Booz & Company
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Growth in the RecessionChallenges and Opportunities for the Telecom Sector
Beirut, April 16, 2009 Conference Presentation
Booz & Company16 April 2009 2
-3
-2
-1
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013
%
Latin America
North Africa
Gulf
G10EU15
Eastern Europe
Asia &
Australasia
Comparative Growth RatesReal GDP Change p.a. (%)
The world is experiencing a far-reaching recession
Note: Gulf includes GCC countries and Yemen
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However, emerging markets, including the Middle East, continue to promise sustained economic growth
2009 2010
Old Forecast New Forecast Old Forecast New Forecast
World Output 2.2 0.5 3.8 3.0
Advanced Economies -0.3 -2.0 1.6 1.1
Emerging and Developing Economies 5.1 3.3 6.2 5.0
Africa 4.8 3.4 5.4 4.9
Central and Eastern Europe 2.2 -0.4 3.8 2.5
CIS 3.2 -0.4 4.5 2.2
Developing Asia 7.1 5.5 8.0 6.9
Middle East 5.4 3.9 5.3 4.7
Western Hemisphere 2.5 1.1 4.0 3.0
GDP Growth Projections, 2009-2010%
Note: “Advanced Economies” includes US, Euro Area, Japan, UK, Canada and Other Advanced Economies“Developing Asia” includes China, India and the five ASEAN countries “Western Hemisphere” includes Brazil and Mexico
Source: World Economic Outlook Update, January 2009
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Telecom services growth has proven resilient in economic downturns, especially in growing emerging markets…
Global Telecom Service Revenues(1997 - 2003) (USD Billion)
1,1261,039
968920
854767
712
19981997 20001999 20032001 2002
2001 downturn
Source: ITU
Essential service for users
Relatively small percentage of disposable income
Developed Markets
Emerging Markets
Nascent market stage with continued exponential growth momentum
Coverage expansion in under- penetrated regions
Telecom Resilience Drivers
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… as telecom services are becoming essential for consumers
Source: Business Week, Booz & Company Survey 2008, Booz & Company analysis
27.0%
23.0%
6.0%
15.0%
39.0%
50.0%
56.0%
Household goods
Electronics
Entertainment
Travel
Luxury goods
Essential Basics
Clothing
Rationale and Evidence
Voice remains an essential service Broadband access is increasingly
becoming important for consumers – E.g. European Commission is
considering a universal service obligation (USO) on broadband access
Telecommunications services become more critical during a recessions; e.g.:– Less travel and face-to-face
meetings – Less social activities leading to
more calls and home entertainment (IPTV, internet browsing, etc.)
Expected Cut in Consumer Spending during an Economic Downturn
(2008) (%)
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Telecom plays a key role in enabling other sectors and is thus important for driving overall GDP growth during this recession
Sector Applications - Examples
Healthcare
Telemedicine Health services research Online monitoring
Government
e-Public services National backbone ICT
infrastructure
Aviation
Ticketing systems Routing systems Aerospace research
Logistics
RFID and NFC apps Broadcasting Logistics IT applications
Education
e-Learning Virtual university Content management
Defense
Simulation systems Remote intel gathering GPS
Telecom Industry Enabling Role Contributions to GDP GrowthAverage Annual Growth in %, 1985-2006
AustraliaGermany Canada Japan
%
UK
0,0
US-0,5
0,5
1,0
1,5
2,0
2,5
3,0
3,5
Labor InputICT CapitalNon-ICT CapitalMulti-Factor Productivity
ICT accounts for majority of capital's contribution to GDP growth
Note: ICT related capital includes hardware, communication and software Source: OECD Factbook 2008, Booz & Company analysis
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Governments see the national broadband infrastructure and a key driver for growth out of the recession National Broadband Networks - Government Investments
“[We] need action – and action now. That is why I have asked my economic team to develop an economic recovery plan… that will help save or create at least two and a half million jobs, while rebuilding our infrastructure… As we renew our schools and highways, we’ll also renew our information superhighway… because that’s how we’ll strengthen America’s competitiveness in the world.”
“When we talk about the roads and the bridges and the railways that were built in previous times - and those were anti-recession measures taken to help people
through difficult times - you could [by comparison] talk about the digital infrastructure and that form of communications revolution at a period when we
want to stimulate the economy. It's a very important thing”
Rationale
Policymakers in the US, UK, Korea, Germany, Spain, and Portugal are looking at channeling investments in Next Generation Broadband Networks to
– create new jobs
– support new businesses
– stimulate investment
Barack Obama, Radio Address on the Economy1)
Gordon Brown, The Observer Interview2)
1) http://change.gov/newsroom/entry/the_key_parts_of_the_jobs_plan/2) http://www.guardian.co.uk/politics/2009/jan/04/gordon-brown-employment-new-deal
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However, Government ownership in national incumbents may create inefficiencies in operations
* Jordan Telecom excluded due to its recent rapid privatization and accompanying restrictions on labor cut-backsSource: ITU 2005. Epsicom, Operator Annual Reports
Government Ownership - Impact
Telecom Egypt
Omantel
EtisalatQ-Tel France Telecom
Deutch TelecomTelekom Austria
KPNTelecom Italia
Telefonica
Jordan Telecom
R2 = 0.8*
0
10
20
30
40
50
60
70
80
90
0 50 100 150 200 250 300 350 400 450
Lines per FTE
Gov
't O
wne
rshi
p (%
)
Impact of Ownership on Efficiency (2006)
Other Drivers
As the telecom sector develops, there is a lower need for the government to remain directly involved
Changing demographic structure drive governments to free up funds to invest in social welfare projects
Reducing ownership increases private investment attractiveness Reducing ownership eases pressure international trade commitments
Regional Incumbents (2008)
70%
60%
55%
30%
3%
13%
10%
30%
17%
40%
25%
17%
7%
10%
53%
61%
0% 20% 40% 60% 80% 100%
KSA
UAE
Qatar
Morocco
Jordan
GovernmentPublic Institutional InvestorsPrivate SectorForeign
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MENA telecom liberalization has led to a rapid increase in the number of operators, particularly in the mobile sector …
Number of Mobile Operators in the MENA Region(2000 - 2008)
44
373636
32
272625
19
2008200220012000 2003 2004 2005 2006 2007
Source: Global Insight, Booz & Company analysis
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… resulting in strong market growth
MENA Telecom Subscribers(Million) (2004 - 2008)
+27%
Mobile
Fixed
Broadband
2008
227.0
79%
21%
2007
217.2
76%
24%
2006
168.5
71%
28%
2005
128.7
64%
35%
2004
87.4
57%
43%
Note: Telecom revenues are estimatesSource: Informa, Global Insight, Booz & Company analysis
MENA Telecom Revenues(USD Billion) (2004 - 2008)
40.6
36.4
32.2
27.5
22.8
+16%
20082007200620052004
MENA Telecom Market Overview
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The MENA region can be divided into three sub-regional clusters, each with its unique characteristics
Overview of Sub-Regional Clusters in the MENA Region
Note: All numbers are 2008Source: Informa, EIU, CIA World Fact book, Booz & Company analysis
GDP/Capita (USD)
28.496
4.6448.755
36
13 12
ARPU (USD/Month)
20
1410
Number of Mobile Players
63
141
84
Population (Million)
Gulf
Levant and EgyptNorth Africa
83
53
80
Mobile Penetration
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Market level competition is intensifying in most markets, but lags in others…
Competitive Activity of Sub-Regional Clusters in the MENA Region(2008)
Source: Informa, Booz & Company analysis
< 3 Mobile Players 3 Mobile Players > 3 Mobile PlayersLegend:
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… while cross border competition is becoming increasingly dominant
International Footprints and Revenues of Selected Regional Players(2008)
Qtel International FootprintEtisalat International FootprintZain International Footprint
STC International Footprint Orascom International FootprintBatelco International Footprint
81% of revenues from international Operations
73% of revenues from international Operations
12% of revenues from international Operations
22% of revenues from international Operations
83% of revenues from international Operations
30% of revenues from international Operations
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This is leading to the emergence of true global players in the MENA region
Number of MENA Telecom Service Providers by Class
Description Typically part of large Western European group
Mainly state-owned operators that have not expanded their footprint
Emerging global telecoms with assets spanning multiple clusters
Operators with several assets within the MENA region
Operators with one telecom asset
Operators that don’t own physical network
MVNO Emerging Global
Operators
LocalIncumbents
Expatriate Operators
4
Regional Operators
2
7
8
3
7
Source: Global Insight, Booz & Company analysis
Niche Operators
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MENA Market Share By Service Provider Class(%) (2009)
Lessons from advanced markets indicate that local incumbents tend to disappear in time and global/regional players dominate
Europe Market Share by Service Provider Class(%) (2009)
4%
MVNO2%
Niche
Regional17%
Global
77%
20%0%
Niche2%Local
Incumbent
Regional 7%
Global71%
MVNO
Source: Global Insight, Merrill Lynch Matrix, Booz & Company analysis
MENA and Europe Subscriber Market Share by Class
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Being part of a global or regional network helps operators success against competition and serve their customers appropriately
Procurement Consolidation
Shared Services
Consolidation
Corporate Strategy
Unification
Capacity Building and Know-how Transfer
Roaming Management
Synergy Sources
Leverage intensity of traffic across the footprint
Consolidate and streamline purchasing activities across operations
Align corporate strategy across operations and unify corporate brand image
Leverage best practices and knowledge sharing across the organization
Consolidate other shared services with the organization and streamline processes across operations
Potential Sources of Synergies Non-Exhaustive
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“We intend to seed 3G among the masses…look forward to more content and services.”
CEO, SingTel, 2005
“The launch of 3.5G rounds off the year in spectacular fashion”
CEO, Batelco, 2008
"This purchase (Vodafone Sweden) will improve our economic scale in the Nordic region,“
EVP, Telenor, 2005
“This transaction… will help us achieve our ambition to become the undisputed leader in the region."
Chairman, STC, 2008
“Continued portfolio extension through tariff and product innovation”
CEO, Telefonica, 2005
“Each package has its own unique advantage in terms of pricing and services"
CEO, Omantel, 2008
“Our strategic partnership with America Movil significantly increases our roaming footprint
CEO, Vodafone, 2005
“The partnership with Vodafone will enable du to join the world’s largest international mobile network
CEO, du, 2009
Establishing a company for content reflects STC’s quest to launch value-added services
CEO, STC, 2008
“The partnership between Microsoft and FT promises customers a New Experience in Telecommunications”
CEO, France Telecom, 2005
As a result, the CEO agenda in the MENA region today is beginning to resemble that of emerging markets three years ago
International Expansion
Service Sophistication
Roaming Agreements
Infrastructure Investment
Horizontal Integration
1
2
3
4
5
CEO Agenda - Advanced Markets (2005) CEO Agenda - Middle East (Today)
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In summary…
The telecom sector is less vulnerable to the global recession than other sectors
The sector is seen as a driver of the economy and therefore policy makers are driving investments and reform more than ever before– Support broadband infrastructure deployment– Encourage investments– Reduce Government ownership while increasing government support
The region continues to experience growth as liberalization advances, however lags behind in some countries where liberalization is necessary
We will see single market operators being subject to failure as globalization pcks up pace– Being part of a global or regional group is a must for long term success
The gap between the Middle East region and Europe is narrowing, however some countries need to play significant catch up in order to reach this level
