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ZONG PAKISTAN

Zong, a global telecom brand, was introduced in Pakistan by China

Mobile Pakistan Limited (CMPak). Significant investments were
made initially to expand Zong’s network across Pakistan and in
positioning Zong as a price leader in an already fiercely
competitive telecom industry. The results were positive as Zong
increased its market share from 2% in 2007 to 10% in 2011. In
2012, Zong launched a mobile financial services product, Timepey,
in collaboration with Askari Bank. However, the product could not
achieve the traction that was forecasted and lagged the
competitor’s offerings. Despite this setback, its market share in
telecom soared to 20% in 2015. This increase in market share had, however, not resulted in higher
profitability. Like other players in the cellular industry, Zong was also looking for innovative ways to
improve both its top and bottom line.

Zong’s Chief Commercial Officer, Moid Javeed, had more than 20 years of experience in the industry.
Before joining Zong, he was Marketing Director at Jazz and had occupied various senior positions in his 8
years at Jazz.

Cellular industry of Pakistan

Pakistani cellular industry started in 1990 when the government awarded AMPS licenses to two players,
Paktel and Instacom. In 1992, a GSM license was acquired by Mobilink followed by Ufone in 1998. In
1994, a regulatory body, Pakistan Telecom Authority (PTA), was created to facilitate and develop the
industry on modern lines. The subscriber base grew steadily but slowly in the initial years. The first
inflection point came in 2004 when PTA announced a technology-neutral, ambitious cellular policy with
a calling party pay regime. Two new licenses were awarded in 2004 to Telenor and Warid, and the
growth of the cellular market went into high gear. The subscriber base grew from 5mn in 2004 to 140mn
in 2014 with a cellular penetration of 77% of the population.

The next inflection point came in 2014 when PTA awarded licenses for next generation mobile services.
Four of the operators, Mobilink, Telenor, Zong and Ufone, participated in the spectrum auction and
launched their 3rd generation services by 2014. Zong was the only operator that had purchased a 4G
license in the auction and started offering 4G services in September 2014. By 2017, all major operators,
except Ufone, had purchased 4G licenses and were competing aggressively for market share.

The industry started with lucrative gross margins, and these, when multiplied by a huge subscriber base
and frequent usage, resulted in mouth-watering profits. However, the industry also faced multiple
challenges which led to increasing pressure on profit margins in a few years. Some of these problems
were inherent to the industry and mirrored the challenges faced by the cellular industry in other
countries. The first amongst this was the cost structure. The fixed costs (license fees, setting up of
cellular towers all over the country, upgradation to next-generation technologies, customer acquisition
costs etc.) were in hundreds of millions of dollars. The variable costs of a call, on the other hand, were
minimal. This meant that scaling up customer base and maximum capacity utilization were strategic
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imperatives for all players. The mad rush to achieve both these objectives led to frequent price were
amongst players to obtain and retain as many customers as possible. Prices eroded steadily, and the
industry Average Revenue Per User (ARPU) reached $2.41 in 2010, which was amongst the lowest in the
region. Industry players had frequent interactions with PTA to discuss and stabilize the health of the
industry.

Cellular consumer behavior presented another reason for pressure on margins. First, with the increased
subscriber base, the industry was dominated by subscribers who did not have adequate disposable
incomes. Second, despite significant marketing spend on brand building, most consumers, especially the
youth, treated the service as a commodity and switched brands frequently based on the latest product
bundle offering deeper price cuts and/or free SMS or data. They carried multiple SIMs. As many later
versions of mobile phones allowed dual SIMs, brand switching was convenient. Consumers were using
different SIMs for voice or data depending on the tariffs. Given the price-sensitive nature of subscribers,
their choice of selecting and using a cellular service was influenced by the service their friends and
family members used. Since voice services generally covered most of their bills, this also meant that the
SIM used for voice calls was the primary SIM of the customer that got the highest share of the wallet.
This was popularly called the calling circle effect in the industry. Almost all cellular players offered many
‘friends and family’ packages to influence customer acquisition and retention. However, operators with
a larger subscriber base had a competitive edge.

Cellular industry in the digital age

Rapid penetration and cheap access of internet and broadband across the globe allowed innovative
entrepreneurs to exploit digital opportunities by offering radically new or improved products and
services at extremely attractive prices if not free. This was helped by the fact that the incremental costs
of producing and distributing virtual products were next to nothing. Companies like Apple, Facebook,
Google, Amazon, Alibaba, and Tencent became the darlings of Wall Street. The success of these firms
came at the expense of many former successful businesses that lost out in the digital disruption.
Industry boundaries were getting blurred, and corporate leaders all over the world were apprehensive
where digital innovators would strike next.

While cellular operators had initially benefitted from digital revolution by disrupting traditional landline
operators, they were now apprehensive that the new Over the Top (OTT) service providers like Skype,
WhatsApp and Facebook (that used internet-based applications on mobile phones) would seriously
erode their voice and SMS revenue streams.

The future direction of the cellular industry was also expected to be impacted by the digitization efforts
of the government and the private sector. The Government of Pakistan had initiated many ventures to
enable and strengthen e-governance. Land records, records of educational institutions, poverty
alleviation payments etc. were being digitized and made easily accessible. Most significant growth was
seen in the domain of digital financial systems. While Telenor’s EasyPaisa had pioneered the use of
mobile phones for money transfer since 2009, digital financial services were expected to get a big boost
with the launch of government’s National Financial Inclusion Strategy in 2015. In 2016, the m-banking
transaction volume had reached Rs 2,096 bn.

Jazz Strikes: The Veon ‘Be truly free’ launch

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Jazz launched VEON in Pakistan in Nov 2017 with a big bang ‘Be Truly Free’ campaign. VEON offered in-
app voice calling and messaging. However, this required both the communicating parties to have the
VEON app. To incentivize the app uptake and usage, Jazz zero rated the app usage on its network. It
meant that Jazz users could use the app even with zero balance. It seemed that in order to rapidly scale
the uptake of the platform, Jazz had decided to take a hit on their existing revenues for both voice and
data. According to industry sources, a large amount of marketing budget was allocated for this
ambitious launch.

Zong’s response

Zong’s marketing team had been alerted about the impending VEON launch. They knew that it was
Jazz’s attempt to attack Zong’s leadership position in the 3G/4G data market. Given Jazz’s dominant
subscriber base and the free VEON offer, there was a clear signal that Jazz planned to dominate both
voice and data markets in the future. There was also the danger of losing Zong subscribers to the
attractive VEON offer.

There was some debate at Zong whether to hit back Jazz in their area of strength, i.e., voice market, or
retaliate in Zong’s area of strength, i.e., data market. An idea was floated to take out the pricing
advantage of Jazz customers by subsidizing Zong customers’ calls to non-Zong customers. However, it
was shot down as being too inexpensive. The conclusion was to fight in the data market. Within the data
market, three retaliatory options emerged with key proponents for each. These were:

Option 1: Hard bundling free WhatsApp with top data offers

The nature of product offers in the cellular world was different from that of the normal FMCG world.
There would be a standard product offered at a standard price. This was typically called Pay as You Go
(PAYG) product. For example, in Oct 2017, a PAYG Zong subscriber would have paid Rs 2 plus tax per
minute for voice, Rs 1.5 plus tax per SMS, and Rs 4 plus tax for 1MB of internet use. However, at any
point in time, only a small minority (less than 10%) of the subscribers would be subscribing to PAYG. The
large majority would be subscribing to some other product offer, or offers, of the operator depending on
subscriber’s usage patterns and price sensitivities. The easy availability of tons of second-by-second
consumer product usage and other consumer behavior data allowed cellular operators to indulge in the
micro-segmentation of their huge customer base and extend customized product offers to them. These
product offers were essentially limited-duration promotional offers (either reduced price or increased
value) on voice, data, or some combination of both. Customers could subscribe to these offers by
sending an SMS code and could also re-subscribe at the end of the offer as many times as they wanted if
the offer was active. At any one point in time, most operators would be carrying hundreds of such
offers. Most of these offers were not terminated but morphed into new offers by changing the price
discount or value offered. While cellular operators offered a huge number and variety of such products,
the top 10% of these offers carried the bulk of their traffic share.

After having discounted the idea of fighting Jazz with voice offers, Zong managers considered their
leading data offers active in the market. Sajid, Head of pricing at Zong strongly advocated that Zong
should hard bundle free social media MBs to their existing top data offers. Since WhatsApp was the
most popular amongst OTT players available in the market, Sajid suggested that free WhatsApp MBs
should be hard bundled with selected data offers. For example, the subscribers of the top offer Daily
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Offer (which provided subscribers around 500 MB of data use for Rs 18 only for one day and the offer
expired at midnight each night unless re-subscribed) would obtain free use of WhatsApp within validity.

Sajid explained, “This option would, not only, minimize customer defection, but also add incremental
subscribers from both competitors and from our own base of less-engaged customers. Don’t forget we
are behind our targets for 4G subscriber acquisitions so far. I am sure with hard bundling we would cross
our targets easily”.

“True”, retorted Umar (Director Marketing), “But don’t forget the cannibalization of both our voice and
data revenues from these subscribers”.

Option 2: Building a digital app to be offered free

Some managers were keen to develop Zong’s own digital app to compete directly with VEON. One of
Zong’s technical teams had already been working on developing an in-house app that would allow its
users to call for free while roaming anywhere in the world. Since international roaming services were
very costly, Zong wanted to get a higher share of this niche business by rolling out its app to potential
roamers and offering discounted rates for the app usage internationally. The beta version of the app was
stable and had received positive feedback from a majority of the internal users/testers.

“I think this is a WeChat moment for us”, said Mudassar, head of Segments and Portfolio at Zong. He
continued, “Why should we subsidize and market competitive OTT products for short-term gains only to
lose in the long-term. We know how the nature of the game is changing in the digital world. We have
already established that we can develop an interesting app. Instead of a threat, Jazz has provided us
with an opportunity to develop and launch our own version of WeChat and capture the Pakistani
market”.

“Do we have the time and resources to develop and create mass adoption of such an app? You are
asking us to compete with giants like WhatsApp, Messenger, and IMO”, questioned Sajid.

Option 3: Free WhatsApp offer

Umar advocated the third option of offering free WhatsApp to all. He believed that instead of competing
with the OTT players, Zong could simply partner with them. Most of the users already had at least one
such app installed in their smartphones, and it would take away the development and adoption
challenges for Zong. However, this also meant investing Zong’s advertising money to promote a platform
that was not owned by Zong and which could pose a serious threat to Zong in the future.

“We have already invested heavily in our 3G/4G network expansion. Let’s use this opportunity to, not
only, beat VEON, but also, expand our subscriber base aggressively. Customers love the word ‘free’.
WhatsApp is already a popular app; and ‘free WhatsApp’ would be a lethal combination for the youth
crowd. Why limit it to only our current product subscribers. I want to target the whole market. It will
consolidate our leadership in the data segment for good”. Umar made his case.

“Right, but what about the massive revenue loss across the board”, said Sajid.

Case questions:

(1) The cellular industry was facing low productivity even prior to the arrival of digital disruption.
What factors had led to that?
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Ans1) Cost Structure, consumer behaviour. They were competing rather than coopeting

(2) What dangers of digital disruption exist for the industry? What opportunities does it entail?

Ans 2) Cut in revenue streams, leading to decrease in margins. Digital finance, 4g operators to support
internet facilities.

(3) How do you evaluate the competitive strategies employed by various players in the industry?

Ans 3) Jazz Veon/Call Offer, Zong Data Market, Telenor easy paisa, ufone somewhere in the middle

(4) What option would you select in responding to the VEON threat? Why?

Ans 4) Option 1