Written
by Hani Abbasi, Vice President and Pol Creus, Analyst at Delta Partners
Fixed-Mobile
Convergence (FMC) – owing to several benefits including significant cost
synergies, revenue uplift and improved customer loyalty – is becoming
increasingly popular in emerging markets, following success stories in
developed countries.
In
developed markets, early adopters to FMC (e.g. Vodafone, Orange, BT, AT&T,
Rogers and Telefonica), have established their presence in several aspects of
the telecom value chain.
These
operators have availed numerous benefits including cost synergies (IP transit,
OPEX improvements, backhauling efficiencies), increases in revenue, improved
customer retention (up to 75% reduction in churn), which have given them a
sustainable competitive advantage.
Most of
the early adopters organically approached FMC by building their own fixed /
mobile networks as their conventional business gained momentum, since they were
then operating in a relatively less competitive market. However, as telecom
markets became more fragmented, many telecom operators found it easier to adopt
an ‘inorganic’ strategy in order to implement convergence.
Emerging
markets vs. developed markets
The
emerging markets, as discussed here, include high-growth, developing economies
such as Eastern Europe, Middle East, Africa, CIS and Asia; and exclude
relatively affluent (resource-based) economies with relatively mature telecom
sectors, such as those in South East Asia and the Gulf (GCC).
Certain
characteristics and market dynamics differentiate these emerging markets from
developed markets (as outlined below):
1.
Demographic growth: Emerging
markets typically have fast-growing and relatively young populations, which
drive a sizeable untapped addressable market for broadband services.
2.
Lack of wholesale regulations: Wholesale
/ network sharing regulations in many of these markets either do not exist or
are in the initial stages of policy-making. Consequently, infrastructure
sharing exists between operators on an opportunistic basis only (more common in
mobile than in fixed line).
3.
Primarily mobile markets with
prepaid dominance and high churn: Majority of the value in the telecom market in
these countries is in the mobile space. A significant part of the mobile
customer base remains prepaid in many of these markets (which warrants high
churn). As a result, retention has become a key motive for FMC.
4.
Incumbents with basic / poor
fixed infrastructure: Incumbent operators often have the widest fixed
infrastructure coverage (nationwide, in some cases) but with obsolete quality
(e.g. PSTN, copper, DSL).
5.
Challenges in obtaining
permits: Due to lack of transparency in certain markets, it becomes challenging
for operators to obtain rollout permits (e.g. Right of Ways, Spectrum). As a
result, these permits become a commodity and often a driver of M&A.
6.
Limited talent, especially
related to advanced technologies: Emerging markets are behind the technology
curve, especially when it comes to fixed infrastructure (e.g. FTTx) and its
associated value proposition. As a result, the required talent to drive
this change is also scarce in most markets.
Recent
FMC in emerging markets
As in
developed markets, FMC has become increasingly important in emerging markets.
Increased competition and high data consumption have led to flattening revenue,
suppressed margins, higher cost to serve (especially data), whilst offering
similar levels of network investment. In addition to the benefits of FMC
outlined for developed markets, there are certain needs in emerging markets
that are also addressed by FMC.
Mobile
operators in emerging markets have the desire to establish a fixed network in
order to get reliable access to fibre backhaul for their mobile broadband
proposition (over 3G and 4G) as well as to expand their business offering.
These networks can then be further expanded to reach customer premises.
Many
emerging market mobile operators organically approached convergence as there
have not been enough fixed assets available in the market other than
state-owned incumbents. However, acquisitions / attempted-acquisitions are
quickly becoming a popular trend, especially as single / dual-play broadband
operators emerge.
It has
also been common for fixed line operators (especially state-owned incumbents)
to launch their own mobile operators to expand revenue streams as customers
begin substituting fixed line for mobile. However, as emerging telecom markets
became more fragmented (due to several mobile license / frequency tenders),
fixed line operators have managed to find easy acquisition targets in often
struggling mobile challengers.
Impact on
performance and returns
In
addition to significant impacts on operating performance (ARPU uplift, churn
reduction, etc.), convergence results in a distinct effect on the financial
performance of telecom operators. Like-for-like comparables are not always
available since not all operators are listed. The Exhibit below shows
comparison of EBITDA margins, EV / EBITDA (valuation multiple) and return on
invested capital for selected operators per region.
In
general, integrated operators outperform standalone operators in all of the
said financial metrics. Market specific or operator specific circumstances may
not allow for clear comparisons within regions.
Potential
risk associated
While
converged offerings come with several advantages, it is important to be weary
of potential risks
1.
Bundling discounts:
Operators typically offer discounts (c.10-40%) on bundled fixed-mobile products
to drive adoption in the short term. If multiple operators adopt convergence in
the market at the same time, this may result in a price war, negating the FMC
value upside in the short term.
2.
FMC overcrowding: In
certain markets, operators may adopt FMC to replicate a competitor’s strategy,
without assessing market demand. In the absence of wholesale regulations, it
may not make financial sense for all operators to invest into fixed-line
infrastructure.
3.
Lack of expertise and
overspending: It is often challenging to find the right management expertise to
implement an effective FMC strategy. Standalone mobile and fixed players often
tend to embark on their traditional management to deploy this strategy with
limited experience of the new business (fixed or mobile). This, in many cases,
has resulted in overspending on CAPEX, organisational inefficiency, slower time
to market and inability to fully realise synergies
Best
path to implementation – Organic vs. Inorganic
FMC
implementation can broadly be categorised into three paths that are typically
considered by operators:
Build and
Acquire are the most typical options assessed by operators. The full lease /
wholesale option exists only in certain markets where a wholesale network
(nationwide fixed or mobile network connecting a sufficient set of subscribers)
exists and favourable regulations push such an operator to share its network at
commercially viable rates. Despite this, partial leasing of network (at least
Long Haul and Metro) exists opportunistically even in the Build and Acquire
options.
Multiple
strategic, commercial, technical and financial aspects need to be considered in
order to adequately assess the organic vs. inorganic FMC options. Obviously,
each market has its own limitations and opportunities, but the Exhibit below
assesses the most pertinent considerations.
Generally,
organic FMC has become less favourable in emerging markets today. Due to the
lack of experience and talent with standalone operators to run and maintain
technologically advanced networks (e.g. FTTx) efficiently, there have been many
unsuccessful organic FMC attempts. Obtaining Right-of-Ways and Spectrum has
been another big challenge where, either due to high competition or lack of
transparency, it has become challenging to roll out a new network with the
desired quality of service.
This is
where inorganic FMC has triumphed. It not only enables quick time to market,
but also brings forth a business with a proven track record and management.
While integrations of businesses could be challenging, it can be phased out
over a period of time so as to avoid disruption to business and market shocks.
Meanwhile, the two businesses can still avail several cost synergies as well as
revenue synergies via cross-selling.
Operators
tend to be more inclined towards building their own business organically as a
default approach. However, given unfavourable trends (e.g. flattening or
declining revenue, suppressing margins, declining RoIC) related to traditional
mobile or fixed line businesses in isolation, operators should re-evaluate the
time and resources required for organic deployment of new strategies such as
FMC. In doing so, telecom operators in emerging markets will be able to embrace
the benefits of FMC and ultimately accelerate their growth.
