> Executive Briefing

Dr.Stefan Figge
Stefan.Figge@detecon.com

The 3rd Option:

Success in Emerging Low
ARPU Markets
Emerging markets provide the next episode of the mobile
telecommunication success story. For established operators they are
a strategic option to mitigate the financial pressure from increasingly
saturated, competitive home markets. Cost efficient networks and ultra
low cost handsets are sample levers that currently change operator
economics and enable profitable operations even in a low ARPU
setting. Identifying the appropriate marketing mix for such markets
remains critical for success. The solution to this problem is
characterized by satisfying extremely different needs and therefore
handling distinctive propositions that at first glance appear even
contradictory.

www.detecon.com
 Success in Low ARPU Markets
The 3rd Option: Success in Emerging Low ARPU Markets

> Executive Briefing

Emerging markets as a third option

Throughout the last decades, users of mobile telecommunication services were primarily
recruited from developed regions such as Western Europe or Japan. After years of growth,
increasing saturation and competition are now leaving a mark on the financial performance
of established mobile operators in these early adopter regions. These operators are now
fostering their positions in their home markets by focusing on one of the following two
strategic options:
Q Cost efficient bit pipe: Striving for cost leadership by dismantling the value chain and
maximizing economies of scale
Q Infotainment life companion: Offering a wide service portfolio across communication
and infotainment needs to maximize share of customers’ wallets

The first option appears unattractive for most players as it means accepting a limited market
size and decreasing market power. The second option revives operators’ long gone mobile
commerce dreams of New Economy times – which nowadays have become even more
challenging as internet players enter the mobile arena (e.g. Google Maps, Yahoo Go!) and
device vendors bundle services and mobile devices (e.g. iTunes Wireless, Nokia’s OVI).
In this situation emerging markets represent a third strategic option offering a promising
future: It will be those regions that fuel the next wave of mobile growth and push global
penetration over the current 51 percent. Emerging markets for this report are therefore
understood as countries lagging behind in this global average mobile penetration.

Mobile penetration ‘07 by region Net adds ’08-’12: 1.1bn subs

N. America
C/E Europe
96%
117% W. Europe India
82%
Latin 5% 4% 25%
4%
Global America
10%
51%
34% 39%

68%
14% 12%
Ro MEA China
4%
17%
Egypt 4%
Nigeria Ro Asia Pacific

Fig. 1: Current mobile penetration and future growth by region

Region-wise these markets are located in Asia Pacific, Africa and the Middle East. More than
three quarters of the expected 1.1bn subs to join between 2008 and 2012 will originate from
those regions with India, China, Nigeria and Egypt as the top-four contributing countries. By
comparing nominal annual GDP per capita of e.g. India (2007: 973US$) with the Western
European average (2007: 39,261US$) it becomes obvious that operations in these markets
have to deal with a significantly different wealth and living situation of customers. Thus a
business model capable of profitably handling low ARPU subscribers is required.

Detecon International GmbH 07/2008 2 www.detecon.com

 Success in Low ARPU Markets
The 3rd Option: Success in Emerging Low ARPU Markets

> Executive Briefing

The challenge for setting up such a business model is to exploit markets’ full revenue
potential, establishing excellence in operations (minimized OPEX) while applying an
efficient infrastructure (optimized CAPEX). To make such a low ARPU business model
work, an effective marketing mix has to reflect the particularities of the emerging markets. A
set of imperatives will be developed to act as guiding principles for the marketing strategy in
such countries.

Know your customer!

Serving emerging market customers requires dealing with extreme differences concerning
budgets and needs. With a daily income below the global average of 20 US$, affordability is
the most dominant adoption barrier. But when zooming into emerging markets a
characteristic bi-polarity of demand appears. Opposite the low ARPU mass market, a small
high value segment is typically also an integral element acting as an early adopter and driver
for the whole economy. This emerging market elite is an important segment that contributes
significantly to overall revenues. In Egypt for instance, high value postpaid customers
constitute less than 10% of the subscriber base but generate more than a quarter of all
revenues. Their minute consumption is 7.5 times higher than the average.

On the other hand the low budget mass market applies mobile telephony primarily as a tool
to improve most basic living conditions. Mobile phones are used to save time, to organize
labor force and to support day-to-day transactions. The limited budget means that mobile
consumption always comes at the cost of other basic goods. The chosen level of device
costs, activation charges and service fees therefore determine the success of subscriber
acquisition. As customer demand varies not only for those two income segments but also
across age and regions, generating customer insights is crucial. Concept tests for tariffs and
products, conjoint analysis to reveal willingness to pay as well as general usage and attitude
studies are of importance even though often hindered by limited external research services.

Offer affordable prepaid and sophisticated postpaid!

As mobile devices are the largest affordability barrier for emerging market customers, it is no
coincidence that after years of feature accumulation, voice centric ultra low cost devices are
conquering global handset sales. The Nokia 1200 for instance is such a very basic GSM
device with a robust design and costs around 30 US$. Voice centric propositions consisting
of such devices, preactivated SIM-only starter-kits and prepaid price plans address mass
market subscribers’ basic needs and allow them to leapfrog the affordability threshold.

The needs of the high value elite segment provide a different picture and require a different
product design. The product has to reflect the subscribers’ social position and satisfy
entertainment needs. The affordability requirement is typically replaced by the request for
worry-free pricing and payment. Accordingly, elite subscribers are usually willing to pay
hundreds of US$ for golden numbers and they put much effort into acquiring the latest
devices.

Detecon International GmbH 07/2008 3 www.detecon.com

 Success in Low ARPU Markets
The 3rd Option: Success in Emerging Low ARPU Markets

> Executive Briefing

Ringback tones in many countries have become a successful value added service (VAS),
sometimes even exceeding SMS in terms of revenues. A sophisticated proposition bundling
latest devices and VAS within worry-free postpaid price plans addresses the segment’s
characteristic image and entertainment needs. Etisalat’s “Option” in Egypt is an illustrative
case study on how to implement such propositions for high value customers.

Be simple and transparent – but also smart in pricing!

Offered price plans have to address segments’ varying willingness to pay and thus reflect the
bi-polar demand structure of emerging markets. Allowance based postpaid tariffs have
proved to be well suited for addressing the convenience attitude of the elite segment. They
also allow pushing VAS by for instance bundling SMS or mobile TV. Be it as bundles or as
money based allowance, such price plans clearly differ from mass market oriented tariffs
with price per minute as the most important purchase criteria.
Accordingly low sticker prices within overall simply structured prepaid price plans make it
possible to attract the attention of affordability focussed subscribers. Enabling customers to
optimize their bill with regard to their individual calling patterns, e.g. by reduced rates for on-
net calls or to friends & family, offers differentiation potential and a tactic pricing lever for
marketing measures. In Ukraine, friends & family numbers are essential tariff elements that
significantly fueled the country’s development as one of the fastest growing mobile markets.

Be emotional and involving – become a life companion!

Building up a brand image that effectively caters for the two important income segments is
one of the most challenging parts within the go-to-market approach. Addressing segments
with individual brands appears as a straightforward option, which Telenor follows with its
youth-oriented Djuice brand. Since launch settings with extreme time-to-market pressure
typically contradict such multi-branding, coherent communications under one brand is the
usual approach requiring rigorous management. Communication measures have to ensure
that segments are individually addressed and no dilution of the brand image happens.

Implementation is achieved by using the promoted service category as a proxy to determine

the messages’ character and tonality. To satisfy aspirational needs of the elite segment on
one hand, communication requires attaching values such as e.g. fun or individualism to the
brand. Communicating innovative VAS, for instance mobile TV, differentiates from other
operators and steers brand perception towards a unique position. Communication towards
the mass market segment on the other hand requires addressing functional needs and
affordability. Since voice is of primary interest, such market communication has to
emphasize on best value. But hammering only on price is not sufficient. The segment
primarily consists of low budget first-time users who cannot afford wrong purchasing
decisions. To tackle this potential adoption barrier, communication has to stress not only
value but also include the tonality of trustworthiness and life companionship.

Detecon International GmbH 07/2008 4 www.detecon.com

 Success in Low ARPU Markets
Success in Emerging Low ARPU Markets

> Executive Briefing

The customer is king – and sometimes a prince!

A segment’s revenue potential determines applicable customer touch points. Hence, the
mass market segment has to be served through highly cost efficient interaction channels. To
still bank on a large number of points of sale (POS) strong indirect sales partners are
required. The identification of suitable existing networks, e.g. FMCG distributors, supports
the fast set up of seller capabilities. Additionally utilizing the customer base for distribution
purposes allows the extension of sales reach beyond any fixed POS. Balance transfer, such
as Philippine’s Smart Load service, lets subscribers pass on balance, even to remote
locations. Offering specific street seller propositions enables customers to run their own
business by reselling voice minutes and credit. Of course, the minimization of costs has
downsides concerning personal treatment. SIM toolkit applications and interactive voice
response units (IVR) let subscribers administer their account without any personal and
therefore costly interaction.

While interaction channels for the mass market are designed with regard to costs, serving
the elite segment requires a commitment for best in class personal customer treatment. Own
or franchised direct shop concepts implemented at specific hot spots allow the
implementation of sophisticated customer touch points supporting the brand as well as the
presentation of the full product portfolio. 24x7 available call center agents as well as
attractive loyalty programs and individually designed promotions additionally ensure
customer satisfaction and retention.

Detecon International GmbH 07/2008 5 www.detecon.com

 Recommendation
Success in Emerging Low ARPU Markets

> Executive Briefing

Recommendation
Emerging markets still provide obvious growth opportunities for mobile telecommunications.
New operator economics allow profitable operations even in a low ARPU setting. With such
preconditions, marketing excellence that reflects emerging markets’ particularities is possibly
the most critical lever for an operator’s performance. The challenge of achieving such
excellence is effectively satisfying the typical bi-polar demand and equally catering for
distinctive needs within a single marketing organization. The following imperatives are
guidelines for a marketing strategy that exploits the full potential of emerging markets.
Q Know the extremes and generate customer insights for the high value elite as well as the
low budget mass market segment.
Q Include latest devices and VAS as well as affordable SIM-only products with ultra low
cost devices in your portfolio.
Q Consider allowance based, worry-free postpaid tariffs as well as low commitment prepaid
price plans with selected options to optimize bills.
Q Strive for a credible brand image by balancing messages of smart VAS innovations and
reliable, best value voice services.
Q Extend reach by relying on indirect sales, use your customer base and offer customer
self administration for the mass market segment while providing sophisticated customer
touch points with personal treatment to the elite segment.

Detecon International GmbH 07/2008 6 www.detecon.com