With limited opportunities for regional expansion, 2008 will be the year when mobile phone operators in the Middle East explore different business models to maintain their growth. Saudi Telecom, Etisalat, Zain, Orascom Telecom and Qtel, the incumbent Qatari operator, will all explore three alternative ways of growing businesses.

The big five operators will look for licences coming to the market in other parts of the world - with the vast populations of Africa and the Far East providing the greatest opportunities. They will also seek acquisitions among the relatively small number of operators that are open to outside investment.

Finally, they will seek to lease their networks to third-party virtual network operators (VNOs) - with strong brands and large distribution networks. VNOs allow existing licence holders to increase their share of the local market at little risk, while generating additional revenues.

So far, operators in the Middle East have publicly condemned VNOs, vowing not to use them. Wataniya, the Kuwaiti operator, and Batelco, Bahrain's incumbent mobile and fixed-line operator, have been the most vocal critics.

Business model

Harri Kopenen, chief executive officer (CEO) of Wataniya, and Peter Kaliaropoulos, CEO of Batelco, both argue that VNOs only exist in markets where the incumbent telecoms operators are failing to serve their customers properly.

At the end of October 2007, Kopenen said that collectively, Europe's many VNOs make a loss each year. In June 2007, Kaliaropoulos publicly told an executive from start-up VNO Friendi Mobile that his company's business model had no chance of working in the Middle East.

Both Kopenen and Kaliaropoulos are mistaken in thinking that VNOs do not have a future in the region. The only reason the Middle East has yet to have a VNO is because the region's regulators have made the business model illegal.

Only Jordan's regulator, the Telecom-munications Regulatory Commission, has announced that it will allow VNOs, provided they pay it a 10 per cent share of their revenues - the same proportion it takes from the revenues of its four existing licence holders. Although retailers, start-ups and rival telecoms operators have been able to do revenue-sharing deals since early October 2007, none has done so. Jordan's mobile market may be a little too competitive for Middle East companies that have, until now, faced little real competition.

Saudi Arabia will be a more attractive market for VNOs if the Communications & Information Technology Commission decides to legalise the business model in early 2008. Dearbhla McHenry, an analyst at telecoms consultant Pyramid Research, says Saudi Telecom, the Arab world's largest operator, has good reasons to do a deal with a VNO.

“Saudi Telecom, which is having great difficulty holding on to mobile market share, might be interested in entering a relationship with a VNO to secure guaranteed revenues,” says McHenry. “Were such a deal to take place, it is possible that it would have a slight negative impact on the prospects of the third mobile entrant, Zain.”