Faraz Ahmed, a resident of Anda Mor, North Karachi, wakes up at four every morning and sets off to his vendor’s home closeby. Leaving his motorcycle there, he logs into the Uber app and starts his day.
“The first ride is usually to the airport or Cantt. railway station,” Ahmed tells Profit, carefully navigating his black Daihatsu Mira on a busy Korangi Road towards DHA Phase 2, one of his favorite areas that gives him ride after ride. In his 12-hour workday, he caters to commuters from various parts of Karachi to meet his vendor’s daily target and earns Rs80 per ride in commission. For him, ‘fast Internet’ is crucial for smooth functioning of the app.
Though at a nascent stage, the growing use of data-intensive apps like Uber and Careem has increased data usage in the country. It has become an important source of earning for telecom operators whose revenues are stagnating because of over-the-top services (OTT) such as WhatsApp that offer free voice calls and text messages — the same services, which were telcos’ core business until recently.
These ride-hailing services require drivers to have a reliable smartphone and a portable high-speed Internet (mobile broadband) connection. With Jazz (formerly Mobilink), Telenor, Zong and Ufone all offering mobile broadband services, choices are aplenty. But, booking a few dozen rides, at least in Karachi, would confirm an overwhelming majority of these drivers use Zong’s data service — who is number two in that area is anybody’s guess because there is no public data to ascertain that.
“It’s the cheapest service and offers excellent network quality in every part of the city,” Ahmed says of China Mobile Pakistan, which operates under the brand name Zong. The market experts we spoke to second the cabbie, saying Zong’s success, particularly in 4G where it had the first-mover advantage, is mainly a function of lower price, higher network quality and a wider coverage.
China Mobile, the parent company of Zong, acquired Paktel in 2007, to become the latest entrant in what was then a five-operators telecoms market – the company at that point had a tiny 2% share in the market. Known for selling its services on prices lower than industry average, it fought Ufone tooth and nail in the price-sensitive, low-end voice and text messages (2G) segment, giving the latter a run for its money.
It was the first operator to sell subscriber identity module (SIM) cards for free to quickly expand its subscribers. Back then, naysayers, particularly competitors would mock the company, predicting it won’t survive long with this strategy.
Zong neither saw it as an issue, nor gave a whit about the critics. Speaking to this correspondent in late 2012, Zong’s former chief executive Fan Yunjun had said they were under no hurry to increase their tariffs. Until 2011, Zong was the smallest player in the market, but the company’s aggressive strategy of lowering prices to expand its customer base helped it surpass Warid Telecom (now Jazz) in fiscal year 2012 and Ufone in fiscal year 2014.
With all mobile phone makers and service providers looking to tap into 4G, the Chinese are once again using economies of scale to take on the European giants, Jazz and Telenor in the high-end data segment, which is touted as the “next oil” by experts.
That said, there is a downside to this strategy. More than 10 years into the market, Zong claims that it has yet to book its first-ever profit.
“Our focus is to expand into, and develop a sustainable 4G ecosystem, profits will follow,” Maham Naeem, Director Corporate Affairs and Director Strategy, China Mobile Pakistan tells Profit over phone — an indication that it is unlikely to increase tariffs anytime soon.
Explaining, the company’s strategic head said Zong 4G has a very unique business model. “For us, providing the best customer experience is the top priority. We are determined and focused on transforming the lives and creating a digitally inclusive Pakistan.”
The company, in its responses to Profit, clearly states that being the official Chinese cellular company in Pakistan, their strategy is to enable connectivity for the government, businesses and people of Pakistan and provide them with wider and faster 4G network thus not worried about profits even 10 years after commencing operations. Both competition and critics may mock Zong for this strategy, but a telecom expert sees the method behind this madness.
“If the industry is earning $2 [ARPU] from voice, Zong is earning $10 from data,” a telecom expert told Profit, requesting not to be identified. “Their strategy is good and it has even worked.”
Unlike voice where it is still at number three and has a much lower Average Revenue Per User (ARPU), Zong enjoys an unprecedented lead in the 4G segment, the next battleground for telcos. It is the largest 4G operator in the country, accounting for more than half of this segment. Its share in 4G is 10 percentage points higher than that of Jazz and Telenor put together based on Pakistan Telecommunication Authority (PTA)’s data for January. Even in the combined category of 3G and 4G, Zong is now number two, closely following numero uno, Jazz.
“4G throughput is much higher. It is twice as much of 3G throughput,” said the telecom expert — measured in megabits per second (Mbps), throughput is the amount of data passing through a network at any given time. “So on that basis, they may actually be the largest data provider in the country,” he said. The expert further said Zong is not bound to report their financials publicly, but he would not rule out the possibility of them actually being in profit.
Both Jazz and Telenor, the market leader and the second largest player respectively, are growing their 4G subscribers at a faster rate, but they are struggling to catch up with Zong 4G, said Parvez Iftikhar – an Islamabad-based Information and Communications Technology (ICT) expert.
“When it comes to data, Zong is far ahead of the competition and the latter will take a lot of time to catch up with them,” Iftikhar said – by PTA stats, Zong had a 55% share in 4G market at the end of January but the company claims it is 70%.
Bullish on 4G, the company plans to invest $225 million in (4G) network expansion this year, which will take its total investment in the country to $2.4 billion. Once the smallest player, Zong has now become a data giant with its 4G footprint expanded into more than 300 cities. It has even rebranded itself as ‘Zong 4G’, but how it got there makes an interesting study for both local and international businesses operating in Pakistan because of Beijing’s growing interest in the country.
Chinese companies are often accused of using economies of scale to destroy markets, small wonder then Pakistani traders have expressed their reservations regarding the multi-billion dollar trade project, China Pakistan Economic Corridor (CPEC). Lower prices may benefit consumers in the short-term, but in the long-term it discourages other investors because of a low price-low profit scenario, they say.
If one can recall, the price wars sparked by Zong and Ufone made it extremely difficult for operators to compete because it squeezed their margins. A low tariffs and high tax rates scenario would mean players had to fight in pennies. Besides Warid’s merger with Mobilink, other players went for consolidation and some made layoffs and reduced their physical presence. Eventually, there were talks of introducing a floor price to end the price war.
“Over the last few years, Zong 4G’s core focus has been on value and scale both,” Naeem of Zong says. As far as the floor pricing is concerned, every operator has its own strategy that’s tailored to their own business needs, he said. Explaining, the Director said they are constantly increasing their scale, “but we don’t believe in scale only”, customer experience is a core focus area for the company because no business can have a sustainable future without it.
Diplomacy takes precedence over acumen:
“One can’t accuse it [Zong] of selling low, they are the leader in the high-end 4G market,” said the telecom expert quoted earlier, praising the company’s overall strategy. “They were the first ones to move on 4G full throttle and got an early mover’s advantage to capture that market,” he said referring to April 23, 2014 auction of licenses for next generation mobile services where Zong was the only operator to bid for the 4G spectrum.
Iftikhar, however, seems to disagree. “Zong certainly has a competitive advantage in 4G, but the situation would have been different if the government had structured the auction in a better way.”
Explaining, the ICT expert said firstly the base price was too high, which discouraged investors to participate with enthusiasm. The base price for 10 MHz of 3G license was $295 million while it was set at $210 million for a 4G license. Secondly, the government imposed conditions on the 4G spectrum. That meant an operator had to buy 10 MHz of 3G spectrum to qualify for the bidding of a 4G license, making the latter all the more expensive from an investment point of view. “It didn’t make a good business case.” Those who bought 5 MHz of 3G could not qualify for 4G either.
Moreover, the government restricted the 850 MHz spectrum – of the defunct Instaphone – to a new operator. This frequency is a lucrative spectrum all over the world and had a demand in Pakistan because it could match with frequencies of both Warid and Telenor. Because of these conditions, both the 850 MHz and 10MHz of 4G remained unsold. If these conditions were not there, a player like Telenor would never have wasted that opportunity, he said.
It may be added here that Telenor Group’s then president and CEO Jon Fredrik Baksaas flew to Islamabad just before the auction and met former finance minister Ishaq Dar and minister of IT and telecom Anusha Rahman to convey his reservations regarding the auction including high prices. At that time, Telenor was so apprehensive that it even conveyed to Islamabad that it might even exit the market if its reservations were not addressed, according to an industry source.
One might argue if the spectrum was so expensive and didn’t make a business case, why would Zong go out of the way to buy 10MHz each in both 3G and 4G.
Unlike other operators all of whom were private investors, says Iftikhar, Zong’s parent company is 100% owned by the Chinese government, which changes things – China Mobile had $70 billion in cash reserves months before the auction.
Regardless of all the success Zong had in 4G, Iftikhar still believes it wasn’t a wise decision from a business point of view. And, he may be right because there is enough credence to the talk that the Pakistani government had pushed its Chinese counterpart to make a major investment in the spectrum auction – and Zong’s responses to our queries suggest the same.
“Pakistan is a strategic partner for China, and the friendship between the two countries is very deep. We value this national level relationship much more than just profit,” Naeem said.
Elaborating on his point, Naeem said, Zong’s model and business strategy is different because it is owned by the Chinese government and has a strong financial backing by Beijing. Zong was the single largest investor in the 2014 spectrum auction contributing more than $500 million.
“Our focus is to invest in network development, we have re-invested all our earnings in Pakistan. We have never taken the money out of the country and this is also going to be our future strategy,” Naeem says. “Our communications network will be an important piece of the puzzle for connecting multiple projects of CPEC across Pakistan.”
The first-mover advantage:
Strong financial backing of the Chinese government and diplomacy may have been the prime reason for Zong’s early bet on 4G. But the company has made full use of its first-mover advantage in that area.
Both Telenor and Jazz also ventured into the 4G space later on, but by the time they started their rollout, Zong was sitting atop four million 4G users – the early adopters of this high-end broadband segment.
“In the absence of competition, Zong played aggressively in terms of network rollout,” says Iftikhar, adding it turned out to be a timely decision for the company.
When other operators were deploying 3G, which is an outdated technology, Zong was upgrading its towers to 4G because they had deep pockets. So on one side it was behind Jazz and Telenor in 3G, but on the other hand it was leading in the 4G segment. It currently has 5 million plus 4G users, followed by Jazz’s 2.2 million and Telenor’s 1.8 million.
Is the honeymoon over?
After an initial surge, which almost entirely went to Zong, the growth in 4G subscriptions seems to have slowed down. However, in recent months both Jazz and Telenor have been growing their 4G user base both in percentage terms and absolute numbers at a much faster rate than Zong. In the first seven months of fiscal year 2018, Telenor has expanded its 4G user base by a whopping 210%, followed by Jazz, which increased its 4G users by 138%. On the other hand, Zong increased its 4G users by 25%.
Since Zong’s base is large already, the percent increase may not give the actual picture, but even in absolute terms both Telenor and Jazz have sold more 4G connections – averaging close to 200,000 per month – during the last five months compared to Zong’s 100,000 per month during the same period.
Do the latest number indicate end of Zong’s honeymoon period? Since Telenor and Jazz still have larger user base on overall basis, including 2G, which still accounts for two-thirds of the market, they will just need to convert their existing users to 4G. Simple it may sound, yet it is not.
Experts believe, even at current pace, counting on Zong not moving a muscle to fight back, it will take Telenor and Jazz a couple of years to match Zong’s 4G base.
On an overall (3G plus 4G) basis, Jazz is leading the data segment with 16.7 million broadband subscribers followed by Zong’s 14 million, but a deeper look explains why experts find Zong to be far ahead of its competition.
Experts believe Zong has 10 megahertz (MHz) of 4G spectrum, which is largely unused because of its lower subscriber base. Moreover, it has highest number of 4G base transition station (BTS) towers or cell sites in the country, which translates into wider coverage. In other words, it can absorb many more users without compromising on speed and quality. In other words, Jazz and Telenor have to increase the number of their 4G towers to outpace Zong. And that will take time.
However, experts also say Zong’s lead is mainly a function of first-mover advantage, and who ever has better strategy from now onwards, will be the leader. As this report is being filed, Zong has its new CEO join the company. But it continues to play aggressively by keeping tariffs low even in data.
Ifitkhar, the ICT expert, says Zong will gain more subscriptions and may even snatch greater share from its competition, especially from Jazz if the latter’s OTT app Veon doesn’t click. “It is too early to say anything about Veon, which has just launched, but I don’t see Jazz and Telenor catching up with Zong 4G in the near future.”
Though the current focus of 4G rollout is the previlleged consumers, who are early adopters, experts believe Zong will go further down to the bottom of the pyramid. The 4G penetration remains under 10%, and a large number of mobile phone users still doesn’t have a 4G compatible smartphone.
For example, in case of Ahmed, the Uber cabbie, both the phone and the data package is paid for by his vendor. “I live in a rented house and can’t afford a smartphone of my own,” Ahmed says.
In an emailed statement to Profit, Zong explained that it would continue to invest in the 4G market. Zong is opening up its customer care centers across Pakistan when others are closing theirs, it said. “We don’t have an urban or rural area policy, we go to areas where we see potential even if it already has presence of other operators,” Naeem says of Zong’s expansion strategy.
Talking to an obscure industry web portal, Zong’s ex-CEO Liu Dianfeng said recently: “Our core desire with respect to the local market is to build on our technological edge in 4G LTE to revolutionise the lifestyle of Pakistani people. This includes expanding both, our Network Infrastructure and data based product portfolio. It’s a long journey and it will take time but the market is reacting stronger and stronger in this area every year, especially after the 4G launch in the country.”
OTTs, a threat or opportunity?
As per a report by Profit in a recent article, data now accounts for 30% of industry’s total revenues, up from 21% of the previous year, but this growing usage of data is not translating to growth in overall revenues of the telecom sector.
OTT apps like WhatsApp, Viber, Skype and Facebook Messenger use the incumbent’s network and provide free messaging and voice and video calls, denting their revenues. On the hand, operators are forced to invest in infrastructure to cater to the growing demand for data. And things are going to get worse. According to a research by McKinsey & Company, the OTTs share could be as high as 60% of messaging and 25% of voice revenues this year.
To counter the OTT threat, Veon, the Amsterdam-based parent company of Jazz, launched its own OTT app, also called Veon, in several countries including Pakistan. Besides several other features, Veon offers free messaging and calls to Jazz subscribers even if their credit is nil, the unique selling point for the app to counter international rival WhatsApp.
“If we didn’t become an OTT, WhatsApp would kill us. The risk of not taking this risk is much higher,” Jazz’s Chief Aamir Ibrahim said at the time.
However, soon after Jazz started promoting Veon, Zong came up with an offer to give its data subscribers free and unlimited access to all WhatsApp services on all networks anywhere in the world, clearly indicating its core strategy regarding the threat of OTTs.
“OTTs are the future and eventually everyone has to move in that direction. It is a question of when, not why,” Naeem said, adding Zong didn’t view it as a threat and was not scared either. “We rather want to adopt it and partner with OTTs because it helps bring more people on data.”
Explaining, the Director said, “4G handsets penetration is less than 5%, so we don’t want to build our entire model around one app.” Responding to a question about WeChat, an OTT app that has taken the Chinese market by storm and is said to be direction Veon is taking, he said, “WeChat was successful because the 4G ecosystem in China was mature enough to support it.”
Naeem further said even with the presence of 4G technology it took time for WeChat to become a hit among the users. Overtime, it has become a standalone mobile app with over 980 million active users and is known as an ‘app for everything’ in China, but the market dynamics are different in Pakistan, he said and it will take a while before 4G is fully mature in Pakistan.
“OTT are the future and have the potential to fill many technological gaps that still exist. Hence, we would always look forward to collaborate with OTT providers,” he said.
As opposed to Veon, which ventured into OTT to lure customers to its network, Zong’s strategy is to bring people to data using existing platforms, like Facebook, WhatsApp, Uber and Careem, which are already popular among a large segment of population, said the telecom expert. “Once they have brought in consumers in big numbers to their data network, then products like Ali Baba and WeChat can be introduced,” he said.
Giving an example, the expert said majority of Uber and Careem drivers experienced data and smartphone for the first time because of Zong. This also holds true for Ahmed, the cabbie. If it were not for Uber, he would wait longer to experience a 4G-compatible smartphone.
Ahmed earns more than 25,000 a month but still has a basic phone with no Internet connection. “I will buy a smartphone when I will drive my own Uber [car],” he said. His objective quite obviously is leasing out a car in the next 18 months – followed by a data connection. Which network? “Of course, Zong!”, he said, adding, “for it is the cheapest one can find.”