Core 20 growth markets for global telecom industry

INSEAD, the leading international business school, has partnered with leading TMT advisory and investment firm Delta Partners to release a joint white paper that defines core emerging markets, growth drivers as well as opportunities and challenges in the global telecommunications industry.
At a time when Facebook is getting ready to IPO, its focus on emerging markets like Brazil, India, Mexico and Indonesia to fuel the next stage of growth is widely quoted, and for good reasons.

Whilst the developed world is mired in economic turmoil, large emerging markets are becoming the new global growth engines. Their telecom industries are key enablers of economic growth by connecting people and enabling access to the internet, often through a mobile device for the first time like a new US$ 46 tablet in India or low cost smartphones in Indonesia.
Entitled ‘D-20: Rising Stars in the Telecom Space,’ the white paper profiles a list of 20 countries and “drivers” of growth (D-20) that comprises Argentina, Bangladesh, Brazil, China, Egypt, India, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Poland, Russia, Saudi Arabia, South Africa, South Korea, Thailand, Turkey, and Vietnam.
The D-20 represents the twenty emerging markets that are expected to drive nearly 75% of all incremental GDP growth until 2016. With 4.4 billion inhabitants, these 20 emerging markets are home to almost 65% of the world’s population and generate 30% of current global GDP today.
The joint study offers a high-level overview of their macro-economic environments and the impact their projected population growth, expanding middle class, increased rate of consumer spending, current and projected GDP growth and mobile competitive dynamics are expected to have on the telecommunications industry. The findings were announced at the INSEAD Asia Campus in Singapore today.
Loïc Sadoulet, co-author of the white paper who is also a professor of Economics at INSEAD and inititated INSEAD’s Africa Initiative, said: “The D-20 represents key growth engines for the world economy as well as the telecom industry.  However, their future development will continue at varying paces, with different sets of drivers and products and services, and impact on enabling innovation in other industries.  This report sets out to facilitate a clear understanding of where the D-20 markets are headed and to serve as a strategic guide on understanding the trajectory of the industry, especially for investors and decision makers.”
In their infancy, the telecommunications markets in the D-20 were dominated by limited competition driven by domestic monopolies; low penetration of basic services and customer tolerance for low quality. However, a number of key shifts are re-shaping the future of the telecom industry – especially with the emergence of both foreign and domestic competition.
Today, operators are forced to adapt to a more complex set of circumstances including intense competition, markets which are reaching saturation for basic services, explosive demand for data services and growing pressure from investors to develop on promised returns. Andreas von Maltzahn, co-author and Principal at Delta Partners noted: “All of the world’s twenty largest telecom operators like Telefónica, Singtel and Vimpelcom are present in at least one of the D-20 markets to find new sources for growth. This is not surprising as these markets are expected to add over one billion new mobile users until 2015 and are already a US$330 billion industry today. We see large opportunities in D-20 markets with mobile data revenues growing at a CAGR of 18%, as well as many opportunities around content, mobile payments and other verticals.”
In order to understand the industry shifts in more detail, the authors of the report clustered the D-20 markets by tariff levels and expected subscriber growth. This allows them to map countries from high revenue growth potential (high tariffs and high expected subscriber growth) compared to lower monetisation potential (low tariffs and low expected subscriber growth). The result is a set of clusters identified with similar levels of market maturity, competitive intensity and hence type of opportunities and challenges.

The following clusters emerged:
The Crown Jewel cluster represents favourable economic conditions for driving profitable telecom penetration growth.
This cluster consists of Brazil, Mexico and Nigeria and sees high tariffs and relevant subscriber growth left resulting in strong revenue growth potential. Its operators are the “Crown Jewels” of respective international players such as MTN and Telefónica.
The Goldmine cluster denotes relatively mature markets but with high tariff levels which allow operators to seek new sources of growth while still generating stable cash flows from their existing business.  South Africa, Poland, Saudi Arabia, Argentina, Turkey, South Korea and Iran are included in this cluster. While these countries have smaller populations than the other D-20 countries they possess the highest GDP per capita and are the most developed of the emerging markets with tremendous potential for continued growth.
The Rough Diamond cluster are large countries with low-income populations and high growth rates in service penetration-these countries are China, India, Indonesia, Pakistan, and Bangladesh. They are some of the fastest growing economies in the world and the telecom industry is almost a perfect mirror for their growth. These countries account for 40% of the world’s telecom market and are expected to drive innovation and profitability while operating at some of the lowest tariffs.
The Coal cluster includes Vietnam, Philippines, Egypt, Thailand and Russia where already low tariff levels and near saturation are causing strong pressure on growth. While the population in these countries is relatively poor they have robust economies and expect 7-11% growth until 2016, but they are experiencing the toughest situation for telecom operators as new avenues for growth need to be found whilst costs kept under control in a low tariff environment.
Operators are encouraged to understand the characteristics that will shape their clusters and the set of challenges and opportunities this brings so they can work to capitalise or mitigate them.
The INSEAD/Delta Partners White Paper draws the following conclusions:

1.  D-20 represents the twenty major growth engines for the world economy and the telecom industry. Growth may have peaked among the D-20 but will still be higher than GDP in their markets and higher than the telecom industry growth rate of developed markets.

2.  New services such as mobile data and content will double in revenues by 2016. The anticipated cost reduction on smartphones and better data pricing will encourage growth. Operators will need to act decisively in navigating the complex economics of data services and substitution of core voice and SMS revenues to monetise this opportunity. This is coupled with the myriad of CAPEX-hungry network technologies necessary to cope with the surge in traffic.

3.  The focus on efficiency and return on invested capital will become increasingly central to the success of the telecom sector in these markets. EBITDA and profit margins may erode due to changes in the revenue mix towards unsustainably low data pricing and CAPEX increase. This will require innovation and close looks at the business models.

4.  Domestic market consolidation (M&A) is likely to offset competitive pressure in most D-20 markets where hyper-competition has been a mainstay. It will be necessary for survival as sub-scaled operators will be acquired to establish pricing stability within the market.
“This is an exciting time for operators in the D-20 markets. These economies will play a greater role on the global stage. We foresee the operators who succeed in competing within the D-20 countries taking a similarly central role in the telecom industry. In the beginning, the telecom industry operated with a ‘build it and they will come’ mentality.  
Today companies are being pushed to be more strategic and figure out how to maximise opportunities in these rapidly emerging  markets as they are forced to deliver growth, efficiency and return on investments,” commented Mar Pages, co-author and Principal at Delta Partners based in Singapore.
‘D-20: Rising Stars in the Telecom Space’ is authored by Loïc Sadoulet, Affiliate Professor of Economics and Academic Lead for the Africa Initiative at INSEAD, Andreas von Maltzahn and Mar Pages, Principals at Delta Partners in Singapore and Alberto Pamias, Managing Partner at Delta Partners in Dubai. Tami Abadi, Anna Arlorio, Pavel Duzhnikov, Cedric Garrigues and Humaira Surve also contributed to the report.