capture a

share of the increasing subscriber base. Most

operators continue developing oversimplified price

structures to drive adoption, which is understandable,

given the significant growth observed in severalemerging markets – as high as one million subscribers

a month.

However, what some operators tend to miss is the

opportunity to shape customer preferences, which is

available in emerging markets and allows operators

to not only capture their fair share of growth, but to do

so more profitably. Compared to those in developed

markets, customers in emerging markets are just barely

exposed to sophisticated price plans and bundles

(in many countries, more than 90 percent of subscribers

are on a single price plan). Operators can leverage this

characteristic of emerging markets to shape preferences

and develop first-order behavioral segmentation that

protects their subscribers from competitive attacks and

captures a higher share of wallet (even dominant

operators have wallet shares of less than 60 percent among

their own customers). This is extremely important in

emerging markets due to more rotational churn (e.g.,

temporary SIM usage due to hyper-promotions, expired

validity due to affordability) than in most mature

markets, predominantly driven by the prepaid nature

of the market. Furthermore, large operators are often

caught in a price war with new entrants trying to retain

market share that can be partially avoided by focusing

on stabilizing the interconnection price.

Emerging markets are dierent

Efficient emerging market pricing makes the most of

the trade-off between average revenue per user (ARPU)

and market penetration. Ideally, in order to maximize

revenue, both wil l rise in tandem. For a given aff luence,

if service penetration grows rapidly but ARPU doesn’t,issues could include declining pricing levels or network

limitations. When the opposite occurs (high ARPU,

low penetration), issues might include distribution

limitations or saturation of the high-income segment.

Likewise, when a market exhibits both low ARPU and

low penetration, it requires the introduction of low cost-

to-serve models.

In assessing the differences across emerging markets,

McKinsey developed a segmentation based upon ARPU,

penetration, and GDP per capita levels. From this, six

market-type clusters were identified (Exhibit 1), two of

which will be examined here. “Aff luent savers” have

ARPU levels below USD 35, penetration rates above 50

percent, and GDP per capita levels that exceed USD

5,000. The “aspiring adopters” segment, on the other

hand, features ARPU levels above USD 35, penetration

06 Righting What’s Wrong: FixingEmerging Market Mobile Pricing


Righting What’s Wrong: Fixing Emerging Market Mobile Pricing



40

rates below 50 percent, and per capita GDP below USD

5,000.

Each market segment will require a unique solution to

capture the most revenue possible. For example, MNOs

can selectively increase prices for affluent savers, since

ARPU is largely dependent upon price and penetration

remains unaffected by it (Exhibit 2). However, any

pricing moves need to take the competitive context into

consideration as well. While dominant operatorsshould focus on retention as they increase prices, they

can minimize customer dissatisfaction if the first-

order behavioral segmentation is in place. For operators

with low market share, raising invisible prices is a

much more pragmatic approach to improving revenue

performance.

On the other hand, MNOs in certain aspiring adopter

markets can lower the minimum cost of ownership

and prices, if needed, to drive penetration. McKinsey’s

analysis shows, for instance, that lowering prices for

high-priced aspiring adopters can increase penetration

without hurting ARPU (Exhibit 3). Options to lower

prices include employing flat-rate pricing, lowering prices

for certain call types, and offering deep “friends and

family” discounts. While all boost penetration, they also

help shape customer preferences and, hence, develop

behavioral segments that can be further targeted in the

future.

Two cases of note show where MNOs successfully leveraged

their market characterist ics to improve revenue

performance. One incumbent operator in an affluent

saver market increased its ARPU by 10 percent by

developing four new price plans that effect ively raised

prices by 12 percent. And, an operator hoping to boost

its penetration in an aspiring adopter market increasedits number of gross subscriber additions by more

than 50 percent, while also increasing ARPU by 6 percent.

Its success was driven by the introduction of three

new segmented pricing plans, including a “per second”

plan targeted at low-income groups, which was

expensive for high-ARPU subscribers to switch into.

Operators can boost penetration and ARPU bypricing right

Experience in emerging markets shows that MNOs

can increase both market penetration and ARPU

performance by focusing on customer behaviors and

perceptions regarding different pricing models.

Unlike mature markets, in which new price plans are

launched only after months of design and testing,

emerging markets demand deployment in weeks. Quickly

Emerging markets fall into 6 actionable clusters01



41

understanding revenue trends of the existing base (plus

competition where possible) and rapid market testing

allow MNOs to not miss out on the 50 to 100 percent annual

growth seen recently.

Analyzing revenue performance can bring out insights

regarding customer behavior. Low adoption, high

churn, or traffic sharing across multiple SIMs are typical

drivers of low-revenue performance. The following

is a sample of other performance drivers that operatorscan address.

Brands matter, and pricing is not necessarily the (only) fix.

In markets with very low penetration (e.g., certain

Afr ican markets), adoption and churn can be driven by

customers’ perceptions of an MNO’s market or

technology leadership – not necessarily its price leader-

ship. Imagine a market with 10 percent penetration

and customers with USD 5 ARPU wanting to be associated

with the MNO providing 3G service. Driv ing

appropriate communication is often the key. One operator

rebranded an existing price plan for the youth segment

and saw ARPU rise above 10 percent in that segment.

Branding matters to all segments.

Growth may be hiding value share loss. One operator

proudly posted stunning quarter-over-quarter results

in subscriber growth and attributed its ARPU decline to

higher penetration rates. What the operator failed to

realize until very late was that its oldest and most valuable

customers were gradually reducing their usage and

eventually leaving the MNO. The leading performance

indicators of customer “cohort” or “vintage” can often

provide MNOs a better perspective than lagging indicators,

such as churn.

Wallet share is an enormous untapped opportunity.Even the most capable of MNOs seems to only achieve 50

to 60 percent of wallet share among its high-ARPU

customers (dual-simming rates in excess of 40 percent

are not uncommon in many markets). Understanding

the needs of these customers (e.g., international call rates,

quality of international ca lls, off-net rates) can be

instrumental in designing plans to secure the most valuable

segments in the market.

Elasticity varies dramatically across segments.While

most MNOs are tempted to lower prices to match those

of competitors, they should know that elasticity

is often signif icantly below 1 for most active customers.

Dropping prices can be accretive, provided substantial

new customers sign up as subscribers and inactive

customers become active. In certain segments (rural,

for instance), elasticity figures substantially greater



Affluent savers are candidates for selective price increase02



42

than 1 have been observed. Misjudging segment-specific

pricing needs can be catastrophic. To avoid this, some

operators have deployed real-time pricing tools to take

advantage of differences in elasticity across segments.

Comprehending revenue performance drivers provides

ample indication of the price preferences in the market

that can be further recognized by testing for price aware-

ness. This often highlights a wide gap between real

and perceived prices, with most customers overestimatingprices. MNOs can overcome such perceptions by

heavily advertising headline discounts, e.g., very low

on-net, off-peak rates. Also, the perception of high

prices can lead to opportunities to raise prices, as one

Middle Eastern operator learned. By changing the

billing pulse, the company raised its prices for national

calls by over 12 percent without sacrificing usage.

In some emerging markets, customers can be highly

sensitive to a few price levers. Developing a clear

picture of these preferences can help prevent the launch

of price plans with low success potential. Significant

sensitivity to subscription fees in one market was seen

to the extent that a price plan with a subscription fee

but much cheaper call rates performed very poorly (a

take rate ten times lower) compared to another price

plan without a subscription fee, but with higher call rates.

MNOs can leverage their revenue performance and

price preference understanding to develop new price

plans that can help drive penetration, boost ARPU,

or both (in some cases). However, MNOs should avoid

ARPU-boosting efforts that attempt to capture

elasticity benefits by dropping prices across all market

segments. As noted, elasticity varies significantly

across segments, and dropping prices across all segments

creates a risk of nullifying elasticity benefits from

super-elastic segments by losing ARPU in nonelasticsegments.

Most MNOs can develop new price plans within eight to

ten weeks by rapidly building on customer insights

with survey data. However, prior to launching any new

price plans, operators should be sure to test them

with customers and refine them accordingly to maximize

their impact. Of course, this may not be possible in all

markets due to the risk of being copied and preemptively

launched. Additionally, several major price plan failures

have occurred due to poor network exper ience (e.g., no

capacity to handle customer surge) and poor marketing

execution (e.g., limited awareness, poor distribution).

McKinsey has developed a number of guiding principles

that can help MNOs interested in designing effective

price plans for emerging markets. First, abandon any

Lowering prices for aspiring adopters can help increase penetration03





one-size-fits-all thinking because the needs of high-

ARPU customers are very different from those of low-ARPU

(in some markets very low) customers. Keep things

simple, introducing no more than four or five price plans

to avoid customer confusion. Make price plan headline

rates attractive, perhaps by designing plans that have the

lowest possible headline rate but not necessarily the

lowest monthly costs to the customer. Operators should

also avoid triggering price wars unless absolutely necessary and ensure the lowest on-net rates with a

balanced off-net rate. And finally, balance the

clubbing offer, since exploiting deltas between on-/off-

net tariffs can worsen price penetration, as customers

perceive these tariffs as more expensive.

* * *

MNOs in emerging markets need to understand the

unique likes, dislikes, and preferences of their subscribers

in order to drive penetration and capture the highest

ARPU rates possible. And, while emerging markets may seem like different planets from a pricing perspective,

operators can achieve success by pursuing a proven

methodology.

Zakir Gaibi


[email protected]

Martijn Allessie


Amsterdam office.

[email protected]

Sanjeev Kohli


Dubai office.

[email protected]

Salman Ahmad


[email protected]



45

Getting telecoms customers to “pay up” on past-due

accounts can really pay off for emerging market players

dealing with high default levels. Best-in-class

collections practices can help telcos in emerging markets

achieve significant reductions in losses.

Telcos in emerging markets have a large and growing

number of low-income customers. The profile of

this segment is typical ly one of financial instability,

relatively low education levels, tenuous employment,

growing levels of high household debt, and customer

debts accumulated across dif ferent institutions.

Companies can help ensure that these customers pay

their bills by establishing a more effective collections

process, which can quickly deliver significant value.

In working with telecoms players, McKinsey has developedpractical approaches and tools that rapidly and

significantly impact bottom-line collections performance

by enabling emerging market telcos to capture a 15

to 30 percent net loss reduction. Typically, many companies

that employ these approaches also retain half of the

customers they normally would have lost using prior

methods, having a significant positive impact on churn.

Collections is becoming increasingly important for

customer retention and, ultimately, bottom-line impact.

The current economic situation makes it even more

critical. During any crisis, default levels tend to increase,

but at the same time, retaining these customers is key.

This creates the need for companies to optimize and take

full advantage of collections opportunities.

Telcos can pursue three specif ic initiatives to reduce

their gross collections losses: reduce exposure to high-risk

customers in the active portfolio by using risk models

and adjusting the product offering accordingly as well

as by developing pre-delinquency actions; reduce

losses from delinquent customers by increasing contact

rates with the right-party person and developing

sophistication to increase conversion of contact into a pay-

ment; and increase net recoveries from contractual

write-offs by introducing advanced management

techniques for external agencies focused on transparency,

peer pressure, and compensation based on relative

performance.

Reduce exposure to high-risk customers

Telcos need to identify and actively manage high-risk customers (Exhibit 1). Typically, around 10 to 20 percent

of customers can account for about 80 to 90 percent of

total losses. Once these customers are identified, telcos

can develop product offerings according to risk profi le.

For example, they can offer high-risk customers highly

controlled lines (e.g., prepaid or limited expenditure

postpaid), while lower-risk customers would receive more

traditional products and the offer of additional

products in an effort to increase average revenue per user

(ARPU).

It is also advantageous to pursue pre-delinquency

measures. For example, telcos may find that their billing

process inadvertently encourages “first payment

default” (FPD), resulting from an accumulated initial

07 Paid in Full: Improving TelcoCollections Performance


Paid in Full: Improving Telco Collections Performance



46

bill. In some situations, depending upon the date of

initial subscription and billing cycle, users may receive

an invoice for more than one cycle or more than one

month of consumption. This can create a mismatch of

capacity and ability to pay. Hence, these customers

start their relationship with a provider based upon an

inability to reconcile the first bill (Exhibit 2). Depending

on the date of initial subscription and billing cycle,

customers may not receive invoices for more than one

cycle. This hinders consumer usage education andcapacity to pay a first accumulated bill.

Streamlining the billing cycle drastically reduces the

number of FPDs, thus lowering delinquency rates. For

example, McKinsey’s observations of several collections

processes indicate that the average number of days for

first bill can be reduced by up to 25 percent, resulting in

the first bill generating a 1 to 2 percent reduction of total

losses.

Reduce losses rom delinquent customers

Managers can use two primary approaches in this step.

The first one is to increase the rate of contact with the

right-party person. Research by McKinsey shows that

significant write-offs were never contacted, while

the more contact a telco had with its client, the lower the

loss. In other words, a greater probability exists that

a debtor will pay his or her debt if contacted. A number

of actions can be pursued to help increase the contact

rate. For instance, telcos can facilitate inbound contact

and establish high service levels, develop an outbound

contact strategy that includes standardizing the contact

level, revise collections letters by introducing marketing

and sales concepts, and introduce low-cost channels (e.g.,

automated phone warnings and SMS).

McKinsey has piloted the strategy of sending automated

voice and SMS warnings to the delinquent customer

base – with significant impact (3 to 6 percent reduction

in losses). The use of these tools has been even more

successful when applied at critical times (Exhibit 3). In

addition to automated communications, telcos can

also impose partia l and total service suspensions to

encourage payment in ways that minimize customer

churn.

The second approach to reducing losses from delinquent

customers is to increase promises to pay and promises

kept once the customer has been contacted. Developing

distinct collections strategies based on collections-specific

segmentation is key to maximizing recovery and

minimizing operational costs. McKinsey suggests that

telcos segment and develop specific models for

It is important to identify high-risk customers and actively manage them01



47

delinquent customers. These collections-oriented

techniques enable telcos to gain an in-depth under-

standing that allows them to take the r ight actions

regarding the target delinquent customer groups. To

boost predictive power, telcos can combine clustering

models (e.g., to determine the collections approach

and strategy to each segment), self-cure models (e.g.,

to predict the probability of a customer to voluntarily

pay without contact and, hence, optimize capacity), and

risk models (e.g., to predict the probability of acustomer to write off the contract once delinquent and,

hence, focus contact). Doing so enables telcos to

define the most effective contact strategies.

The collections timing, approach, channels, and intensity

can differ significantly based on the segment under

review. At one end of the spectrum, lower-risk, high-value

customers have a fundamental retention approach.

The idea is to understand and accommodate a potential

short-term financial issue, guaranteeing reinstatement

capabilities. For this segment, contact can be less intense,

an even friendlier approach might be used, and

lower-cost channels could be prioritized. Client rupture

is the last resource.

At the other end of the spectrum, higher-risk, lower-value

customers may require a much more intense, hands-on

approach, which may include significantly higher

contact levels, more demanding letters, and the proactive

use of reinstatement products. This approach can

deliver large, quick results in the range of 30 to 40 percent.

In this manner, one telco in particular captured a 30

percent reduction in net losses (USD 65 million) just

within the first year of implementation.

Increase net recovery rom contract write-os

Typically, a high-delinquency portfolio is assigned to

third-par ty collections agencies that receive

compensation in proportion to the total volume they

collect. While agencies have an incentive to ask for

as large a share of the total portfolio as possible, they

have both an already committed capacity with other

companies and an available capacity – in many situations,

lower than that which is necessary. Agencies then

select the most attractive accounts in their allotment,

working via a “skimming” process. Therefore, unless

telcos careful ly manage portfolio allocation, a large

proportion will remain untouched.

One effective approach to collections requires companies

to completely rethink their monitoring, portfolio

allocation, and compensation schemes. By tracking

batches, managers can expose significant differences in

The billing process may encourage the so-called first payment

default02


Paid in Full: Improving Telco Collections Performance



48

third-party agency performance. Applying this process

can highlight the distinction between agencies that

simply skim accounts and those that deliver the best

results.

High-performance monitoring and incentive systems

include (a) introduction of batch tracking – monitor-

ing batches of accounts allocated to each agency over

time and comparing the true performance of distinct

agencies, (b) reassignment of accounts based on agency performance, and (c) creation of targets for collections

agencies based on customer batches and improved

monitoring. This approach has proven to increase by 10

to 20 percent the recovery performance of high-

delinquency portfolios.

* * *

Telcos in emerging markets will either become more

systematically aggressive in going after collections

or face the growing dead weight of late payments and

write-offs. The key is to collect the delinquent payments

without churning the higher-risk customers. Thesteps described here can help telcos boost collections

and assess default risk among customers quickly and

completely.

Applying certain collections methods at critical times can yield

a 3 to 6 percent reduction in total losses03

Paulo Fernandes

is a Principal in McKinsey’s São Paulo

office.

[email protected]

Sami Foguel


São Paulo office.

[email protected]




The Silver Lining: Downcycle-Driven Opportunities for Emerging Markets

Despite the global credit crunch and downward spiraling

financial markets, telecoms operators in emerging

markets have something to be bullish about.

Globally, the downcycle puts pressure on the telecoms

industry in two ways: First, attracting and retaining

customers is likely to become harder, as overall acquisition

rates slow and competition for each new customer

increases. Second, most operators will find less available

capital, and that which is available will come at a higher

cost. However, unlike the automotive and retail

sectors, where the credit crunch and recession are causing

deep distress, the telecoms industry will likely

experience milder effects. Historically, the correlation

between revenue growth and overall GDP growth

has not been as strong in telecoms as it is in many other

industries. Moreover, telecoms businesses havelower ongoing fixed costs compared to companies in

many other sectors. As a result, most players are

not at risk of outright financial distress. However, the

credit crunch wi ll probably impact the industry

significantly, changing the balance of power between

larger and smaller players and between players

in Asia and other markets.

Within the telecoms world, emerging market operators

enjoy more robust market positions than their

counterparts in more developed markets for a number

of reasons. In general – a nd with some notable

exceptions – they operate in markets that have more

attractive structures and, as a result, achieve

higher sustained profitability. On average, operators

in Asia earn free cash f low margins – indicated

here by (EBITDA - capex)/revenues – of nearly 20 percent,

driven both by higher EBITDA margins and lower capex

per revenue unit. In the Middle East/Afr ica region,

free cash f low margins exceed 20 percent, as they do in

Latin America and Eastern Europe. By way of

comparison, margins in the US and Western Europe are

about 11 and 12 percent, respectively. Furthermore,

the leading operators in emerging markets have typically

taken on significantly less debt than those in

developed markets. Average net debt over EBITDA is just

0.4 in Asia, 0.7 in Eastern Europe, and 1.4 in the

Middle East and Africa, while in North America it averages

1.9 and in Western Europe 2.4. Operators in emerging

markets can leverage their unique positions to not only

further shield themselves against the downcycle,

but, in some cases, even emerge with the upper hand.

However, far from monolithic, emerging markets dif fergreatly in terms of structure and profitabil ity.

For example, China’s three operators generate a collective

USD 14.5 billion in free cash f low per year. The

group also includes small but extremely profitable markets

that have yet to liberalize ful ly, such as Qatar.

Operators in such markets enjoy significant home country

advantages. At the other end, markets like Indonesia

encourage massive infrastructure-based competition.

Indonesia now has eleven operators, many of them

subscale and loss-making.

Dealing with three downcycle trends

While many emerging market operators may find a safe

harbor of sorts from the recession, they are not

completely immune. A downcycle will affect their

businesses in a variety of ways. The following three

08 The Silver Lining: Downcycle-DrivenOpportunities for Emerging Markets



52

trends will present significant challenges – and

opportunities.

First trend. Radically increased uncertainty, diminished

planning visibility, and the risk of distress for critical

partners are hallmarks of a downcycle and will increase

the need for both f lexibility and a greater emphasis on

risk management.

A recession limits telecoms operators’ planning visibility in the short and medium term in many ways. This

presents significant challenges in an industry that

requires high upfront capital commitments, making it

more difficult to embark with confidence on big

projects such as new network builds. For example,

operators are likely to find it increasingly difficult

to predict pricing and uptake rates in their markets due

to the uncertainty that surrounds the possible

depth of the recession. Furthermore, in less mature

markets where market share is stil l up for grabs,

there is a greater risk that operators might use the context

to steal share from other players and, in doing so,

spark destabilizing price wars.

Critical industry partners are also likely to experience

distress. Upstream vendors, for instance, will likely

face significant pressure, as the industry cuts network

equipment budgets. Likewise, distribution channels,

which in most markets face razor-thin profit

margins, may go out of business. This presents risks for

those, typically smaller operators whose sales

rely more on third-party distr ibutors.

Operators should use this new context to find

opportunities to reshape the telecoms value chain, as

players and partners in adjacent industries and

markets come under financial stress. Operators withhealthy balance sheets could, for example, pursue

acquisitions in complementary sectors such as retail.

They could also seek partnerships, joint ventures,

or the outright acquisition of distressed businesses (for

example, in the Internet, content, or payment

arenas) to accelerate the pace and quality of innovation

and widen their scope of products and services.

Second trend. Sound balance sheets and strong cash

flow generation will shift financial power toward

Asia’s emerging markets, with large operators in these

markets on track to emerge as potential global

consolidators.

As the downcycle plays out, the leading emerging players

will be able to accumulate far more M&A “firepower”

than their counterparts in developed markets (Exhibit 1).

The bulk of M&A “firepower” will lie with Asian players01





Our modeling indicates that the leading Asian telcos –

the ones that benefit f rom a combination of huge

customer bases, high profitability, and lower debt levels –

will accumulate the bulk of this f irepower.

On the other hand, telecoms players in the Middle East/

Africa region, Latin America, and Eastern Europe

will not accumulate enough cash to compete with these

Asian players under any conceivable outcome.

Similarly, over the shorter to medium term, the less

profitable and more leveraged operators in Western

Europe and North America will likely use their cash to

service existing obligations. Thus, should they

choose to use it, Asian operators are presented with

a window of opportunity over their counterparts in

Western Europe and North America in which they may

be able to execute M&A, while facing less competition

for the acquisition target.

Third trend. As the capital deployed in the industry

drops, a rapid reconfiguration of industry structures is

probable, with smaller players in more fragmented

markets becoming increasingly unviable. As a result,

regulators will likely be more willing to shift their

emphasis from encouraging infrastructure to pushing

service-based competition.

The credit crunch has significantly reduced the overall

amount of capital deployed in the telecoms industry,

while making that which is available more expensive.

Overall, we estimate that in the last quarter of 2008,

new debt capital raised by operators in Asia fell by about

35 percent from a run rate of approximately USD 1.9

billion per month to around USD 1.2 billion per month.

While the market still seems will ing to lend to larger,

more established players, smaller telcos and attackers

will probably find accessing capital more and morechallenging. Under these new conditions, some smaller

operators, despite being able to capture subscribers and

achieve cash flow break even, will remain below economic

breakeven – i.e., the point at which they return enough

free cash f low to pay the carrying cost of their invested

capital (equity plus debt) at the going market rate of

return. This would render them unlikely ever to create

value for their investors. For instance in Indonesia, one

of the most crowded telecoms markets, we estimate

that to achieve economic breakeven, the average small

operator’s subscriber requirement will rise from about

6.4 million subscribers in 2007 to over 10 million in 2010,

due to both rising capital costs and a price war that is

driving down ARPU (average revenue per user).

As a consequence of these trends, small attackers in

all markets will almost certainly experience distress.

Increased pricing pressure and rising capital costs likely to make smaller

operators less viable02



54

These players have historically based their business

plans on vendor-financed networks and cherry-picking

strategies, assuming more limited price competition.

Both of these factors have changed, raising the required

critical mass needed for a company to attain minimum

economic scale (Exhibit 2).

Larger, multi-country operators should consider

rethinking their ownership of smaller attackers. Andthe smaller companies themselves will likely need to

seek a way out, either through in-market consolidation

or a change in their business models away from

fixed assets. There are signs of this a lready, as industry

consolidation moves have begun. For example, after

years of fighting for share, the two smaller operators in

Australia – Vodafone and Hutchison – recently agreed

to merge their businesses to create a 6 million subscriber

entity with about a 25 percent market share. Similarly,

Oi, the fourth largest mobile operator in Brazil , acquired

the leading wireline operator, Brasil Telecom, creating

a national champion. We see this trend accelerating in the

more fragmented markets: Hong Kong, Indonesia, Sri

Lanka, Thailand, and perhaps even India and Japan.

On top of the potential in-market consolidation of operators

in their traditional form, the reduction of available

capital will likely encourage industry participants to

rethink the way they have operated. Some of the

players have gone one step further than just planning for

it. Etisalat in Abu Dhabi, for example, has recently

signed a 15-year agreement with Reliance Infratel for the

sharing of passive infrastructure such as towers,

repeaters, shelters, and generators.

Critically, regulatory authorities, which act as the gate-

keepers of industry structure, will probably face an

increasingly diff icult balancing act. The new conditions

mean that they must take greater care to ensure

that the goals of promoting competition and uptake are

appropriately balanced against the growing need to

ensure player viability and overall industry stability.

As a result, the terms of regulatory debate in many markets

will likely shift away from encouraging competition-

based infrastructure (i.e., lots of operators) to promoting

shared infrastructure (e.g., network frequencies, towers,

and backhaul) and more service-based competition.

These changes could lead some telecoms players to refocus

on different core business propositions, develop new

capabilities, and compete with a greater emphasis

on differentiation through service innovation. In any case,

taking a proactive stance on regulatory management

will yield significant dividends.

The CEO’s new priorities

Any recession creates winners and losers. The outcome

of this one will probably favor the larger operators,

who can use the context to both consolidate their marketpositions and potentially take advantage of their cash

flows to make game-changing moves. Smaller players

and attackers across all markets are likely to be

challenged. For CEOs and management, there are a few

no-regrets moves that every player should consider to

improve flexibility and strengthen their core operations

by getting back to basics. Operators need to focus

on de-risking critical projects, building f lexibility into

their plans, and developing stronger risk management

skills.

First, managers should stress-test plans and capabilities

against a broad range of potential market scenarios.

Key risks going forward will likely be market-related, e.g.,

price shocks, as well as f inance-related, including

rising inf lation and currency f luctuations, which may

impact operators with vendor contracts in foreign

currencies. Second, all operators need to take a hard

look at their core and non-core operating expenses

and explore solutions such as simplifying products or

reducing the number of operational platforms. Now

is also the time to redouble efforts focused on traditional

good practices to strengthen the core, particularly in

areas like revenue assurance, churn management, and

capex optimization.

Other no-regrets moves depend upon context and starting

position. Specifically the leading larger operators

have three sources of opportunity: they can work to

reshape regulations, they can explore game-changing

acquisitions in markets, and they have overseas

expansion opportunities. For these players, there are no

regrets in investing in regulatory management and

attempting to improve market structures in their home

markets. The context presents a unique opportunit y

to work actively with the regulators to shape a more stable

and sustainable industry outcome. The stakeholders

involved are open to such a dialogue now more than ever.

Larger operators might also use the context to explore

game-changing downstream acquisitions. The oppor-

tunities presented here could be particularly rich. In





addition to consolidation of smaller players, as discussed

earlier, attractive assets in adjacent spaces – retai l,

content, Internet, and media to name a few – could become

available and will probably prove to be attractive targets.

Finally, larger players might carefully consider

the opportunities presented by geographical footprint

expansion. Historically, many leading global

players have enlarged their footprints during downcycles. With the firepower advantage these leading players

now enjoy, this may be a unique window of opportunity.

However, the record on value creation in situations

like this is mixed, and such moves require a careful balance

of risk and reward.

Smaller players and attackers in more fragmented

markets, however, are at risk. Managers here should

consolidate their markets either directly or via

infrastructure sharing to change the rules of their game.

Multi-country operators who own such players

should take a fresh look at their entire portfolios, with

a special focus on their smaller investments and

an eye toward either reshaping their businesses, exiting,

or consolidating. Due to the benefits of improved

market conduct and reduced capital that results, such

initiatives – when available – represent by far the

most valuable inorganic move any player can make.

* * *

While the current economic situation has deeply affected

many industries and countries, strong telecoms

operators in emerging markets might see more promise

than panic as the downcycle plays out. Managers

who realize that the rules of the game have changed

fundamentally and make a commitment to working

their way through the three key implications presented

here will have the best chance of getting through

this recession successfully.

Carl Harris


Singapore office.

[email protected]

Alberto Menegazzi


Dubai office.

[email protected]

John Tiefel

is a Director in McKinsey’s Dubai office.

[email protected]

Fredrik Lind


office.

[email protected]



57

In a bold new expansion beyond its Middle East borders,

Zain acquired African mobile telecoms leader Celtel

International B.V. The move in 2005 underscored Zain’s

ambition of becoming an international tele-

communications services provider. In 2008, all Celtel

operations were rebranded under the Zain banner.

The transformation coincided with the linking of the

world’s first border-less mobile service. Zain’s One

Network is the first mobile network to seamlessly span

two continents.

Chris Gabriel was named CEO of Zain Africa in December

2007. In this capacity, he oversees all 15 operations,

serving 41 million active customers. McKinsey had the

opportunity to meet with Mr. Gabriel and get his

perspective on Zain Africa’s success, the role of telecom-

munications in emerging markets, and the future of mobile in the region.

McKINSEY: What would you say has been the primary

source of growth for Zain?

CHRIS GABRIEL: Most of the growth, the organic growth,

in Africa comes from further penetration – providing

relevant and affordable services to the people of Africa.

There is still enormous growth potential despite the

sentiment that the African market is saturated. The

average penetration level across Africa is only 25

percent. There is also a growing demand for data services

in metropolitan areas and the youth population is

demanding content.

McKINSEY: Do you have a sense of where this

misperception comes from?

CHRIS GABRIEL: Many come to this conclusion

because they’re assuming that growth stops at 100 percent.

If you look at the more mature markets, however,

growth has in fact exceeded 100 percent – 120, 140

percent in some of the more mature global markets.

Most of the penetration to date in Africa has been in the

metropolitan areas. Operators shied away from rural

markets, but there’s a great opportunit y there. If you’re

going to chase growth, however, you need to adapt

your business models and ask yourself questions like

“How can we optimize distribution?” or “How can

we streamline operations?” The Zain Ultra Low-Cost

Handset Initiative has proven enormously successful

in driving rural penetration.

McKINSEY: What exactly does this urban-rural

penetration divide mean for you as an operator inemerging markets?

CHRIS GABRIEL: Well, it’s about understanding the

varying needs of the consumer while, at the same time,

reducing operating costs. Customers in rural areas

don’t want elaborate products because their telecom-

munications needs aren’t that complex. On the cost

side, we need to explore alternative energy sources so

that we can put base stations in areas with limited

or no coverage. Using wind and solar power or hybrid

energy allows us to deliver these services in ways

that are profitable for us and still affordable for rural

customers. In urban areas, on the other hand, the

demand for more sophisticated products is there.

McKINSEY: As you push forward, are you concerned

about the effect of new entrants on the market?

09 Sub-Saharan Success: Zain’s“Wonderful World” Just Got Bigger

An Interview with Zain Africa CEO Chris Gabriel


Sub-Saharan Success: Zain’s “Wonderful World” Just Got Bigger



58

CHRIS GABRIEL: At Zain, we welcome rational

competition. Rational competition serves to grow the

market. We have indeed observed a rise in the number

of new entrants following the issuance of more licenses

by regulators across most markets. We are maintaining

our momentum – growing our market share and

aiming to be number one in all markets in which we

operate. Most new entrants attempt to compete on

price in order to rapidly grow market share – such anapproach is unsustainable. It only serves to shrink

the market and reduce the funds available for future

growth and investment. At Zain, we compete on

customer experience, coverage, and quality of service –

leveraging the world-first Zain One Network advantage.

McKINSEY: If these price-cutting tactics are

unsustainable, what do you envision happening in the

market?

CHRIS GABRIEL: In my view, you’ll see consolidation

across the Afr ican region. The mid-tier players will

be eaten up, and, as a result, you’ll see the emergence

of about three or four very significant players. At the

smaller end, you’ll see more content providers and niche

players emerging – servicing the larger players.

McKINSEY: Do you have a strategy for dealing

with markets in East Africa where there are already

multiple operators competing for customers?

CHRIS GABRIEL: Zain’s ambition is to be one of the top

ten global mobile operators by 2011, serving 110 million

customers. Our focus isn’t on our competitors; nor do we

aim to compete on price. At Zain, we focus on providingrelevant, affordable services to our customers, thereby

growing our market share and generating a return for

our stakeholders. We have a high-qualit y, unified One

Network and extensive coverage. We also offer unique

products and services to the various market segments.

Furthermore, we’re conducting a commercial pilot in

Kenya for Mobile Money Transfer and M-Commerce. In

a nutshell, it’s about quality, coverage, and a relevant

set of affordable products and services to the people in

Africa we serve.

McKINSEY: Is Zain unique in taking mobile banking to

the market?

CHRIS GABRIEL: There are already some offerings

on the market, but we are leveraging our One Network

service not only to provide banking, but also small

transactional services. Known as ZAP, our M-Commerce

offering will revolutionize the market.

McKINSEY: Looking beyond Africa, in particular to

emerging markets as a whole, how do you explain places

like India and Pakistan, where prices are extremely

low compared to those in Afr ica?

CHRIS GABRIEL: Well, they’re different markets. Africastill requires a significant level of investment, and

we want to generate a sustainable cash flow to fund that

investment. There are a lot of areas that haven’t been

penetrated. The demand is there, so we need to tailor our

product and service offerings in ways that allow us to

capitalize on that demand. It’s up to us to make sure that

our business model is optimized to generate the returns

that enable further investment – pricing is only one part

of that equation.

McKINSEY: How do you deal with the politica l unrest

that is often a marker of emerging countries?

CHRIS GABRIEL: Well, with risk comes opportunit y.

We manage and mitigate the risks and leverage the

opportunities. Security risks mean that a lot of operators

will not do business in certain markets. We’ve taken

some bold decisions, which have been questioned by

our competitors. We’ve also had to work closely with

the governments of the countries in which we operate,

demonstrating to regulators how we bring value to

their countries, through employment, taxation and,

more importantly, through our extensive Corporate

Social Responsibility Program, which is primarily focused

on improving health and education for the people of Africa.

McKINSEY: Is corporate social responsibility important

for success in the emerging market, especially in your

region?

CHRIS GABRIEL: For me, it fits perfectly with our brand

values. We’re passionate about people – the people are

our future. I am thinking particularly of some very remote

villages where schools lack proper facilities – class-

rooms, desks, and text books for example. Zain has donated

millions of dollars toward brand-new school buildings,

desks, and text books in many of the geographies in

which we operate. In addition to transforming peoples’

lives, which is the primary purpose of our Corporate

Social Responsibility Program, such donations have a

profound impact on the way people relate to the



59

brand – to Zain. The resulting loyalty is just phenomenal.

My view of the world is that corporate social

responsibility is a key component of business. It’s part

of our philosophy – development is part of what

Africa needs; and it’s part of creating a way for service

penetration and growing the market.

McKINSEY: Can you share any concrete examples of

just how the connectivity Zain provides is transforminglives?

CHRIS GABRIEL: I have heaps of stories that I can share

with you – how long have we got to talk? I went back to

the remote village of Dertu, Kenya, three months after

we had introduced service to see how things were

going. The village elder ran up to me, threw his arms

around me, and said, “I now know how much a bull

costs in Garissa!” Now, Garissa is a village about a hundred

kilometers away from Dertu. Historically, in the

marketplace, if he’d wanted to sell or buy a camel, he had

to walk for two days to get to a market, only to find

that there were no buyers or the price wasn’t right. He

would then need to walk to the next market and tr y

again. Now, in just thirty seconds, using his mobile phone,

he can contact all the markets and negotiate the optimal

price – he then only has to make one trip!

McKINSEY: How else can connectiv ity be helpful?

CHRIS GABRIEL: This same elder also told me about a

lady in the village who was experiencing complications

during childbir th. With one mobile phone call they

were able to bring in help and save both the mother and

the child. In the same village, a boy had been bitten by a snake, and they were able to call in and get the anti-

venom to save his life. When people go out looking

for water in times of drought, they can cal l back to the

vil lage and say exactly where it is. The stories go on

and on. The simple things that we all take for granted are

things they’d never experienced before. Their lives

have been transformed as a result of mobile telephony!

McKINSEY: From a portfolio perspective, are there

markets, like Sierra Leone, you would consider getting

out of because they’re so small even by African

standards?

CHRIS GABRIEL: Zain is not about getting out of markets,

we’re about getting into new markets and achieving

the objectives we have set for 2011. We address the issue

of small market size by regionaliz ing a lot of the

back-office functions and optimizing our cost to serve.

We achieve economies of scale by leveraging our

fifteen African operations and our seven Middle East

operations – so realizing broad-level synergies

helps us profitably serve markets of all sizes.

McKINSEY: Is innovation as important to success in

Africa as it is in developed markets, like Australia and

Europe?

CHRIS GABRIEL: Innovation comes in many forms,

not just technical or product innovation but in people,

business models, processes, systems, and pricing.

Technology is important, but the fundamental focus

that will enable you to achieve success is a focus on

the customer. A lot of players are caught up in talking

2.75G and 3.5G and WiMAX; all great technologies,

but what is important to the customer is the abilit y to

make calls and use relevant, affordable services – not

the technical details.

McKINSEY: One of the areas I imagine you have been

innovative in is in attract ing talent. What is the secret

of your success in get ting people to move to Chad, for

example?

CHRIS GABRIEL: Well, what I’ve found is that there’s a

lot of talent, a lot of potential, and a lot of passion within

Africa. Historically, the African hierarchy has been

very, very top-down, and I’m not about that at all. When

I visit an operation, I walk around with the people

there; ask them what they’re doing; shake their hands;

talk to them; encourage them the right way – encourage

them quietly. We’re finding a lot of talent, a lot of passion,and I’m about unleashing that talent and giving the

younger people of Africa a lot more opportunity and a

chance to prove themselves in roles that would normally

be considered beyond them.

McKINSEY: How specifically does Zain benefit?

CHRIS GABRIEL: We’re focusing our recruitment on

young people, and a swathe of our recruitment will be

from fresh university graduates. On that basis, we get

young local people who are hungry and innovative and

know what the markets demand, rather than bringing in

dinosaurs of the industry who have been performing in

other more mature or saturated markets and think that

their way is the only way. Our emphasis is on leadership,

on people’s ability to embrace the Zain brand and the

Zain values. Furthermore, our human resource policies


Sub-Saharan Success: Zain’s “Wonderful World” Just Got Bigger



60

also focus on leadership – rotating high-potential and

high-performance team members across multiple geo-

graphies – creating our own brand of international leader.

McKINSEY: Considering expansion, are there particular

markets you’re pursuing?

CHRIS GABRIEL: Zain Group’s CEO, Dr. Saad Al Barrak,

is on record as saying that Zain’s primary focus forexpansion will remain the Middle East and Africa, at

least until 2011, after which time we might consider

Asia. In the Middle East and Africa, our primar y focus

is on acquiring existing operations. We do look at

greenf ield licenses; however, we like to limit the number

of greenfield operations at any one time so as not to

dilute our management focus.

McKINSEY: Many believe that operators interested in

entering Africa have to bribe their way to licenses. What

has your experience been?

CHRIS GABRIEL: Zain’s ethics, values, and standards

preclude us from getting involved in any such activity,

so if bribery seems to be the only path to obtaining the

license, we will simply walk away. In fact, we have

walked away from situations where that has been the

expectation.

McKINSEY: You said that in the long term you think

there’l l be some consolidation. Does this present any

market share issues for Zain over the next two or three

years?

CHRIS GABRIEL: I guess the prospect of consolidationfor us means optimizing our business model so that

we can continue on our growth path. I also expect that

the quality we offer wil l serve us well through these

changes. It’s about having innovative products but also

about stimulating demand by being both relevant

and affordable. Even very simple voice can create demand,

all the way through to full video, data, and broadband

services. But as I’ve said before, we see challenges like this

as opportunities, and we won’t shy away from them.

We’re not fearf ul of the competition. We’ll work

very closely with regulators to demonstrate the value

Zain brings to their country in terms of GDP growth,

employment, and productivity. Regarding our market

share, the markets will grow and we intend to benumber one in all the markets in which we operate. We’ll

continue to grow our market share sensibly and grow

our returns accordingly.

McKINSEY: How do you think the current economic

situation is going to affect Afr ica?

CHRIS GABRIEL: I think we’re already seeing some

impact. There are concerns about inflation and currency

devaluation. We’ve seen some governments cutting

their budgets, and we’ve also seen some opportunistic

behavior. The economy moves in cycles, and thus there

will no doubt be a medium- and long-term upside.

McKINSEY: What would be your advice to bright, young

individuals interested in telecommunications in Africa?

CHRIS GABRIEL: Look us up! There’s a wonderful

world of mobile in the reg ion, and at Zain, we are about

making history. We have considerable historical

milestones under our belt, and we wil l continue to make

waves in the sector. The future is very exciting,

and we encourage innovative young leaders to join our

organization. We see no boundaries. With passion

we can exceed even our own expectations.

* * *

Mr. Gabriel was interviewed by Zakir Gaibi, a Principal

in McKinsey’s Dubai office.



63

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Appendix



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The TelecommunicationsPractice

McKinsey’s Telecommunications Practice serves clients

around the world in vir tually all areas of the tele-

communications industry. Our staff consists of individuals

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Industry areas served include network operators and

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