OBG talks to B. Byambasaikhan, Chairman, Mobicom; D. Bolor, CEO, Skytel; and R. Ganbold, CEO, Unitel

Interview: B. Byambasaikhan, D. Bolor, R. Ganbold

With mobile penetration increasing, what are the prospects for new revenue streams in value-added services (VAS) such as mobile data?

B. BYAMBASAIKHAN: We are expecting the mobile phone market to be saturated in Mongolia in the future, but that doesn’t mean the industry will not grow. It will expand by diversifying into VAS. Mobicom has been taking a proactive approach, focusing on developing VAS to meet customers’ needs, to provide more convenience and to push the industry to expand. We established the contents aggregator in 2005, and we invested in mobile broadband services based on WiMAX technology in 2006, becoming one of the first groups worldwide to implement it. We also launched a “mobile money” feature in 2010, which we will be expanding. At the same time, even though the number of “physical” subscribers is near the limit, there is another dimension to the market that can be explored: equipment. There will be more equipment and devices with SIM cards. It could be a vehicle, a remote meter or a vending machine. This technology could be applied to all industries to step up the services they have on offer. We believe that there is much potential for the industry to grow.

D. BOLOR: The use of data services has been increasing significantly, especially since operators launched 3G technology in 2009. During this period, smartphone penetration has been growing steadily, which will have a positive impact on the use of data services in the future. Skytel is trying to charge the minimum price for data services, so this segment is also becoming more competitive. In addition, new regulations will now require all operators to charge per second for voice service – a move that we anticipate will result in an approximately 30% loss in revenues in that sector. This deterioration of a key revenue source makes profiting from mobile data a pressing priority. Mobile penetration still has more room to grow, especially given that penetration have not even reached 100% yet.

R. GANBOLD: My opinion is similar to that of the others. In Mongolia we have a high number of operators, in light of the size of the market – roughly 2.8m people – and the number of players is likely to increase in the future. This is not only due to a new operator entry, but also a the result of the growing number of WiFi network operators and over-the-top (OTT) players. These services can offer customers the same data and content services that mobile operators provide, but with much less initial investment. So we are facing a challenging situation, and the business environment are very challenging. Increasing ARPU is another headache, due to expanding price-war. However, overall, we are pretty optimistic about our chances in terms of market growth and revenue. We will be expanding our horizons to capture more of the market by focusing on data, VAS and content as the big growth drivers over old-school segments like voice and SMS. To succeed in this new era we need a smart strategy, knowing when to upgrade and with what technology, while offering more personalized and tiered pricing plans and services.

Given the relatively small market for four mobile operators, what is the strategy for maintaining attractive average revenue per user (ARPU) levels?

BOLOR: It is very difficult to maintain attractive ARPU levels due to price wars with the competition. We actually predict that in the next two to three years there might only be two or three operators left because of low profitability. In the past 16 years prices for telecoms through mobiles have decreased 10 times. Maintaining healthy ARPU levels is certainly our target, but this can only be achieved by offering new products to the customer. We are looking to broadband revenues and to revenues from mobile VAS, such as mobile payments or mobile health, in order to boost ARPU.

GANBOLD: In Mongolia we have a relatively high number of operators for such a small market – about 2.9m – and the number of players is likely to increase in the future. This is due to a growing number of WiFi networks that will be built in the next two to five years.

WiFi networks can offer customers the same internet service that mobile operators can, but require a much smaller initial investment. So we are not facing an easy situation, and the business environment is very challenging. Increasing ARPU is another headache. But the good news is that Mongolia is an emerging economy that is attracting growing numbers of foreign investment. We are hoping this will help us increase ARPU. In recent years there has also been a shift in attitudes. People have come to understand the true cost-saving and time-saving value of modern communication tools. This will hopefully lead to increasing expenditure in this sector. Within a year we have already almost doubled our customer base and ARPU levels are growing.

BYAMBASAIKHAN: It is true that four mobile operators is too many for a market of this size, but we think competition is necessary to improve service. We have been making a serious effort to meet customers’ diverse needs and reduce tariffs, but as an industry leader we have to think about the future. If the competition becomes too tough, it may reduce the size of the market even if the number of subscribers and traffic increases. It will also make it difficult for operators to improve the quality of their service and invest in new technologies. So we think that an optimal equilibrium must be found in terms of pricing policy. We are very proud that we did not engage in a price war; instead, we have worked to promote the sustainable development of our industry. Mongolia is still mainly a prepaid market and since 2006 we have increased the number of sales point dramatically by introducing mobile dealers. But in any case, as in other countries, the voice ARPU will see a year by year reduction. So our strategy is to compensate for this decrease through data services How much growth are you expecting to see in rural areas, and what additional infrastructure improvements are needed to reach full potential?

GANBOLD: Mongolia is a huge, sparsely populated territory. In spite of this, all four mobile operators have been competing to attain 100% coverage in populated county centres. Now we are trying to go even further and reach more remote areas, but this requires a comparatively huge investment. There are a few things that we need in order to reach such a broad range of users. First of all, we need infrastructure like buildings, electricity lines and towers. Second, we need a transmission network to connect the sites to the main grid. Before we used to have only one state-owned network company; however, some mobile operators were not happy with the management of this company and started building their own infrastructure. We followed this approach and set up a network company with Skytel . Our strategy has been to keep expanding the backbone transmission network in cooperation with Mobicom. However, we are not building regional or branch networks – this will be done by the state-owned company. Communications is a peculiar sector in the sense that even though you might get 200-500 new customers by setting up a base station in a remote area, the most important thing is having the widest coverage. In a nutshell, the highest profit margins are made in urban centres, so you invest in rural areas for the sake of a broad network and providing coverage. So, what you are really doing is subsidising those areas.

BYAMBASAIKHAN: Our company started with network development in the capital city, offering a postpaid service and then started introducing prepaid service a few years later. We have decided to move on to other cities, given that demand from the customer base had been increasing significantly. We now cover over 350 cities, provincial and soum, or county, centres. We have our own nationwide fibre-optic network and satellite network that provides our customers in rural areas with high-quality mobile phone, internet and enterprise services.

BOLOR: For Skytel rural areas represent a clear opportunity. Since our penetration in rural areas is still below 20% of the total market share, it is a clear goal of ours to target that segment. Since June 2012 3G coverage has expanded significantly and our figures for mobile subscribers in those areas have increased very rapidly in the same period. People in the countryside also want access to the internet at a decent speed. Broadband services in rural areas represent another opportunity.

Considering the regulatory framework and government efforts to increase ICT awareness, how would you rate the Mongolian market as a telecoms investment destination?

BYAMBASAIKHAN: Some 16 or 17 years ago, when we first considered investing in Mongolia, the risks were not really measurable as even in developed countries the use of mobile phones was not that popular at the time. We did not expect business to go as well as it is today, but with government support and our commitment to developing the industry we have been able to lead the telecoms industry, bringing it to the level that we are at today. The country is developing rapidly, and we remain committed to promoting innovation and introducing new technologies and solutions. We are also optimistic as Mongolia’s telecoms sector has become an attractive destination for investors. However, there are certain concerns regarding regulation. According to the Competition Law, we fit the definition of a dominant player, and because of that we face some inflexibility when it comes to tariffs. Generally speaking, we are not able to freely reduce tariffs; however, our tariff policy is cost-based and, as mentioned earlier, we do not intend to provoke a price war. Another concern is the new foreign investment law. This piece of legislation has not been finalised, so its potential impact on our business is not clear yet. The telecoms industry should be a sector that encourages innovation and allows creative ideas to be realised, which requires minimal restrictions. We think the government recognises this, so we are not too pessimistic about the new law.

BOLOR: Many changes have taken place in the government, so the future environment in the telecoms sector will be difficult to predict. The new government has already claimed that it will further encourage coverage of broadband in rural areas and aims to establish one-stop service centres where customers may have access to a full range of services. Operators will likely be pressured to limit data tariffs in the future, but this is an inadequate measure as companies still need to break even, given high initial investments. The government must listen carefully to the needs of different operators and then decide on what changes it can make to the regulatory framework.

GANBOLD: This is a tipping point for the Mongolian ICT sector. It is difficult to guess what will happen, but it is also clear that consumer behaviour is changing. Devices are getting smarter and content is getting richer. Before, consumers were limited to the applications built into the handset itself, but now there are endless options that can be downloaded. Nowadays we have become mainly providers of internet service and applications have become free. That is why this is a very uncertain time both for telecoms operators and consumers.

In terms of the regulatory framework, the rules used to be vertically oriented or technology oriented, but now there is an endless amount of applications hitting the scene and it is no longer possible to regulate all those different types of usage/services. There are players that cannot be regulated by the government of Mongolia, such as Google or Facebook. So, in the end, the rules are not very clear since it is difficult to regulate the sector in such a time of transformation. In terms of promoting ICT awareness, I think the government did a good job in laying the ground 10 years ago. Now that the sector is booming, there is really no need for the government to promote it. What the government could do is think about how it can increase the use of ICT in the public services sector. If all public services were available online, it would constitute indirect support from the government for ICT that would be much more effective that any traditional awareness-raising campaign.