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dial 3g for competition
local and international telecom companies are preparing
to bid on a
coveted license to operate egypt’s third mobile network. the
winner will face considerable obstacles, but with mobile penetration
in egypt just 18.5 percent, it seems there’s still plenty of
room for growth.
by rehab el bakry
looking back, it’s almost inconceivable that when mobile telephone
technology was first offered in egypt by the state-owned telecommunications
monopoly arento in the early 1990s, it drew little interest. today,
just over a decade later, the mobile is an indispensable tool for
millions of egyptians. mobile telephony has transformed the culture
and become big business, generating profits for both the operators
and the government. growth of the country’s two mobile networks
– mobinil and vodafone egypt – has been so remarkable
that the ministry of communications & information technology
(mcit) and the national telecommunication regulatory authority (ntra)
have decided to dial up the heat by launching a third mobile network.
an initial attempt at issuing a third mobile license stalled after
the national fixed-line operator, telecom egypt (te), purchased
the license in december 2002 for £e 1.9 million only to return
it the following year when it decided it was not prepared to incur
the cost of building a $300-400 million network. in may 2005, mcit
and the ntra agreed to try again, issuing a formal announcement
that a third network license would be offered.
on february 19, 2006, the ntra released a request for proposals
(rfp) notebook for $25,000, with a bid bond of £e 25 million.
as of press time, some 20 companies have purchased the rfp notebook,
including regional heavyweights uae-based etisalat, kuwait’s
mtc, european operators such as norway’s telenor, italy’s
telecom italia and russia’s mts, and egyptian companies, including
te and raya holding, the latter in a consortium with south africa’s
mtn.
following through on earlier promises, the ntra is requiring the
new mobile network to be both 2g and 3g compatible. third generation,
or 3g, is the most advanced mobile service to date, providing mobile
users with high-quality audio and visual communication, as well
as broad bandwidth data transfer. beyond adding the capability for
videoconferencing or surfing the net via mobile, says ntra chief
amr badawi, a third entrant providing 3g services will streamline
both voice and data transfer to a degree that will reshape the whole
market.
in the late 1990s, 3g was heralded as a revolutionary concept, and
3g-compatible mobile phones were forecast to make car keys, handheld
pcs and even newspapers obsolete. european telecom companies intent
to reap the profits of the revolutionary technology shelled out
more than $15 billion for a 3g license.
yet the technology’s adoption worldwide has been slower than
expected. “a few years ago, the international mobile sector
was dealt severe blows from the bursting of the dotcom bubble. international
operators were in financial trouble because of the 3g licenses they
acquired at huge costs,” explains badawi.
thus, when te took its license and went looking for an international
partner, no one was interested in building the network. its ambitions
confounded, te opted to return the license to the ntra for its money
back, plugging this capital instead into a 25-percent stake in vodafone
egypt that enabled te to offer mobile services.
just three years later, it might be rethinking that decision. with
the 3g standard finally kicking in, many international operators
have already recovered their license fees and profits look set to
soar as phone manufacturers churn out low-priced 3g-compatible phones
bound to attract new users. in egypt, meanwhile, the economy is
on the mend and 3g-compatible phones are already selling –
despite the lack of service.
“at the moment, the investment environment in the country is
suitable for the entry of another operator, with stabilization of
the currency and the new reform policies that the government has
adopted since [july] 2004,” says badawi. “the situation
has changed and we feel the market is ready for a new entrant, and
that this entrant should carry 3g services [to] help the market
grow.”
new operator, new blood
the introduction of a third mobile operator into the egyptian market
has been a long time coming. according to statistics from mcit,
the two current operators have increased the mobile penetration
rate from 0.001 percent (83,000 subscribers) in may 1998 –
when mobinil bought the first license and network from the arab
republic of egypt national telecommunications organization (arento),
the common ancestor of mcit, ntra and te – to around 18.5 percent
(14 million subscribers) as of december 2005. still, egypt’s
mobile penetration rate is lower than that in other arab countries
such as saudi arabia, which has a 52-percent penetration rate, or
uae, where mobile penetration hovers around 90 percent. even in
iraq, where mobile service was only introduced a little over two
years ago, the penetration rate has reached 13.6 percent.
according to walaa hazem, telecom analyst and associate at hc brokerage,
there are few markets of comparable size in which the mobile penetration
rate is still so low. consequently, egypt’s market is eager
for enhanced mobile services, and everyone – from local to
regional to international operators – sees the potential for
growth and profit.
but tapping into this growth and profit will not come easy, insists
hazem. “the majority of egyptians have a lower disposable income
than their counterparts in the region, [so] the challenge for the
new entrant and the current two operators will be to develop products
that lower the entry barrier for egyptians.”
the egyptian market’s price sensitivity has long been an obstacle
for operators mobinil and vodafone egypt, who recognize that they
need to strike a balance between profitability for themselves and
affordability for the masses. as a result, the price per minute
in egypt hovers around $.04 (£e .25), one of the cheapest
rates in the world. yet the key to increasing the penetration rate
was creating products that decrease the cost associated with entering
the market, such as the cost of the line and the mobile phone. six
years ago, the cost of a mobile line was around £e 1,200 for
postpaid and £e 600 for prepaid service. today, the cost of
the postpaid line has plummeted to £e 75, while the cost of
the prepaid line is just £e 30. the cost of mobile handsets
has also fallen, with the price of a basic handset dropping from
£e 500 in 2000 to as little as £e 200 in 2006.
mobinil ceo alex shalaby attributes these advances to the longstanding
duopoly in the market. he explains that when mobinil first entered
the egyptian market, the telecommunications sector was severely
underdeveloped. the duopoly helped increase access to telecom services
– both mobile and fixed-line – by changing the perception
that telephones were the privilege of the lucky few.
“we used marketing and promotion to increase the level of awareness
among egyptians, who until that point were still used to single-line
black phones with rotary dials,” he recalls. “to many
it was a luxury to have a telephone line, never mind a mobile line.”
not only did mobile penetration increase, its associated markets
– isps, the fixed line network – also improved dramatically
after mobiles were introduced, says shalaby. “now, there are
more mobile subscribers than [fixed-line subscribers]. in many parts
of africa and in pakistan, they have completely leapfrogged. the
[fixed-line] networks died and only the mobile networks have survived.”
badawi points out that while the two current operators have grown
the market, the presence of a third operator will inevitably create
more competition, driving prices even lower and throwing creativity
into high gear. “the two operators have lowered the entry cost
for new subscribers and introduced new offers, which has [driven]
up the number of subscribers. [however], i do believe that one of
the main reasons that the number of subscribers almost doubled over
the past year was the serious talk about a new entrant.” on
the other hand, he admits, there is still plenty of room for the
third entrant to secure a market share large enough to make their
operation very profitable.
that big upside is exactly what kuwait’s mtc is counting on.
mtc was among the first to announce its intention to bid on the
third license. “our insistence on competing here in egypt is
a strategic decision with more implications than simply competing
for another license,” says mtc’s deputy chairman and managing
director saad hamad al-barrak.
at 20 years of age, mtc is among the biggest and longest-established
mobile operators in the region, with company revenues that exceeded
$2 billion in 2005, and profits in excess of $580 million. the company
owns and operates networks in 19 countries in africa and asia as
well as six licenses in the middle east, with a combined total of
15 million subscribers as of february 2006. securing a license in
egypt would make it the fourth largest mobile operator in the world
in terms of geographic area coverage.
“we plan to actively bid for the third mobile license in egypt
because we seek to become the largest operator in the region,”
says al-barrak. “[and] you cannot really be a market leader
in the middle east without operating in egypt because of its sentimental
value to the region as well as the fact that it is considered the
economic and political center.”
al-barrak points out that the company’s licenses in other developing
markets, such as bangladesh, have given it experience in carving
out a share in price-sensitive markets. he says his company’s
track record at managing and generating profit in these markets
is an advantage, but it is also aware of the benefits it could bring
to the market. “our strategy for every market we enter is not
just about the profit we make,” he says. a third operator will
increase the penetration rate, which will attract more investment
into the sector and related sectors. “the telecommunications
sector has become essential in attracting other investments,”
he adds.
uphill battle
egypt’s own raya holding is bidding for the third license
in partnership with south africa’s mtn. sameh montasser, raya
holding’s vice president for business development, explains
that raya has always been clear about its plans to bid for a third
mobile license if and when the ntra issued it. “we have always
positioned ourselves as an it and telecommunications company,”
he says. “thus far, though we’ve succeeded at becoming
one of the best it providers in the market, we still don’t
have a stake in telecommunications. that’s why we are more
than eager to secure this license.”
but raya’s lack of expertise in the telecom sector prompted
the firm to secure a partnership with a proven operator such as
mtn. “mtn was interested in cooperating with the third licensee
in 2002 because egypt would strengthen its portfolio beyond african
countries and into the middle east. but it couldn’t come to
an agreement with the licensee at the time,” says montasser.
“so when we let it be known that we were in the market for
a strong mobile operator to partner with, it was more than eager.”
he explains that mtn provides technical know-how to complement raya’s
it support and extensive knowledge of the local market.
securing the license will do more than cement raya’s position
as a telecom and it leader; it will also generate revenue. “we’re
very aware that there is a lot of room in the market for a third
operator and we can generate revenue because it’s still considered
a virgin market. but we also know it won’t be easy for us to
get as much of a market share as the other two operators,”
says montasser.
hc’s hazem agrees, pointing to the experience of other markets
where late entrants are unable to secure as high a market share
as their predecessors. “the new licensee is unlikely to attain
the same market share. however, even if a company can secure 5 million
subscribers, that would allow it to generate profit and make it
worth its while.” putting it into perspective, he adds: “five
million subscribers is more than the population of some countries,
so it’s a subscriber base that some would kill for.”
to make this possible, however, the ntra will have to remove factors
hindering the ability of customers to switch operators. according
to hazem, this is already starting to happen. “the ntra has
decided to permit number portability, which will allow users to
switch networks without having to switch their mobile numbers,”
he notes.
norway’s telenor has no issue with coming late into the game.
in fact, it enjoys the challenge. “we’re not looking for
a market where we can sweep in and make some money,” says esben
tuman johnsen, telenor’s vice president for corporate communications.
“we want to develop the market... and there is room and a need
to further develop the egyptian market. that’s why it interests
us.”
he says the company already has experience as a third entrant in
a developing market, a situation that forced it to develop and introduce
new technology, and be creative in terms of the services and pricing
it offered to secure its market share. “we were in the same
situation when we entered the malaysian market [in 2001] and we
came from behind [so that] today we have more than 25 percent of
that market,” he says. “if you really put in the effort,
you can make money and live up to the challenge.”
while telenor’s interest in the egyptian market was expected,
te’s interest surprised many. “i have to admit, we predicted
that most of the companies that purchased the rfps would be interested,
but te was a surprise,” says montasser. “this is a company
that had the license twice already – once as arento and once
in 2002 – and both times it sold it. why try for it once again?”
hazem on the other hand, says he was not surprised. te is looking
for an opportunity to round out its portfolio. while it already
has a stake in the mobile market through its 25-percent stake in
vodafone egypt, it wants more control. “it’s one thing
to have a share and it’s another to manage a mobile company,”
says hazem. “te acquired the stake in vodafone egypt in order
to include a mobile [operation] in its portfolio and that was a
great strategic decision. they bought the shares in the company
and now they can sell them for four times the price and use the
money to pay for the license. this way, they enter the market and
they don’t even have to spend a penny from their own pocket.”
although te has not yet officially announced that it will bid, rumor
has it that it is in negotiations with italy’s telecom italia
as a potential partner. should te win the bid, it would likely have
to sell its stake in vodafone egypt as egypt’s telecommunications
law does not allow the same company to own stakes in competing operators.
a license to die for
few industry insiders would disagree: the egyptian license is one
to die for. judging by the performance of mobinil and vodafone stocks,
which have increased their value over 540 percent 250 percent respectively
in the last three years, the mobile business in egypt is highly
lucrative. some bidders worry, however, that acquiring the license
will kill them before they ever see a penny. “we all predicted
that this was going to be an expensive license to get and build
and that securing a market share was going to be difficult, but
it seems that the government is also seeing this as a way to raise
money and that’s not the way it should be,” complains
mtc’s al-barrak.
the ntra has prided itself on being fair and transparent in all
license-issuing procedures, but some contenders say the bidding
process adopted by the ntra has made them nervous, particularly
the final step – the open auction. unlike the bid in 2002 or
the closed-bid deals in which mobinil and vodafone each paid $516
million for a license, the ntra has decided not to fix a price for
the license. instead, licensees will have to submit an initial proposal
and preliminary feasibility study. the ntra will draft a shortlist
on the basis of these submissions, with a final auction expected
within the next few months.
al-barrak says that the ntra’s decision to sell the license
to the highest bidder is not necessarily in the best interest of
the market. “it would be unfortunate to turn this into a bidding
war, because this doesn’t really guarantee the development
of the sector,” he says. “we in the middle east have this
myth that telecommunications – the mobile networks in particular
– will become the second petroleum... and there is great [temptation]
for governments in the region to milk this in order to see how much
money can be generated.”
al-barrak is concerned that the license will go to a company that
is unsuitable for the market and will not sufficiently develop it.
“the decision should be based on the bidder’s knowledge
of the sector,” he argues. “but the idea of an auction
is designed to bring in as many bidders as possible in order to
generate as much money as possible. this usually translates into
a compromise on standards.”
in any case, he argues that the new entrant should receive the license
at a lower price than that paid by mobinil and vodafone because
it will be entering the market long after the first two operators
have secured their market share. montasser accepts that the price
may be higher, but argues that an open bid will add to the burden
of the third entrant – which will already have an uphill battle
to secure a market share. “building a new network that is 3g
compliant is already a costly process,” he says. “and
this sector is very capital-intensive, which means that we operate
for quite some time before we cover our cost. so the open bid is
only going to constitute an extra burden for the new operator.”
from the perspective of a european company such as telenor, however,
the bidding process is nothing out of the ordinary. telenor’s
johnsen explains that a lot of developing markets use the open bid
process because it generates the maximum possible revenue for the
government. “this was the case for one of our licenses in asia,
but it really doesn’t make that much of a difference,”
he says. “every company has a ceiling price that they are willing
to pay for any given license. if they feel that they have reached
their ceiling, then that’s the end of the matter.”
badawi insists the open bid was designed to make the process more
transparent. based on recent experiences in developing markets,
he says, the ntra and mcit believed that an open auction was the
best option. “the other option was to have a fixed price for
the license, and then go for what i call ‘the beauty contest,’”
the rfp set very high requirements that, he argues, guaranteed that
the bidders would all have experience and high technical knowledge.
badawi believes that any of the shortlisted companies would strengthen
the market. “it’s our duty to qualify the bidder technically,
to make sure that the list of bidders we select for the auction
is extremely well qualified technically. if they are all qualified
technically, then let the one who pays the most get it.”
hazem admits that the bidding process may be less than ideal for
those trying to enter the market. predictably, however, the underlying
rationale is a bit more complex. hazem says that some industry figures
saw old grudges that needed to be settled. following the issuing
of the previous license, in which bids were closed, observers grumbled
that te had received special treatment. “this way, everyone
will know exactly why a certain operator got the license.”
incumbent advantage
the open-bid format is not the only point of frustration for the
bidders in this auction. monstasser also points to the fact that
any new services offered by the third operator will automatically
be available to the incumbents – which will soften the new
entrant’s marketing edge. “any benefit that we receive
is also afforded to the preexisting operators,” he says. “this
means that we won’t have much of an advantage in the market.”
the rfp has issued statements confirming that mobinil and vodafone
egypt have the right to operate 3g networks, if they choose, provided
they pay the license fees. badawi says the matter was out of the
government’s hands because according to mobinil and vodafone’s
licenses, any service that a new operator is afforded will automatically
be offered to them as well. “this is what their license states
and the government is simply honoring its commitments,” he
says. “whether that’s the way i would have stated it in
the license... that’s another matter.”
yet just because the incumbents have the right to apply for the
same services as the third operator doesn’t mean that mobinil
or vodafone will rush to offer them. shalaby says that while mobinil
has the option of offering 3g services, the company will make that
decision on its own schedule. will it happen soon? “at the
moment, no,” he says. “we’re not going to build a
new network this year – it’s not in our plans and certainly
not in our budget. by the time the new entrant is on board sometime
in early 2007, we’ll have an opportunity to gauge the receptiveness
of the market to the enhanced services.”
more importantly, says shalaby, the decision to upgrade to 3g will
depend on who actually secures the license. “we have some issues
pending, like number portability and national roaming. we’re
waiting to assess the situation [based on] data,” shalaby says.
in the meantime, mobinil will launch edge, a new technology that
features services similar to those offered by 3g technology, by
year’s end. the service makes its existing network 2.5g-compliant,
allowing it to provide many of the same services as 3g, but at a
lower speed.
for shalaby, what is most important is the identity of the company
that secures the third license. he explains that some companies
are known to be very aggressive in marketing and advertising, while
others use technology as their advantage. “all of these are
[variables] that come into consideration when we decide how to move
forward – especially when it comes to the 3g question,”
he says.
one thing that is certain, however, is that the upcoming 12 months
will be an exciting time for egypt’s telecommunications sector.
the company that wins the third license will be poised to make profit,
but the real winner, industry players agree, will be the end consumers,
who stand to benefit from new products, better services and lower
rates.
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