Gaining an edge: Moves to increase transparency and extend services benefit the sector

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On December 20, 2012, MobiCom extended its 3G network to Erdenebulgan soum (county), a remote area close to the Russian border with about 3000 inhabitants. For the company, which is the largest mobile operator in Mongolia, it was a significant step; it can now claim that it offers 100% 3G coverage in the country. Mongolia’s population density is less than two people per sq km. And with 40% of the country living in the capital city, the rest of the country is even more sparsely inhabited (Omnogovi province only has about 0.3 people per sq km). Added to that is the fact that about 40% of the population is nomadic and that the GDP per capita is only about $2400 a year. Thus, covering the entire country with 3G services was not easy from a technological or a commercial point of view.

BUSINESS CASE: But for Mongolia and MobiCom it may make sense. The economy is growing fast and people, in both the capital and the countryside, are gaining wealth as a result, with GDP per capita growing 15.7% in 2011 (the second-fastest in the world after Macao). It is a remarkably young country, with 27% of the population below the age of 15. As in China, wealth and consumer spending power are rising rapidly in urban areas. Resource and agriculture wealth is spread throughout Mongolia, and 3G users are becoming prevalent throughout the country. Like many places with poor legacy telecoms infrastructure, the internet is primarily accessed via handsets rather than via desktops and fixed broadband. Extending 3G to rural areas is about far more than SMS and calls. It is about extending the internet to half the nation.

Efforts have been paying off. The number of mobile subscribers grew 17.2% from 2010 to 2011 and has more than doubled since 2007. Indeed, the penetration rate broke 100% in 2011 to hit 103.8%, according to the sector regulator. That was up from 9.2% in 2002. Fixed-line telecoms, meanwhile, is clearly on the decline, with the penetration rate stuck at under 7% for the past five years.

TOWN & COUNTRY: There are some unique aspects to Mongolian society that might also explain why a national 3G network makes sense. According to Ts. Ariunaa, manager of the retail product development division at Unitel, the population is influenced by both rural and urban elements, with Mongolian families often having members both in the capital and outside of it, and many university graduates beginning their careers in the largest city. Serving these families and keeping them on the same network is one reason to make a heavy capital investment in remote base stations and fibre-optic networks to distant localities. Though people are spread out over a wide area, the networking effect may be particularly strong and could justify going to the trouble of serving the entire nation. MobiCom is especially interested in being more than a mere seller of mobile minutes. The company believes that it can offer products and services that will help not only the average person keep in touch, but also provide the communications infrastructure that is vital for highly profitable and critical areas of the economy. Its strategy recognises that the changes in Mongolia, add to the demand for a national high-speed network.

“We want to provide the infrastructure needed to support other infrastructure,” said Koichi Kawase, the chief strategy officer of MobiCom. “We want to provide the network for power companies and transportation.”

UNIQUE MARKET: In many ways, the Mongolian telecoms market is quite different from others in Asia. The geography, demographics, mineral wealth and rapid growth make it a fairly unique place for mobile phone development. In some ways it is more challenging than other countries for mobile phone deployment. It simply does not have the critical mass found in most Asian nations. In other ways, it is far more promising. Incomes are almost sure to rise at speeds that are not possible in more crowded countries, while the challenges of communications make effective links more valuable.

Indonesia has the traffic to help spur demand, for example, but Mongolia has the distances.

Mongolia is a remarkably free country, and this further distinguishes it from many other Asia markets. To be sure, the country suffers from corruption issues (ranked 94th in the 2012 Transparency International Corruption Perception Index, the same as India) and nationalism is on the rise. However, it has made efforts to keep the telecoms market open and accountable. Central to its telecoms strategy is the formation in 2002 of the Communications Regulatory Commission (CRC) of Mongolia. The commission seeks to manage the sector in line with the country’s World Trade Organisation commitments. “Regulation must be independent. It must be financially independent,” says T. Naranmandakh, the deputy director of the Legal, Information and Administration Department of the CRC. “That is why our salaries are higher: to prevent corruption.”

SIMILARITIES: As much as Mongolia is different, it is grappling with some of the same issues facing other regional markets. It is not exempt from economic forces that plague the industry. The biggest problem from Bombay to Bangkok are the falling average revenue per user (ARPU) figures as local mobile operators battle for the market share by dropping prices. With four operators, Mongolia certainly has fewer competitors than other regional markets, such as Indonesia (7) and India (15), but it has more than China (2) and Japan (3) and seems to suffer from some of the same challenging economics as the more competitive markets. According to Ts. Purevdorj, the vice-president of marketing and sales at Skytel , ARPU at the company has dropped 50% over the past five years, from about $20 to $10.

“Price competition is getting serious. The market is getting tough,” said Purevdorj. “I do not want the market to be like India, with an ARPU of less than $3.”

“It is tough,” added MobiCom’s Kawase. “I would not say that it is too many, but we have four operators in a country with fewer than 3m people.”

MobiCom is in a particularly difficult position. Its market share in mobile subscriptions was 42.9% at the end of 2011. According to industry sources, that number might be higher – about 50% – as Mongolia is a country where individuals often have multiple SIM cards. If stricter accounting principles are used to identify active accounts, MobiCom may find that it has a greater share of customers actually using their service. The CRC puts Unitel’s market share at 21.2%, Skytel ’s at 19.7% and G-Mobile’s at 16.2%.

This market structure is potentially problematic. Business in Mongolia is governed by the Law on Prohibiting Unfair Competition, which was first passed in 1993 and amended in 1995, 2002 and 2005. It was further backed up in 2005 with the formation of the Unfair Competition Regulator Authority (now called the Authority for Fair Competition and Consumer Protection).

COMPETITION LAW: The law and the resolutions that have followed it deal with dominant entities – enterprises with such high market shares that they are potentially anti-competitive. The legislation is sophisticated and has a wide reach. Activities of concern under the law, which is also administered by the CRC, include restrictions on supply, selling at low prices, discriminatory pricing, refusal to trade and tie-in sales. It is a document that measures up when compared to Western anti-trust levels and it applies directly in the telecoms sector. As a result, MobiCom has to tread carefully with regards to pricing. It must make sure its sales are profitable and while also watching that it does not undercut its competition. As a result, MobiCom is considered an expensive option by mobile phone users. Its current tariff is MNT70 ($0.05) a minute in-network and MNT110 ($0.08) to phones in other networks. Skytel is MNT60 ($0.04) in-network and MNT70 ($0.05) out. Unitel is as cheap as MNT0 in-network and MNT35 ($0.02) out. GMobile is as low as MNT0 for in-network calls and MNT30 ($0.02) to other providers.

ISSUES: Arriving at a suitable figure for MobiCom’s cost base is a challenge for regulators, and that makes it tough to determine whether the dominant player is dumping (exporting at a price lower than the domestic market price) or profiting. The prices MobiCom pays for its inputs – hardware, software and bandwidth – are constantly dropping. Technology is becoming cheaper and the company is working to increase efficiency. While the CRC has demonstrated its competency, it still suffers from many general bureaucratic issues while managing a quickly evolving sector. It may set a price floor for MobiCom that is far higher than expenses.

“After showing regulators our costs, they say MobiCom cannot go below that cost,” said Kawase. “But our costs will change over time. Even if we lower costs, we will not be able to reduce our tariff. ” Still, Kawase argues that the limits placed on the firm are not necessarily problematic and ultimately may benefit MobiCom and the industry. He notes that in markets without such restrictions in place, operators are tearing each other apart, and the result is an inability to make proper capital expenditures. While Mongolian ARPU levels may be considered low, they are nowhere near as low as in the more competitive markets of Asia, such as Indonesia. This has had the benefit of allowing the industry to increase its investments in infrastructure.

ANSWER IS DATA: While Mongolia does not have the same price wars that are found in some other Asian markets, it is dealing with many of the same common problems. The voice and SMS markets are saturated and margins are suffering as a result. Operators are struggling to find the next source of growth and profits.

This is indeed the story globally. The consensus is that the future is in data, and that is exactly what Mongolia is focusing on today. The country is making the same transition that operators everywhere are trying to make. “We need growth, and I think that comes from data,” Skytel’s Purevdorj told OBG.

For now, there is no clear path ahead as operators seek to find exactly where demand lies, how much customers are willing to pay and which technology is most suitable. Mongolia has been spared some of the harder choices, as its 4G demand will mainly be in Ulaanbaatar and a couple of larger cities, and 3G is good enough to be rolled out on a nationwide basis. Therefore, the debate about LTE, WiMAX and true 4G is not a high-stakes issue as elsewhere. Still, the general conundrum surrounding data is very much a concern for the industry in Mongolia. “The ARPU from the core business is dropping, but operators cannot make money from data yet,” said Ts. Ariunaa, the manager of retail product development at Unitel. “In the future, we know that profit will be from data, but we do not know yet how we are going the manage and sell data products.”

BOTTLENECKS: Several bottlenecks in the sector will slow data growth. There is a lack of content and few applications, for example, meaning that demand for data is not as high as it might be in larger countries with more indigenous offerings. The population does not have the need to utilise so much bandwidth yet.

The most serious bottleneck may simply be the lack of properly enabled handsets, even in the capital. Only 15% of the phones in the country are smartphones, according to MobiCom, and there does not seem to be a clear way forward to bring advanced devices into the hands of users. There is unlikely to be an easy solution. While the low-cost tablets may work in other relatively poor nations by introducing people to data on an affordable device, this might not be the solution in Mongolia. Operators are struggling with this problem.

“We cannot underestimate the importance of quality,” Kawase told OBG. “Low-cost tablets are not always the solution. For short-term use, they are fine, but sooner or later the customers will not be satisfied,” he said.

Even here, there may be a problem as those who can afford high-end handsets may not really understand how to use them. As in many places, they are more or less fashion items. While this may result in handset sales, it might not generate the data traffic that operators need.

“People are not educated in the use of the latest IT services,” said Ariunaa. “They buy products for prestige.”

Mobile operators are thus working towards making data a more accepted and readily used part of their packages. Creating new products and offering a wider range of value-added services are among the measures being undertaken. For example, in 2005 MobiCom created Mongol Content to provide music, games, video, TV, news and weather, among other things, for mobile handsets. The company also operates Mobifinance, an e-payment services that allows customers to make money transfers, pay bills, purchase goods and top up their phones, among other functions (see Banking chapter). The service has already been duplicated as well, by the Make Money app, indicating the growing sophistication of this segment. Summit, a domestic electronics and computers retailer, is anticipating that these changes will be coupled with increased demand. "We expect market growth for electronic goods to be ranging within 20% to even 30% over the coming two years," T. Ganbat, Summit’s president, told OBG.

BUNDLING: One solution for the operators as they wait for data to gain popularity and fight falling prices, is to bundle their offerings, combining data and voice into monthly single-priced packages. This gets data into the market, introducing reluctant customers to available options while creating additional revenue and potentially increasing profits. “We collect constant revenue by bundling,” said Unitel’s Ariunaa. “That is how we maintain the margin.” Bundling, however, can cause problems of its own. Because it is very difficult to know the price of individual components in a package, as each customer will use different amounts of voice, data and SMS, the true cost of the overall package is difficult to determine, making it hard for regulators to know when a company is dumping and when it is selling at a fair price. For MobiCom, its discussions with the CRC have become more difficult because of bundling.

“The pricing scheme is changing. Now it is tending more towards flat-rate monthly, all-inclusive schemes,” said Kawase. “It is becoming more difficult to know how we can apply the regulation. What is our true cost?”

BEST PRACTICES: While Mongolia is certainly an open market and highly competitive, there are still areas where it is in need of improvement. The European Bank for Reconstruction and Development (EBRD) identified several areas of weakness in 2011. While the bank noted a sufficient degree of separation between policy creation and regulation of the industry, it also said that the CRC’s powers were not clearly defined and its authority to make recommendations and enforce decisions needed to be more precisely detailed. The EBRD also stated that certain processes, such as negotiations for interconnection agreements and the evaluation of these agreements as well as of dispute resolution, work in practice but lack essential guidelines. The bank also identified some cases that were not completely transparent. Mobile phone number portability was another subject highlighted in the EBRD report. This point is a divisive issue, according to industry executives. MobiCom is expected to be against the idea, according to Ariunaa, the thinking being that the ability to so easily switch providers would work against the relatively expensive market leader. Skytel , as the third-largest provider, is said to be for number portability, as the company would probably gain from fluidity in the market. Unitel is on the fence about the issue, as it could lose or gain from the change, Ariunaa told OBG.

OUTLOOK: Prospects for the sector are generally optimistic. While data may pose a challenge for the operators and it could well be years before ARPU is able to begin to rise on the strength of value-added offerings, the basics are very much in place. The country is quickly becoming wealthy, benefitting from the fact that the market is relatively open and free. Naturally, demand will rise, as the population will want more sophisticated handsets and mobile applications. More competitive operators are expected to meet the market’s needs. A benign and encouraging regulator should ensure smooth development. The market has already proven to be a surprising prospect. When mobile phones were first sold in the country, even the most eagerly anticipated handsets were purchased by just a few segments of the population, namely foreign investors, the local elite and government officials. At the time, no one would have envisioned nationwide coverage and widespread mobile telephony, not even investors.

“Nowadays, I am quite convinced of this market,” Kawase told OBG. “I believe there is a lot of room for growth. In the beginning, when we first thought about investing in this market, in all honesty, we did not think the business would be as successful as it has been. We thought we would just develop our services in the capital. But once we started the service three years later, we started getting a huge number of customers.”

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The Report: Mongolia 2013

Telecoms & IT chapter from The Report: Mongolia 2013

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The Report

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