The role of telecom operators in the Middle East looks set to undergo a fundamental change.
Providing excellent connectivity and data speed will no longer be their primary focus. Instead, operators are now well-positioned to make substantial gains by enabling the digital transformation of the public and private sectors.
To reorient their business successfully, however, they will need to bolster their capabilities through acquisitions, partnerships and investment, and overcome various challenges.
By offering enhanced connectivity and ever-increasing data speeds over the last decade, telecom operators have facilitated a technological explosion, with significant impact on businesses and consumers alike.
During the next decade, operators in the Middle East will need to play a similarly vital role. The relevant services they can provide include enhancements of cloud and new-age technologies, such as blockchain and artificial intelligence (AI). The potential rewards are substantial, promising the sustainable growth that operators crave as the market for their traditional activities becomes saturated.
According to IDC, the regional public sector cloud market alone is expected to grow to $2.35 billion by 2024 - more than double its current size.
In their favour
Operators in the region have several natural advantages which equip them well for this transition. First, they already have a large customer base resulting from high mobile penetration. For example, the UAE is ranked number two globally for its proportion of mobile subscribers.
Second, they have the available cash to make the necessary investments. Operators in the Middle East have always been able to generate a high level of free cashflow by global standards, and the COVID-19 pandemic is unlikely to alter this reality significantly.
Third, most regional operators are recognized as national assets and have public investment. For example, the Emirates Investment Authority has a 60 per cent stake in Etisalat, and the Public Investment Fund in Saudi Arabia owns 70 per cent of stc. Moreover, regional regulatory authorities have implemented timely reforms, which provide an impetus for digital transformation.
However, to reposition themselves as enablers of digital transformation, operators will need to augment their existing capabilities through inorganic growth. Regional operators have been active in mergers and acquisitions despite the pandemic.
For example, Etisalat completed its acquisition of German cybersecurity firm Help AG in 2020, while Ooredoo and Hong Kong conglomerate CK Hutchison Holdings are exploring a deal to merge their Indonesian wireless phone businesses.
Operators should not, however, restrict themselves to mergers and acquisitions. Another route to inorganic growth is corporate venturing. Operators can consider making strategic investments in the growing number of technology start-ups regionally and worldwide.
In March 2020, Riyadh-based online grocery app Nana raised $18 million in an investment round co-led by Saudi Technology Ventures (STV), which is backed by stc, and Middle East Partner Ventures (MEVP).
Joint ventures are another option. Telecom operators in the Middle East can co-invest in emerging technologies, or combine forces to establish regional infrastructure platforms. In 2019, the UAE’s du and Bahrain’s Batelco entered a joint venture named Arc, in order to set up a technology platform capable of providing connectivity and data center services throughout the region.
Partnerships and alliances can be equally important in developing operators’ strategy and laying the platform for future success. One example is the recent multi-year partnership between Etisalat and Microsoft.
The tech giant will help Etisalat to develop a public cloud-first strategy, which will involve building a digital platform equipped with automation and AI capabilities. Another recent strategic partnership, this time between Conviva and Ooredoo Kuwait, will use machine learning to improve customer retention and maximize individual customer value.
Along with needing to improve capabilities, Middle East telecom operators will face other challenges as they seek to become enablers of digital transformation. Given the scale of current downturn evident in other sectors, and the healthy history of returns recorded by regional operators, shareholders will surely push for further short-term gains, possibly inhibiting the large-scale, long-term investment required for strategic change.
Such change requires continuity at the top. The frequent leadership turnover in some companies represents another obstacle. The right talent must be brought in, not just through inorganic growth, but also through recruiting expertise from companies that specialize in emerging digital focus areas.
Operators will need to undergo a culture change and become more comfortable with risk. They should have the courage to appoint specialist leaders from outside their ranks to run these new companies, and eliminate the prevailing fear of failure within their organizations.
If telecom operators in the Middle East confront these challenges boldly, then they are likely to look very different in 2030. The major rewards promised by this change lie within their grasp.
- Jad Hajj is Partner at Strategy& and leader of the firm’s technology, media, and telecommunications practice in the Middle East.