The Next Big Thing?

Several opportunities, including a new GSM licence, are opening up in Iran's telecoms sector. While the government is going to great lengths to attract business and create much-needed jobs, foreign telecoms players are eagerly anticipating improved access to a huge, untapped market

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By  Richard Agnew Published  December 8, 2003

|~||~||~|With its richness of natural resources, large population and state of under-development, Iran is a market that has been closely watched by telecoms equipment vendors and service providers over the last few years.

While the political environment surrounding the country has often proved a stumbling block for the private sector, recent years have witnessed Iran gradually becoming a more attractive prospect for investment. The government has also pressed on with efforts to capitalise on this growing interest from foreign companies in what is perceived to be a largely untapped market, and wide-ranging reforms of the telecoms sector have been set in motion to attract their capital.

In view of the country's booming labour market, the Ministry of Post, Telegraph and Telephone (MoPTT), which oversees the telecoms industry, has also shown something of a fresh approach to the problems it aims to tackle through liberalisation of the sector.

While other countries in the GCC have taken a more cautious stance on the introduction of competitors, the retention of revenues by Telecoms Company of Iran (TCI), the incumbent operator, is perceived to be a lower priority for the country's government.
Instead, the main reason behind the restructuring of the sector is perceived to be the need to foster growth which would help reduce unemployment levels officially placed at around 11% but also estimated at up to a quarter of the population.

Set against this backdrop, the telecoms sector has been selected as a major area of focus in the government's third five year plan for the economy. Through these reforms, TCI is being redesigned for the modern era and restructured into a holding company overseeing 28 provincial departments and three separate divisions covering data, mobile and backbone infrastructure, and its headcount is being cut back. The MoPTT has also proposed several new licences for different providers, in a bid to create jobs, extend access and modernise the country's infrastructure to handle advanced, IP-based services.

One area that has already seen considerable change in Iran is the internet sector, which has shown steep growth in recent years and is now estimated to contain over 300 service providers and 3.2 million users, according to the MoPTT.
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The government has set out plans to position Iran as a hub for CIS and other neighbouring countries for international bandwidth. Inside Iran, efforts are also being made to regularise internet service provision. New licences are planned which will pool current providers into a structured hierarchy of ICPs - which are allowed their own international gateways - ISPs, which must lease their bandwidth from the ICPs, and data centre operators.

Uniquely in the Middle East, licences have also been created for voice over IP (VoIP) providers. While other countries in the region have balked at such a move, supposedly because of the potential impact on incumbent operators' earnings, Iran has attempted to regularise VoIP and the several internet cafes that have been set up to offer cheaper long distance calls.

"It's a progressive way of thinking," says Mohsen Malaki, senior analyst, IDC CEMA's telecoms group. "Iran is probably the only country in the region that has licensed VoIP providers. Everyone else in the Middle East has been thinking about how much money to retain for the government, but it's refreshing to see [the MoPTT] doesn't care about that," he adds.

International vendors, accordingly, have been quick to take advantage of the new opportunities. Taiwanese telecoms equipment supplier, Senao, is among several foreign providers that have set up distribution operations in Iran.

"Iran is the largest market in the Gulf and opening up the telecom sector for private players will immediately spur demand for a range of new technologies, which are currently lacking in the market," says Tony Chou, MD of Senora Trading, a member of the Senao Group. "The future is basically in IP-based products and companies in Iran are realising this. There is [also] huge demand for VoIP solutions among corporations as well as government [organisations] in Iran," he adds.

Additionally, various moves are afoot to attract investment into the mobile sector, with the same primary aim of generating growth and jobs. With mobile penetration standing at only 3.33% at the end of 2002 and expected by IDC to reach 4.07% by the end of this year, there is believed to be significant pent-up demand for subscriptions. And with TCI having only launched SMS earlier this year, there is also perceived to be an opportunity to start testing out the market in Iran for services beyond voice.

This year has seen two major opportunities open up in the mobile sector - a build, operate, transfer (BOT) licence to market and manage a network supporting 2 million prepaid cards for TCI and, more recently, the start of a tender for a new entrant into the GSM market.

Following a contest involving some 35 participants, the former licence was awarded in the summer to a consortium including Sweden-based mobile group, Millicom, Rafsanjan Industrial Complex, the Iranian agricultural and industrial firm, and two other foreign companies called Mason International and Commu1.

The aim is that the network will be transferred to the incumbent after ten years. In the meantime, it is expected by the MoPTT to generate at least 8,000 direct or indirect jobs, and according to TCI, offer prepaid SIM cards at a price of 200,000 Rials (US$25), far cheaper than the cost of setting up a contract.

A similar level of interest, meanwhile, is believed to have been generated by October's announcement of a tender for the entrance of the country's second nationwide GSM operator. The 15-year licence, which is expected to be awarded by mid 2004, will be offered in both the GHz900 and GHz1800 bands and allow a minimum of two years exclusivity. Operators believed to be interested include Lebanon's LibanCell, which has offered telecoms and internet services since 2000 in Iran's Kish Island, under a BOT contract.

The usual rivals for regional growth opportunities, Kuwait's Wataniya and MTC-Vodafone, and Orascom of Egypt, are also expected to try their hand, especially as the licence will allow them to leverage their soon-to-be-launched mobile networks in neighbouring Iraq. Additionally, various operators in the GCC, such as Qtel and Etisalat, are thought to be preparing bids.

While the contestants see great opportunities for growth in a largely untapped market, the government is also hoping to take advantage of the expansion that the licence would generate. It has published ambitious targets for improved access, including plans to increase the country's total mobile network capacity to 10 million lines by 2005. Analysts also see high potential for the market, with some predictions suggesting the country's mobile user base could reach 12 million by 2008.

A further plus, at least for the competition and customers, is that TCI will need to invest heavily in its own mobile network if it is to compete effectively with the new operator. Criticisms of its existing mobile services include low coverage, high drop rates and the fact that TCI's network is reaching its capacity limit. "The new entrant can easily surpass TCI by offering a decent network. [TCI] doesn't have decent national or road coverage and on the consumer side it has problems with customer service and billing," adds Malaki.
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But it will not all be easy going for the new entrant. Clearly, the mood of potential investors assessing Iran has often been affected by embargoes and other potential effects of the country's internal and external political disputes, so theirs will not be a risk free enterprise. And although Iran has shown much purpose over the last few years with liberalisation and has improved its operating environment for the private sector, an independent telecoms regulator is not yet in place to ensure that the entrant can have a smooth working relationship with TCI.

This particular problem seems to have been reflected in apparent difficulties that have hindered the creation of the BOT prepaid operator and are believed to have arisen during negotiations of a final agreement with TCI for the execution of the prepaid service.
Both Millicom and Rafsanjan Industrial Complex declined to provide comment for this article, or to attempt to allay concerns that have been expressed about the likelihood of the venture's services being up and running by March 2004, the government's target for their launch.

Prospective bidders for the new GSM licence will also be wary that this problem could devalue their own investment opportunity, and impact on their ability to resolve issues such as interconnection, roaming and site sharing with TCI, as well as site acquisition from public and private property owners.

"We are interested in Iran and indeed are in early discussions with possible partners. Iran is one of the only largely untapped mobile markets still remaining in the world," says Ross Cormack, executive director, wireless services, Qtel. "[However,] it would be in the interests of Iranian consumers for a regulator to be in position before the licence [is awarded,]" he adds.

On a wider scope, measures are also being called for, to allow greater societal acceptance of the rapid changes that are affecting the sector. "It is the responsibility of the government to create and maintain an appropriate environment for fair competition by setting up the required regulatory bodies to monitor and control privatisation," says Fereidoun Ghasemzadeh, founder and CEO of Iranian internet and e-commerce firm, Afranet.
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"Also, many middle and lower level authorities still do not [wish] privatisation to happen, no matter what the higher authorities want. It [will] take activities such as seminars, training programmes and so on to align their thoughts with the goals of the government," he adds.

The MoPTT, in turn, says it has planned for these issues. Anticipating likely concerns of competitors for the GSM licence, the MoPTT said at the announcement of its mobile plans that it has formed a subcommittee to work towards the creation of an independent telecoms regulator by the time the new entrant is introduced.

And further developments that have been set out in the area of liberalisation and dispersion of telecoms services show the MoPTT's ambitions to develop the sector as a whole. For example, the government's published proposals lay out the eventual privatisation of selected parts of a restructured TCI during its fourth five year plan, which will kick off in 2005.

"It is planned that the shares of the [new firm], except TCI and the backbone company, along with the provincial companies, will be presented on the [Tehran] stock market in the near future," says Mr. Kabiri-Rahni, general director for planning and project control, TCI.

A major part of Iran's future strategy is also to exploit its favourable geographical lcoation to position itself as a telecoms hub for the CIS region and the other countries that it borders, as well as to diversify its own means of access to international bandwidth to bring down the costs of services in its own market.

For example, TCI is currently working together with the Russian Uoya Export Company on the production of Zohreh, a satellite that will use five of its twelve channels for telecoms services. The operator, according to reports, is also planning the launch of a smaller spacecraft, Mesbah, within the next two years.

But efforts are also being made to decrease Iran's dependence on more expensive satellite connections. Only around 20% of its internet bandwidth is currently being delivered via fibre, which has increased bandwidth costs for the country's own ISPs. "Most of the bandwidth used in Iran is provided through satellites, and the PTT's contract with Flag is the only serious alternative. But the service is very unreliable and has had frequent disconnections," says Ghasemzadeh.
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To tackle this, various fibre-optic links are being installed in Iran as junctions or for long-distance connections, and to allow the country to cut costs by peering directly with its neighbours.

In addition to a current connection to the global Flag network through Fujeirah in the UAE, Iranian manufacturers have been commissioned to build the Armenian and Iranian stretch of the 27,000km fibre optic network being laid along the ancient Silk Route, between Europe and East Asia.

Recent contracts also include an agreement to expand Iran's bandwidth supply through Turkey, and a deal awarded to Pirelli and Etisalat cable-laying subsidiary, E-Marine, to supply 400km of submarine and terrestrial fibre linking Iran with Kuwait. The latter network, due to be finished by mid-2004, will incorporate dense wave division multiplexing (DWDM) and is expected to be ultimately capable of transmitting data at 10Gbits/s.

Internally, the MoPTT says internet and telecoms access will also increase as networks are pushed out into rural and remote areas. To achieve this, TCI has set out plans to install an improved national data network to provide a gateway to ISPs. On the access side, the government's targets also include the expansion of Iran's fixed network to 20 million lines by 2005.

Additionally, TCI has turned to alternative technologies to push services into remote regions, signing Singapore-based vendor, BBS@ccess, along with local partners to deliver wireless connections into rural and suburban areas.

"The number of internet users is increasing rapidly because of the commissioning of the required backbones," says Kabiri-Rahni. "Most villages with more than 100 inhabitants have [received] telecoms coverage. [Also,] 3000 villages with less than 100 inhabitants have been connected," he adds.
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