Telecom companies must focus on the bottom line

The strong performance that GCC mobile telecommunications markets have witnessed in the recent years -driven by increase in service penetration and high Average Revenue per User (ARPU)- enabled regional operators to successfully pursue aggressive expansion plans.

In the last 5 years, leading GCC telecommunications groups like Zain (with 21 international operations), Etisalat (with 17), Qtel (with 9), and STC (with 9) have successfully expanded their international footprint.

However, by doing so, these operators have also entered into lower-income and more competitive markets.

In addition, increased competition in their domestic markets has led to additional pressure on margins due to countries like Bahrain, Oman, Saudi Arabia and UAE opening up to new mobile operators.

Overall, this has diluted profit margins resulting in a drop in the Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) rate from 52% in year 2004 to 47% in 2007.

"While operators continue pursuing their expansion plans, now they need to increase their efforts to enhance customer experience and improve their operational efficiency levels to reap the true economies of scale. Operators need to accelerate their transition from top line focus towards bottom line management," said Marc Biosca, Head of the Telecom Practice of A.T. Kearney, Middle East.

Operators have begun to realize that geographical footprint and the number of subscribers does not automatically result in higher margins and shareholder value.

With increased competition and higher penetration levels, the competitive battle will need to move to retaining subscribers through enhanced customer satisfaction.

According to Dr. Karl Deutsch, Vice-President and Global Head of Telecoms at A.T. Kearney operators must improve operations before they are stretched in too many directions.

"As we have seen in other regions in the past, topics like operational efficiency, cost performance, group synergies, outsourcing and infrastructure sharing will climb on the priority list of the leading players earlier than expected. Meaning, this will have them swimming (cutting costs) while flying (trying to expand) at the same time."

Simultaneously, telecommunications companies need to continue enhancing the customer experience and service levels they deliver to their customers.

Only companies that will be able to differentiate in these fields will be in a position to retain their customer base and gain market share in a sustainable manner from other operators.