MBA Exam Case - Zong

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LCA059
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ZONG PAKISTAN: IN SEARCH OF PROFITS IN A ‘FREE’ WORLD (A)
“You can’t be serious!” exclaimed Moied Javeed, Chief Commercial Officer, China Mobile Pakistan Limited
(CMPak), as he looked quizzically at Umar Tanwir.
Umar (better known as UT) was Director Marketing at Zong, the company’s cellular brand.
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“Moied Sahib, I wouldn’t have recommended this under ordinary circumstances. But are these ordinary times?
You know Jazz as well as I do. Our market shares are threatened. Our strategy of clear leadership of the data
market is at stake,” UT responded.
“I know, I know,” said Moied. “We need to respond to Jazz by the end of the day. I have already set up a meeting
on this with the CEO.” He continued, “However, we are accountable for the bottom line as well. Why don’t you
all come back with final recommendations with clear bottom line implications in the afternoon?”
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It was a sunny Monday morning in November 2017. The top commercial strategy team was in a huddle at Zong’s
headquarter, situated in the lush green suburbs of Islamabad, Pakistan. Only a day back, Jazz, their largest
competitor, had launched VEON with a bang. The whole industry was abuzz with its implications. Moied had
alerted UT and his team a couple of weeks back as soon as he became aware of the impending VEON plans of
Jazz. The Zong team had started their homework in earnest and came up with three broad options for responding
to Jazz’s move. However, the team members had serious disagreements on which one was the best. Unfortunately,
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the time for a response had arrived.
COMPANY BACKGROUND
The origins of CMPak could be traced back to Paktel, a pioneer of mobile phones in Pakistan in 1990-91. Paktel
used the Advanced Mobile Phone System (AMPS) and was the leading player in the initial years. However, by
early 2000 it had lost out to later entrants who were using newer Global System for Mobile Communication
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(GSM) technology and investing heavily in network expansion and marketing. Paktel launched GSM in late 2004
and eventually sold out to CMPak in 2007. CMPak was a fully owned subsidiary, and the first global venture, of
China Mobile Communications Corporation, the world’s largest telecom operator headquartered in Beijing,
China.
CMPak introduced its global brand, Zong, in Pakistan, and started investing heavily in building both its brand and
market share. Significant investments were made to expand Zong’s network across the country and in positioning
Zong as a price leader in an already fiercely competitive industry. The results were positive as Zong increased its
market share steadily, from a paltry less than 2% in 2006-07 to a promising 10% by 2010-11. In 2012, Zong
launched a mobile financial services product, Timepey, in collaboration with Askari Bank of Pakistan. However,
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the product could not achieve the traction that was forecasted and lagged the competitor’s offerings. Despite this
setback, the GSM service market share continued to rise to reach a decent 20% by 2014-15. This increase in
This case was prepared by Muntazir Mehdi, Deputy Director Digital Channels, Zong and Dr Ehsan ul Haque, Professor at the Lahore
University of Management Sciences (LUMS). It is intended to be used for class discussion rather than to illustrate either effective or ineffective
handling of the situation. Some non-public data has been disguised and some business details have been simplified. This material may not be
quoted, photocopied, digitally or physically redistributed in any form without the prior consent of Lahore University of Management Sciences.
© 2020 Suleman Dawood School of Business, Lahore University of Management Sciences
This document is authorized for educator review use only by KISHWAR GULZAR, NUST - National University of Science and Technology until Jun 2024. Copying or posting is an infringement
of copyright. Permissions@hbsp.harvard.edu or 617.783.7860
Zong Pakistan: In Search of Profits in a ‘Free’ World (A) LCA059
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market share had, however, not resulted in increased profitability. Like other players in the cellular industry, Zong
was also looking for innovative ways to improve both its top and bottom line.
Moied Javeed had more than twenty years of experience in the cellular phone industry. Before joining Zong in
2014, he was Marketing Director at Jazz and had occupied various senior positions in the organisation in the past
eight years there.
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THE CELLULAR INDUSTRY1
Pakistani cellular industry started in 1990 when the Government of Pakistan (GOP) awarded AMPS licences to
two players, Paktel and Instacom. In 1992, a GSM licence was acquired by Mobilink followed by Ufone in 1998.
In 1994, a regulatory body, Pakistan Telecommunication Authority (PTA), was created to facilitate and develop
the industry on modern lines. The subscriber base grew steadily but fairly slowly in the initial years. The first
inflection point came in 2004 when the PTA announced a technology-neutral, ambitious cellular policy with a
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calling party pay regime. Two new licences were awarded in 2004 to Telenor and Warid, and the growth of the
cellular market went into high gear. The subscriber base grew from a meagre 5 million in 2003-04 to almost 140
million by 2013-14 with a cellular penetration of nearly 77% of the population (see Exhibit 1 for industry growth
data).
The next inflection point in the cellular industry came in 2014 when the PTA awarded licences for the next
generation mobile services. Four of the operators, i.e., Mobilink, Telenor, Zong, and Ufone, participated in the
spectrum auction and launched their Third Generation (3G) services by mid-year 2014. Zong was the only
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operator that had purchased a Fourth Generation (4G) licence in the auction and launched 4G services in
September 2014. Warid did not opt for the auction but partitioned its already existing spectrum to offer a 4G Long
Term Evolution (LTE) service in December 2014. By 2017, however, all major operators, barring Ufone, had
purchased 4G licences and were competing aggressively for market share.
Cellular industry in Pakistan started with lucrative gross margins, and these, when multiplied by a huge subscriber
base and very frequent usage, resulted in mouth-watering profits. However, the industry also faced multiple
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challenges, which led to increased 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 (licence 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, and it was a perishable commodity. This
meant that scaling up of customer base and maximum capacity utilisation were strategic imperatives for all
players. The mad rush to achieve both these objectives led to frequent price wars amongst players to obtain and
retain as many customers as possible. Prices eroded steadily, and the industry ARPU reached USD 2.41 in 2010,
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which was considered to be amongst the lowest in the region. Industry players had frequent interactions with PTA
to discuss and stabilise the health of the industry.
Cellular consumer behaviour presented another reason for pressures 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 fairly convenient. Consumers were using different SIMs for voice or data depending
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on the tariffs. According to PTA’s annual report for 2014-15, users of cellular phones had, on average 2.17 SIMs,
and the ARPU per SIM was USD 1.99.
Another cost element that differentially impacted the profitability of the cellular players was the domestic Mobile
Termination Rate (MTR) regulated by PTA. Customer calls were either on-net (meaning the calling and receiving
parties were on the same network- ZONG to ZONG call) or off-net (calling and receiving parties were on different
networks – ZONG to Mobilink call). In the case of off-net calls, the network originating the call needed to pay
the MTR fee (PKR 0.9 per 60 seconds) to the network terminating the call. This led to differential costs for calls
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made on on-net or off-net. Companies had the option to pass on this cost to customers in the form of differential
tariffs or absorb the costs to keep the prices simple, albeit at a great loss to the bottom line. Most companies
maintained a differential although price pressures led the differential to squeeze over the years. The MTR regime
helped players with a larger subscriber base. Industry players had petitioned to PTA for many years to reduce this
fee, but there was no progress.
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The MTR, and the resultant different tariffs for on- or off-net, had also impacted consumer behaviour. 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 the majority 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 operators
offered many ‘friends and family’ packages in order to influence customer acquisition and retention. However,
operators with a larger subscriber base had a competitive edge.
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The Pakistani cellular industry was also negatively impacted by factors that were peculiar to Pakistan. The post-
9/11 war on terror had created major law and order challenges for Pakistan leading to frequent unavailability of
services in war-torn areas and disruption of services to many cities during sensitive religious or special occasions.
Crackdowns on illegal SIMs, used sometimes by terrorists, led to a biometric verification process in 2014-15,
which significantly reduced the subscriber base and had a negative impact on revenues. The cost side of the
business was impacted by serious energy crises, which led to frequent and long duration power cuts (load
shedding), causing painful disruption of service for customers. Cellular operators had to invest significantly in
installing back-up systems (typically battery and diesel power generators) throughout their networks to provide
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smooth services.
Finally, the economic challenges faced by the country, coupled with natural disasters like floods, led to fairly low
GDP growth rates and high inflation for the last decade. On top of this, the government taxed the cellular industry
fairly heavily, leading to reduced demand. Many petitions by the cellular industry and PTA to reduce various
taxes did not receive any support as the government itself was facing increasing budget deficits. The Pakistani
rupee also continued to lose its value with respect to the dollar. For instance, one USD fetched Rs. 58 in mid-
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2004 while the same fetched PKR 105 by late 2017. Cellular operators were earning in rupees but were incurring
costs in dollars in terms of telecom equipment spend. This had put increased pressure on the bottom lines of all
operators.
The Pakistani cellular industry was peculiar in the sense that almost all of the operators were headquartered in
Islamabad, the capital of Pakistan, but a relatively smaller city. The industry players had all grown together.
Consequently, most senior managers of the industry knew each other fairly well, both in professional and personal
capacities.
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Challenges for the Cellular Industry in the Digital Age
The new millennia brought with it the mantra of digital disruption. Rapid penetration, and inexpensive 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 new companies used different business models to create value for themselves and their customers. However,
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a pattern seemed to emerge that included scaling up ‘at all costs’ by offering some products or services free (both
to benefit from economies of scale and network effects), monetising in innovative ways, and evolving from a
product to a platform approach to provide a one-stop digital shop for customers. The success of these companies
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 the digital
innovators would strike next.
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While cellular operators had initially benefited from the 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. In any case, serious money was betting on innovative OTT apps and monetisation
possibilities. The Chinese company, Tencent, was an interesting example in this regard. It started in 1998 and
only became profitable when it partnered with two cellular operators in China (China Mobile and China Unicom)
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to offer Mobile QQ – a mobile-based instant messaging service. Tencent launched WeChat as a chat service for
smartphone users in 2011. By June 2017, WeChat had 963 million active monthly users and offered its consumers
numerous services, including e-commerce, social networking, media and entertainment, gaming, search, mobile
payments, etc. Industry experts observed that China’s restrictions on Facebook, Twitter and Google were partially
responsible for Tencent’s meteoric success. By early 2017, Tencent had become the tenth most valuable listed
company in the world, far outshining the performance of its original cellular partners.2
The cellular industry in Pakistan was also gearing up for the digital revolution. The availability of adequate
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spectrum was one strategic asset for cellular operators for this purpose. Prior to 2014, all five cellular operators
held approximately the same amount of spectrum each. Between 2014 and 2017, massive investments were made
in buying additional spectrum by various operators in order to launch their 3G and/or 4G/LTE services. All
operators also invested heavily in upgrading their 2G networks to 3G or 4G. While broadband services were
already offered by companies like PTCL, Wi-Tribe, and Wateen, the arrival of cellular broadband completely
changed the scenario. Just like the ruthless competition for the voice market, cellular companies engaged in fierce
competition for the data market by offering highly attractive data bundles to gain shares. Consequently, the mobile
broadband subscriber base shot up from zero in early 2014 to 42.1 million by mid-2017, completely dominating
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the non-cellular broadband, which had reached a subscriber base of 2.5 million by that time.
Consumption of data and various OTT services, especially those of WhatsApp, Google, Facebook shot up. See
Figure A for adoption of various social media platforms in Pakistan in 2017. According to Digitz (a market
research organisation), social media usage on mobile phones had grown 47% between January 2016 to November
2017.
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Figure A
Popular Social Media Platforms in Pakistan (Mn)

33.0 31.0
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4.9 4.2 3.5 2
Facebook Youtube Instagram LinkedIn Twitter Google +
Source: Digital Trends Report November 2017, Digitz.
This growth was also assisted by the availability of smartphones with increasing functional capabilities coupled
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with ever reducing prices (see Figure B for smartphone penetration among mobile (handset) users in Pakistan).
As a result, the revenue mix of cellular companies was impacted. Growth in data revenues outpaced that of voice
reaching almost 25% share for the industry by 2017.
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Figure B
Smartphone Penetration in market

24%
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19%
14%
10%
2014 2015 2016 2017
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Source: Company Documents.
The future direction of the cellular industry was also expected to be impacted by the digitisation efforts of the
government and the private sector. The Government of Pakistan (GOP) had initiated many ventures to enable and
strengthen e-governance. Land records, records of educational institutions, poverty alleviation payments, etc.,
were being digitised and made easily accessible. GOP was also involved in developing multiple incubation centres
in the country with the assistance of leading universities in order to encourage the development of innovative
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digital ventures. E-commerce was another major driver of digitisation of the economy. According to PTA, by
mid-2017, there were about 2000 e-retailers in the country making transactions worth USD 100 million. The
transactions were expected to grow to USD 1 billion by 2020. Companies also started planning for and dabbling
in, the Internet of Things (IOT).
Most significant growth was seen (and was being forecasted) 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
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services were expected to get a big boost with the launch of GOP’s National Financial Inclusion Strategy in 2015.
The growth in mobile wallets and mobile banking agents is provided in Figure C. In 2016, the M-banking
transaction volume had reached Rs 2,096 billion.
Figure C
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Source: PTA Annual Report 2016.
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Competition
Competition in the cellular sector was fierce. Each competitor approached the market based on the strategic intent
of its top leadership and the resources that were made available. A brief description of the competitors and their
manifest strategies is presented below.
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Jazz/Mobilink
Mobilink was one of the first GSM licensees in Pakistan, starting its operations in 1993-94. In 2001, Egyptian
telecom giant Orascom bought majority shares of the company and invested heavily in network and subscriber
expansion with a view to dominate the market. Around this time, the industry pioneers like Paktel and Instaphone,
which were both saddled with the older AMPS technology, were somewhat confused about their future strategy,
and consequently investments, in Pakistan. Similarly, Ufone, another early GSM operator and a subsidiary of the
government-owned telecom giant, PTCL, was undergoing the throngs of privatisation and not investing in the
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future. Mobilink’s strategic moves allowed it to capture almost 63% of the cellular market by early 2005.
The arrival of Telenor and Warid in 2005 did not affect the leading position of Mobilink. Whether it was price
wars, brand wars, or technology wars, Mobilink matched the thrusts of each competitor and maintained its market
share (see Exhibit 2 for historical subscriber market shares of various players).
Mobilink underwent major ownership, organisational and brand name changes in the decade starting 2011. First,
the ownership changed hands in 2012 when VimpleCom acquired majority shares from Orascom. VimpleCom
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was one of the larger telecom companies in the world operating in 14 countries with a customer base of 218
million. The arrival of the new owners and the pressures of profitability faced by the industry led to initiatives to
curtail costs. Brand rationalisation was carried out in addition to organisational restructuring and some
downsizing. Mobilink had traditionally been using a variety of brands (such as, Mobilink, Jazz, Indigo, etc.) for
different products targeted at different market segments. In 2012, work commenced to move to one brand name
with the key debate between choosing Mobilink or Jazz. In 2015, it was decided to use Mobilink for the company
and brands. However, within a couple of years, with a new leadership team in place, the name was changed to
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Jazz. The argument was the superior familiarity of subscribers with the Jazz brand.
In late 2015, Mobilink announced its purchase of Warid. Warid, a Lahore-based cellular operator, owned by Abu
Dhabi Group, had maintained its small but loyal customer base since its beginning. However, the scale was too
small, and Warid had been up for sale for a few years. Warid’s merger with Mobilink led to many legal,
organisational, technological, and commercial migration and assimilation challenges. However, the benefits from
economies of scale, rationalisation of costs, and availability of free 4G spectrum outdid the challenges. The
merger was fully operationalised by early 2017.
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In 2017, Jazz was consolidating its strategic move of becoming a technology company as opposed to a
telecommunication one. As part of the strategy, it had started investing heavily in mobile financial services
business. Also, in 2017 Jazz acquired an additional 10 MHz chunk in the 1800 MHz band for USD 295 million.
This acquisition further solidified Jazz’s spectrum holding (see Table A below).
Table A: Spectrum Holding of Cellular Players
JAZZ ZONG TELENOR UFONE

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Source: Frequency Allocation Board of Pakistan.
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Telenor
Telenor was a fully-owned subsidiary of the Telenor Group, a global telecommunication operator headquartered
in Norway. Telenor launched its services in Pakistan in 2005, focusing on both a higher quality European
technology and simple, ‘honest’ and low price that initiated an aggressive response from Mobilink. Over the
years, Telenor used generous investments in expanding its network and subscriber base, and by 2010 it had
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become the second-largest cellular operator by market share. Telenor focused on the rural and northern areas of
Pakistan to avoid cut-throat market share battles that were underway for the urban markets. By 2014, Telenor was
seriously threatening Mobilink for market leadership.
Telenor played a pioneering role in mobile financial services in the country when it launched EasyPaisa in late
2009 with Tameer Microfinance Bank. While many competitors followed with their own mobile money transfer
service in a few years, EasyPaisa’s dominance in the industry continued. By 2017, EasyPaisa had the largest
network of Over the Counter (OTC) agents for money transfers, however, it had not reached a satisfactory level
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of active mobile wallet penetration and use of other financial products.
Telenor’s future strategy seemed to have put a strong emphasis on leveraging the digital revolution spreading in
the country. Its purchase of spectrum for 3G and 4G services, its innovative work in mobile-based services in the
agriculture value chain, and its work with many government and private sector partners to exploit digital
technology were key elements of this strategy.
Ufone
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Ufone was the mobile service brand of Pak Telecom Mobile Limited, a wholly-owned subsidiary of Pakistan
Telecommunication Company Limited (PTCL) – a GOP organisation. Ufone launched its services in 2001 and
by early 2005 had attained the second largest market share. It was the first operator to launch GPRS and MMS
services. Similarly, it was the first operator to target the masses with its attractive pricing and advertising strategy.
From 2005 onwards, PTCL was engaged in the lengthy process of privatisation, culminating in a management
takeover by Etisalat by 2006. Etisalat, the state-owned telecom operator of UAE, focussed more on managing and
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revamping the huge operations of PTCL. Top management attention and investments for Ufone seemed to get
erratic. Consequently, Ufone lost market share first to Telenor and later to Zong. In 2014, it acquired spectrum to
launch 3G; however, it did not follow other operators in purchasing spectrum for the launch of 4G. There were
rumours that Etisalat was planning to revitalise Ufone.
ZONG’S GROWTH STRATEGY
By late 2013, Zong’s management had decided to move away from reliance on the price leadership strategy that
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they had been following to gain market share. They also decided that rather than fighting for the voice/SMS
market segments with eroding profits and where Zong had a weaker competitive position, they should focus on
dominating the emerging data segment. Consequently, in 2014, Zong acquired 20 MHz of spectrum for around
USD 500 million and launched the first 4G service in Pakistan in addition to 3G service.
Expansion of 3G/4G subscriber base was contingent on two key factors; the availability of service and the
availability of 3G/4G enabled handsets. Consumer research had suggested that contrary to voice, 3G/4G service
had very different selection criteria for users. Choice was primarily driven by availability/coverage, followed by
speed and then price of the service. Consequently, Zong invested heavily in network expansion for both 3G and
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4G. By 2017, Zong had upgraded around 70% of its network to 3G/4G, largest among all the competitors.
The availability of 3G/4G enabled handsets (equipped with 4G SIM Card called uSIM) with the subscribers was
improving rather slowly as the costs of 4G smartphones were beyond the reach of the masses. In order to combat
this challenge, Zong launched MBB (Mobile Broadband) devices – small handheld, battery-powered devices that
were sold with a uSIM and emitted a Wi-Fi signal – in 2015. Since most of the smartphones already had built-in
Wi-Fi, MBB devices offered a cheaper solution to 4G handset upgrades. Other players in the Pakistani market
had also offered MBB devices before Zong. PTCL, the incumbent fixed line operator, had launched EVO in the
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late 2000s using its wireless local loop network. While PTCL’s EVO proved the potential, it was fairly slow in
expanding its reach. Zong, on the other hand, aggressively marketed its MBB device. It priced its devices at parity
with EVO.
The launch of the Zong MBB device as a 4G enabler was a great success. Compared to the frail fixed broadband
network in the country, Zong’s 4G was fast, mobile and offered enough monthly quotas to satisfy the needs of
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the majority. MBB business generated revenue and trial for Zong. While the ARPU of a regular handset customer
was little over PKR 200, MBB ARPU was over PKR 1800. On the downside, it consumed far more bandwidth
than regular GSM service. In order to reduce this network congestion, Zong increased the price of its MBB service
in the first quarter of 2017 with very limited impact on its revenues.
In 2016, as part of the repositioning strategy, the top management decided to rebrand and upmarket Zong’s image.
It was felt that the old logo and colour scheme (red and blue) reminded customers of the original low price brand-
of-the-masses positioning. It was very challenging to break the clutter and reach out to the higher end of the
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market with a credible value proposition. However, 3G/4G presented a unique opportunity. By leapfrogging the
technology and offering 4G before anyone else, Zong repositioned itself as a brand that was cutting edge, modern
and leading the digital age. It was targeted towards the young, tech-savvy customers. To materialise this shift, the
brand logo was modified, and a new colour scheme (fuchsia and lime) was introduced (see Exhibit 3). This new
scheme also borrowed heavily from the global rebranding efforts of the parent company.
The communication strategy was also changed. While earlier TVCs addressed the masses, new communication
was created to attract and engage the internet-aware youth of the country. The management believed that these
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young people were the new opinion-makers, and winning them over would be critical for the success of Zong’s
repositioning efforts. An aggressive marketing campaign was followed, positioning Zong clearly as a data player.
All of these efforts and investments led to Zong capturing the leading market share in the 3G/4G market (see
Exhibit 4).
JAZZ STRIKES: THE VEON ‘BE TRULY FREE’ LAUNCH

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VimpleCom in Europe was facing typical challenges of cellular operators all over the world, i.e., reduced
profitability from severe price competition, increasing cannibalisation of GSM revenues from OTT service
providers, etc. To address these challenges VimpleCom came up with the idea of VEON, an online messaging
platform designed to compete with players like WhatsApp, Viber, WeChat, etc. The VEON app aimed to offer
basic communication for free, while taking a cut from the proceeds it received through its partnerships with the
popular internet services offered through its app, using data insights that it could glean as a network operator.
VEON rolled out the beta version in its Italian subsidiary in November 2016a. After a year of testing and
improvements, the app was launched in four additional countries.
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Jazz launched VEON in Pakistan in November 2017 with a big bang ‘Be Truly Free’ campaign. VEON offered
free in-app voice calling and messaging. However, this required both the communicating parties to have the
VEON app. In order to incentivise 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, an unprecedented amount of marketing budget was allocated for this ambitious launch (see
Exhibit 5 for sample communication).
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a
“Wind rolls out new Veon messaging platform in Italy.” Telecompaper. November 8, 2016. https://www.telecompaper.com/news/wind-
rolls-out-new-veon-messaging-platform-in-italy--1170699 (accessed January 2020).
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DEVELOPING 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.
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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, on account of MTR, by subsidizing the MTR charges of Zong customers’ calls to non-Zong customers.
However, it was shot down as being too expensive. The conclusion was to fight in the data market as MTR charges
had no impact on VOIP/OTT calls made from any operator.
Within the data market, three retaliatory options emerged with key proponents for each. These were:
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Option 1 – Hard Bundling Free WhatsApp with Top Data Offers
The nature of product offers in the cellular world was fairly 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 October 2017, a PAYG Zong subscriber would have paid PKR 2 plus tax per minute for voice,
PKR 1.5 plus tax per SMS, and PKR 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
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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
behaviour data allowed cellular operators to indulge in the micro-segmentation of their huge customer base and
extend customised 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 as long as the offer was active. At any one point in time, most operators would be carrying
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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 (see Exhibit 6). Sajid Munir, Head of Pricing and Business Planning 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
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should be hard bundled with selected data offers. For example, the subscribers of the top offer Daily Offer (which
provided subscribers around 500 MB of data use for PKR 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, “ Adding free WhatsApp to existing flagship products would give the existing subscribers
flexibility to use it without additional charge. It would also target the right data savvy customers and would
encourage them to use Zong to counter VEON’s free voice/video calls and texting advantage”.
He continued, “This option would, not only, minimise customer defection, but also add incremental subscribers
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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 UT. “But don’t forget the cannibalization of both our voice and data revenues from these
subscribers.”
“I have calculated the impact for the top five offers (see Exhibit 6). This seems to me the safest and the best
option at this time,” replied Sajid.
9
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“I agree it is safe; however, I am not sure it is the best,” UT responded. “I understand that it limits the downside,
but unfortunately, it also limits the upside.
Option 2 – Building a Digital App to be Offered Free
rP
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 Afzal, Head of Segments & Portfolio at Zong.
yo
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.
op
“I have calculated the costs involved,” responded Mudassar (see Exhibit 7). “I am confident we can manage it.”
He continued, “If Jazz can do it, why can’t we. We definitely have the advantage of the hugely successful
experience of our parent company that they didn’t. I am not too worried about time as I am looking at this decision
strategically rather than tactically. In any case, we, or even Jazz, have no idea how fast and in what numbers
would Pakistanis adopt VEON. Our free WhatsApp retaliations, on the other hand, would hit our bottom line
tC
surely, immediately, and, in my opinion, completely unnecessarily.”
Option 3 – Free WhatsApp Offer
UT 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
No
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.” UT made his case.
“True,” retorted Sajid. “What about the massive revenue loss across the board.” It was Sajid’s turn to get even
Do
with UT. (See Exhibit 8).
Mudassar interjected, “And this loss does not even include the marketing costs to inform Pakistanis about our
offer. Remember VEON’s massive spend.”
“I know, I know,” responded UT. “But look at the upside. I won’t be surprised if we add millions of new
subscribers with this. As far as marketing costs are concerned, I am sure we can talk to Facebook and ask them
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to pick up these costs. After all, it’s their product that we are offering free. VEON is a direct threat to them as
well. We already have good experience of working with them.”
Sajid smiled cynically, “I am not so sure of adding millions of new customers. You must have seen the numbers
of monthly incremental subscribers so far (see Exhibit 9). They are far less than what you would need just to
break even.”
rP
“Those numbers don’t count. They belong to the era without Free WhatsApp. Now we are entering the ‘Free’
world,” responded UT.
The Afternoon Meeting
Sajid, Mudassar and UT arrived at Moied’s office sharp at three in the afternoon and a lively debate ensued with
each proponent essentially reiterating his case. After listening to each advocate, Moied looked at Qais Khan, Head
yo
of Product Development at Zong.
“So Qais, what is your opinion on the technical development side of these options,” asked Moied.
Qais responded, “Well, from a technical feasibility perspective, I think Hard Bundling would be the easiest and
fastest to implement.”
He added, “Developing a new App or modifying our prototype VOIP app would need significant time and testing
op
for scaling up across our subscriber base.”
“Free WhatsApp can be offered in a couple of days; however, we would not be able to set any threshold for abuse
control during this time. FUPIb application would need further development on our IT end and would require at
least two months. The bigger problem is we do not know the uptake of the Free WhatsApp offer. There is a strong
possibility that it leads to severe network congestion problems destroying the quality of service for everyone,” he
concluded.
tC
Moied reflected for a while and said, “Well, thank you very much, gentlemen, for your hard work and enthusiasm.
The ball is in my court now. Let me mull over it alone in my office. But that won’t be for long. I need to present
my recommendation to the CEO at 4:30 p.m. in any case.
No
Do
b
FUP - Fair Usage Policy. A feature widely used in telecom service sector to set an upper cap on the maximum amount / count of resources
that can be used in any offer / product in order to prevent unhealthy competition. This is monitored by the PTA.
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Exhibit 1: Cellular Growth Data
Subscribers Revenues Investments

Years (‘000) (PKR Million) (USD Million)
2005-06 34,506 89,896 1,420
rP
2006-07 63,159 133,131 2,584
2007-08 88,019 182,122 2,337
2008-09 94,342 212,423 1,229
2009-10 99,185 236,047 908
2010-11 108,894 262,761 358
yo
2011-12 120,151 298,509 211
2012-13 127,737 311,145 570
2013-14 139,974 322,683 1,789
2014-15 114,658 317,016 977
2015-16 133,241 345,537 659
op
2016-17 139,758 367,530 486
2017-18 150,239 382,410 568
Source: PTA Reports.

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Exhibit 2: Subscriber Base and Shares of Cellular Players
Mobilink/Jazz Telenor Zong Ufone Warid

Year
(‘000) (‘000) (‘000) (‘000) (‘000)
2009-10 32,202 23,798 6,704 19,549 16,931
2010-11 33,378 26,667 10,927 20,533 17,387
No
2011-12 35,953 29,963 16,836 23,897 13,499

2012-13 37,121 32,183 21,177 24,547 12,706
2013-14 38,768 36,571 27,197 24,352 13,084
2014-15 33,424 31,491 22,102 17,809 9,830
2015-16 39,118 38,020 25,251 19,833 11,017
2016-17 52,470 40,804 28,084 18,397 -
Do
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Exhibit 3: Zong Rebranding (p 1 of 2)
Before
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yo
op
After
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No
Do
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Exhibit 3: Zong Rebranding (p 2 of 2)
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yo
op
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No
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Exhibit 4: 3G/4G Subscribers Base and Shares
3G Subscribers
Operator Zong Jazz Telenor Ufone Warid
rP
2013-14 417,814 425,992 895 539,376 --
2014-15 2,898,094 3,656,345 4,162,616 2,570,283 --
2015-16 5,988,197 8,919,218 8,371,991 5,223,096 --
2016-17 8,640,333 11,443,340 10,453,885 4,960,486 --
4G/LTE Subscribers
yo
Operator Zong Jazz Telenor Ufone Warid
2013-14 -- -- -- -- --
2014-15 105,128 -- -- -- 106,211
2015-16 680,620 -- -- -- 347,132
2016-17 4,041,766 937,209 607,013 -- --
op
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No
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Exhibit 5: VEON Launch
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yo
op
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No
Do
Source: Media Publications.
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Exhibit 6: Calculations for Option 1: Hard Bundling Free WhatsApp with Top Data
Offers (p 1 of 2)
Top Five Data Offers

Unique
rP
Offer Name Total Subscriptions Subscription Revenue
Subscribers
PKR
(A) (B)
Daily Offer 950,000 12,000,000 216,000,000
Weekly Offer - Medium Pack 750,000 1,500,000 225,000,000
yo
Weekly Offer - Large Pack 600,000 1,100,000 192,500,000
Weekly Offer - XL Pack 400,000 750,000 150,000,000
Monthly Offer 250,000 266,000 132,734,000
Subscriber Profile
op
Subscriber Data Non Data WhatsApp
Offer Name
ARPU ARPU ARPU AVPU AVPU
PKR PKR PKR MB MB

(C) (D) (E) (F)
tC
Daily Offer 273 227 46 2,000 100

Weekly Offer - Medium Pack 396 330 66 3,500 150
Weekly Offer - Large Pack 424 353 71 4,500 250
Weekly Offer - XL Pack 495 413 82 6,000 350
Monthly Offer 677 584 93 10,000 450
No
Where:
ARPU – Average Revenue per User per Month.

AVPU – Average Volume of Megabytes of Data used per User per Month.
Do
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Exhibit 6: Calculations for Option 1: Hard Bundling Free WhatsApp with Top Data
Offers (p 2 of 2)
Expected Gain / Loss Calculations
rP
Incremental WhatsApp Loss Per Incremental
Offer Name Voice Lossd
Revenuesb Lossc Subscriber Loss
PKR PKR PKR PKR PKR
(K=10% x B) (L=C / E x F) (M=10% x D) (N=L+M) (O = N x A)
Daily Offer 21,600,000 (11.35) (4.60) (15.95) (15,152,500)
yo
Weekly Offer - Medium Pack 22,500,000 (14.14) (6.60) (20.74) (15,555,000)
Weekly Offer - Large Pack 19,250,000 (19.61) (7.10) (26.71) (16,026,000)
Weekly Offer - XL Pack 15,000,000 (24.09) (8.20) (32.29) (12,916,000)
Monthly Offer 13,273,400 (26.28) (9.30) (35.58) (8,895,000)
Total for Top Five Offers 91,623,400 (68,544,500)
op
.b
Expected subscription increase in each bundle 10%, through non-engaged or new subscribers
.c
Once made free, all revenues earned in lieu of WhatsApp will be lost
.d
10% voice cannibalization expected
For simplification, no overlap between offers has been assumed

tC

No
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Exhibit 7: Calculations for Option 2: Building a Digital App to be Offered Free
Current Required
Daily Active Users (DAU) 25,000 500,000
rP
One Time Costs (in USD)
Effective Hardware cost per DAU 1.0 0.35
User License per DAU 0.2 0.1
First Build (IOS + Android) 20,000 60,000
Total 50,000 285,000
yo
Recurring Monthly Costs (USD)
Operations / Support Costs per DAU 0.5 0.1
Total 10,000 25,000
Man Hour Cost ( in USD) 10.00 10.00
Small Feature development (man hours) 80
op
Major Feature development and testing (man hours) 600
Developers currently available 10
Incremental One Time Cost = USD 235,000 x 105 = PKR 24.67 Million
Incremental Recurring Monthly Costs = USD 15,000 x 105 = PKR 1.57 Million
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Total Incremental Cost in First Year = PKR 43.57 Million

Each small change will require 2.5 days and big change 12.5 days.
Extra feature development will incur additional costs and time throughout the year.
As per initial estimates, app should have a minimum support of 500K DAU

No
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Exhibit 8: Calculations for Option 3: Free WhatsApp Offer
2G 3G 4G Total
Subscribers (A) 15,319,075 8,917,040 4,680,090 28,916,205
rP
ARPU PKR (B) 175 195 210
Data ARPU PKR - Internet (C) 10 70 110
AVPU MB (D) 5 1,200 3,000
AMPU Minutes 320 240 180
WhatsApp AVPU MB (E) 0.3 100 270
yo
WhatsApp Penetration (F) 10% 50% 80%
ARPMB PKR/MB (G = C/D) 2.00 0.058 0.037
WA Loss Per Sub PKR (H = G x E) 0.6 5.8 9.9
Data Revenue Monthly Loss PKR 919,145 25,859,416 37,066,313 63,844,874
(I = H x A x F)
op
Non Data Revenue Drope PKR 18,957,355 41,798,625 28,080,540 88,836,520
(J = 7.5% x (B-C) x A x F)
Total Loss PKR (K = I + J) 19,876,500 67,658,041 65,146,853 152,681,394
Blended ARPU Pre-Offer 186.8

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Blended ARPU Post-Offer 181.5
.e
7.5% drop in non-data ARPU expected due to substitution
Assumption: New customer on WhatsApp offer will have the same technology mix as the current base
Where:
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ARPU – Average Revenue per User per Month

AVPU – Average Volume of MBs of Data used per User per Month
AMPU – Average Minutes per User (voice minutes)
ARPMB – Average Revenue per MB of Data used
Blended ARPU – Weighted Average ARPU across entire base

Do
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Exhibit 9: Monthly Subscriber Growth of Zong
Increase over Increase over Increase over

90 Day Base
Month previous 3G previous 4G previous
(total)
month month month
rP
Jan-17 27,496,157 7,475,904 2,855,336
Feb-17 27,706,481 210,324 7,602,691 126,787 3,111,307 255,971
Mar-17 28,008,535 302,054 7,780,743 178,052 3,372,713 261,406
Apr-17 27,924,625 83,910 7,924,632 143,889 3,591,201 218,488
May-17 28,214,245 289,620 8,674,799 750,167 3,823,877 232,676
yo
Jun-17 28,084,677 129,568 8,640,333 34,466 4,041,766 217,889
Jul-17 28,423,969 339,292 8,686,404 46,071 4,418,333 376,567
Aug-17 28,475,681 51,712 8,772,220 85,816 4,573,970 155,637
Sep-17 28,916,205 440,524 8,917,040 144,820 4,680,090 106,120

op
tC
No
Do
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End Notes
1
This section and the subsequent one borrows heavily from information contained in various annual reports
published by the Pakistan Telecommunication Authority (PTA) from 2010 to 2018.
2
This section borrows heavily from the case, “China’s Tencent: Leading the Way in Monetizing Platforms”,
rP
published by IMD, Lausanne, Switzerland, 2017
yo
op
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No
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22

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the time for a response had arrived.

© 2020 Suleman Dawood School of Business, Lahore University of Management Sciences

Challenges for the Cellular Industry in the Digital Age

Popular Social Media Platforms in Pakistan (Mn)

4.9 4.2 3.5 2

Facebook Youtube Instagram LinkedIn Twitter Google +

Source: Digital Trends Report November 2017, Digitz.

Smartphone Penetration in market

2014 2015 2016 2017

Source: PTA Annual Report 2016.

Table A: Spectrum Holding of Cellular Players

JAZZ ZONG TELENOR UFONE

47 MB 33.6 MB 28.6 MB 18.7 MB

Source: Frequency Allocation Board of Pakistan.

ZONG’S GROWTH STRATEGY

JAZZ STRIKES: THE VEON ‘BE TRULY FREE’ LAUNCH

Option 2 – Building a Digital App to be Offered Free

surely, immediately, and, in my opinion, completely unnecessarily.”

Option 3 – Free WhatsApp Offer

could pose a serious threat to Zong in the future.

with UT. (See Exhibit 8).

The Afternoon Meeting

Subscribers Revenues Investments

Source: PTA Reports.

Exhibit 2: Subscriber Base and Shares of Cellular Players

Mobilink/Jazz Telenor Zong Ufone Warid

2011-12 35,953 29,963 16,836 23,897 13,499

Source: PTA Reports.

Source: Company Documents.

Operator Zong Jazz Telenor Ufone Warid

Source: Media Publications.

Top Five Data Offers

PKR PKR PKR MB MB

Daily Offer 273 227 46 2,000 100

ARPU – Average Revenue per User per Month.

Expected Gain / Loss Calculations

PKR PKR PKR PKR PKR

(K=10% x B) (L=C / E x F) (M=10% x D) (N=L+M) (O = N x A)

Daily Offer 21,600,000 (11.35) (4.60) (15.95) (15,152,500)

For simplification, no overlap between offers has been assumed

Source: Company Documents.

Total Incremental Cost in First Year = PKR 43.57 Million

Source: Company Documents.

Blended ARPU Pre-Offer 186.8

Blended ARPU Post-Offer 181.5

ARPU – Average Revenue per User per Month

Source: Company Documents.

Increase over Increase over Increase over

Source: PTA Reports.

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