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Rajasekar Mueid 2013
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Article in Competitiveness Review An International Business Journal incorporating Journal of Global Competitiveness · May 2013
DOI: 10.1108/10595421311319825
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23,3 An analysis of the
telecommunication industry
in the Sultanate of Oman using
234
Michael Porter’s competitive
strategy model
James Rajasekar
Department of Management, College of Economics and Political Science,
Sultan Qaboos University, Muscat, Sultanate of Oman, and
Mueid Al Raee
Regional Accounts – Process Technology and
Equipment – North America and Caribbean,
UOP – a Honeywell Company,
Des Plaines (Chicago), Illinois, USA and Department of Management,
College of Commerce and Management,
Sultan Qaboos University, Muscat, Sultanate of Oman
Abstract
Purpose – Michael Porter’s Five Forces Model provides an ideal mechanism and framework to study
the Oman telecommunications industry’s competitive structure. The purpose of this paper is to use this
model to identify the competitive forces that affect it the most.
Design/methodology/approach – This paper is based on empirical research. The data were
collected primarily from secondary sources such as published interviews of chief executive officers of
the telecommunication companies in Oman, government reports, and Telecommunication Regulatory
Authority of Oman (TRA). The authors then used Michael Porter’s five forces model to investigate
the competitiveness of the telecommunication industry in Oman.
Findings – The analysis shows that the strongest competitive forces in the industry are rivalry
among competitors and threat of substitutes. While the threat of entry and power of buyers also
having a significant impact, the power of suppliers is of very limited impact. Hence, the five forces
model impacts uniformly on all the players in Oman’s telecommunication market and have important
strategy implications for them all. The results of this analysis are then used as a critical tool to formulate
effective strategies for industry players in the face of the changing dynamics of telecommunication
services industry in Oman.
Originality/value – This study is one of the few papers that attempted to study the telecommunication
industry in Oman in depth. However, this is the first research study that investigated the competitive
landscape of this industry using an established framework such as Michael Porter’s five forces model.
As such, the study brought to light new insights and paradigms in competing in the telecommunication
industry in Oman. This study also suggests new strategic directives to the incumbents, new entrants,
buyers and suppliers.
Competitiveness Review: An
International Business Journal Keywords Telecommunications industry, Five forces model, Competition, Industry analysis,
Vol. 23 No. 3, 2013 Competitive strategy, Sultanate of Oman
pp. 234-259
q Emerald Group Publishing Limited Paper type Research paper
1059-5422
DOI 10.1108/10595421311319825
Introduction Telecommunication
The telecommunications business has seen tremendous changes in the past decade, industry in Oman
especially in the Middle East, with all players, from equipment providers to service
providers and consumers, being affected. Between 2008 and 2010, Information and
Communication Technology (ICT) services became cheaper, the price of high-speed internet
halved and that of mobile cellular services dropped by 22 percent (Parkes, 2011),
a transformation which has brought great benefit to consumers. The quiet country of 235
Oman, despite sharing in these trends, remains the weakest performer in the region
according to the 2009 ICT Development Index, where it placed in the 71st position globally
(International Telecommunications Union (ITU, 2010a, b, c)). However, it fared better on the
Networked Readiness Index, jumping 47 places in the Individual Readiness of IT
sub-category and reaching 40th position globally. Its performance on the ICT Government
Readiness Index was even better, placing it among the top ten nations (Dutta and Mia, 2011).
The objective of this paper is to provide an in-depth study of Oman’s
telecommunications industry, using what is generally acknowledged by both academics
and professionals as the most significant and influential analytical tool for assessing the
nature of competition in an industry, Michael Porter’s Five Forces Model (Stonehouse and
Snowdon, 2007; Porter, 1999; Ketels, 2006). A literature review reveals that there has been
some study of the transformation of government-owned telecommunication companies
into competitive enterprises in the region, as well as some work on the setting up of new
telecom service providers. However, there has not so far been any attempt at a
comprehensive study of the regional market structure. This study therefore aims to
highlight the short-term and long-term challenges that any enterprise, whether incumbent
or entrant, will face in the industry in Oman and to suggest how they should deal with them.
Sultanate of Oman
Oman is a country which has been very little studied in terms of strategic management.
The telecommunication sector in Oman faces challenges similar to those that are being
faced elsewhere; the fast-paced development that is desirable in the technological and
CR
23,3
236
Figure 1.
Global ICT developments,
1998-2009
Source: ITU World Telecommunication/ICT Indicators database
40
4
2 2 20
Figure 2.
ICT developments in
Oman from 2005 to 2010 0 0
2005 2006 2007 2008 2009 2010
data segment, is estimated to grow at a CAGR of 2.2 percent to reach $1.14 billon
(RO 440 million) in 2012, from $1.07 billon (RO 412 million) in 2009. The internet
and data segment as a whole is expected to grow by 15 percent to reach a $121 million
(RO 46.6 million) target by the end of 2010 and $138.4 million (RO 53 million) by 2011.
It is also expected to ride the next wave of growth due to the prevailing
under-penetration of the internet. Nawras, the newer player, increased its revenue by
24 percent and reached $444 million (RO 171 million) as of 2009, driven mainly by the
mobile and 3G segment (US Research, 2010).
In the past, the incumbent Omantel had a monopoly of all fixed-line and internet
access services. In 2008, the International Telecommunication Union classified all
Oman’s telecommunications sectors as a monopoly, except for the mobile cellular
services which were classified as Partial Competition as of 2005 (ITU, 2008). However,
the situation changed in November 2008, when alternative mobile operator Nawras,
55.6 percent owned by Qtel of Qatar, won a 25-year license to build and operate
domestic and international services, together with submarine cables and transmission
stations. The license also included spectrum rights, valid for 15 years and possibly
renewable for a further ten years, to provide wireless broadband. Nawras pays the
same 7 percent royalties as does Omantel and was required to pay a one-time fee of
OMR 500,000 (Nawras, 2010a, b).
Nawras is building a latest generation fiber optic backbone across the country, in
conjunction with WiMAX networks, and a new international gateway. It launched its
first fixed-line services to corporate customers in May 2010 and to the public on 19 June
2010. As a result of these developments, most telecommunication service services in
Oman, including local services, domestic and international fixed long distance,
wireless local loop, internet services, mobile data services, fixed wireless broadband
and international gateways, are classified as having full competition. Whereas the DSL
sector still operates as a monopoly and the mobile and 3G sectors are classified as
partially competitive (ITU, 2011).
Within the mobile sector, Omantel and Nawras currently have roughly equal shares Telecommunication
of the market but may find the future environment challenging, partly because Oman industry in Oman
has been the first country in the region to launch MVNOs. Five licenses have been
awarded since June 2008, with Connect Arabia’s FRiENDi becoming the first operating
MVNO in the Middle East, closely followed in May 2009 by Majan Telecom’s Renna.
Both operators are targeting the expatriate population, offering low recharge amounts
and competitive international rates. Connect Arabia also partnered with two radio 239
stations to launch a second brand, “Halafoni”, in July 2009, this time targeted at young
nationals and other Arabic speakers with an emphasis on downloadable content.
Two further MVNO’s were launched in 2010, both using Nawras’ network. In August
2006, Oman also became the first country in the region to introduce mobile number
portability (MNP). The more competitive mobile market and the low broadband
penetration rates provide an opening for mobile broadband services through high
speed packet access (HSPA) and next generation networks (NGNs). Both mobile
operators have launched services and have marketed them strongly with numerous
special offers. They appear to be winning subscribers from fixed-line to broadband and
the broadband market is increasingly becoming more mobile.
Rates for GSM Evolution (EDGE) or General Packet Radio Service (GPRS), 3G mobile
networks based on Universal Mobile Telecommunication Standard (UMTS), 3G þ
mobile networks based on HSPA, fixed networks which are typically based on Public
Switched Telephone Network (PSTN), enterprise networks like Unified Communication
Infrastructure and, finally, internet infrastructure like routers and switches.
The NEPs have recently undergone a number of significant consolidations through
mergers and acquisitions. Notable examples are the joint venture of Nokia and Siemens
(Nokia Siemens Networks), the acquisition of Marconi by Ericsson, the merger between
Alcatel and Lucent and many numerous acquisitions by Cisco (George Bailey, 2007). The
power of these suppliers depends on a number of factors, namely: the level of
concentration of the NEPs, whether or not they depend heavily on the telecommunication
service providers for their revenues, the costs to the telecommunication service providers
of switching NEPs and the level of differentiation of products. It is also relevant to note
here that there is minimal threat of forward integration by NEPs.
The power exerted by workforce suppliers is the second element; it is affected by the
availability of a qualified and experienced telecommunications sector work-force and
also by the consolidation in the regional labor market in the telecommunications sector.
CR Both of these issues need further investigation. An analysis of the impact of the labor
23,3 unions and the role they play in determining the power of the workforce suppliers in any
industry is also relevant to the telecommunications industry in Oman and elsewhere.
Another consideration that has to be made in telecommunications markets is that of
service providers such as VNOs. These VNOs may themselves be leasing network
space from telecommunication service providers who have widespread networks in the
244 region. As such, the suppliers for the VNOs are the telecommunication service
providers with widespread networks and this supplier and industry participant
relationship has to be looked into.
For network operators, the Omani telecommunications market is similar to that in
any other country. Consolidation among CSPs by convergence leads to a greater
dependence on a few large clients of suppliers, which should generally mean lower
bargaining strength for telecommunications service providers. However, due to the
resultant pressures on their profitability, service providers are increasingly looking at
lowering their operating costs and capital expenditure (lowering the cost per
subscriber) and this is putting pressure on NEP margins. Switching from PSTN to
NGN increases the use of standardized network components (COTS) at the expense of
more proprietary equipment, a process which has reduced the bargaining power of
suppliers. Software increasingly replaces traditional network components. What this
means overall is that the power of network equipment suppliers is low in the global
telecommunications market, and the same holds true for Oman.
The role of trade unions is still uncertain in Oman. Prior to 2006, trade unions were
banned under Oman’s labor law, along with collective bargaining and strike action. In
2006, a Royal Decree legalized the formation of trade unions, as well as collective
bargaining and strikes. After nearly two years of delay from the proposed date of
holding the founding congress of the trade unions, the General Federation of Oman
Trade Unions (GFOTU) was established in February 2010. At this point, 50 Omani
trade unions have elected some 100 delegates to the congress and named Saoud Ali
Abdullah Al Jabri as the GFOTU President. The move represents a significant
development for the country’s budding trade union movement (Martins et al., 2010).
Another key issue is the policy of Omanisation, the replacement of expatriate workers
with local staff. In a deteriorating economic environment, the “Omanisation” policy may
be relaxed further, following the Ministry of Manpower’s decision in February 2009 to
reverse a previous government edict banning expatriate workers from certain
professions. However, the government is committed to continuing to fund higher
education and training in order to develop local professional and technical expertise. It is
also urging the private sector to provide more employment opportunities for Omani
citizens and to agree on and meet specific targets. Despite changes in Omani labor law,
supply-side problems remain – in particular, the greater cost of employing locals and the
additional rights they enjoy once in a job – and are likely to slow down the progress of
Omanisation (Shakeel and Butter, 2009). The success of the policy is also likely to be
undermined by the gradual implementation of the GCC common market, which should
eventually allow Omani nationals to seek employment freely within the six-member
bloc. The attractions that neighboring countries may offer to highly skilled Omanis,
such as better wages, could reduce the number of well-trained local staff. Ultimately,
then, the power of the labor supply market remains high (Table II).
3. The power of buyers Telecommunication
Buyers of telecommunications services include both individual and corporate buyers. industry in Oman
The most influential factors in their decision making are price sensitivity and the
perceived quality of service. Price sensitivity is a function of the overall buying behavior
of buyers in the market, the income of the buyers and the value that is accorded by these
buyers to the products and services offered by the participants in the
telecommunications industry. Moreover, it is natural that companies are much more 245
likely to achieve superior profitability and earn above-average profits if they are able to
find a unique way of delivering superior value to customers. The negligibility of
switching costs for buyers has already been discussed in the sub topic of customer
switching costs under the discussion for threat of entry in the telecommunication sector
(point 1a above) and is a critical factor when investigating the power of the buyer.
Another important factor which influences the power of the buyer is the availability of
information about the variety of products and services available in the market.
Low switching costs increase the power of the buyer, while lack of information does
the opposite. In the Omani market, buyers’ price sensitivity is moderate, with customer
service and quality also being highly significant. There are only two network operators
providing fixed and mobile telephone and internet services and, although MVNOs
exist, their impact on buyer power is limited as they only provide services through
networks from the two key operators.
The price of telecommunication services also plays an important part in the power
of buyers. These prices are significantly higher than others in the region. Oman has an
IPB of 1.64 (ITU ICT Price Basket as a percent of GNI per capita). This is the second
highest in the GCC region, where Kuwait, the United Arab Emirates, Bahrain and
Saudi Arabia all have lower telecommunication service prices as a percentage of GNI
per capita, with their IPBs standing at 0.37, 0.82, 0.87 and 1.02, respectively,
(ITU, 2010a, b, c). The IPB is reflective of the power of the buyers in the market, with
higher pressure from buyers leading to a more competitive pricing structure and a
lower IPB Index. Overall, then, the power of buyers in Oman’s telecommunications
market, and their competitive pressure, can best be described as moderate (Table III).
Overall
impact of Sub Overall impact of Impact of factor
Force force force sub force Factor Condition on supplier
Overall Overall
Table III. impact of impact of Factor of impact on
Summary of power Force force Sub force sub force Factor Condition buyers
of buyers in Oman
telecommunications Power Moderate Not Not Price sensitivity Moderate Moderate power
market showing factors of applicable applicable Switching costs Negligible High power
impacting the buyers Product or service Low Low power
competitive structure of information
the market availability
not build products around the VoIP they will eventually lose this market because new entrants Telecommunication
may tap into this segment. But they have to act very fast (Bhatnagar and Al Fori, 2010).
industry in Oman
The TRA has yet to declare the VoIP policy in Oman and thus the threat of this
substitute looms over the incumbents continuously. Satellite phone and satellite internet
remain a threat for the future. However, until better service provision and lower rates can
be guaranteed, the threat from this kind of substitution remains low. The overall impact
of substitutes, however, is driving prices down and remains appreciable, due to VoIP 247
and other alternatives such as online voice chatting and international video conferencing
(Table IV).
Overall
impact of Overall impact of Impact on
Force force Sub force sub force Factor Condition substitutes Table IV.
Summary of threat
Threat of High Not Not applicable Availability of Low Low threat of substitutes in Oman
substitutes applicable substitutes telecommunications
Price- Low High threat market showing factors
performance impacting the
trade-off competitive structure
Switching costs Low High threat of the market
CR segment, however, is likely to be rather different, as there are six MVNO networks leasing
23,3 either from Omantel or Nawras; these MVNOs are promising to compete vigorously.
In general, the network coverage and financial strength of both the major operator
and providers is a significant factor in their competitiveness. However, due to the Omani
market being largely an oligopoly, competitive rivalry at present is indirect and discreet.
The regulations, however, do not limit the number of entrants in the market. The TRA
248 itself prefers investors who are more infrastructure-based because they add more value.
In an interview, Dr Mohammed Ali Al Wahaibi, Under Secretary – Communications,
Ministry of Transport & Communications commented about the liberal market situation
in Oman as an answer to the question “What is the need to have so many telecom
operators in the country as the penetration levels are in excess of 100?”:
We do understand the developments in the market and value the importance of quality players.
But you see the TRA and the Ministry cannot reject companies seeking a certain type of license
if they fulfill the criteria and have a strong business case. We do highlight the complexities and
issues involved to the investor and if the investor insists on pursuing the opportunity, we
usually allow them to go ahead and let the market decide. In general, we prefer more
infrastructure-based investors because they add more value not only to the customers but also
to the economy as well. They make significant investments and generate employment in the
market. As a result, there’s a cascading value effect. However, due to our small market size,
difficult terrain and horizontal distribution of the inhabitants, it is not easy for the
infrastructure-based investors (Bhatnagar and Al Fori, 2010).
An examination of the financials of Omantel and Nawras offering a picture of their
financial strength is shown below. According to Table V, though Nawras’s 2009
revenue (US$171 million) is much lower than Omantel’s (2009, US$357 million), Nawras
fares better when comparing the net income to the revenue generated in 2009.
(5b) Rate of industry growth. When looking at the rate of industry growth, both
present and prospective, each service provided, namely fixed and mobile, voice and
internet communication service, must be analyzed individually. There are generally two
types of growth; one is related to actual growth in buyers willing to buy services
Nawras Omantel
2007 2008 2009 2007 2008 2009
look at seriously. Such packages, that include mobile, land and internet communication,
could not only attract customers but also create higher barriers to customer switching.
A second area of incumbents’ concern about the threat of new entrants is the fact that
access to distribution channels remains open and the government favors further
liberalization of the market, while at the same time offering only limited licenses to the
incumbents who have to ensure that these license terms are met. Thus, although
incumbents have advantages, such as established networks, local knowledge and brand
identity, meeting the complete set of government rules means that they will have to lower
their profitability by ensuring service provision to market sectors that may offer low Telecommunication
revenue or be unattractive in terms of profit margin. Hence, the incumbents in Oman industry in Oman
must develop a sustainable economic model that will provide services that not only are
affordable for the consumer but also maintain the profits of the operators. It has also
been suggested that improving the quality and reducing the cost of telecommunication
services results in the improvement of a country’s overall economic performance
(Varoudakisa and Rossotto, 2003). For example, recent studies suggest that increasing 253
broadband penetration by 10 percent can increase a country’s GDP by 1.3 percent
(Touré, 2010). Telecommunications development is thus the key to improving internal
efficiency, competitiveness and strength (Table VII).
On the more positive side of the picture; the moderate level of the threat of entry
means that the only new entrants in the market will have to be regional operators with
plenty of money and advanced low-cost technology solutions. Such regional and
international cash-rich operators do exist and are constantly evaluating the
advantages of entering the Omani market. While such potential new entrants may
be attracted by the low customer switching costs and the availability of distribution
channels, they will be discouraged by the knowledge that they would have to compete
with the current market players whose incumbency advantages are very high.
Perhaps the most interesting aspect of the level of the threat to entry lies in the role
of the government’s independent regulatory authority, the TRA. Threat to entry is an
important tool which the government uses to protect the rights of the customers and
ensure that the incumbents meet the needs of the market. It achieves this through its
policies, especially its control of regulation and deregulation. In our view, it is
important for the TRA to maintain a balance and keep the threat of entry at a moderate
level. This will ensure that the market maintains a healthy degree of competition and
also that companies’ profitability is maintained within acceptable and reasonable
levels. It is also important that the authorities clearly demonstrate their desire to make
the latest advances in telecommunications available to the majority of the population.
One way that the TRA could increase penetration in fixed broadband communications
might be to introduce an internet-provider license only, rather than the typical
universal service provider model that they have followed thus far. The rationale behind
it would be easy to explain; such a license is necessary because the incumbents have
achieved only a low level of penetration in this area (Table VIII).
The second of Porter’s Five Forces is the power of suppliers, a force which our analysis
has shown to be low. This factor, when seen in isolation from the effect of threat to entry,
impacts uniformly on all the players in Oman’s telecommunication service providers
market and has important strategy implications for them all. First, the low-level power of
suppliers enables the service providers to benefit from the best technology at lower costs,
maximize their own profits and switch if required or necessary, since NEP switching
Limitations
In conclusion, this study is by no means exhaustive and does leave some areas unexplored.
For example, the analysis does not explicitly classify the impact of the forces on one
another and it would be profitable to further investigate this topic. In addition, the study is
limited in its linking of the analysis of the impact of the forces on the firms’ strategies and
only uses indicators to assess the market structure. It would therefore be useful to analyze
the Five Forces Model and its application by getting actual data from a longitudinal
perspective on how the firms are currently shaping their strategies. Such an analysis could
also help to identify potential gaps in the strategies that must be filled if players are to
counter the negative impact and harness the opportunities created by market forces.
Moreover, as discussed earlier, the impact of restrictive government policy on the threat to
entry and threat of substitutes is critical to the future status of the telecommunications
sector in Oman. For Oman to achieve significant growth on the ICT Development Index, it
is crucial that the government establishes full deregulation of the market. Where such
CR deregulation will speed up the development of ICT services in the country, incumbents
23,3 need to be well prepared to deal with any resultant changes in the market, especially
because – given the dynamics of the telecommunication industry – these are likely to
happen suddenly and without much warning.
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23,3 Policy, Vol. 28 No. 1, pp. 59-78.
Further reading
Alleman, J. and Rappoport, A. (2007), The Future of Communications in Next Generation
258 Networks – The Unsustainability of Access Competition, International Telecommunications
Union, Geneva.
Bauer, J.M. (2006), “Bundling, differentiation, alliances and mergers: convergence strategies in
US communications markets”, Communications & Strategy, No. 60, pp. 59-83.
Drucker, P.F. (1999), “Beyond the information revolution”, The Atlantic, October, available at:
www.theatlantic.com/past/docs/issues/99oct/9910drucker.htm (accessed 25 July 2010).
Grundy, T. (2006), “Rethinking and reinventing Michael Porter’s five forces model”, Strategic
Change, Vol. 15 No. 5, pp. 213-229.
Maniewicz, M., Teltscher, S., Gray, V., Magpantay, E., Olaya, D., Welsum, D.v., Poupaert, O.,
Rollet, N. and Vallejo, I. (2010), Measuring the Information Society, Telecommunication
Development Bureau, Geneva.
OECD (2000), OECD Information Technology Outlook 2000 – ICTs, E-commerce and the
Information Economy, Organisation for Economic Co-operation and Development, Paris.
Plunkett Research, Ltd (2010), Telecommunications Statistics, Plunkett Research, Ltd, available
at: www.plunkettresearch.com/Telecommunications/ TelecommunicationsStatistics/
tabid/96/Default.aspx (accessed 30 July 2010).
Population Division of the Department of Economic and Social Affairs of the United
Nations Secretariat (2009), World Population Prospects: 2008 Revision, United Nations,
New York, NY.
Porter, M.E. (1998), “Clusters and the new economics of competition”, Harvard Business Review,
Vol. 76 No. 6, pp. 77-90.
TRA (2009), Universal Service Policy and Its Implementation Policy, Telecommunication
Regulatory Authority, Muscat.
United Nations Department of Economic and Social Affairs – Population Division (2009), “world
population prospects: the 2008 revisions”, Population Newsletter, No. 87, pp. 1-4.
Appendix
Glossary
3G Third Generation
4G Fourth Generation
ADSL Asymmetric Digital Subscriber Line
ARPU Average Revenue per User
CEO Chief Executive Officer
EDGE Enhanced Data Rates or GSM Evolution
GDP Gross Domestic Product
GSM Global System for Mobile Communications
HSPA High Speed Packet Access
ICT Information and Communications Technology
IP Internet Protocol
ISDN Integrated Service Digital Network
ITU International Telecommunications Union
MNP Mobile Number Portability
MVNE Mobile Virtual Network Enabler Telecommunication
MVNO Mobile Virtual Network Operator
NEP Network Equipment Provider industry in Oman
NGN Next Generation Networks
NNP National Numbering Plan
TRA Telecommunications Regulatory Authority
USO Universal Service Obligation
VNO Virtual Network Operator 259
VoIP Voice over Internet Protocol
WTO World Trade Organization