By Mohamed Allouba News Focus Syria Thinks Small Damascus turns to microfinance to combat poverty An Industry Unraveling Once a symbol of national pride, cotton’s prospects are coming apart at the seams A New Way of Doing Business Non-profit group promotes economic development by giving companies a helping hand The Science of Buying Marketers examine the brain to find out what makes consumers tick Digital Booty With electronic piracy plaguing the music business,legitimate media companies scramble for a business model that pays A Rocky Start Theft, corruption and a little chaos mark the launch of a new property levy meant to haul the country’s tax system into the modern era Highway Robbery Reputation of white taxi program takes a hit as drivers caught rigging meters By Khaled Habib Coming to a meeting near you: The Blackberry mobile email device has cultivated a small-but-loyal following By Courtesy of TNS James Fergusson of TNS By Greg Baker Then again, maybe not — video calling has yet to take off

By Yasmeen El Mallah and Tom Gara

The first challenge of any new technology, product or service is getting people to actually adopt it. The second challenge is keeping the product relevant and increasing its popularity once adoption has become widespread. Customers have adopted mobile phones at an unprecedented rate, so the question for Egyptian mobile network operators is how to keep them interested.

To put the adoption, acceptance and phenomenal growth of mobile phone usage in context, you really need to look at it compared to the other great technological leaps of the twentieth century. The car has changed the basic landscape of cities and is the textbook example of mass production — and as of today there are over 800 million of them across the world. Television was introduced in the 1930s and is the symbol of twentieth-century media globally. As of 2007, there are 1.6 billion television sets worldwide.

The first GSM mobile network was launched in 1989. Today, there are over 2.7 billion mobile phone users worldwide — 800 million of whom signed up in 2006 alone. There are now 2 mobiles for every fixed-line phone in the world — and as many new phone customers each year as there are car owners on the entire planet. Analysts expect that by the end of 2009, over 50% of the world’s population will own a mobile phone.

The unprecedented, and truly stunning growth of mobile phone usage has come hand-in-hand with a boom in associated industries — mobile-phone manufacturers, network-equipment makers and most prominently, network operators. No matter where you look around the world (particularly in emerging markets), one thing seems the same: for the last five or more years, mobile-network operators have been the booming, bullish darlings of their national business communities.

Now, however, mobile operators everywhere are facing the second, inevitable challenge — how to remain profitable and continue to grow once the adoption boom dies down. With usage of their core product becoming almost universal, the question is — what next?

This is the scenario that has the word ARPU in the minds of mobile-industry professionals everywhere. An acronym for average revenue per user, ARPU is a basic measurement of how much money each individual customer is spending on his or her phone bill. Now that the land grab of new customers is slowly coming to an end, ARPU growth is widely seen as the only way for network operators to keep growing income once the subscriber base stops expanding.

In Egypt, the land grab is still in full swing. With a growing economy and a mobile-phone penetration rate of less than 20%, industry analysts still see rich green pastures of potential customers in Egypt, just waiting to be swallowed up by the nation’s two operators (and Etisalat’s network, when it finally becomes active). However, it is not that simple. ARPU is still high on priority lists for a simple reason: The 80% of Egyptians who do not yet own a mobile phone are also the 80% who, economically, are unlikely to spend very much on their phone once they own it.

According to James Fergusson, regional director of Taylor Nelson Sofres (TNS), Etisalat will have to work very hard in promoting themselves and coming up with offers that will compel mobile-phone owners to switch networks. Fergusson explains that there are two types of customers in the market:

There are the lower-margin customers whose usage and spending is lower, and their demand for services is limited. They usually are most concerned with text-messaging capabilities and minutes. These customers make up the bulk of the prepaid segment.

High-value customers, on the other hand, are more likely to be interested in additional services such as music downloads, mobile email, entertainment and other leisure products. They represent the majority of postpaid users — accounts that are billed at the end of each month. “There are two types of people. It’s not a ‘one size fits all’ concept,” says Fergusson.

Although postpaid accounts represent less than 10% of the subscriber base for the two active networks, Vodafone and Mobinil, the accounts make up a disproportionately large percentage of the companies’ subscriber revenues. And with Etisalat expected to aggressively target this lucrative customer group — threatening to deprive both companies of part of their their cash cow customers — the competition for the high-value customers has become greater than ever.

Ferguson explains that for Etisalat to successfully win current customers of rival networks, they will need to create offers that will address the needs of different types of users. High-end users will not switch for a minimal difference. High-end users in this kind of situation are harder and costlier to target than those at the low-end. They are usually more loyal to their current network and not willing to exchange numbers after they have established contacts and acquaintances — unless the benefits of the new network are significantly better than their current network’s. Low-end users are more willing to switch if things such as text messaging and minutes are cheaper.

According to Ferguson, the very first priority for Etisalat is to provide quality service. In order to do so, they need to make sure their customers are satisfied through outstanding customer service, fulfillment and quality. If they are unable to reach at least Vodafone and Mobinil’s standards, then they will find it difficult to establish a position in the market — and will suffer greatly for it.

“Etisalat needs to make sure that they’re at least at the same level as their competition. They also need to make sure that everything works as soon as they launch and not as they go along. If they fall down, they will receive bad press and word-of-mouth,” says Fergusson. Nobody likes a bad review.

Branding will also be an issue. Etisalat has already established its name in other countries, but will need to work hard to do so in Egypt, just because it has come so late into the game. “There are huge network problems in Egypt now, so [if I were Etisalat] I would play up my brand. Etisalat should be building [its] brand to prove [itself] and [its] credibility,” says Fergusson.

For the incumbents, Fergusson believes that they need to think of new and innovative ways to keep their customers. First of all, they need to offer what the customers need and make sure they tailor according to what each tier requires.

Secondly, they need to be innovative in their pricing system. Fergusson offers one example: there could be service that offered free calls to a limited number of phone numbers that a person can choose. A couple that uses the same network would be allowed to call each other for free. These details, says Fergusson, are what will keep customers loyal to the incumbents — which could essentially be a matter of life and death for the two companies.

The importance of the premium segment of the mobile telecom market in Egypt cannot be understated. In recent years, both operators have consistently added hundreds of thousands of new customers each month — the overwhelming majority being prepaid users. This has had the effect of “diluting” ARPU figures for both companies, as the growth in revenue created by big spenders is simply lost in the much more rapidly expanding pool of low-cost users. Both Vodafone and Mobinil saw their ARPU drop in 2006 — Mobinil’s by 17.4% and Vodafone’s by a less severe 5%.

The significantly lower decrease in ARPU experienced by Vodafone may signal that an exclusive focus on big-spending postpaid customers is not the key to success. Although both companies grew their subscriber base enormously in 2006 — 38.4% for Mobinil, 42.1% for Vodafone — it was Vodafone that managed to grow the ARPU of these primarily low-margin new customers. The 8.57 million prepaid customers on the Mobinil network (2.64 million of whom joined in 2006 alone) spent, on average, 10.7% less than they did in 2005.

In the case of Vodafone, it was almost exactly the opposite. Vodafone’s 8.07 million prepaid subscribers (2.07 million of them newly added in 2006) spent, on average, 12.7% more. In short, Vodafone managed to get their prepaid customers to spend more — a feat that all three network carriers will be expected to perform in future years.

ARPU growth comes primarily from offering more services to mobile customers in the hope that they will adopt new services as eagerly as they adopted core services like voice calling and text messaging. “Push to talk” from Mobinil and the selling of ringtones, wallpapers and music by Vodafone are examples of new services from 2006, part of a broader push by both companies to get their customers spending more on their phone bill.

Will this work in Egypt? When looking at the adoption of higher-value mobile services abroad, one is left with a feeling of hit-and-miss: certain services, in certain markets, have taken off, while many have failed miserably, losing their operators millions, and in many cases billions, of dollars.

Once seen by operators as the gateway to a new generation of high-value, high-profit mobile services, the third generation of mobile phone technology (known as 3G) has instead become symbolic of the challenges faced when trying to raise ARPU in a highly competitive, rapidly changing market.

Coming as it did in the bullish, exuberant days of the dot-com bubble, 3G was hyped as being the future, both for customers and operators. An advanced new system and infrastructure that would offer high data-transfer speeds and all the new services associated with them, 3G quickly became the great hope of network operators looking to grow their ARPU.

Governments soon realized that the auctioning or sale of 3G licenses represented a cash-cow of vast proportions — in the year 2000, over $130 billion was spent by mobile operators in Europe alone to acquire 3G licenses. Many of these operators have since struggled to recoup the high expenses — especially given that a number of 3G’s supposed ‘hit’ features have turned out to be flops.

Hong Kong-based Hutchison Whampoa Telecommunications (in which Orascom Telecom is a significant shareholder) knows better than most the risk — and opportunity — that 3G represents to the mobile industry. Hutchison’s billionaire chairman Li Ka Shing — one of the world’s richest men, with a well deserved reputation for flawless business acumen — hedged much of his company’s telecom bets on the uptake of 3G, spending over $25 billion on developing 3G networks in Europe, Asia and Australia.

Hutchison Whampoa’s 3G business has hemorrhaged money ever since, losing $2.56 billion in 2006 on top of the $11 billion that it lost between 2003 and 2005. The company’s struggle is symptomatic of that of the industry: Enormous licensing and set-up costs have not translated into increased 3G revenues, as users fail to flock as expected to the much-hyped new services.

“In the UK and Australia, 3G launches have not been successful. People talk about it as a product — it is a technology. If you’re going to launch, you need to offer customer benefits. How does it help people in their day-to-day lives?” says Fergusson. He continues to explain that third-generation technology is aimed primarily at “white-collar” users.

“It allows them to do mundane things right away, [such as] mobile banking, checking email and checking the news. People want to optimize time that is spent waiting for a meeting or while stuck in a traffic jam,” explains Fergusson.

Video calling was a poster child of 3G enthusiasm. Those who have grown up in the world of Star Trek and James Bond imagine a video communicator facilitating face-to-face conversation between people a world (or galaxy) apart, and assume that such a product would be destined to succeed.

Experience has not validated this assumption. Of the hundreds of 3G networks across the world now offering video calling to their customers, none have seen the service become a widely used success. In the high-technology East Asian havens of Japan, South Korea and Hong Kong (where 3G and 3G-like services have been around much longer and seen wider adoption), video calling has not proven to be the ‘killer app’ that operators hoped it would be. Services such as music and ringtone downloads have seen greater success — particularly in Japan, where the mobile-music market now easily tops $1 billion per year.

Usability issues, cost, hardware challenges and marketing of the service are all seen as reasons for the unexpected flop of video calling, but customer demand (or lack thereof) is also a major factor. In November 2006, the GSM Association, the leading mobile industry body, released the results of a survey of mobile users in Europe, Asia and North America. The survey asked users to rank their preference for different mobile data (i.e. non-voice) services. Video calling came in at a miserable twelfth out of fourteen options, ranking behind services like mobile radio, instant messaging and what could turn out to be the unexpected star of the ARPU scene — email.

The great success of the Blackberry mobile email device is a sign that mobile email is a viable service — most importantly, one that is in demand by big-spending users. For the business market, always-on instant access to email while on the road is a highly lucrative product, with the Blackberry now as much an icon of corporate America as the mobile phone itself once was. As of December 2007, Blackberry makers Research in Motion (RIM) reported 7 million Blackberry users, with over 800,000 added in the previous three months alone. Both Mobinil and Vodafone offer the Blackberry in Egypt.

Many of the emerging mobile trends that show promising potential for ARPU growth are actually services that do not require the expensive 3G network infrastructure at all, and can be rolled out almost immediately on the current second-generation networks. This is good news for network operators looking to grow ARPU quickly and among the widest possible base of users — but bad news for operators who shelled out huge sums of money for the privilege of operating 3G networks that no longer seem as lucrative as they once did.

“[Third-generation technology] is a big investment and its priority is growing. There isn’t a need for the market to migrate, though. They [Etisalat] need to be more aggressive [in the market] to make people adopt the concept. They can already work off of 2.5G [see below]. The only major difference between 3G and 2.5G is that 3G is a few seconds faster,” says Fergusson.

Vodafone Egypt recently splurged LE 3.34 billion on a 3G license, after Etisalat got one thrown in with their unexpectedly high LE 16.7-billion bid for the third operator license. Both companies may come to regret the large sums spent on the licenses — and Mobinil, the only company that has not paid for a license as yet, could be the last ones laughing.

EDGE technology — which Mobinil deployed in early 2006, only to be rebuffed by the regulator, who claimed it was technology not covered by the company’s existing 2G license — offers most 3G-style services without 3G-size costs. If Mobinil’s efforts to convince the regulator that EDGE is not a 3G service and thus does not require the multi-billion pound investment that goes with it is successful, it could represent a stunning coup for Mobinil management.

EDGE represents for the mobile telephony landscape what ADSL does for the internet — a huge increase in data-transmission speed over the same ‘old fashioned’ network. Just as the upgrade from dial-up internet to ADSL did not require the laying of new phone lines, EDGE can offer a data service comparable to 3G without any new infrastructure being needed. Like ADSL, it is an innovation in how the data is ‘packaged’ and transmitted, not in the physical-transmission system itself. Depending on how it is implemented, the EDGE platform can deliver performance as fast as, and faster than, 3G. Because of this, it has variously been dubbed ‘2.5G’ by some (including Mobinil, in attempt to have it classified under the company’s license) and ‘2.75G’ by others.

In March 2007, network-equipment maker Ericsson announced that their next-generation EDGE platform, named EDGE Evolution, would be rolled out by 2009, bringing truly 3G speed and features to current networks. The new technology only requires a software upgrade by network operators, meaning expensive hardware updates are not necessary. It will offer data-transmission speeds of 1,000 kilobits per second (kbps), comparable to the high-speed DSL currently available in Egypt, and faster than the average transmission speeds of 400-800 kbps currently experienced by the average 3G user. Other key network-industry players such as Siemens and Nokia also support the technology.

Ericsson also announced that there were now 196 commercial EDGE networks in the world, which strongly suggests that the system is here to stay.

Whether through EDGE, 3G, or another acronymous technology being developed in a telecommunications lab buried deep inside a faraway mountain, it seems certain that a plethora of new, sometimes exciting, sometimes useless services will be offered to Egyptian phone users in the coming years. The hopes of the network operators lie largely in such services being adopted — not necessarily with the raging enthusiasm that greeted the mobile itself, but with more than the mild disinterest shown toward 3G gimmicks such as video calling. Ferguson believes that people will adopt 3G services “only when the benefits are compelling enough” — and the jury is still out on exactly when that will be. bt