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RESILIENT ICT
GLOBAL RECESSION, LAWSUITS, NO PROBLEM
BY RASHAD MAHMOOD
France Telecom and Orascom Telecom’s dispute over ownership of Mobinil has been undoubtedly one of the most followed business stories in Egypt, as the drama featuring international arbitration, Egyptian law and the good old corporate buyout runs its course. However, below the surface the rest of Egypt’s information and communications technology (ICT) sector has been chugging along, providing in excess of 4 percent of Egypt’s GDP and providing valuable jobs during difficult economic times.
The story of 2009 was the ongoing battle between France Telecom and Orascom Telecom. The dispute started in 2007, when the companies disagreed over the strategic direction of Mobinil. Orascom turned to the International Court of Arbitration in an attempt to force France Telecom to sell it its shares. However, the court ordered Orascom to sell its remaining shares in the Mobinil holding company to France Telecom. In a complicated arrangement, the Egyptian Company for Mobile Services (ECMS) operates the mobile operator Mobinil and is 51 percent owned by the Mobinil holding company. The holding company is owned 71.25 percent by France Telecom and 28.75 percent by Orascom. Orascom also owns 20 percent of ECMS, with the rest publicly traded, and these shares are not directly involved in the dispute.
Orascom, in rejecting and appealing the arbitration court’s decision, argues that France Telecom’s bid is too low and that it should offer the same price to all shareholders. On December 10, the Egyptian Financial Supervisory Authority agreed that France Telecom’s bid was acceptable, prompting Orascom to appeal the decision. An administrative court put an urgent hold on the deal until it can reach a substantive decision on the matter, which is not due until February 13 at the earliest, according to an Egyptian telecom analyst. As to the outcome, “it is impossible to say. Either way this ruling goes, it will likely trigger further appeals, so we may not know the final outcome for a long time to come,” according to the analyst.
This isn’t the only high-profile telecommunications case winding its way through the Egyptian court system. In a dispute that pits the mobile companies against Telecom Egypt, the country’s only fixed-line provider, the mobile companies are challenging a National Telecommunication Regulatory Authority ruling in September 2009 that rebalanced tariff rates. It set the fixed-line to mobile interconnection rate at 6.5 piastres per minute and the mobile to fixed line rate at 11.3 piastres per minute. Mobile companies, led by Mobinil, have objected, arguing it is unfair to charge higher rates to mobile operators. The analyst says that in response, TE filed a counterclaim, and both cases are still in court with no timeline for resolution.
Aside from disputes among the mobile operators, Egypt’s ICT sector weathered 2009 better than those of most countries, seeing continued expansion in ICT-enabled services. However, companies whose business relied on sales to the US and Europe saw significant declines in revenue.
Egypt’s mobile subscriptions increased from 41.3 million in January 2009 to 53.4 million by the end of October, according to the Ministry of Communications & Information Technology (MCIT). Broadband Internet subscriptions also increased, from 719,000 in January 2009 to 930,500 by the end of September. Akil Bashir, chairman of Telecom Egypt, says his goal is for the number of broadband subscribers to reach 1.5 million by the end of 2010. Eighteen percent of Egyptians have access to the Internet, and 15 percent of households had a computer by the end of August.
Bashir makes a point to clarify that one of the biggest stories of 2009, the offering of triple play licenses, was “not triple play” because the winners will still be using Telecom Egypt for voice service. The licenses will give the winners the right to build their own infrastructure to newly developed residential areas, and offer data and video services. “In most instances, Telecom Egypt will work with the companies to offer voice through their infrastructure,” notes Bashir. Bidding for the licenses is scheduled for March 15 and is expected to generate $1 billion in additional investments in Egypt over a five-year period, according to government estimates. Bashir justifies the decision to let companies provide only video and data by saying that it would otherwise be “unfair to Telecom Egypt, which has to provide service all over the country.” The new residential developments are predominantly for wealthy Egyptians, and thus high-value customers.
A major development in the ICT sector is the opening of the Maadi Technology Village – a 75-acre compound equipped with the latest infrastructure. More importantly, it will offer less expensive space and is more accessible than Smart Village, where many companies supply transportation for employees because of its location in Sixth of October governorate. Three buildings have been completed and two companies – Raya and Xceed – are already operating. When the park is completed in 2012, there are expected to be 40 buildings accommodating as many as 30,000 employees, according to MCIT.
As part of Egypt’s expanding international connectivity, two major submarine cables are being built, one by Telecom Egypt and one by Orascom Telecom. Telecom Egypt’s TE North cable will be ready early in 2010, while Orascom’s cable is further from completion. Both will add significant capacity to Egypt’s data transmission capability and should drive down costs for users.
In recent years, Egypt has built a reputation as an emerging destination for outsourcing. The global outsourcing market is estimated at $25 billion annually and expected to grow. In Egypt, the IT export sector accounts for about $1 billion in business annually and employs more than 15,000 people, with an additional 22,000 providing IT services domestically, according to Shehab Mohamed of the Information Technology Industry Development Association. IT services include call center operations, text support and software development. They do not include mobile and fixed-line telecommunications.
Major international companies that have recently started operations in Egypt or expanded their business include Stream, EMC, IBM, Sykes and Orange, according to Xceed CEO Adel Danish. Overall, he says, ICT services sector revenue grew 8-12 percent in FY 2008-09, which is significantly lower than hoped for in an emerging industry accustomed to much higher growth rates. He also notes that even though revenues increased, profitability did not match revenue growth. “There is a general direction in all companies to put pressure on suppliers to reduce costs,” he says. “They come and tell you that immediately we want to reduce costs by 10-15 percent. In order to keep their business, we agree, maybe not at these levels, but we do reduce the cost.” However, he observes that there is a countervailing effect in difficult economic times, when more companies turn to outsourcing as a way of cutting their costs, “so we’re seeing more deals, but at lower prices.”
ITWorx, one of Egypt’s largest software companies, is among those that have felt the effects of the global recession. “Companies with significant sales to the United States saw dramatic declines, as much as 50 percent,” says Wael Amin, CEO of ITWorx. He notes that the company’s business in the Middle East was largely unaffected by the crisis and it is expanding into Africa. He expects 2010 to be a better year as businesses that delayed purchases start to buy again.
Tarek Asad, manager of Egypt’s Technology Development Fund, which was established by the government to provide venture capital to Egyptian startups, says the fund invested in five companies in 2009 and increased investments in several others. “There is lots of innovation happening in the sector. The quality of companies to invest in has increased dramatically since the start of the fund in 2004,” he says. Companies funded include ConnectMe TV, a company that will provide a digital storage and replay device for satellite television; Timeline Interactive, a gaming company; and Ideal Ratings, a company that identifies and evaluates Sharia-compliant investments.
Danish’s main concern going forward is the supply of talented multilingual Egyptians. He notes that salaries for contact center staff are going up because of increased competition for the most qualified employees. “Salaries of agents are increasing, and in first line and second line management there are huge pressures on salaries,” Danish says, stressing that some of his employees who left have nearly doubled their salaries. He praised the government for being aware of the problem and leading such efforts as its new EDU Egypt initiative, which trains university students in computer skills and helps prepare them for the private sector job market.
Egypt’s ICT sector, while slowed by weak global demand for services in 2009, is well positioned to rebound as companies continue to look for ways to cut costs, and its main markets in the Middle East, Europe and Africa return to strong economic growth. Despite the recent spate of lawsuits, it is still one of Egypt’s most vibrant sectors and should continue to be a major source of jobs and income.
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