While 2009 was tough for the telco industry, economic growth in India, China, Latin America and the Gulf States produced an explosion of regional players rocking the telecoms landscape and bringing wireless communications to growing numbers of consumers. Indeed, 11 of the 20 top performing companies last year – and four of the top seven – came from developing markets. China Mobile has a larger market capitalisation than Microsoft, while Taiwan’s HTC Touch Diamond handset generates as much excitement in its core Asian markets as Apple’s iPhone does in the West.

Having dodged the recent recession better than their peers in the developed markets, companies such as Indian champion Bharti Airtel, South Africa’s MTN, América Móvil of Mexico, Egypt’s Orascom and Zain of Kuwait, reflect the shifting locus in mobile telecoms. Much of their success has been down to the fact they got a head start when penetration rates were low but poised to grow rapidly, but it has also been the result of some brave business strategies and a dynamism that makes their Western counterparts seem positively sluggish. According to management consulting firm Oliver Wyman, while others were exiting the tricky Latin American market during the downturn of 2001-2003, América Móvil opted to move in; those operations now account for 25% of the company’s revenue.

Iain Fenn, a leading emerging market telco expert at the UK-based law firm Linklaters, says many of these companies benefit from “a cost-base efficiency, nimbleness and an undoubted appetite for risk given the innate riskiness of their home markets”. Fenn notes too that many are privately held, which boosts agility. “We shall certainly see the emerging market players becoming far more active throughout Latin America, Asia and even perhaps eastern Europe. They have a lot of experience in areas that the Western operators simply don’t have.”

Providing mobile services in a developing country is a different proposition from doing so in the developed world. Not only can infrastructure be patchy and power supplies unreliable, there is also the challenge of running networks profitably when average revenue per user (ARPU) is a fraction of what it may be in developed markets. Indeed, with their diversity, political instability and poverty – not to mention competition – emerging markets act as a kind of laboratory.

Given its rock-bottom ARPUs and comparative advantage in technology, it is unsurprising that India has been the crucible of telco business innovation. Like much of Indian technology innovation, outsourcing is at the heart of this trend. Bharti Airtel’s IT operations are farmed out to the likes of Ericsson and Nokia Siemens Networks (NSN), which keeps costs down and leaves Bharti to focus on its core competency of marketing and strategy. Under a process known as managed capacity, the carrier requests and pays for its capacity in advance at an agreed price, leaving the vendor to handle the business of engineering networks and facilitating base stations.

Such judicious alliances and infrastructure sharing has often led to expeditious expansion, granting companies access to assets, customers and markets without the need for major capital investment. For example, Indus Towers, which operates 100,000 mobile phone masts, is a joint venture between Bharti Aritel, India’s biggest mobile operator, Vodafone, the third largest mobile service provider in the world and Idea, India’s fifth largest mobile service provider. According to Oliver Wyman, the deal increased Bharti’s Aritel’s total number of towers by 75% – a figure that would have cost Bharti upwards of €1bn to attain had it attempted to expand on its own.

African operators face many of the same operational and network diffi culties, further compounded by language, cultural and political barriers. To date, mobile operators in the region have been reluctant to share infrastructure or consolidate with foreign companies for fear of relinquishing a market-dominant position. For example, recent talks between Bharti and South Africa’s MTN broke down after MTN’s major shareholder, the South African government, expressed concerns that the company could fall into foreign hands; Bharti has since turned its attention back to more local acquisitions, buying a 70% stake in Warid Telecom, Bangladesh’s fourth largest mobile operator, in January. However, major regional operators may soon have no option but to consolidate, as they push to profitably expand and upgrade networks in underserved rural areas, where many potential customers live but where the ARPU will likely be lower and the return on infrastructure investment reduced.

One such company, Kuwait’s Zain, may be now feeling the eff ects of regional expansion. From a single-country outfit serving 600,000 customers, in 26 years Zain has become a leading operator in 23 Middle Eastern and African countries, providing mobile services to more than 70 million users; however, Zain posted profit falls of 17% year-on-year for the first nine months of 2009, which some analysts put down to the expense of expanding operations in Africa. In November 2009, perhaps in response to the figures, Zain announced that it had awarded five-year network outsourcing deals to NSN to optimise, modernise and manage its multi-vendor network sites in Kenya, Tanzania and Uganda, in order to streamline operations and improve effi ciency.

Undeterred, Zain still aims to become one of the top 10 leading mobile telecom companies in the world by market capitalisation by 2011, and believes the experience gained in difficult emerging markets will assist in this endeavour.

“The expertise that emerging market players have gathered in reducing their cost base and increasing their efficiency to address their low-ARPU markets can of course be leveraged for rapid foreign expansion,” says Ibrahim Adel, chief communications officer at Zain. “Horizontal expansion into adjacent markets can help realise better synergies. I see an expansion into ‘developed’ markets to be an option that can be considered opportunistically, more than strategically.”

Other regional operators also have their eyes on global expansion.

Orascom Telcom Holdings, headquartered in Egypt, now has around 80 million subscribers in the Middle East, Africa and South Asia and was one of the early networks into Iraq following the 2003 military action. The company has now set its sights on North Korea in a joint venture announced with Pyongyang in January 2009. As Orascom executive chairman Naguib Sawiris said at the time: “We believe this market will open its doors, it might unite with South Korea and the yield could be very, very high.” The group has also now acquired operations in Italy and Greece and plans a green-field operation in Canada.

However, branching into more developed markets is not straightforward and emerging market telcos must use what they have learned about innovative price-structuring and offerings to appeal to the saturated Western market.

América Móvil has taken its prepaid subscriber model, Tracfone, to the US, targeting a lower-end customer than contract providers such as AT&T and Verizon by offering only prepaid minutes, with no credit check, no service contract and no hidden fees. While prepaid makes up less than 20% of total US wireless subscriptions, Tracfone has a 28% share of this market, with 10.5 million subscribers.

Importantly, emerging telcos must not forget that there are still untapped markets at home, which, despite the infrastructure difficulties and low ARPU, off er growth opportunities if handled sensitively.

Industry watchers predict around two billion more mobile subscribers will be added globally by 2013, the majority in rural areas. Chris Gabriel, chief executive of Zain Africa, says: “There is great potential and value in emerging markets; relevant, affordable and localised products and services together with an optimised business model are keys to creating value in low ARPU markets.”

Nick Jotischky, Informa Telecoms and Media’s principal analyst covering the Middle East and Africa, agrees: “Operators that adapt to the intense competition and the evolving role of communications will be best suited to dynamic but harsh operating environments.”

Many emerging market companies are already expert in adapting services to regional needs – such as South Africa’s MTN’s pioneering use of dynamic tariffing, which adjusts call charges to network usage and the “borderless roaming” introduced by Zain to East Africa – but also in offering solutions to brand-new consumer needs.

In many cases, emerging market telcos have led the way in expanding data service operations, which can top up ARPU. While the move from using mobiles solely to call or text to more internet-led services has taken some time in the West, developing countries have been quick to adopt new technology. Low disposable income and high price sensitivity has made many consumers sophisticated in their choice of operator and ready to switch if a service disappoints. Consequently, providers have sought out region-specific ways to attract and, more importantly, retain customers.

In Kenya, Safaricom, the country’s leading provider, has teamed with Vodafone to offer M-PESA, a mobile banking services that is showing Western companies the way. In a continent where millions do not have access to traditional banking and where the cost of setting up branch networks can be prohibitive, such services are vital. Offering bill paying and electronic money transfer facilities among others, the service has encouraged both custom and loyalty.

Elsewhere, Taiwan’s Chungwa Telecom has opted for bolt-on services to retain market share in a country with 100% penetration, partnering with financial institutions, universities and online music outfits to add a range of content to its traditional off erings. Zain’s Adel says: “It is essential for these operators to preserve their value and think of ‘addendums’ to their business models. Internet access represents the next largest potential.”

According to Oliver Wyman, 20%–25% of the world’s population use the internet, double that of five years ago, with smartphones fast becoming the access vehicle of choice. Smartphones now make up around 15% of global mobile phone sales, up from 3% in 2004.

In fact, rather than opting for cheaper offerings, customers in emerging markets are leapfrogging regular mobiles in favour of smartphones, which provide the complete wireless access that underserved communities need. In the Middle East and Africa, subscriptions on a 3G network now account for half of total mobile subscriptions, and in an Oliver Wyman survey, more than 60% of Indian mobile owners said their next phone would be a smartphone.

In emerging markets, with the ongoing infrastructure investment, potential still abounds. Given their large, underserved populations the possibilities for savvy service providers are enormous..

TURKCELL’S DELIGHT

Take one dominant local market leader with a close on 60% market share, add two rivals recently purchased by major international operators committed to ending that dominance, season with newly launched 3G services and number portability, and allow to stew in an environment of global economic crisis. You could be forgiven for thinking that sounds like the ideal recipe for a major market shake up. But that’s exactly the market scenario faced during 2009 by Turkey’s biggest mobile operator Turkcell.

However, far from heralding a meltdown, it has fought off aggressive pricing by rivals Vodafone and Oger Telecom and returned to profit growth. CEO Süreyya Ciliv attributes Turkcell’s success to a combination of meeting his competitors’ aggressive marketing tactics head-on and off ering one of the fastest 3G services available anywhere in the world.

Fortunately for Turkcell, a long regulatory spat saw Turkey delay the introduction of 3G until after the introduction of number portability. The delay allowed the company to make use of the latest HSBA plus technology, while most major European operators are still using older, slower standards. With 1.8 million subscribers for its new 3G services, Turkcell boosted its subscriber base back to 36 million – only marginally down on its 2008 peak of 37 million, and maintain its market share of around 57%. Little wonder that Ciliv was named CEO of the Year at the annual World Communications Awards last December.

However, with so much success at stake, it is little surprise that 2010 is shaping up to see a bitter battle between the company’s three main shareholders for control of the firm. It would take a lengthy book to detail all the twists in the tale of relations between Turkey’s Cukurova Group which currently controls Turkcell, and boardroom rivals Scandinavia’s TeliaSonera and Russia’s Alfa Telecom. Suffice it to say that the announcement late last year by TeliaSonera and Alfa that they would merge their holdings in Turkcell and Russian mobile operator MegaFon and work to take control of the Turkish operator has been seen by many as a sign of changes ahead. Th at said, few expect Cukurova to give up its prize asset without a fight.

THE MISSING LINX

Economic and technological conditions in eastern Europe may be challenging, but this is not denting the ambitions of Amsterdam-based telecoms and data services provider Linxtelecom. The company, which has subsidiaries in Russia, Poland, Estonia, Latvia, Lithuania, Ukraine, Hungary, Finland, Sweden, as well as in Germany and the UK, is expanding aggressively throughout central and eastern Europe and the Caucasus through strategic acquisitions and organic growth.

Linxtelecom aims to be a conduit between western and easten Europe, working with western companies who need to transfer data and IP services to the east and with companies in the east who require connectivity in and to the west.

Chief executive Jules Delahaije says: “Although the need for connectivity is apparent, the responsiveness of the market and stage of development diff ers greatly from one country to the next. For example, connectivity services in Estonia or some parts of Russia are on a par with the west, while in parts like Georgia or Bulgaria the markets are relatively immature and untapped. Then there are the diff erences in quality of the local infrastructures, the different political and business cultures, languages and regulatory environments.”

Delahaije says that banks and multinationals throughout the region are increasingly outsourcing their non-core business and, as a result, back-up and disaster recovery now represents Linxtelecom’s core business.