BEYOND MAINSTREAM

SUCCEEDING AS A TELECOM
CHALLENGER
How to win facing strong competitors

JUNE 2015
 THINK ACT
SUCCEEDING AS A CHALLENGER

THE BIG 3
1
Mobile operator challengers which
enter markets with at least two players
present have no guarantee of success
– and many of them fall short of
grabbing a large enough chunk of the
subscriber base.
p. 3
2 There is no 'one size fits all' for becoming a successful challenger, but the
strongest performers tend to focus their efforts on capital/cost effectiveness,
accentuated differentiation of products/services compared to the
competition and ensuring a regulatory framework that makes it
possible for them to compete effectively.
p. 4

3 Based on the efforts of successful players, struggling challengers need to ensure four key
success factors to take market share:
•• Master the basics
•• Bet on the future
•• Ensure a favorable regulatory context
•• Challenge the strategy
p. 9

Viettel
Vietnam
p. 7

2 ROL AND BERGER STRATEGY CONSULTANTS

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Struggling in competitive markets.

Mobile telecom operators across the
globe face the challenge of generating
enough profits to recuperate their initial
investments in spectrum licenses and
network roll-outs, to cover the substantial
recurring investments needed for new
network technologies (e.g., 3G and 4G)
and to improve their service quality.

1 Many challenger operators (late entrant operators rates (see A ). Operators which fail to achieve 10-15%
which entered into markets with two or more market share often struggle to secure EBITDA margins
incumbents) have faced difficulties competing in this of around 20%, which are typically needed to cover
context. This uphill battle is reflected in their market CAPEX investments, interest payments and tax.
share, where many fall short of securing a sizeable To improve performance, late entrants must take
customer base. In markets with more than 80% action on three fronts:
mobile penetration at the time of the challengers' A. Review the cost structure to become leaner
launch, the average market share for third entrants B. Strengthen the product, service and channel
three years later was 16%, less than half of a three- differentiation versus competitors
way split of the market. However, the actual market C. Obtain the necessary support to compete
share per operator varies substantially, from a 
comfortable 42% to a paltry 1%. Ideally they should act on these dimensions in parallel.
Market share is far from the only element that In our work with clients, we have seen that operators
drives operating profits. However, our experience in who fail to act early to improve their situation risk
working with mobile operators, their shareholders entering into a downward spiral of unstable
and lenders, indicates a relatively strong relationship management and deteriorating brand image. Although
between market share and EBITDA margins. An it's true that repositioning a struggling challenger
analysis of 150 operators in three-operator markets requires planning and considerable effort, the
confirms this, showing a significant, positive alternative to bringing this about is often even less
correlation between market share and EBITDA margin attractive – if viable at all.

ROL AND BERGER STRATEGY CONSULTANTS 3

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2 A. REVIEW THE COST STRUCTURE TO BECOME Staff and overhead costs also require review, and the
LEANER potential levers to reduce costs merit detailed
Late entrants have levers available to improve cost assessment. Improving HR policies for performance
efficiency both in the short- and long-term. One of management, recruitment and training as well as
these is network capital efficiency, where we find that working to reduce other operational expenditures
clients who take a holistic approach, accounting for could help operators 'do more with less'.
both technical and commercial aspects, are the most
successful. This can help operators become more B. STRENGTHEN THE PRODUCT, SERVICE AND
selective and cost effective in both maintenance and CHANNEL DIFFERENTIATION VERSUS
technology roll-outs. Increased network sharing, for COMPETITORS
instance, could allow operators to focus their Several late entrants have been successful in taking
technology investments on core areas, whilst market share by introducing new product combinations
transforming other capital investments into operational to the market – better addressing under-served
expenditures. segments. Their strategies include an emphasis on
However, such a strategy requires careful area-by- online/non-physical distribution together with a simple
area analysis of potential price and traffic volume and aggressively priced product portfolio.
evolutions in order to ensure that the sharing is Strong customer segmentation has also led many
financially attractive compared to capital investments. challengers to focus their network on priority areas
For a more detailed description of how to optimize (e.g., major cities), while leveraging roaming
network costs, see Roland Berger's publication agreements to serve customers in other areas.
Building and managing a value-centric network. Customer segmentation can also lead operators into

A v
CORRELATION BETWEEN MARKET SHARE AND EBITDA MARGIN RATE FOR 150 OPERATORS IN 3-PLAYER
MARKETS (QUARTERLY DATA, Q4-2014)

70%

60%
EBITDA margin rate

50%
R2 = 0.28
40%

30%

20%

10%

0%
-10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60%

Subscriber market share

Source: Company data, Roland Berger analysis

4 ROL AND BERGER STRATEGY CONSULTANTS

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identifying competitive advantages in covering rural will determine which strategies will be successful and
zones, where incumbents have little to no presence. which ones will fail in a particular market. An aggressive
For a more detailed overview of what opportunities pricing strategy without a favorable regulatory
rural populations in developing countries represent, we framework, for instance, can deal a heavy blow to a
invite you to read the Roland Berger publication late entrant's finances.
Opportunities in rural areas of emerging markets for Keeping this in mind, we propose taking a closer
mobile telephone operators. look at five late entrants that faced two or more
incumbents at launch: B
C. OBTAIN THE NECESSARY SUPPORT TO
COMPETE 1. Free Mobile (France)
Late entrants may find it hard to challenge incumbents 2. Orange (Spain)
on price due to their spectrum allocation, unfavorable 3. Movitel (Mozambique)
roaming agreements and/or mobile termination rates 4. U Mobile (Malaysia)
(MTR). Regulatory authorities need to provide the 5. Viva Kuwait (Kuwait)
necessary framework for late entrants to compete
effectively in the market. Typical solutions to achieve 1 FREE MOBILE (FRANCE)
this include asymmetric termination rates and caps on Free, a subsidiary of Iliad Group, launched its French
incumbents' national roaming prices. Without such mobile services in 2012 and quickly managed to
regulatory support, late entrants are likely to face great secure a substantial share of subscribers – whilst
difficulty becoming attractive to customers while facing three incumbents.
securing adequate profits. The company focused on a simple product
Challengers that find themselves in an unfavorable portfolio, aggressive prices, and online channels.
regulatory context should make it their priority to lobby Leveraging its fixed broadband services (present in the
authorities so as to produce changes to the regulatory market well before the launch of mobile operations)
framework. Operators that have successfully managed the company could push aggressive pricing for its
to obtain regulatory changes in their favor include Zain mobile offering even further. This aggressiveness
in Saudi Arabia, LIME in Jamaica and Movistar in Peru. was further facilitated thanks to asymmetric MTRs.
Free created an upheaval in the French mobile
Learning from others market not only with its low prices, offering monthly
plans at EUR 2 (for no additional cost to the company's
Identifying individual actions to drive commercial and Freebox fixed-line broadband customers), but also
financial performance along the improvement fronts is thanks to their accompanying 'no commitment'
necessary, but struggling challengers will need to approach to mobile offers. With its anti-establishment
combine these into a coherent whole in order to positioning, the company has been successful in
succeed. This is where we believe they have lessons to attracting youth and price sensitive customers alike.
learn from successful peers in other markets. For this Free applies a strict segmentation of its clients,
article, we have selected successful challengers from and focused its early technology deployments only in
different countries and continents based on their areas where it was profitable compared to its
ability to take substantial subscriber market share. wholesale national roaming deal with incumbent
Although late entrants in dire straits can be Orange. This allowed the company to quickly grow its
inspired by others' success, they should carefully subscriber base, with the subscriber growth in priority
assess the level of applicability of different strategies areas helping finance the network roll-out in other
to their unique situation. Specific contextual elements areas in order to respect regulatory obligations.

ROL AND BERGER STRATEGY CONSULTANTS 5

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The company also boosted profitability by keeping its Orange grew its 4G customer base from 0.5 million in
overheads limited, focusing on attracting fewer, higher 2013 to 2.3 million in 2014.
caliber employees. Free's strategy did not only help it Although the company has faced challenges to its
gain 5.2 million subscribers in 12 months, but also to revenues and margins in the tough Spanish economic
become profitable within 18 months of launch. context, the company managed to grow its customer
base and keep EBITDA margin rates around 25%
2 ORANGE (SPAIN) during 2014.
Orange Spain is an example of a late entrant (launched
as Amena in 1999 and acquired by Orange in 2005) 3 MOVITEL (MOZAMBIQUE)
which managed to turn around its performance. Until A subsidiary of the Vietnamese telecom group Viettel,
2008, Orange struggled with poor performance and Movitel set out to establish and grow its subscriber
negative customer perception in the market. The base in Mozambique. The company launched in 2012
company then decided to launch a series of initiatives and gained 2 million customers in its first 12 months
to 'fix the basics', which led it to invest in reducing of operations. With strong competition in urban areas
billing system complexity, to simplify its product from Vodacom (Vodafone Group) and mcel, Movitel
portfolio and to adapt its service levels to better fit has gained traction in the market with its positioning
with different customer segment requirements. as an innovative and caring network for every
In parallel to its operational performance Mozambican.
improvements, the company introduced aggressive Movitel's aim is to become the operator of choice
device subsidies, smartphone bundles and product for rural populations. The company plans to achieve
pricing initiatives aimed at poaching customers from this through substantial investment in network
the competition. Orange also launched a set of coverage, a vast retail network, competitive prices and
operator-branded smartphones in the Spanish market a substantial direct sales force. To ensure sales reach
to better cater to consumers' need for good, value for to customers in rural areas, the company leverages
money devices in a harsh macro-economic climate. door-to-door sales – an approach which has helped
With a high penetration of smartphones in its Movitel obtain 80% market share in rural areas.
customer base, Orange set out to become the leader in The company's success in Mozambique has earned
data in the Spanish market. It quickly expanded its 4G it many awards, including 'Rural Telecom', 'Competitive
coverage, covering 70% of the Spanish population by Strategy Leadership' and 'Fastest Growing of the Year
the end of 2014. Thanks to this aggressive bet on data, in Middle East and Africa'.

B
EX AMPLES OF SUCCESSFUL LATE ENTRANTS
FREE MOBILE
France
ORANGE
Spain

U MOBILE
Malaysia
MOVITEL VIVA KUWAIT
Mozambique Kuwait
Source: Company data, Roland Berger analysis

6 ROL AND BERGER STRATEGY CONSULTANTS

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AS AA CHALLENGER
CHALLENGER

VIETTEL'S SUCCESS STORY

CONNECTING THE POOR

Viettel is run by the Vietnamese Ministry of Defense, based out of Hanoi,

and entered the Vietnamese telecom market as the fourth entrant in 2000.
The Viettel group views telecommunication as a commodity, which should
be made accessible to all. The group penetrates poor populations by
undercutting competitors' prices and investing in good network coverage
throughout their markets.
The company's strategy in developing countries is to capture the poor,
often rural, populations ahead of its competitors, betting on these customers
remaining loyal to the company as economic development lifts chunks of the
population out of poverty. Its strategy has led the group to invest in developing
markets in three continents. To date, the group manages operations in
Vietnam, Cambodia, Laos, Timor-Leste, Mozambique, Cameroon, Haiti, and
Peru. Viettel is set to start operations in Burundi and Tanzania during 2015
and company officials have stated that the group aims to run operations in
20 countries by 2020.
Viettel has managed to grow its revenues by 20% to USD 9.1 billion in
2014 and its profits before tax by 15% to USD 1.5 billion. Its wireless
customer base reached 73 million at the end of 2014, of which 17.5 million
are outside of Vietnam.

73
million USD 1.5
MOBILE billion
SUBSCRIPTIONS PROFITS

USD 9.1
8
COUNTRIES
billion
REVENUES

ROL AND BERGER STRATEGY CONSULTANTS 7

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SUBSCRIBER MARKET SHARE

50%
1 FRANCE
Orange France 30%
SFR
Bouygues Telecom
10%
Free Mobile
Dec 12 Dec 13 Dec 14

2 SPAIN 40%

30%
Telefónica Móviles Espana
Orange Spain 20%
Vodafone Espana
10%
Yoigo
Dec 12 Dec 13 Dec 14

3 MOZAMBIQUE 60%

Mocambique Celular 40%

Vodacom Mozambique
Movitel Mozambique
20%

Dec 12 Dec 13 Dec 14

4 MALAYSIA 40%

Maxis Communication 30%

Celcom Malaysia 20%
DiGi
U Mobile Malaysia 10%
Dec 12 Dec 13 Dec 14

5 KUWAIT 40%

Zain Kuwait 35%

Ooredoo Kuwait
Viva Kuwait 30%

25%
Dec 12 Dec 13 Dec 14

Source: Company data, Roland Berger analysis

8 ROL AND BERGER STRATEGY CONSULTANTS

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4 U MOBILE (MALAYSIA) To deliver on its promise as an innovative, data-centric

U Mobile is a challenger in the Malaysian market and operator, Viva Kuwait ensured ePayment capabilities
has grabbed substantial market share in recent years from its inception in 2008. Launching its LTE network
thanks to its data-centric, innovative offerings. The in Q1-2013, just after the market leader and well ahead
company launched its first publicly available mobile of the then number two in the market, helped the
product, Surf with U, a data-only plan, in Q1-2008. operator become the second player.
Only the following quarter did the company launch a Viva Kuwait's data-centric, innovative approach
mobile service plan (postpaid). has allowed the company to capture the lion's share of
U Mobile faced many challenges after launch, and LTE traffic in Kuwait. The company further combines its
only managed to take 1% market share within its first innovation with a strong focus on reaching its
two years of operations. This prompted the company customers where they are, and leveraging social media
to revamp its strategy, based around four main pillars: to improve customer reach – for instance by answering
fast and robust network; product and service customer queries on Twitter.
innovation; optimized back-end operations; and strong The company's emphasis on a stable, reliable
distribution network. The need for the latter led the network together with competitive, data-centric offers
company to leverage channel distribution partners, has allowed Viva to achieve success both with
such as 7-Eleven, Cosway, Singer, Giant and Tesco in subscriber numbers and substantial improvements in
order to complement traditional sales channels. financial performance. In 2014, revenues were up 31%
U Mobile managed to turn around operations and and EBITDA up 72% compared to 2013.
was named the 'most promising service provider of the
year' in 2011 by Frost & Sullivan, a research firm. The Winning in competitive markets 3
company continued its quest to gain subscribers with
its 'Vision 2 million new customers" campaign in Q4- Several of these successful challengers identified the
2014. The campaign focused on offering aggressive importance of data early on, and dared to bet on data
benefits to new customers, including free 250 MB of products and services as the main drivers of subscriber
data per month for the first 12 months. Cheap base growth. Focusing on data was not only a bet on the
international rates also helped the operator attract the future, but also a lever to differentiate the operators from
international workforce present in the country. the incumbents, which tended to be cannibalization-
Following the successful implementation of its averse due to their comfortable voice subscriber revenues.
revised strategy, the company's subscriber market What these success stories have in common is that
share grew from <1% in 2009 to 17% in 2014, in a the challengers identified a 'white spot' in their
four-player market. respective markets and established a clear strategy for
how to occupy this space. These strategies took
5 VIVA KUWAIT different forms, depending on the market context, but
Viva Kuwait, partially owned by Saudi telco incumbent share some key success factors:
STC, launched its operations in 2008 – facing two other
large operators with regional presence: Zain and MASTER THE BASICS
Ooredoo (formerly Wataniya). To differentiate itself from Whatever their strategy, late entrants still need to
the strong competition, Viva quickly identified under- master the basics common to successful telecom
served segments in the market and launched mobile operators, such as ensuring good network service
broadband packages together with other innovative levels and quality for its customers. Operators can
plans. Realizing the importance of data, it focused on choose to do this through an aggressive network roll-
rapid deployment and upgrading of its 3G sites. out (e.g., Movitel) or through a selective, paced roll-out

ROL AND BERGER STRATEGY CONSULTANTS 9

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while ensuring solutions for non-covered zones (e.g., challenger's costs of sales will be higher due to large
Free mobile). voice traffic volumes going off-net. Alternatives do
Operators like Orange Spain show that in order to exist, such as promoting OTT services instead of off-
succeed in their market, they also needed to ensure net voice calls and/or pushing highly data-centric
the basics of customer satisfaction and a strong brand offers, but challengers are more likely to succeed in
image. Orange Spain realized this in part through an markets with a favorable regulatory framework.
efficient billing system and an easy-to-understand
product portfolio. CHALLENGE THE STRATEGY
Some challengers have become successful through The successful challengers have above all one lesson
analyzing which basic attributes incumbents' clients to teach their struggling peers: you can still get things
valued the most (e.g., customer service, customer right. Challengers that are successful today, such as U
experience) – and worked on them to become better Mobile and Orange Spain, went through several years
than the incumbents. of sub-par performance and marginal market share
growth before finding their recipes for success. They
BET ON THE FUTURE managed to turn around their performance by
Late entrants will have a greater chance of success in revamping their strategies and building the right
new market segments where the incumbents' positions organizations to deliver them.
are weaker. They should aim at completing the Struggling late entrants should act now to analyze
incumbents' product offering and distribution channels both their internal situation and the market dynamics. An
to gain an edge. Data and online distribution were in-depth understanding of which market opportunities
such levers, but in most markets today they have exist and how the company should best tap into these is
become so important that no operator can afford to key for any strategy to work. Once the course is set, the
overlook them. company will need to work hard to build the right team
Areas to be explored for relevant future developments and organization for the journey. And if the regulatory
could be in new network technologies (e.g. LTE framework is unfavorable, no time that is spent lobbying
Advanced, 5G), Over-The-Top services (e.g. OTT video, regulators should be considered lost.
enterprise cloud services), Big Data analytics (e.g. Getting ahead however is only part of the battle,
Smart City solutions) and integrated enterprise ensuring an adaptive strategy and an agile organization
solutions. Except for network technologies, operators to deliver it is a continuous effort. The operator's
should seek partnerships with for them non-traditional C-suite should implement governance bodies and
partners. processes that regularly ensure they review the
company's strategy – including aspects that helped
ENSURE A FAVORABLE REGULATORY CONTEXT drive success in the past.
Many regulators actively work to improve competition Operators that do this will identify when yesterday's
among operators in their markets, and providing recipe for success is not fit to address tomorrow's
favorable conditions for new entrants has been used challenges. Challenging not only other operators but
as one important lever to achieve this goal. This does also their own strategy will help operators not only get
not hold true in all markets however. We have worked ahead, but stay ahead.
with challengers that had their strategic options heavily
limited due to, for instance, high, symmetric MTR since
the launch of their operations.
Without favorable regulations, challengers may
face difficulties to undercut incumbents' prices, as the

10 ROL AND BERGER STRATEGY CONSULTANTS

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ABOUT US
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A VALUE-CENTRIC BIG DATA MOBILE TELEPHONE
NETWORK OPERATORS IN RURAL
AREAS

To create a value-optimizing The study examines the big Today mobile communication
investment plan requires promise and the challenges is so commonplace that the
answering complex questions of Big Data for the telco markets of the industrialized
that dive deep into a telecom
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industry. Big Data provides
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